Hormel Foods Corporation — Form 10-Q Summary
Business context and reporting period
Hormel Foods processes and sells branded and unbranded food products across five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and International & Other. This filing covers the three and six months ended April 26, 2015, compared with the periods ended April 27, 2014. Balance-sheet comparisons are with October 26, 2014. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $2,279.3 | $2,244.9 | $4,674.4 | $4,487.5 |
| Gross profit | $459.6 | $378.8 | $904.2 | $777.4 |
| Gross margin | 20.2% | 16.9% | 19.3% | 17.3% |
| Operating income | $277.7 | $216.6 | $543.7 | $453.7 |
| Net earnings attributable to Hormel | $180.2 | $140.1 | $351.9 | $293.4 |
| Diluted EPS | $0.67 | $0.52 | $1.30 | $1.09 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $445.7 | $275.0 |
Q2 sales increased 1.5% and six-month sales increased 4.2%; six-month tonnage rose 4.2%. Six-month adjusted net earnings, excluding Stockton plant-closure and international joint-venture exit charges, were $367.5 million, or $1.36 diluted EPS, versus GAAP net earnings of $351.9 million and $1.30 EPS.
At April 26, cash and cash equivalents were $624.4 million, versus $334.2 million at fiscal year-end. Current assets were $2,302.4 million and current liabilities $870.2 million. Long-term debt was $250.0 million, with no current maturities shown; the filing reports compliance with debt covenants. Six-month capital expenditures were $55.0 million. Cash dividends paid were $118.7 million; declared dividends were $0.50 per share for the six months. Fiscal 2015 capital expenditures were estimated at $165–180 million.
Material changes and segment performance
Q2 earnings attributable to Hormel rose 28.6%; six-month earnings rose 19.9%. Margin improvement reflected value-added product growth, lower pork input costs, and lower feed and fuel costs. Acquisition-related additions also boosted reported sales: CytoSport contributed $87.2 million in Q2 and $151.4 million for six months; additional MegaMex products contributed $24.1 million and $41.6 million, respectively.
| Segment | Q2 sales change | Q2 operating-profit change | Six-month operating-profit change |
|---|---|---|---|
| Grocery Products | +1.3% | +0.8% | -13.1% |
| Refrigerated Foods | -8.0% | +52.3% | +34.4% |
| Jennie-O Turkey Store | +15.4% | +41.3% | +49.2% |
| Specialty Foods | +32.3% | +10.5% | -1.7% |
| International & Other | -7.5% | +2.5% | -17.6% |
Refrigerated Foods profit benefited from value-added sales and lower pork costs, despite lower sales prices and the end of the Precept joint venture. Jennie-O results improved on value-added growth and lower input costs. Specialty Foods sales growth largely reflected the CytoSport acquisition. International sales were pressured by export declines, port constraints, and the strong U.S. dollar.
Outlook, commentary, risks and unusual items
- Management said first-half results positioned the company for fiscal 2015 earnings growth. It expected full-year SG&A of 7.5–7.8% of sales and an effective tax rate of 34–35%.
- Jennie-O faced a significant supply-chain challenge from highly pathogenic avian influenza (HPAI); reduced bird supply and higher prices were expected to affect the second half. Refrigerated Foods expected continued value-added growth, though at a slower year-over-year pace and with lower pork operating margins.
- Management anticipated Grocery Products profit growth from lower input costs, Specialty Foods improvement from CytoSport synergies, and improved International results as port conditions eased.
- On May 26, 2015, after quarter-end, Hormel agreed to acquire Applegate for a preliminary $775 million in cash, subject to regulatory approval. The company expected the deal to be neutral to fiscal 2015 earnings after transaction costs and fair-value adjustments, with benefits expected in fiscal 2016. Funding was expected from cash and short-term financing.
- Unusual charges included $10.5 million for the Stockton facility closure, $9.5 million for exiting international joint-venture businesses, and a $4.5 million charge for closing CytoSport’s Benicia production facility. The CytoSport agreement also allows up to $20 million of additional consideration; $10.3 million was recognized as the estimated fair value at quarter-end.
- Key exposures include HPAI and other livestock disease, volatile pork, poultry, grain and other commodity costs, food-safety and product-liability risks, acquisition integration, and export/foreign-market conditions. The company used commodity hedges and reported that most expected cash-flow-hedge losses would be recognized over the next 12 months.
- Unrecognized tax benefits, including interest and penalties, were $25.3 million; federal and state tax examinations were ongoing. The filing said known legal proceedings were not expected to materially affect financial condition, results or liquidity. Standby letters of credit totaled $42.0 million, including $3.5 million for an affiliate.
Important facts for investors to verify
- How HPAI affects Jennie-O bird availability, volume, input costs and second-half profitability.
- Whether underlying sales and margins sustain growth after separating acquisition contributions and commodity-cost benefits.
- Applegate closing, financing, integration costs, and the timing of expected earnings benefits.
- Progress in realizing CytoSport synergies and the effects of its facility closure.
- Actual fiscal 2015 capital spending, tax rate, and any changes in tax-audit exposures or commodity-hedge impacts.