Hormel Foods Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended July 24, 2016. Hormel processes and sells branded and unbranded food products through five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and International & Other. Fiscal 2016 is a 53-week year; the extra week falls in the fourth quarter. Share and per-share comparisons reflect the February 2016 two-for-one stock split.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $2,302.4 million | $2,188.6 million | $6,895.3 million | $6,863.0 million |
| Gross profit | $475.3 million | $409.4 million | $1,559.7 million | $1,313.6 million |
| Gross margin | 20.6% | 18.7% | 22.6% | 19.1% |
| Operating income | $274.8 million | $231.2 million | $958.1 million | $774.8 million |
| Net earnings attributable to Hormel | $195.7 million | $146.9 million | $646.1 million | $498.9 million |
| Diluted EPS | $0.36 | $0.27 | $1.19 | $0.92 |
| Operating cash flow | Not separately presented | Not separately presented | $621.7 million | $690.2 million |
At July 24, 2016, cash and cash equivalents were $379.6 million; current assets were $2.010 billion and current liabilities $1.129 billion. Short-term debt was $145.0 million and long-term debt $250.0 million, for total reported debt of $395.0 million. The company was in compliance with its debt covenants. Capital expenditures were $165.8 million year to date; management estimated approximately $250 million for fiscal 2016.
Material changes versus prior comparable periods
- Q3 sales rose 5.2%, operating income 18.9%, and net earnings 33.2%. Nine-month sales were up 0.5%, while net earnings rose 29.5% and diluted EPS rose 29.3%.
- Q3 growth reflected the addition of Applegate and Justin’s, recovering Jennie-O volumes following the prior-year highly pathogenic avian influenza (HPAI) outbreak, value-added product growth, and stronger pork exports. Nine-month sales were held back by lingering HPAI effects in the first half and softer export demand.
- Refrigerated Foods led Q3 segment profit growth, up 23.6%, with Applegate, favorable market conditions, and value-added sales contributing. Jennie-O profit rose 58.7% as production recovered. Grocery Products profit was nearly flat, in part due to Justin’s advertising and transaction costs.
- Specialty Foods Q3 sales fell 25.0% and profit fell 13.1%, primarily reflecting the May 2016 sale of Diamond Crystal Brands (DCB). DCB had contributed approximately $260 million of fiscal 2015 sales.
- Gross margin improved, while SG&A increased 12.1% in Q3, mainly due to higher advertising and the inclusion of Applegate and Justin’s expenses. Year-to-date operating cash flow declined as higher earnings were offset by unfavorable working-capital changes.
Outlook, commentary, risks, and unusual items
- Management expected favorable market conditions and value-added product growth to support Refrigerated Foods, Jennie-O, and Grocery Products in Q4. It expected Jennie-O profit growth as it sought to regain distribution lost during HPAI; Specialty Foods was not expected to achieve year-over-year sales or profit growth because of the DCB divestiture.
- International & Other expected continued momentum in SPAM, SKIPPY, and pork exports, while China operations faced higher raw-material costs and soft retail meat demand. Grocery Products anticipated Q4 sales growth supported by Justin’s, SKIPPY, and Wholly Guacamole.
- Management forecast a fiscal 2016 effective tax rate of 32.0%–32.5%. The Q3 rate was 28.6%, benefiting from discrete tax events, primarily international entity restructuring.
- Justin’s was acquired on May 26, 2016, for a preliminary $281.7 million, funded with cash and short-term financing. The company cited an estimated $70 million net present value benefit from tax-basis amortization. DCB was sold for preliminary net proceeds of $110.1 million. A $1.0 million goodwill impairment charge related to DCB assets held for sale was recorded in the first half.
- Jennie-O recorded a $9.6 million Q3 mark-to-market hedge loss. Due to market volatility, Hormel temporarily suspended special hedge-accounting treatment for certain Jennie-O corn futures; related gains or losses were recognized in earnings as incurred.
- Key risks include food safety and product liability, commodity price and supply volatility, livestock and poultry disease, consumer demand and competition, acquisition integration, litigation, regulation, labor costs, and international-market exposure. The filing states known legal matters were not expected to materially affect financial condition, results, or liquidity.
- Other notable items: nine-month cash dividends paid were $219.7 million, and the annual dividend rate increased to $0.58 per share. Share repurchases totaled $45.0 million year to date. Unrecognized tax benefits, including interest and penalties, were $28.3 million; the possible effect of state tax audits could not be reasonably estimated.
Important facts for investors to verify
- Whether Jennie-O sustains its recovery and regains distribution, and whether the company’s Q4 profit expectations materialize.
- How much reported growth reflects acquisitions and favorable markets versus underlying organic volume, pricing, and margins.
- Whether working capital, capital spending, dividends, and acquisition needs affect cash generation and debt after the Justin’s purchase.
- The eventual purchase-price and working-capital adjustments for Justin’s and DCB, and progress integrating Justin’s.
- Commodity-hedge effects, tax-rate outcomes, and resolution of uncertain tax positions and ongoing audits.