Hormel Foods Corporation — Q1 FY2014 10-Q
Reporting period: Three months ended January 26, 2014; comparisons are with the three months ended January 27, 2013, unless stated otherwise. Financial statement amounts below are in millions of dollars except per-share data. The interim statements are unaudited.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $2,242.7 | $2,116.2 | +6.0% |
| Gross profit | $398.6 | $344.2 | +15.8% |
| Gross margin | 17.8% | 16.3% | +1.5 percentage points |
| Operating income | $237.2 | $198.2 | +19.7% |
| Net earnings attributable to Hormel | $153.3 | $129.7 | +18.2% |
| Diluted EPS | $0.57 | $0.48 | +18.8% |
| Cash from operating activities | $314.3 | $141.8 | +$172.5 |
| Dividends declared per share | $0.20 | $0.17 | +17.6% |
Sales tonnage increased 2.4% to 1.27 billion pounds. The SKIPPY businesses contributed $86.5 million of sales in the quarter; the filing does not provide a comparable organic-sales growth figure.
Segments
| Segment | Sales change | Operating profit change | Reported drivers |
|---|---|---|---|
| Grocery Products | +20.2% | +12.9% | SKIPPY sales and core-product volume supported results; higher meat input costs pressured some product margins. |
| Refrigerated Foods | +6.1% | +58.6% | Positive pork operating margins, bacon demand, and value-added retail and foodservice growth. |
| Jennie-O Turkey Store | +2.3% | +1.0% | Value-added growth and favorable feed costs were largely offset by weak live production in severe cold. |
| Specialty Foods | -16.2% | -10.5% | Loss of a sugar-substitute foodservice agreement and softer nutritional-product sales. |
| International & Other | +24.2% | +31.8% | Strong SPAM exports and SKIPPY sales; partly offset by lower joint-venture results and China start-up costs. |
Total segment operating profit rose 20.4% to $245.0 million. Equity in affiliate earnings declined to $4.7 million from $9.8 million, primarily due to lower MegaMex results reflecting higher input costs and unfavorable exchange rates.
Liquidity, debt, and capital resources
- Cash and cash equivalents were $639.8 million at January 26, 2014, versus $434.0 million at October 27, 2013. The cash flow statement reports $887.7 million at the end of the comparable prior-year quarter; these are different comparison dates.
- Current assets were $2,166.8 million and current liabilities were $824.5 million at quarter-end. Long-term debt, less current maturities, was $250.0 million, unchanged from October 27, 2013. Debt fair value was estimated at $262.0 million.
- Operating cash flow was $314.3 million. Investing activities used $70.1 million, including $41.4 million for the China SKIPPY acquisition and $37.0 million of capital expenditures. Financing activities used $37.3 million, including $44.8 million in dividends paid.
- Fiscal 2014 capital expenditures were estimated at $130–140 million. The company reported compliance with all debt covenants. It had $42.5 million of standby letters of credit, principally for workers’ compensation programs, including $4.9 million supporting an affiliated party.
- The annual dividend rate increased to $0.80 per share. The company reported no share repurchases under its public plan during the quarter.
Outlook, risks, and contingencies
- Management expected Refrigerated Foods momentum to continue, while warning that PEDv-related hog supply tightness could affect the industry; the overall impact remained unknown. The company said PEDv had affected its internal farm operations and some independent suppliers.
- Jennie-O faced higher fuel and weather-related costs expected to continue into the second and third quarters. Management expected a full year of SKIPPY sales to benefit Grocery Products and International & Other, and anticipated growth in value-added products.
- For FY2014, SG&A was expected at 7.3–7.6% of sales, the effective tax rate at 34–35%, and interest expense at approximately $12–14 million. No full-year earnings or EPS guidance is provided in the filing text.
- Specialty Foods was expected to continue declining as it rebuilt its product portfolio after expiration of the sugar-substitute agreement. Grocery Products planned pricing actions to protect margins amid commodity-cost volatility.
- Key risks include livestock disease, volatile pork, poultry, feed, avocado and peanut costs, food safety and product liability, changing consumer demand, acquisition integration, foreign-market risks, regulation, and labor relations. A San Leandro union contract covering about 102 employees was due to expire during FY2014; negotiations had not begun.
- Unrecognized tax benefits, including interest and penalties, totaled $24.6 million; $16.3 million would affect the effective tax rate if recognized. The company could not reasonably estimate the timing or amount of changes from pending state tax audits. Management said known legal matters were not expected to materially affect financial condition, results, or liquidity.
Most important facts for investors to verify
- How much of sales and profit growth reflects underlying volume, pricing, and margins versus the $86.5 million of SKIPPY sales and acquisition-related effects.
- Whether PEDv materially tightens hog supplies or raises raw-material costs, and how that affects Refrigerated Foods margins and customer supply.
- Whether severe-weather and fuel costs persist at Jennie-O, and whether its production performance improves.
- Whether Specialty Foods can replace lost sugar-substitute business and stabilize sales and profit.
- Execution and final purchase-price valuation of the China SKIPPY acquisition, including the disclosed start-up costs.
- Progress against management’s expense, tax-rate, interest-expense, and capital-spending expectations, as well as any changes in tax contingencies or legal matters.