Hormel Foods Corporation — Form 10-Q Summary
Business context and reporting period
Fiscal 2016 first quarter, three months ended January 24, 2016; comparable quarter ended January 25, 2015. Hormel processes and sells branded and unbranded food products through Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and International & Other. Fiscal 2016 is a 53-week year, with the extra week in the fourth quarter. Per-share and share data reflect the two-for-one stock split effected in January 2016.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $2,292.7 million | $2,395.1 million | Down 4.3% |
| Gross profit | $558.0 million | $444.6 million | Up 25.5% |
| Gross margin | 24.3% | 18.6% | Up 5.7 percentage points |
| Operating income | $359.5 million | $266.0 million | Up 35.2% |
| Net earnings attributable to Hormel | $235.1 million | $171.7 million | Up 36.9% |
| Diluted EPS | $0.43 | $0.32 | Up 34.4% |
| Operating cash flow | $278.7 million | $246.5 million | Up $32.2 million |
Management’s non-GAAP adjusted comparison excludes prior-year charges for the Stockton plant closure and international joint venture exits: adjusted net earnings increased 25.5% to $235.1 million and adjusted diluted EPS increased 22.9% to $0.43 from $0.35.
- Lower input costs—especially pork, grain, and other raw materials—helped lift gross profit; lower pork markets and turkey supply shortages contributed to lower sales. Sales tonnage declined 2.8%.
- Cash and cash equivalents were $375.2 million at quarter-end, versus $347.2 million at October 25, 2015, and $527.1 million at the prior-year quarter-end. Current assets were $1.946 billion and current liabilities $1.020 billion.
- Long-term debt was $250.0 million, with no short-term debt at quarter-end; the company repaid $185.0 million of short-term debt during the quarter. Debt was $435.0 million at October 25, 2015. The company reported compliance with debt covenants.
- Cash used in investing was $21.0 million, including $33.5 million of property and equipment purchases. Cash used in financing was $227.5 million, including debt repayment and $66.1 million of dividends paid.
- Quarterly dividends declared were $0.145 per share. The fiscal 2016 annual dividend rate was raised to $0.58 per share. No common shares were repurchased in the quarter.
Material changes and segment results
Four of five segments increased operating profit. The Refrigerated Foods segment included Applegate Farms, acquired in July 2015 for a preliminary $774.1 million cash purchase price; Applegate contributed $76.3 million of first-quarter sales.
| Segment | Sales change | Operating profit change | Key context |
|---|---|---|---|
| Grocery Products | Down 4.3% | Up 57.8% | Favorable input costs, efficiencies, and prior-year Stockton closure charges aided comparison. |
| Refrigerated Foods | Up 1.6% | Up 65.0% | Applegate, value-added products, and higher pork margins supported results. |
| Jennie-O Turkey Store | Down 15.4% | Down 1.8% | HPAI-related flock losses reduced production and sales volume. |
| Specialty Foods | Down 9.7% | Up 44.2% | Favorable input costs and supply-chain synergies offset weaker contract packaging sales. |
| International & Other | Down 6.8% | Up 68.8% | Prior-year JV-exit charges benefited comparison; softer markets and currency remained challenges. |
Overall SG&A increased 16.4% to $209.9 million, mainly reflecting Applegate expenses, employee-related costs, and advertising. Equity in affiliate earnings rose to $11.5 million from $1.7 million, including a markedly better result from foreign joint ventures versus the prior-year period.
Outlook, risks, and contingencies
- Management expected favorable input costs to continue in Refrigerated Foods, Grocery Products, and Specialty Foods, while pork operating margins were expected to moderate as the year progressed.
- Turkey production was expected to return to normalized levels by the end of Q2, supporting potential strong second-half JOTS growth, assuming no recurrence of HPAI. International & Other was expected to improve, though the strong U.S. dollar was expected to remain a challenge.
- Fiscal 2016 capital expenditures were estimated at approximately $250 million; the company expected a full-year effective tax rate of 33.5%–34.0%. The filing provides no consolidated full-year earnings or EPS guidance.
- Key risks include livestock and poultry disease (including HPAI), food safety and product liability, commodity and feed-price volatility, consumer demand and competition, acquisition integration, foreign exchange and international market conditions, regulation, litigation, environmental matters, and labor relations. Union contracts at the Vernon, California facility covering about 1,100 employees were due to expire in fiscal 2016; negotiations had not begun.
- Unrecognized tax benefits, including interest and penalties, totaled $25.6 million; IRS examinations covered fiscal 2013 and 2014, and state audits were ongoing. The company also reported $44.1 million of standby letters of credit, including $4.0 million for an affiliate’s workers’ compensation obligations. Management did not expect currently known legal proceedings to materially affect financial condition, results, or liquidity.
- A portion of Diamond Crystal Brands was classified as held for sale: $116.9 million of assets and $2.2 million of current liabilities. The company stated the portion was not material to annual sales, earnings, or EPS.
Important facts for investors to verify
- Whether the profit and margin improvement is sustainable as pork margins moderate and prior-year closure and joint-venture exit charges roll out of comparisons.
- Progress in restoring turkey production after HPAI, and whether the expected second-half recovery occurs without another outbreak.
- Applegate integration, realized growth and synergies, and completion of its preliminary purchase-price allocation.
- Execution against the $250 million capital expenditure estimate, debt and cash levels, and ongoing dividend commitments.
- Developments in tax audits and uncertain tax positions, as well as any changes in legal, product-safety, commodity, currency, or labor exposures.