Hormel Foods Corporation — Q3 FY2020 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended July 26, 2020, compared with the periods ended July 28, 2019. Balance-sheet comparisons are to October 27, 2019. Unless noted, amounts below are in U.S. dollars.
Business context and reporting period
Hormel manufactures and markets branded food products through Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. The COVID-19 pandemic shifted demand from foodservice toward retail: retail demand remained elevated in Q3, while foodservice began recovering as restrictions eased. The quarter included Sadler’s Smokehouse, acquired March 2, 2020 for $270.8 million.
Financial performance and liquidity
| Metric | Q3 FY2020 | Q3 FY2019 | 39 weeks FY2020 | 39 weeks FY2019 |
|---|---|---|---|---|
| Net sales | $2,381.5m (+4.0%) | $2,290.7m | $7,188.4m (+2.8%) | $6,995.8m |
| Gross profit | $422.4m | $433.4m | $1,368.2m | $1,390.9m |
| Gross margin | 17.7% | 18.9% | 19.0% | 19.9% |
| Operating income | $249.6m | $256.7m | $823.5m | $875.3m |
| Net earnings attributable to Hormel | $203.1m | $199.4m | $673.7m | $723.3m |
| Diluted EPS | $0.37 | $0.37 | $1.23 | $1.33 |
| Cash from operations | — | — | $878.1m | $572.9m |
Q3 sales grew, but gross profit and operating income fell; reported diluted EPS was unchanged. Nine-month sales increased while operating income, net earnings, and diluted EPS declined. The filing attributes margin pressure principally to lower foodservice mix and COVID-related operating costs. The 39-week comparison also reflects the prior-year CytoSport divestiture and gain.
At July 26, cash and cash equivalents were $1,729.4m, versus $672.9m at fiscal year-end; short-term marketable securities were $17.6m. Total debt, including current maturities, was $1,305.5m, compared with $250.0m at October 27, 2019. The company issued $1.0bn of 1.8% senior notes due 2030; $258.7m of debt was classified as current. The $400m revolver had no outstanding draws, and Hormel reported compliance with debt covenants. Current assets were $3,409.8m and current liabilities $1,427.1m.
Investing activities used $506.0m in the first 39 weeks, including the Sadler’s acquisition and $226.8m of property and equipment purchases. Financing activities provided $684.0m, including bond proceeds; dividends paid were $362.0m and share repurchases were $12.4m. Capital expenditures for FY2020 were estimated at approximately $350m.
Material changes and segment results
- Grocery Products: Q3 sales rose 6.9% to $580.8m and segment profit rose 36.4% to $80.2m, on stronger branded retail demand and favorable mix.
- Refrigerated Foods: Q3 sales rose 4.8% to $1,363.1m, aided by retail, deli, commodity sales, and Sadler’s; segment profit fell 11.0% to $152.8m. Lower foodservice sales, pandemic-related costs, and losses on strategic hog hedge positions weighed on profit.
- Jennie-O Turkey Store: Q3 sales fell 4.0% to $286.8m and segment profit fell 66.8% to $7.1m. Management cited three early-quarter plant pauses, higher manufacturing and live-production costs, lower foodservice and commodity sales, and COVID-related costs.
- International & Other: Q3 sales rose 2.0% to $150.8m and segment profit rose 25.9% to $23.6m, reflecting stronger China results and improved partner earnings.
- Q3 U.S. retail sales were $1,390.1m versus $1,163.4m; U.S. foodservice sales were $588.1m versus $729.3m. Management identified the pandemic and shelter-in-place restrictions as the driver of this channel shift.
Outlook, risks, and unusual items
- Management expected Q4 to have similar conditions to Q3: continued retail strength, lower foodservice demand, and higher COVID-related operating costs. It estimated another $20m–$40m of COVID-related operating costs in Q4; costs incurred to date were approximately $60m net of CARES Act credits.
- Refrigerated Foods noted that labor availability, safety-related production inefficiencies, and low inventories could constrain supply despite strong retail demand. Jennie-O expected ongoing retail strength but continued pressure from lower foodservice volume and pandemic costs. Grocery Products expected strong branded retail demand; International & Other expected continued branded-export strength and year-over-year improvement in China, with higher input costs a risk in China and Brazil.
- The company reported spending more than $11m on production-team bonuses in FY2020 to date and described enhanced employee safety measures. It said pandemic effects remained uncertain and could affect workforce availability, supply chains, operating efficiency, customer demand, and costs.
- The annual dividend rate was increased to $0.93 per share, its 54th consecutive annual increase. No full-year earnings or EPS guidance is provided in the supplied filing text.
- Other notable items: the 2019 comparison included $16.5m pretax gain on the CytoSport sale; Q3 2020 included higher investment results, including gains on trust-held securities. Hedging losses of $28.4m before tax were in accumulated other comprehensive loss, with most expected to be recognized over the next 12 months.
- Management said known legal proceedings were not expected to materially affect financial condition, results, or liquidity. Principal disclosed uncertainties include COVID-19, commodity prices and supply, livestock disease, food safety, labor, customer demand, foreign currency, regulation, litigation, and execution of the multi-year Project Orion systems implementation.
Important facts for investors to verify
- Whether retail demand and foodservice recovery continued after the quarter, and how the resulting channel mix affected margins.
- Actual Q4 pandemic-related costs versus the estimated $20m–$40m, and whether labor or production constraints limited sales.
- Profit recovery at Refrigerated Foods and Jennie-O, including commodity and strategic hedge effects.
- Integration and performance of Sadler’s, and progress against the approximately $350m FY2020 capital-expenditure estimate.
- Debt maturity and liquidity profile following the $1bn note issuance, as well as the company’s ability to sustain dividends and fund planned investment.