Hormel Foods Corporation — Q1 FY2013 10-Q
Business context and period: The filing covers the three months ended January 27, 2013, compared with the three months ended January 29, 2012. Hormel processes and sells branded and unbranded food products through Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and All Other. The interim financial statements are unaudited; results for the quarter may not indicate full-year performance.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $2,116.2 million | $2,039.4 million | +3.8% |
| Gross profit | $344.2 million | $337.4 million | +2.0% |
| Gross margin | 16.3% | 16.5% | -0.2 percentage points |
| Operating income | $198.2 million | $195.9 million | +1.2% |
| Net earnings attributable to Hormel | $129.7 million | $128.4 million | +1.0% |
| Diluted EPS | $0.48 | $0.48 | Unchanged |
| Operating cash flow | $141.8 million | $152.2 million | -$10.3 million |
| Capital expenditures | $22.1 million | $30.5 million | -$8.4 million |
SG&A was $155.8 million, or 7.4% of sales, versus $152.5 million, or 7.5%. The effective tax rate was 33.5%, compared with 33.4%. Declared dividends were $0.17 per share versus $0.15.
Liquidity and debt: At January 27, 2013, cash and cash equivalents were $887.7 million, up from $682.4 million at October 28, 2012. Short-term marketable securities were nil after liquidation during the quarter, compared with $77.4 million at fiscal year-end. Current assets were $2,399.8 million and current liabilities $737.4 million. Long-term debt was $250.0 million, unchanged; the company reported compliance with debt covenants. Operating cash flow was the principal liquidity source. Financing cash use was $3.0 million, including $39.4 million of dividends paid; investing activities provided $66.3 million, including $77.6 million from securities sales.
Material changes and segment performance
- Grocery Products: Sales rose 24.0% to $334.1 million and segment profit rose 13.2% to $49.9 million. Growth included $54.5 million of Don Miguel product sales newly handled by Hormel’s retail sales force, as well as stronger core products.
- Refrigerated Foods: Sales fell 1.9% to $1,063.4 million; profit was essentially flat at $53.8 million. Planned lower harvest levels reduced fresh pork sales; weak pork processing margins and live-production costs were partly offset by value-added products.
- Jennie-O Turkey Store: Sales increased 3.4% to $390.3 million, but profit declined 23.2% to $58.9 million. Higher grain costs and lower commodity turkey prices pressured results.
- Specialty Foods: Sales rose 7.3% to $233.8 million and profit increased 42.7% to $23.8 million, supported by improved results across its operating businesses.
- All Other: Sales increased 3.8% to $94.5 million and profit rose 37.2% to $17.1 million, led by strong pork exports and better China operations.
Consolidated tonnage increased 1.6% to 1.24 billion pounds. Equity earnings from affiliates declined to $9.8 million from $11.0 million, mainly due to lower MegaMex results.
Outlook, risks, and notable items
- Management expects continued growth in Grocery Products, Specialty Foods, and All Other. It expects pork operating margins to improve gradually, while high feed costs and weak commodity turkey prices may continue to pressure Jennie-O in the near term; management anticipates improvement in the latter half of the year.
- Management forecasts FY2013 SG&A at 7.0%–7.5% of sales, an effective tax rate of 33.5%–34.5%, interest expense of $12–$14 million, and capital expenditures of approximately $130–$140 million.
- After quarter-end, on January 31, 2013, Hormel completed the U.S. Skippy peanut butter acquisition for a preliminary $663.1 million in cash, funded with existing cash and liquidated securities. It expected to acquire the China business by fiscal year-end for approximately $42 million more. Management expects the acquisition to be accretive to FY2013 margins, though Q2 transaction and transition costs will offset operating-profit benefits; fuller benefits are expected in FY2014.
- Management cited commodity price and supply volatility, feed costs, food safety and disease, consumer demand, acquisition integration, litigation, regulation, environmental matters, and labor relations among relevant risks. Union agreements covering about 150 employees at two facilities expire during FY2013; negotiations had not begun.
- Unrecognized tax benefits, including interest and penalties, totaled $31.2 million. Standby letters of credit totaled $43.9 million, including a revocable $5.6 million guarantee for an affiliate. Known legal matters were not expected to materially affect financial condition, results, or liquidity.
Important facts for investors to verify
- Whether the Skippy acquisition’s final purchase-price and asset allocation, China closing, integration costs, and anticipated earnings contribution align with management’s expectations.
- Whether pork margins recover and grain and turkey commodity costs ease as anticipated, particularly given the sharp year-over-year decline in Jennie-O profit.
- Whether sales and profit growth in Grocery Products, Specialty Foods, and All Other can continue, including the contribution from Don Miguel products.
- How operating cash flow, capital spending, dividends, and any share repurchases affect liquidity after the cash-funded acquisition.
- Developments in tax audits and other contingencies, and the impact of food-safety, commodity, disease, regulatory, and labor risks.