Hormel Foods Corporation — Q2 FY2012 Form 10-Q
Business context and period: The unaudited filing covers the quarter and six months ended April 29, 2012, compared with the periods ended May 1, 2011. Hormel processes and sells branded and unbranded food products through Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and All Other.
Financial performance
| Metric | Q2 FY2012 | Six months FY2012 | Comparison with prior year |
|---|---|---|---|
| Net sales | $2,012.9 million | $4,052.3 million | +2.7% quarter; +4.4% half-year |
| Gross profit / margin | $335.6 million / 16.7% | $673.0 million / 16.6% | Gross profit +2.9% quarter; down from $700.2 million and 18.0% for the half-year |
| Operating income | $194.7 million | $390.7 million | +12.7% quarter; down from $408.5 million for the half-year |
| Net earnings attributable to Hormel | $127.9 million | $256.3 million | +16.7% quarter; down 0.8% half-year |
| Diluted EPS | $0.48 | $0.95 | +20.0% quarter; unchanged half-year |
| Operating cash flow | Not separately provided for the quarter | $213.0 million | Down from $275.9 million |
Quarterly tonnage fell 2.1% to 1.20 billion pounds; six-month tonnage also fell 2.1% to 2.41 billion pounds. Lower volume alongside higher sales reflects pricing and product mix. SG&A was $148.7 million for the quarter and $301.2 million for six months, respectively 7.4% of sales in both periods.
At April 29, cash and cash equivalents were $524.8 million, short-term marketable securities $76.8 million, and current assets $2,060.1 million versus current liabilities of $700.0 million. Long-term debt was $250.0 million, with no current maturities shown. Cash plus short-term securities exceeded reported long-term debt by approximately $351.6 million. Pension and post-retirement benefit liabilities were $476.2 million. Six-month capital expenditures were $58.2 million; operating cash flow less these expenditures was approximately $154.8 million.
Six-month cash from operations declined mainly due to lower earnings and higher working capital. Investing used $51.8 million, including capital expenditures; financing used $100.6 million, including $73.2 million of dividends and $42.1 million of share repurchases. Cash increased $61.6 million from the fiscal-year start to $524.8 million.
Material changes and segment results
- Refrigerated Foods: Q2 sales declined 0.8% and segment profit fell 24.5%; six-month profit fell 35.8%. Management cited persistently unfavorable pork margins and lower commodity pork volumes.
- Jennie-O Turkey Store: Q2 sales rose 6.9% and profit 50.3%; six-month profit rose 21.9%. Value-added sales, pricing, and operating efficiencies helped, while grain costs and declining commodity turkey values were cautions.
- Grocery Products: Q2 sales rose 1.4% and profit 9.8%; six-month sales declined 0.7% and profit 0.8%. SPAM and MegaMex contributed, while some center-of-store products remained soft.
- Specialty Foods: Q2 sales rose 11.7% and profit 8.8%; six-month sales rose 12.8% and profit 2.9%, supported by nutritional products, mix, and earlier pricing actions.
- All Other: Q2 sales rose 11.1% and profit 52.2%; six-month sales rose 13.7% and profit 37.4%, with export pork and SPAM sales contributing.
For the six-month period, consolidated gross margin declined substantially despite higher sales, principally because pork operating margins were below prior-year levels. Equity in affiliate earnings increased to $18.8 million from $13.6 million for six months, driven chiefly by MegaMex. Interest expense declined to $6.5 million from $13.8 million.
Outlook, risks, and contingencies
- Management expected pork margins to improve gradually in the second half but remain below prior-year levels; it anticipated international exports would remain strong. Turkey margin gains could moderate due to lower commodity turkey values and higher grain costs.
- Fiscal 2012 estimates included SG&A of about 7.5% of sales, an effective tax rate of 33.5%–34.5%, interest expense of $12–$14 million, and capital expenditures of $120–$130 million. The filing does not provide a clear full-year sales or EPS forecast.
- The company maintained commodity hedges for hogs, grain, and natural gas. Key exposures include pork, poultry, and feed costs; hedge ineffectiveness and investment-price changes can affect earnings. Management estimated a 10% decline in non-fixed-income investments would reduce pretax earnings by about $11.3 million.
- Unrecognized tax benefits, including interest and penalties, totaled $28.3 million; $18.5 million would affect the effective tax rate if recognized. The timing and effect of possible state audit changes could not be estimated.
- A renewable $4.8 million standby letter of credit guarantees an affiliated party’s workers’ compensation obligations and is not recorded on the balance sheet. The company reported compliance with debt covenants; known litigation was not expected to materially affect financial condition, results, or liquidity.
- Principal disclosed risks include food safety and product liability, commodity and feed-price volatility, livestock disease, competition, economic conditions, regulation, environmental matters, labor relations, litigation, and international operations. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pork margins recover as expected and how that affects Refrigerated Foods and consolidated gross margin.
- Whether Jennie-O’s value-added growth and efficiencies offset grain costs and lower commodity turkey values.
- Working-capital movements and operating cash generation relative to the planned $120–$130 million fiscal-year capital program.
- Progress on tax audits and the potential resolution of the $28.3 million unrecognized-tax-benefit balance.
- Execution of management’s outlook, including the stated expense, tax, and interest ranges; the filing gives no full-year EPS guidance.