Hormel Foods Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended October 25, 2020 (52 weeks); fourth quarter ended the same date. Hormel produces and markets branded and other food products through Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $9.608 billion | $9.497 billion | +1.2% |
| Organic net sales | $9.519 billion | $9.363 billion | +1.7% |
| Gross profit / margin | $1.826 billion / 19.0% | $1.885 billion / 19.8% | Profit down 3.1% |
| Operating income | $1.100 billion | $1.196 billion | Down 8.0% |
| Net earnings attributable to Hormel | $908.1 million | $978.8 million | Down 7.2% |
| Diluted EPS | $1.66 | $1.80 | Down 7.8% |
| Operating cash flow | $1.128 billion | $923.0 million | Up 22.2% |
| Capital expenditures | $367.5 million | $293.8 million | Up 25.1% |
Net margin was 9.5%, versus 10.3% in FY2019. Management attributed earnings pressure primarily to approximately $80 million of incremental COVID-19 operating costs, weaker foodservice sales and the absence of prior-year benefits related to the CytoSport divestiture and a legal settlement.
Year-end cash and cash equivalents were $1.714 billion, compared with $672.9 million a year earlier. Total debt, including finance leases, was $1.304 billion, versus $269.7 million; cash exceeded reported debt by approximately $410.7 million. Hormel issued $1.0 billion of 1.8% ten-year notes in June 2020. It had no draws on its $400 million revolving credit facility and reported compliance with debt covenants.
FY2020 segment results: Grocery Products sales were $2.385 billion and segment profit $358.0 million; Refrigerated Foods $5.271 billion and $609.4 million; Jennie-O Turkey Store $1.333 billion and $105.6 million; International & Other $618.7 million and $93.8 million. Segment profit increased 5.5% in Grocery Products and 24.2% in International & Other, but declined 10.6% in Refrigerated Foods and 10.5% in Jennie-O.
Material changes and business developments
- COVID-19 shifted demand sharply from U.S. foodservice to retail: U.S. Retail sales rose to $5.441 billion from $4.947 billion, while U.S. Foodservice sales fell to $2.490 billion from $2.943 billion.
- Full-year volume increased 1.2%; organic volume rose 2.4%. Fourth-quarter net sales fell 3.3% to $2.420 billion and diluted EPS fell to $0.43 from $0.47, reflecting weaker foodservice performance and production constraints.
- Hormel acquired Sadler’s Smokehouse for $270.8 million in March 2020, adding to Refrigerated Foods. FY2020 investing cash outflow included the acquisition and higher capital spending.
- Sales to Walmart represented 14.6% of FY2020 revenue, up from 13.5% in FY2019.
Outlook, risks and unusual items
Management expected FY2021 sales and earnings growth, with retail demand remaining strong but growing less rapidly than in FY2020, and a modest foodservice recovery that was not expected to reach 2019 levels. The filing provides no numerical sales or earnings forecast. Management expected COVID-related higher operating costs to continue through the first half of FY2021, with most costs subsiding as the pandemic came under control. The effective tax rate was expected to be 20.0%–21.5%; estimated capital expenditures were $350 million. FY2021 has 53 weeks.
- Key risks include further pandemic disruption, employee availability and illness, facility efficiency and supply-chain interruptions, foodservice weakness, higher raw-material and feed costs, commodity-price volatility, and limits on passing cost increases to customers.
- Approximately 30% of pork raw materials were sourced from Wholestone Farms under an agreement expiring in December 2021. Hormel was negotiating renewal while evaluating alternative procurement options.
- Other exposures include customer concentration, food-safety and product-liability risks, livestock disease, labor relations, international trade and currency risks, litigation, and execution risks in the multi-year Project Orion systems implementation.
- Management said currently known litigation matters were not expected to materially affect financial condition, results or liquidity. The filing reports $47.5 million of standby letters of credit, primarily for workers’ compensation; these are not recorded on the balance sheet.
- Hormel declared no material goodwill or intangible impairment in FY2020. Annual dividends increased 5% to $0.98 per share for FY2021, the 55th consecutive annual increase.
Important facts for investors to verify
- Whether retail strength and the anticipated foodservice recovery offset continued pandemic costs, labor constraints and higher input costs.
- Progress on renewing or replacing the Wholestone pork supply agreement before its December 2021 expiry.
- Debt maturities and refinancing: the $250 million 4.125% notes mature in April 2021; review available liquidity and covenant headroom.
- Execution, cost and expected benefits of Sadler’s integration, Project Orion, and planned capacity projects.
- Segment profitability trends, Walmart concentration, pension-asset valuations and assumptions, and any changes in litigation, tax contingencies or other commitments.