Hormel Foods Corporation — Q1 FY2021 Form 10-Q
Reporting period: Thirteen weeks ended January 24, 2021; comparisons are with the thirteen weeks ended January 26, 2020, unless stated otherwise. Amounts are in U.S. dollars.
Business context and results
Hormel manufactures and markets branded food products through Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. COVID-19 continued to shift demand from foodservice toward retail and deli. Record quarterly sales reflected retail, deli, and international growth, partly offset by weaker foodservice demand.
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $2,461.1 million | $2,384.4 million | +3.2% |
| Gross profit | $450.2 million | $468.4 million | -3.9% |
| Gross margin | 18.3% | 19.6% | -1.3 percentage points |
| Operating income | $268.0 million | $280.5 million | -4.4% |
| Net earnings attributable to Hormel | $222.3 million | $242.9 million | -8.5% |
| Diluted EPS | $0.41 | $0.45 | -8.9% |
| Operating cash flow | $205.7 million | $188.4 million | +9.2% |
| Capital expenditures | $40.4 million | $58.2 million | Lower year over year |
Gross margin was pressured by lower foodservice mix and COVID-related operating costs. Hormel reported approximately $15 million of direct incremental pandemic-related supply-chain costs, including costs from reduced production volumes and enhanced safety measures. The effective tax rate was 19.7%, versus 16.3%; the prior-year rate benefited from greater stock-option exercises.
Segments and material changes
| Segment | Sales change | Profit change | Reported drivers |
|---|---|---|---|
| Grocery Products | +6.8% | +34.7% | Higher sales, improved mix, and stronger MegaMex earnings. |
| Refrigerated Foods | +1.1% | -15.6% | Retail and deli growth was outweighed in profit by lower foodservice sales, weaker commodity profits, and COVID-related costs. |
| Jennie-O Turkey Store | +1.0% | -30.1% | Retail and holiday whole-bird strength was offset in profit by lower foodservice sales, supply-chain costs, and higher freight. |
| International & Other | +13.1% | +61.4% | Improved branded exports, China recovery, and higher income from international partners. |
U.S. retail sales rose to $1,390.6 million from $1,226.4 million; U.S. foodservice sales fell to $586.3 million from $709.1 million. Shelf-stable sales increased to $523.9 million from $450.7 million, with the filing attributing growth to pandemic-driven consumer demand.
Financial position and liquidity
- Cash and cash equivalents were $1,751.5 million at January 24, 2021, versus $1,714.3 million at October 25, 2020. The company said cash was substantially higher than the prior-year quarter mainly because it issued $1.0 billion of debt in Q3 FY2020.
- Total debt, including current maturities, was approximately $1,301.7 million; current maturities were $258.7 million. Current assets were $3,601.7 million and current liabilities $1,417.5 million.
- Operating cash flow was $205.7 million. Investing activities used $39.3 million, including $40.4 million of capital expenditures; financing activities used $134.8 million, including $125.5 million of dividends and $8.8 million of share repurchases.
- The company said it complied with all debt covenants. It estimated FY2021 capital expenditures at approximately $260 million. The filing states that operating cash flows are a consistent source of liquidity and that the company believes its balance sheet positions it to manage the pandemic.
Outlook, transactions, and risks
- Management expected the FY2021 effective tax rate to be 20.0%–21.5%, excluding the announced Planters acquisition.
- For Q2, management expected Refrigerated Foods to benefit from improved foodservice results and International & Other to grow on continued China strength. Grocery Products was expected to decline against unusually strong prior-year demand; Jennie-O was expected to face higher grain costs. Jennie-O price increases were expected to take effect late in Q2.
- On February 10, 2021, Hormel announced a definitive agreement to acquire the Planters snack nuts portfolio for $3.35 billion, subject to customary adjustments and regulatory approval, with closing expected in calendar Q2 2021. The company cited an approximately $560 million tax benefit, described an effective purchase price of $2.79 billion, and expected to fund the deal with cash and long- and short-term debt. This is a subsequent event, not a completed quarter transaction.
- Management expected most incremental COVID-related supply-chain costs to be temporary, but noted uncertainty around the pandemic, facility operations, labor availability, foodservice recovery, and supply chains. Grain and other input-cost inflation, especially for Jennie-O, was an identified near-term earnings risk.
- Other disclosed exposures include commodity and currency fluctuations, food safety and livestock disease, customer and supplier disruption, and acquisition execution and financing. Hormel disclosed three sets of antitrust lawsuits targeting the pork and turkey industries; it had not recorded reserves because it did not believe it would have liability. It did not expect known legal matters, individually or in aggregate, to materially affect financial condition, results, or liquidity.
Investor facts to verify
- Whether foodservice demand recovered as anticipated and whether the sales-channel mix and COVID-related costs continued to affect margins.
- Whether higher grain, hog, freight, and other input costs were offset by pricing actions, particularly at Jennie-O.
- Planters transaction approvals, final purchase-price adjustments, tax-benefit realization, financing mix, and impact on debt and liquidity.
- Delivery of the approximately $260 million FY2021 capital-spending plan and the stated segment outlook.
- Developments in the disclosed antitrust cases, state tax audits, and other contingencies; the filing does not provide a clear estimate of potential antitrust exposure.