Hormel Foods Corporation — Q2 FY2014 10-Q
Reporting period: Three and six months ended April 27, 2014; fiscal year ends October 27. Financial statements are unaudited. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Net sales | $2.245 billion | $2.153 billion | $4.488 billion | $4.269 billion |
| Gross profit | $378.8 million | $352.8 million | $777.4 million | $697.0 million |
| Gross margin | 16.9% | 16.4% | 17.3% | 16.3% |
| Operating income | $216.6 million | $186.9 million | $453.7 million | $385.1 million |
| Net earnings attributable to Hormel | $140.1 million | $125.5 million | $293.4 million | $255.2 million |
| Diluted EPS | $0.52 | $0.46 | $1.09 | $0.95 |
| Operating cash flow | — | — | $275.0 million | $257.6 million |
Q2 sales rose 4.3%, while tonnage declined 1.3%; six-month sales rose 5.1% and tonnage increased 0.6%. Q2 attributable earnings increased 11.6% and diluted EPS increased 13.0%. For six months, attributable earnings increased 15.0% and diluted EPS increased 14.7%.
At April 27, cash and equivalents were $499.3 million, versus $434.0 million at October 27, 2013. Current assets were $2.173 billion and current liabilities $752.0 million. Long-term debt, less current maturities, was $250.0 million, unchanged from fiscal year-end; the filing reports no current maturities. Shareholders’ investment totaled $3.513 billion. The company reported compliance with debt covenants.
Six-month investing cash outflow was $112.4 million, including $41.5 million for the China SKIPPY acquisition and $77.1 million in capital expenditures. Financing cash outflow was $97.1 million, including $97.6 million in dividends paid and $15.1 million in share repurchases.
Material changes and segment performance
- Refrigerated Foods: Q2 sales increased 9.9% and segment profit 37.9%; stronger pork operating margins and foodservice value-added growth drove results.
- Grocery Products: Q2 sales decreased 0.4%, but segment profit increased 16.1%. The year-on-year profit comparison benefited from prior-year SKIPPY acquisition costs.
- Jennie-O Turkey Store: Q2 sales declined 1.1% and profit increased 1.6%. Value-added growth and favorable turkey markets partly offset weaker live production.
- Specialty Foods: Q2 sales declined 11.6% and profit 26.3%, mainly following expiration of an agreement for DCB to sell certain sugar substitutes in foodservice channels.
- International & Other: Q2 sales increased 22.7% and profit 33.6%, supported by China operations, Mainland China SKIPPY sales, and strong exports.
Consolidated gross margin improved, with Refrigerated Foods and international results contributing gains. Equity earnings from affiliates fell to $3.6 million in Q2 and $8.3 million for six months, primarily reflecting higher input costs at MegaMex. The effective tax rate increased to 34.0% for Q2 and 34.2% for six months, compared with 31.5% and 32.5%, respectively, largely because the prior year included favorable tax settlements.
Outlook, risks, and contingencies
- Management expects elevated beef, pork, turkey, and avocado costs to pressure margins in the second half. Pricing actions are expected to partly offset costs but may constrain sales growth.
- PEDv was affecting company and supplier hog operations. Management expected tighter pork supplies later in Q3 and reduced harvest-facility volumes in the second half; the industry impact remained uncertain.
- Management expected year-over-year Jennie-O growth, but at more modest levels than initially anticipated, and expected continued international growth, aided by China SKIPPY. Specialty Foods sales and profit declines were expected to continue through Q3.
- FY2014 expectations: SG&A of 7.3%–7.6% of sales; effective tax rate of 34.0%–34.5%; interest expense of approximately $12 million–$14 million; and capital expenditures of approximately $140 million–$150 million. No full-year EPS guidance is stated in the filing text.
- The annual dividend rate was increased to $0.80 per share. Management cited the 48th consecutive annual increase and expected to continue paying dividends.
- Unrecognized tax benefits, including interest and penalties, totaled $25.3 million. Several state tax audits were ongoing; the company could not reasonably estimate the effect of potential changes. The company also disclosed $41.7 million of standby letters of credit, including a revocable $3.5 million guarantee for an affiliate.
- Ordinary-course legal proceedings were not expected to have a material effect individually or in aggregate. Principal risks include food safety, commodity costs and availability, livestock disease, customer demand, acquisitions, regulation, litigation, labor relations, and international operations.
Important facts for investors to verify
- Whether pricing can offset higher input costs without materially weakening volumes or sales growth, particularly amid PEDv-related pork supply pressure.
- How Refrigerated Foods’ strong margins and export growth develop, and whether MegaMex earnings and Specialty Foods performance recover.
- Whether FY2014 margin, tax, interest, and capital-spending expectations remain achievable; the filing provides no EPS forecast.
- The cash and working-capital trajectory: inventories rose to $1.054 billion from $968.0 million at fiscal year-end, and management cited unfavorable working-capital changes.
- Final working-capital and tax valuations for the China SKIPPY purchase, and developments in tax audits, unrecognized tax benefits, and other disclosed contingencies.