Hormel Foods Corporation — FY2018 Form 10-K
Business context and reporting period. Hormel produces and markets branded and unbranded food products across Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS), and International & Other. Fiscal 2018 ended October 28, 2018, and comprised 52 weeks; fiscal 2017 also comprised 52 weeks. The filing also reports fourth-quarter results. The former Specialty Foods segment was included in Grocery Products beginning in FY2018, with prior periods recast.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $9.546 billion | $9.168 billion | +4.1% |
| Organic net sales (non-GAAP) | $8.985 billion | $9.067 billion | -0.9% |
| Net earnings attributable to Hormel | $1.012 billion | $846.7 million | +19.5% |
| Diluted EPS | $1.86 | $1.57 | +18.5% |
| Gross profit / gross margin | $1.995 billion / 20.9% | $2.003 billion / 21.9% | Profit -0.4% |
| Operating income | $1.199 billion | $1.280 billion | -6.4% |
| Operating cash flow | $1.242 billion | $1.034 billion | +$207.8 million |
- Reported sales growth reflected acquisitions, principally Columbus, Fontanini, and Ceratti; organic volume declined 1.4%. Fourth-quarter sales rose 1.3%, while organic sales fell 3.4%. Fourth-quarter net earnings increased 19.8% to $261.4 million and diluted EPS was $0.48.
- Net margin was 10.6%, compared with 9.2% in FY2017. The effective tax rate fell to 14.3% from 33.7%, including a provisional $72.9 million net tax benefit from the Tax Cuts and Jobs Act. The tax benefit materially supported earnings growth; management expected a 20.5%–23.0% tax rate in FY2019.
- Gross margin declined amid lower commodity profitability, higher freight, and input-cost volatility. SG&A increased 10.0% to $838.2 million, reflecting acquisitions, advertising, and employee costs. A $17.3 million non-cash CytoSport trademark impairment was recorded in Q4; adjusted FY2018 diluted EPS, excluding it, was $1.89.
- Cash and equivalents were $459.1 million, versus $444.1 million. Current assets were $2.050 billion and current liabilities $1.139 billion. Capital expenditures were $389.6 million, up from $221.3 million; cash used in investing was $1.235 billion, including $857.4 million for Columbus.
- Year-end debt was $624.8 million: a $374.8 million term loan due November 2019 and $250.0 million of 4.125% notes due April 2021. The $400 million revolving credit facility had no draws. Cash exceeded debt by approximately $165 million. The company reported compliance with debt covenants.
- Dividends paid were $388.1 million; the FY2018 dividend was $0.75 per share. The FY2019 annual dividend was announced at $0.84 per share, a 12% increase. Hormel repurchased 1.4 million shares for $46.9 million.
Material changes and segment results
- Refrigerated Foods: FY sales rose 8.4% to $4.772 billion and segment profit rose 5.1% to $617.6 million, aided by Columbus and Fontanini and branded, value-added products. Organic sales declined 0.4%; acquisitions and branded growth offset lower commodity profits and higher freight.
- JOTS: FY sales fell 2.1% to $1.627 billion and segment profit fell 29.0% to $175.7 million. Industry oversupply, weak whole-bird and commodity pricing, and freight costs weighed on results.
- Grocery Products: FY sales declined 1.3% to $2.522 billion and segment profit fell 6.4% to $362.8 million. Contract manufacturing and CytoSport weakness, the impairment, and freight costs offset gains in Wholly Guacamole and Herdez.
- International & Other: FY sales rose 14.6% to $624.4 million and segment profit rose 4.3% to $89.0 million. Ceratti, China growth, and stronger branded exports helped; tariffs reduced fresh pork exports.
Outlook, risks, and contingencies
- Management expected FY2019 sales and operating profit growth, with all segments contributing, but gave no consolidated numerical growth target or EPS guidance. It anticipated improvement in JOTS as industry conditions recover, continued branded growth, supply-chain cost savings, and approximately $350 million in capital spending.
- Management identified global trade uncertainty, potential hog disease in China, market volatility, lower commodity profits, and higher freight as significant risks. Other disclosed risks include food safety and recalls, livestock or poultry disease, commodity and feed costs, customer concentration, labor negotiations, supplier or co-packer disruptions, regulation, foreign exchange, cyber incidents, and acquisition integration.
- Walmart represented 13.6% of FY2018 revenue. Union contracts at four facilities covering approximately 2,300 employees were due to expire in FY2019; negotiations had not begun.
- The Fremont, Nebraska processing facility sale to WholeStone Farms closed December 3, 2018, after year-end. The deal included a multiyear pork-supply agreement; management cited divestiture-related expenses in its FY2019 outlook.
- Ordinary-course litigation was not expected by management to materially affect financial condition, results, or liquidity. Standby letters of credit totaled $45.5 million, primarily for workers’ compensation. Contractual cash obligations totaled $3.431 billion, including substantial livestock, grain, and other purchase commitments.
- Tax accounting for the Tax Act remained provisional at year-end, with finalization expected by Q1 FY2019. The auditor issued unqualified opinions on the financial statements and internal control; management also concluded internal control was effective.
Investor verification priorities
- Separate acquisition-driven reported growth from organic trends, and assess whether organic sales and volume stabilize.
- Track whether Refrigerated Foods’ value-added growth can offset commodity and freight pressure, and whether JOTS profit recovers as management anticipated.
- Assess earnings quality: the Tax Act benefit and equity-based compensation tax benefits lowered FY2018 taxes; the effective rate was expected to rise in FY2019.
- Monitor integration and returns on Columbus and other acquisitions, the CytoSport impairment, and the Fremont sale and related supply agreement.
- Verify debt repayment/refinancing of the term loan due November 2019, liquidity against large purchase commitments, and the impact of planned capital spending and shareholder returns.
- Follow trade and disease risks, input and freight costs, and the FY2019 labor negotiations affecting approximately 2,300 employees.