Hormel Foods Corporation — Q1 FY2012 10-Q
Reporting period: Three months ended January 29, 2012. Hormel processes and sells branded and unbranded food products across Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and All Other. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 FY2012 | Q1 FY2011 / comparison |
|---|---|---|
| Net sales | $2,039.4 | $1,921.6; up 6.1% |
| Gross profit / gross margin | $337.4 / 16.5% | $374.0 / 19.5% |
| Operating income | $195.9 | $235.7 |
| Net earnings attributable to Hormel | $128.4 | $148.8; down 13.7% |
| Diluted EPS | $0.48 | $0.55; down 12.7% |
| Operating cash flow | $152.2 | $165.3 |
| Capital expenditures | $30.5 | $16.7 |
Sales reached a quarterly record despite tonnage declining 2.0% to 1.22 billion pounds. Management attributed sales growth principally to pricing and value-added products. Higher raw material and freight costs and weaker pork spreads reduced gross margin.
At January 29, 2012, cash and cash equivalents were $548.6 million, short-term marketable securities $76.4 million, and current assets $2,021.7 million against current liabilities of $724.6 million. Cash was $463.1 million at October 30, 2011; the cash flow statement reports $598.8 million at the end of the comparable prior-year quarter. Long-term debt was $250.0 million, unchanged from October 30, 2011. The company reported compliance with debt covenants.
Q1 cash flow: operating activities provided $152.2 million; investing activities used $28.6 million; financing activities used $38.9 million. Dividends paid were $33.6 million and share repurchases were $11.1 million. Dividends declared were $0.15 per share, versus $0.1275 in the prior-year quarter.
Changes versus prior-year quarter
- Refrigerated Foods sales rose 7.2%, but segment operating profit fell 44.1% to $53.7 million, primarily on unfavorable pork margins and higher input costs.
- Grocery Products sales fell 2.7% and segment profit fell 9.2% to $44.1 million amid softer core-product sales and raw material inflation.
- Jennie-O Turkey Store sales increased 3.5% and profit increased 4.0% to $76.8 million, supported by value-added sales; tonnage declined 7.1%, partly reflecting planned lower harvest volumes.
- Specialty Foods sales increased 13.9%, while segment profit declined 3.7% to $16.6 million because of input, freight, and mix pressures.
- All Other sales rose 16.6% and segment profit rose 24.8% to $12.5 million, supported by exports and improved Philippine joint-venture results.
- Equity earnings of affiliates increased to $11.0 million from $6.9 million, mainly reflecting MegaMex and Purefoods-Hormel.
Outlook, risks, and unusual items
Management anticipated challenging first-half comparisons and expected pork operating margins to improve gradually during the year. It expected elevated, volatile grain and raw material costs to continue pressuring margins through much of FY2012, with comparative results improving in the second half. The company plans to pursue value-added sales, pricing actions, and operating efficiencies.
- FY2012 SG&A was expected to be 7.5%–8.0% of sales; the effective tax rate 34.0%–35.0%; interest expense $12–$14 million; and capital expenditures approximately $140–$150 million.
- Management cited risks from commodity price and supply changes, food safety and livestock disease, consumer demand and competition, labor costs, regulation, litigation, environmental matters, acquisitions, and international operations. Hedging may be ineffective or limit benefits from favorable price movements.
- Q1 effective tax rate was 33.4%, versus 34.7%, primarily due to favorable discrete items related to prior-period state and federal audit settlements. Unrecognized tax benefits, including interest and penalties, totaled $27.3 million.
- A renewable $4.8 million standby letter of credit guarantees potential workers’ compensation obligations of an affiliate and is not recorded as a liability. The company said known legal matters were not expected to materially affect its financial condition, results, or liquidity.
- Investment securities generated gains, including $1.3 million in the rabbi trust and $0.3 million in the short-term investment portfolio. The company had shifted most of the rabbi-trust portfolio toward fixed-return investments to reduce equity-market volatility.
Investor verification points
- Assess whether pork spreads, raw material inflation, and freight costs eased as management anticipated, and whether gross margins recovered.
- Track volume and pricing trends, particularly in Grocery Products core brands and Jennie-O commodity products, alongside growth in value-added sales.
- Compare subsequent cash generation and capital spending with the FY2012 estimates, and monitor liquidity, debt, and covenant compliance.
- Review the timing and effect of tax audit outcomes and changes in the $27.3 million unrecognized-tax-benefit balance.
- Monitor commodity hedge positions, market volatility, and the potential earnings sensitivity of trading investments.