Hormel Foods Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended January 26, 2020; comparative period ended January 27, 2019. Financial statements are unaudited. Hormel manufactures and markets branded food products across Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $2,384.4 million | $2,360.4 million | +1.0% |
| Organic net sales | $2,384.4 million | $2,295.2 million | +3.9% |
| Volume | 1,187.0 million lb. | 1,196.9 million lb. | -0.8%; organic +2.2% |
| Gross profit / margin | $468.4 million / 19.6% | $488.3 million / 20.7% | Profit -4.1% |
| Operating income | $280.5 million | $306.2 million | -8.4% |
| Earnings before taxes | $290.2 million | $307.0 million | -5.5% |
| Net earnings attributable to Hormel | $242.9 million | $241.4 million | +0.6% |
| Diluted EPS | $0.45 | $0.44 | +2.3% |
| Effective tax rate | 16.3% | 21.3% | Lower in FY2020 |
Organic measures exclude the prior-year impact of the CytoSport divestiture. The lower FY2020 tax rate, attributed primarily to substantial stock-option exercises, helped net earnings rise despite lower pretax earnings.
Cash flow, liquidity, and debt
- Operating cash flow was $188.4 million, versus $187.4 million. Capital expenditures were $58.2 million, versus $39.4 million; operating cash flow less capital expenditures was approximately $130.2 million.
- Investing cash outflow was $60.5 million, compared with $1.7 million; the prior-year period included $30.6 million of proceeds from the Fremont plant sale. Financing cash outflow was $77.9 million, versus $128.9 million.
- Cash and cash equivalents were $724.4 million at quarter-end, up from $672.9 million at FY2019 year-end and versus $512.7 million at the prior-year quarter-end. Current assets were $2,395.0 million and current liabilities $1,023.1 million.
- Reported current and long-term debt totaled $317.2 million, including $8.3 million of current maturities. The balance sheet also included $129.5 million of lease liabilities. The company adopted lease accounting in FY2020; at adoption it recognized $112.7 million of right-of-use assets and $114.1 million of lease liabilities.
- Dividends paid were $112.2 million, up from $100.1 million. No shares were repurchased during the quarter. The company said the FY2020 annual dividend rate was raised to $0.93 per share.
Material changes and segment results
- Refrigerated Foods: Sales rose 5.7% to $1,351.8 million and segment profit rose 2.9% to $167.3 million. Value-added demand and commodity profits supported results; higher raw-material costs pressured value-added businesses.
- Jennie-O Turkey Store: Sales increased 2.8% to $330.1 million and profit increased 1.7% to $38.6 million, reflecting higher commodity profits and operational improvements.
- Grocery Products: Sales fell 10.9% to $540.6 million and profit fell 28.2% to $68.4 million. The CytoSport divestiture, lower Skippy peanut butter sales/pricing, higher input costs, lower contract manufacturing profits, and lower volumes weighed on results.
- International & Other: Sales increased 5.4% to $161.9 million, while profit declined 20.1% to $20.0 million. Higher pork costs in Brazil, China, and other Asian markets, associated with African swine fever supply disruption, reduced profitability; affiliate earnings also declined.
- Total segment profit declined 8.3% to $294.3 million. Gross margin fell 1.1 percentage points, with higher pork and beef costs affecting multiple segments. Reported sales rose 1.0%; organic sales growth was stronger partly because the prior-year comparison included CytoSport.
Outlook, risks, and notable items
- Management expected a FY2020 effective tax rate of 20.5%–22.5%, above Q1’s 16.3%. FY2020 capital expenditures were estimated at approximately $360 million. No full-year sales or EPS guidance is provided in the filing.
- For Q2, management expected Refrigerated Foods growth and continued Jennie-O improvement to partly offset pressure in Grocery Products and International & Other. Grocery Products was expected to face continued effects from the CytoSport sale and lower Skippy pricing.
- Management warned that coronavirus-related disruption in China could make Q2 difficult for International & Other; the impact for the rest of the year was uncertain and dependent on containment, recovery of the sales pipeline, and plant capacity. The outbreak could also create input-cost volatility for Refrigerated Foods. African swine fever and commodity-price fluctuations remain material risks.
- After quarter-end, Hormel agreed to acquire Sadler’s Smokehouse for $270 million; the transaction closed March 2, 2020. Management also cited branded-product investment, business reinvestment, and strategic acquisitions as priorities.
- The company reported compliance with debt covenants and effective disclosure controls. It said known legal matters were not expected to materially affect financial condition, results, or liquidity. Standby letters of credit totaled $45.3 million, primarily for workers’ compensation programs.
- Trading securities held in a rabbi trust generated $5.2 million of gains in Q1, versus $1.4 million a year earlier; their mark-to-market changes affect earnings. Interest and investment income increased to $13.3 million from $6.9 million, while interest expense declined to $3.6 million from $6.1 million.
Important facts for investors to verify
- Whether the lower tax rate was temporary and how results compare once the full-year tax rate returns to management’s stated range.
- Whether higher pork, beef, feed-grain, and other input costs can be offset through pricing, hedging, and product mix.
- The duration and financial effects of coronavirus-related disruption and African swine fever on international operations, supply, and costs.
- Whether Grocery Products stabilizes after the CytoSport divestiture and amid lower Skippy pricing, and whether Refrigerated Foods and Jennie-O sustain growth.
- The funding, integration, and expected contribution of the $270 million Sadler’s Smokehouse acquisition, alongside planned capital spending of approximately $360 million.
- The sustainability of cash generation and the dividend as investment spending rises; reported Q1 operating cash flow was nearly unchanged year over year.