Hormel Foods Corporation — Q3 FY2014 Form 10-Q
Reporting period: Three and nine months ended July 27, 2014; comparisons are with the periods ended July 28, 2013. The quarter’s results exclude CytoSport, acquired after quarter-end on August 11, 2014.
Financial performance and liquidity
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $2.285 billion | $2.160 billion | $6.772 billion | $6.428 billion |
| Gross profit | $364.0 million | $330.3 million | $1.141 billion | $1.027 billion |
| Gross margin | 15.9% | 15.3% | 16.9% | 16.0% |
| Operating income | $214.5 million | $180.7 million | $668.3 million | $565.8 million |
| Net earnings attributable to Hormel | $138.0 million | $113.6 million | $431.4 million | $368.9 million |
| Diluted EPS | $0.51 | $0.42 | $1.60 | $1.37 |
- Quarterly sales rose 5.8%, while tonnage fell 1.4%; nine-month sales rose 5.4%, with tonnage down 0.1%. Price, mix and acquired SKIPPY sales contributed to revenue growth.
- Operating cash flow was $394.4 million for nine months, versus $428.8 million a year earlier. Management attributed the decrease primarily to working-capital changes, including higher inventory values, and pension contributions.
- Cash and cash equivalents were $531.0 million at July 27, 2014, versus $434.0 million at October 27, 2013. Current assets were $2.245 billion and current liabilities $785.1 million.
- Long-term debt was $250.0 million, unchanged from fiscal year-end; no current debt maturities were reported. Capital expenditures were $111.8 million for nine months. The company remained in compliance with debt covenants.
- Dividends declared were $0.20 per share for the quarter and $0.60 for nine months. The fiscal 2014 annual dividend rate was increased to $0.80 per share.
Material changes and segment trends
- Refrigerated Foods: Q3 sales increased 11.6% and segment profit 101.1%, led by favorable pork operating margins and value-added product growth. PEDv affected hog supply and harvest volumes.
- Jennie-O Turkey Store: Q3 sales rose 4.2% and profit 41.9%, supported by value-added sales, strong turkey prices and improved operating efficiencies.
- International & Other: Q3 sales rose 18.3% and profit 12.0%, driven by China foodservice growth and China SKIPPY sales.
- Grocery Products: Q3 sales declined 2.9% and profit 36.2%, pressured by elevated pork, beef and avocado costs and pricing actions that affected demand.
- Specialty Foods: Q3 sales declined 10.0% and profit 25.0%, primarily following expiration of an agreement permitting sales of certain sugar substitutes into foodservice channels.
- For nine months, the acquired SKIPPY businesses contributed incremental sales of $104.7 million and tonnage of 67.8 million pounds compared with the prior-year period.
Outlook, commentary and risks
- Management expected elevated meat input costs to continue pressuring some value-added products, particularly in Grocery Products. It anticipated seasonally positive pork margins, strong Jennie-O results, and a return to year-over-year growth in Specialty Foods in Q4.
- Management forecast FY2014 SG&A at approximately 7.1%–7.3% of sales, an effective tax rate near 34.5%, interest expense of approximately $12–$14 million, and capital expenditures of approximately $150 million.
- CytoSport, maker of Muscle Milk products, was acquired for a preliminary cash price of $424.3 million, subject to final adjustments with a stated price ceiling of $450 million, plus potential payments up to $20 million based on performance. Funding included cash and the revolving credit line. Q4 results were expected to include its sales, with no material earnings contribution net of closing costs.
- Key exposures include volatility in pork, poultry, feed, avocado, peanut and whey costs; livestock disease, including PEDv; consumer demand and competition; food safety and product liability; and acquisition integration. Commodity hedges may be ineffective or limit gains if prices move favorably.
- Unrecognized tax benefits, including interest and penalties, totaled $26.0 million. Standby letters of credit totaled $41.7 million, including a revocable $3.5 million guarantee for an affiliate. Management did not expect known legal proceedings to materially affect financial condition, results or liquidity.
Investor verification points
- Verify the final CytoSport purchase price, funding mix, earn-out terms and subsequent-quarter contribution.
- Track whether higher commodity costs, hog availability and PEDv affect margins and production volumes as projected.
- Assess the sustainability of segment growth, particularly the recovery in Refrigerated Foods and Jennie-O versus ongoing pressure in Grocery Products and Specialty Foods.
- Monitor inventory and working-capital movements and their effect on operating cash flow.
- Compare full-year results with management’s stated SG&A, tax, interest and capital-spending expectations.