Hormel Foods Corporation — Q2 FY2018 10-Q
Reporting period: Quarter and six months ended April 29, 2018. Comparisons are with the quarter and six months ended April 30, 2017, unless otherwise noted. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $2,330.6 | $2,187.3 | $4,661.9 | $4,467.5 |
| Gross profit | $496.7 | $486.9 | $998.9 | $1,039.2 |
| Gross margin | 21.3% | 22.3% | 21.4% | 23.3% |
| Operating income | $306.4 | $316.0 | $613.0 | $671.4 |
| Net earnings attributable to Hormel | $237.4 | $210.9 | $540.5 | $446.1 |
| Diluted EPS | $0.44 | $0.39 | $1.00 | $0.83 |
- Q2 reported sales rose 6.5%, while organic sales declined 0.5%; reported volume increased 2.9%, but organic volume fell 1.4%. Acquisitions contributed materially to reported growth.
- Q2 net earnings attributable to Hormel increased 12.5%, despite lower operating income; the reduced tax rate was a significant contributor. First-half net earnings rose 21.2% while operating income declined.
- Operating cash flow was $443.3 for the first half, up from $280.6. Investing activities used $986.5, primarily reflecting the Columbus acquisition ($857.6) and capital spending of $141.2. Financing activities provided $355.9.
- Cash and equivalents were $261.6 at April 29, versus $444.1 at October 29, 2017. Short-term debt was $185.0 and long-term debt was $624.8, compared with $250.0 of long-term debt and no short-term debt at fiscal year-end. The company reported compliance with debt covenants.
- Dividends declared were $0.1875 per share for Q2 and $0.375 for the first half. The fiscal 2018 annual dividend rate increased to $0.75 per share.
Material changes and segment results
- Refrigerated Foods: Q2 sales rose 13.6% and segment profit 18.4%, supported by Columbus and Fontanini acquisitions and branded retail and foodservice performance. First-half segment profit declined 2.3%, reflecting lower commodity profits, freight, Columbus transaction costs, and the Farmer John divestiture.
- Grocery Products: Q2 sales declined 1.4% and segment profit declined 11.7%; lower CytoSport volumes and contract manufacturing earnings were partly offset by MegaMex results.
- Jennie-O Turkey Store: Q2 sales declined 4.2% and segment profit declined 33.6%. Continued turkey oversupply, excess cold-storage inventory, lower whole-bird and commodity profits, freight, and advertising pressured results.
- International & Other: Q2 sales rose 22.1% and segment profit 6.3%, reflecting Ceratti, China performance, and export sales; weaker branded export margins and higher advertising partly offset gains.
- The company acquired Columbus in November 2017 for a preliminary purchase price of $857.4, funded in part by $750.0 of term and revolving credit borrowings. Purchase accounting remained preliminary; recorded goodwill was $610.8 and was not expected to be tax-deductible.
Outlook, commentary, and risks
- Management expected fiscal 2018 effective tax rate of 17.5%–19.5%. Tax Act accounting remained provisional; the company recorded a $73.8 deferred-tax-liability revaluation benefit and a $5.2 deemed-repatriation charge in the first half, with measurement-period adjustments still possible.
- Fiscal 2018 capital expenditures were estimated at approximately $425.0. Management described ongoing investment in capacity, plant modernization, and value-added products, alongside continued repayment of Columbus-related short-term debt.
- Management anticipated third-quarter sales and earnings growth in Grocery Products and International & Other, with some headwinds; Refrigerated Foods was expected to benefit from acquisitions and value-added momentum. Overall outlook remained exposed to elevated freight costs. Depressed turkey commodity markets were expected to persist, and pork export margins could be challenged by tariffs on exports to China.
- Other risks cited include volatile input costs and commodity availability, disease outbreaks, food safety and product liability, acquisition integration, trade restrictions, labor costs, regulation, litigation, and cybersecurity. The company said known legal proceedings were not expected to materially affect its financial condition, results, or liquidity.
- Management stated disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- How much reported growth and earnings contribution from Columbus, Fontanini, and Ceratti is sustainable, and how final Columbus purchase accounting may change reported balances.
- Whether organic sales and volume trends improve, particularly in Grocery Products and Jennie-O, and whether freight and turkey oversupply continue to pressure margins.
- How provisional Tax Act estimates evolve and how much of first-half earnings growth reflects lower taxes rather than operating improvement.
- Debt repayment, cash generation, and planned $425.0 of fiscal-year capital spending against dividends and other shareholder returns.
- Exposure of pork exports to tariffs and the potential effects of commodity-price, disease, food-safety, and acquisition-integration risks.