Hormel Foods Corporation — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended April 28, 2013; filed June 7, 2013. Unaudited interim results.
Business context and reporting period
Hormel processes and sells branded and unbranded food products across five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and International & Other. The quarter included the U.S. SKIPPY peanut butter business, acquired January 31, 2013.
Financial performance and position
| Metric | Q2 FY2013 | Prior-year quarter | Six months FY2013 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $2.153 billion | $2.013 billion | $4.269 billion | $4.052 billion |
| Gross profit | $352.8 million | $335.6 million | $697.0 million | $673.0 million |
| Gross margin | 16.4% | 16.7% | 16.3% | 16.6% |
| Operating income | $186.9 million | $194.7 million | $385.1 million | $390.7 million |
| Net earnings attributable to Hormel | $125.5 million | $127.9 million | $255.2 million | $256.3 million |
| Diluted EPS | $0.46 | $0.48 | $0.95 | $0.95 |
- Q2 sales increased 6.9%; tonnage rose 3.8%. Six-month sales increased 5.3%; tonnage rose 2.7%.
- Q2 SG&A was $173.1 million, or 8.0% of sales, versus $148.7 million, or 7.4%, a year earlier. Acquisition transition and transaction costs and higher marketing expense contributed.
- Six-month operating cash flow was $257.6 million, compared with $213.0 million. Investing cash outflow was $631.8 million, principally reflecting the $663.1 million SKIPPY purchase; capital expenditures were $45.5 million. Financing cash outflow was $45.6 million.
- Cash and equivalents were $262.7 million at quarter-end, down from $682.4 million at October 28, 2012. Short-term marketable securities were zero after liquidation. Current assets were $1.832 billion and current liabilities $707.9 million.
- Long-term debt was $250.0 million, unchanged from fiscal year-end; the company reported compliance with debt covenants. Pension and post-retirement benefit liabilities were $612.5 million.
- Dividends declared were $0.17 per share for the quarter and $0.34 for six months. The annual dividend rate was raised to $0.68 per share.
Material changes versus the prior comparable period
- Sales growth included $87.0 million from SKIPPY in Q2 and $48.7 million from Don Miguel products; the filing attributes substantial Grocery Products growth to these additions. SKIPPY’s Q2 segment profit impact was described as immaterial.
- Despite higher sales, Q2 Hormel-attributable earnings declined 1.9% and diluted EPS declined 4.2%. Lower gross margin, higher SG&A, and weaker Jennie-O Turkey Store results weighed on performance.
- Jennie-O segment profit fell 25.9% in Q2 and 24.5% for six months, reflecting higher grain costs and lower commodity turkey prices. Specialty Foods and International & Other segment profits rose 24.5% and 21.5% in Q2, respectively.
- The U.S. SKIPPY acquisition increased goodwill by a preliminary $301.2 million and added $264.5 million of intangible assets. The purchase-price allocation remained preliminary; the China business acquisition was still pending.
Outlook, commentary, risks, and unusual items
- Management expected continued strength in Grocery Products and International & Other, with SKIPPY contributing to the second-half results. It anticipated improvement in pork operating margins and Jennie-O results as commodity pressures moderated, while warning that Jennie-O’s third quarter would remain challenging.
- The SPLENDA foodservice sales contract was scheduled to expire at the end of June 2013; management said Specialty Foods would face the loss of those sales and DCB’s Perrysburg, Ohio plant would close by fiscal year-end.
- FY2013 estimates included SG&A of approximately 7.5% of sales, an effective tax rate of 33%–34%, interest expense of $12–$14 million, and capital expenditures of $120–$130 million. No full-year EPS guidance is provided in the filing text.
- The company expected to complete the China SKIPPY acquisition by fiscal year-end for approximately $42 million, subject to regulatory approvals and working-capital adjustments.
- Key operating risks include volatile grain, hog, and poultry prices; disease and food-safety events; pricing and demand shifts; acquisition integration; contract loss; and regulatory, litigation, labor, and international risks. The company held 15.9 million bushels of corn cash-flow hedge contracts; it expected to recognize most related accumulated losses over the next 12 months.
- Unrecognized tax benefits, including interest and penalties, totaled $22.1 million. Standby letters of credit totaled $43.6 million, including a revocable $5.6 million letter supporting an affiliate. Ordinary-course legal matters were not expected to have a material effect. Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm final SKIPPY purchase accounting, integration costs, and completion and economics of the planned China acquisition.
- Track feed, hog, and turkey market trends and whether management’s anticipated margin recovery materializes.
- Assess the earnings and plant-closure effects of the SPLENDA contract expiration.
- Reconcile segment-profit data: the segment figures sum to $195.6 million for Q2, but a table in the MD&A contains an apparent conflicting total; the filing text does not provide a consistent figure in every presentation.
- Monitor liquidity after the acquisition-related cash decline, alongside capital spending, dividends, repurchases, and remaining debt-covenant capacity.