Hormel Foods Corporation — Q2 FY2021 Form 10-Q
Reporting period: Second quarter ended April 25, 2021 (13 weeks), with year-to-date comparisons covering 26 weeks. Comparisons are against the periods ended April 26, 2020. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Change |
|---|---|---|---|
| Net sales | $2.607 billion | $2.422 billion | +7.6% |
| Gross profit | $476 million | $477 million | -0.2% |
| Gross margin | 18.3% | 19.7% | -1.4 percentage points |
| Operating income | $289 million | $293 million | -1.4% |
| Earnings before tax | $293 million | $286 million | +2.1% |
| Net earnings attributable to Hormel | $228 million | $228 million | +0.1% |
| Diluted EPS | $0.42 | $0.42 | Flat |
For the first half, sales increased 5.4% to $5.068 billion, while gross profit declined 2.0% to $926 million. Net earnings attributable to Hormel fell 4.3% to $450 million and diluted EPS fell 4.7% to $0.82. First-half gross margin was 18.3%, versus 19.7%.
Segments and material changes
- Refrigerated Foods: Q2 sales increased 16.5% and segment profit increased 31.9%, reflecting foodservice recovery, retail and deli growth, higher fresh pork profits, and lower operating costs.
- Grocery Products: Q2 sales declined 8.1% and segment profit declined 23.3%, largely against unusually strong pandemic-related consumer stocking in Q2 FY2020.
- Jennie-O Turkey Store: Sales increased 2.4%, but segment profit declined 53.6% as feed costs rose sharply.
- International & Other: Sales rose 16.8% and segment profit rose 5.7%, supported by China, the Philippines, and fresh pork exports.
- Foodservice recovery lifted Q2 U.S. foodservice sales to $724 million from $567 million a year earlier. Retail demand remained elevated, although Grocery Products faced difficult prior-year comparisons.
Higher pork raw material and turkey feed costs more than offset record sales, reducing gross margin. SG&A rose 3.1% in Q2, primarily due to employee-related costs. Equity earnings from affiliates increased 30.5% to $13 million. Q2 COVID-related incremental supply-chain costs were approximately $6 million, versus approximately $20 million of higher pandemic-related operating costs in the prior-year quarter.
Cash flow, balance sheet, and capital
- First-half operating cash flow was $361 million, down 34% from $548 million, primarily because the company intentionally increased inventory to support demand. Inventories were $1.229 billion at quarter-end, up from $1.073 billion at fiscal year-end.
- Cash and cash equivalents were $1.485 billion, compared with $1.714 billion at October 25, 2020. Net cash used in investing was $87 million; capital expenditures were $86 million. Fiscal 2021 capital expenditures were estimated at approximately $260 million.
- Net cash used in financing was $508 million, including repayment at maturity of $250 million in notes and $258 million of dividends paid. The annual dividend rate was increased to $0.98 per share.
- Total debt, including finance leases and other financing arrangements, was approximately $1.050 billion, compared with $1.304 billion at fiscal year-end. The company reported compliance with debt covenants. Its $400 million revolving credit facility had no outstanding draws at quarter-end.
- Current assets were $3.514 billion and current liabilities $1.175 billion at April 25, 2021.
Outlook, transactions, and risks
- Management expected a high-cost environment for the remainder of FY2021, with higher hog and pork markets, turkey feed costs, and broader inflationary pressures. Pricing actions and continued foodservice strength were expected to partly offset cost pressure in Q3. The company also took strategic grain hedges after quarter-end.
- Management expected strong branded retail demand in Grocery Products and improved foodservice results in Refrigerated Foods. Jennie-O expected pricing to partly offset higher grain costs. International & Other anticipated improved export results, while identifying shipping interruptions as a risk.
- Excluding the expected Planters acquisition impact, the estimated FY2021 effective tax rate was 20.0%–21.5%. The filing did not provide full-year sales, earnings, or EPS guidance.
- The proposed $3.35 billion cash acquisition of the Planters snack nuts business, including Planters, NUT-rition, Planters Cheez Balls, and Corn Nuts, was expected to close in June 2021. Hormel estimated an approximately $560 million tax benefit, implying an effective purchase price of about $2.79 billion.
- After quarter-end, Hormel entered into a $750 million revolving credit facility, with an option for an additional $375 million subject to conditions, and a term loan facility of up to $300 million. It also agreed to issue $2.3 billion of senior unsecured notes, subject to customary closing conditions, to help fund Planters and for general corporate purposes.
- Key exposures include commodity and feed-price volatility, inflation, COVID-related operating and supply-chain disruptions, international trade and shipping risks, and potential acquisition integration and financing risks. Approximately 30% of pork raw materials were sourced from Wholestone Farms under an agreement expiring in December 2021; Hormel was negotiating and evaluating alternatives.
- Hormel disclosed three groups of antitrust lawsuits targeting the pork and turkey industries. It had not established reserves because it did not believe it would have liability. Other known legal matters were not expected to materially affect financial condition, results, or liquidity.
Investor verification priorities
- Confirm the Planters transaction closing, final purchase price and tax benefit, integration progress, and resulting debt and interest burden.
- Track whether pricing and hedges offset sustained pork, feed, and other inflation, particularly in Jennie-O and gross margins.
- Assess inventory normalization and recovery in operating cash flow after the strategic inventory build.
- Monitor foodservice demand and retail comparisons as pandemic-driven channel patterns normalize.
- Follow the Wholestone supply agreement negotiations and alternatives ahead of its December 2021 expiry, along with developments in the industry antitrust cases.