Hormel Foods Corporation — Q3 FY2012 Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2012, ended July 29, 2012. Comparisons are with the periods ended July 31, 2011, unless noted. Amounts below are in millions except per-share data.
Financial results
| Metric | Q3 FY2012 | Q3 FY2011 | 9M FY2012 | 9M FY2011 |
|---|---|---|---|---|
| Net sales | $2,008.2 | $1,910.6 | $6,060.5 | $5,791.2 |
| Gross profit | $307.1 | $297.9 | $980.1 | $998.1 |
| Gross margin | 15.3% | 15.6% | 16.2% | 17.2% |
| Operating income | $171.9 | $146.8 | $562.5 | $555.3 |
| Net earnings attributable to Hormel | $111.2 | $98.5 | $367.4 | $356.9 |
| Diluted EPS | $0.41 | $0.36 | $1.37 | $1.31 |
- Q3 sales rose 5.1%; tonnage increased 3.6%. Nine-month sales rose 4.7%, while tonnage declined 0.3%.
- Q3 attributable earnings increased 12.9% and diluted EPS rose 13.9%. Nine-month attributable earnings increased 3.0% and diluted EPS rose 4.6%.
- Q3 SG&A was $145.0 million, down from $156.6 million; as a share of sales it declined to 7.2% from 8.2%. Nine-month SG&A was $446.2 million versus $461.9 million.
- Cash from operations for nine months was $284.1 million, down from $319.4 million. Investing used $72.9 million; financing used $141.9 million. Capital expenditures were $93.9 million, compared with $56.3 million.
- At July 29, cash and cash equivalents were $533.2 million, short-term marketable securities $77.0 million, current assets $2,117.3 million and current liabilities $676.7 million. Long-term debt was $250.0 million, with no current maturities reported. The company said it was in compliance with debt covenants.
- Dividends declared were $0.15 per share in Q3 and $0.45 for the first nine months. Nine-month share repurchases totaled $50.7 million.
Segment performance and changes
- Grocery Products: Q3 sales rose 21.1% and segment profit 31.6%. Sales included $46.1 million from Don Miguel products after Hormel’s retail sales force assumed responsibility for them. Core brands and MegaMex results strengthened.
- Refrigerated Foods: Q3 sales edged down 0.2%, while profit rose 6.9%; nine-month profit fell 24.9%. Value-added products helped offset weak pork operating margins and lower commodity fresh-pork sales.
- Jennie-O Turkey Store: Q3 sales increased 7.3% and profit 12.2%; nine-month profit rose 19.7%. Value-added growth and improved mix helped counter higher grain costs and lower commodity-meat prices.
- Specialty Foods: Q3 sales rose 11.1% and profit 18.5%, with all three operating businesses reporting improved quarterly profit.
- All Other: Q3 sales increased 1.8% and profit 54.6%, supported by export sales of fresh pork and SPAM products, pricing actions and lower raw-material costs.
- Across the first nine months, total segment operating profit was essentially flat at $577.3 million versus $577.7 million. Lower Refrigerated Foods profit largely offset gains in other segments.
Outlook, risks and other notable items
- Management expected full-year FY2012 SG&A of approximately 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 provides no full-year EPS guidance.
- Management anticipated seasonally lower hog costs in the fall and positive, but below-prior-year, pork margins for the remainder of FY2012. Elevated, volatile grain costs were expected to pressure Jennie-O Turkey Store; value-added growth, exports and operating efficiencies were cited as offsets.
- Nine-month gross profit and gross margin declined despite higher sales. Management attributed pressure principally to a weaker spread between hog costs and primal values; shipping and handling costs had also increased across segments.
- Operating cash flow fell year over year, reflecting unfavorable working-capital movements and higher pension contributions, despite increased earnings and additional dividends from joint ventures. Inventory increased $41.2 million over the nine-month period.
- Commodity prices, feed costs, livestock disease, food safety, competition, regulation, litigation, economic conditions and international operations are identified risks. A 10% decline in investments not held in fixed-income funds would reduce pretax earnings by an estimated $11.3 million.
- Unrecognized tax benefits, including interest and penalties, totaled $29.8 million; tax audits were ongoing and the potential effect of changes could not be reasonably estimated. A renewable $4.8 million standby letter of credit guarantees an affiliate’s potential workers’ compensation obligations and is not recorded as a balance-sheet liability.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Known legal proceedings were not expected to materially affect financial condition, results or liquidity.
Important facts for investors to verify
- Whether pork spreads and hog costs recover as expected, and the extent to which grain-cost inflation affects turkey margins.
- Whether the recent improvement in value-added sales, MegaMex results and international exports continues to offset commodity-market weakness.
- Why operating cash flow declined, and whether working capital, pension contributions and planned capital spending affect cash generation for the full year.
- Progress and outcomes of tax examinations, including potential changes to the $29.8 million uncertain-tax-position liability.
- Performance and market exposure of trading investments, commodity hedges, and the company’s ability to maintain its dividend and repurchase plans.