Hormel Foods Corporation — Q1 FY2019 10-Q
Reporting period: Three months ended January 27, 2019; comparison is with the three months ended January 28, 2018. Balance-sheet comparisons are with October 28, 2018. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q1 FY2019 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $2,360.4 million | $2,331.3 million | +1.2% |
| Gross profit / gross margin | $488.3 million / 20.7% | $498.3 million / 21.4% | Profit down 2.0% |
| Operating income | $306.2 million | $302.0 million | +1.4% |
| Earnings before income taxes | $307.0 million | $305.2 million | +0.6% |
| Net earnings attributable to Hormel | $241.4 million | $303.1 million | -20.3% |
| Diluted EPS | $0.44 | $0.56 | -21.4% |
| Operating cash flow | $187.4 million | $304.2 million | Down $116.8 million |
- Sales volume increased 0.5%. Cost of products sold rose 2.1%, with management citing higher freight and operating expenses.
- SG&A declined 12.0% to $193.5 million, primarily due to a legal settlement and the prior-year Columbus acquisition costs. Equity in affiliate earnings fell 51.3% to $11.5 million, partly reflecting a non-operating MegaMex tax benefit in the prior-year quarter.
- The effective tax rate was 21.3%, versus 0.6% a year earlier. Hormel attributed the prior-year rate chiefly to deferred-tax remeasurement following the Tax Act; this comparison drove much of the decline in net earnings despite higher pretax earnings.
Segments and material changes
- Grocery Products: Sales increased 0.5% to $606.8 million; segment profit decreased 2.3% to $95.3 million. Branded growth was partly offset by lower contract manufacturing sales; profit comparison was affected by the prior-year MegaMex tax benefit and a current-year legal settlement.
- Refrigerated Foods: Sales rose 1.9% to $1,278.7 million and segment profit rose 3.2% to $162.6 million. Value-added profits more than offset a 70% decline in commodity profits, higher freight, and higher operating costs.
- Jennie-O Turkey Store: Sales were down 0.5% to $321.2 million; segment profit was nearly flat at $37.9 million. Lower retail lean ground turkey sales weighed on results.
- International & Other: Sales rose 2.1% to $153.5 million and segment profit rose 1.3% to $25.0 million. China and branded exports improved, partly offset by weaker fresh pork export profitability amid tariffs.
- Hormel reorganized its deli businesses into Refrigerated Foods and moved its ingredients business from Grocery Products to Refrigerated Foods; prior-year segment figures were recast for comparison.
Cash, debt, and liquidity
- Cash and cash equivalents were $512.7 million at quarter-end, up from $459.1 million at October 28, 2018. Net cash increased $53.6 million during the quarter.
- Operating cash flow was $187.4 million, down from $304.2 million. Management cited working-capital changes, including lower deferred hog payments versus the prior year.
- Cash used in investing was $1.7 million, versus $905.3 million in the prior-year quarter, which included the Columbus acquisition. Capital expenditures were $39.4 million, down from $53.7 million.
- Total reported debt was approximately $624.9 million: $374.9 million current maturities and $250.0 million long-term debt. Hormel said it was in compliance with all debt covenants.
- Current assets were $2,100.7 million and current liabilities $1,435.8 million. Dividends paid were $100.1 million; share repurchases were $44.8 million.
Outlook, risks, and unusual items
- Management expects FY2019 capital expenditures of approximately $350 million and an effective tax rate of 20.5%–23.0%. The annual dividend rate increased to $0.84 per share.
- For Q2, management expects Refrigerated Foods foodservice and deli strength and favorable China input costs to help offset weaker lean ground turkey sales and significantly weaker pork export margins. It expects JOTS earnings to decline year over year, citing lean ground turkey retail weakness and higher costs following extremely cold weather.
- Management also anticipated Grocery Products sales growth from branded center-store and Mexican-food products, with pressure from lower contract-manufacturing margins and lower equity earnings. International & Other growth was expected to be supported by China, while pork exports remained exposed to trade uncertainty.
- After quarter-end, Hormel announced a definitive agreement to sell CytoSport to PepsiCo for $465 million, subject to customary closing conditions and expected to close in Q2 FY2019.
- The sale of the Fremont facility led to pension and post-retirement plan curtailment items and costs. Commodity costs, freight, tariffs and trade conditions, livestock and poultry disease, food safety, consumer demand, foreign exchange, and labor relations are among the disclosed risks. The filing says currently known legal proceedings are not expected to materially affect financial condition, results, or liquidity.
Most important facts for investors to verify
- Whether Q2 and full-year segment outlooks materialize, particularly for pork exports, lean ground turkey, and value-added Refrigerated Foods.
- Whether operating cash flow recovers from the year-over-year decline as working-capital movements normalize.
- Completion, timing, and proceeds of the CytoSport sale, including any effects on reported results.
- How commodity, freight, tariff, and input-cost pressures affect gross margin and the company’s ability to offset them through pricing and branded products.
- Debt repayment plans, the $374.9 million current maturity, and continued compliance with debt covenants.