CRITICAL ACCOUNTING POLICIES
There have been no material changes in the Company's Critical Accounting
Policies as disclosed in its Annual Report on Form 10-K for the fiscal year
ended
RESULTS OF OPERATIONS Overview The Company is a global manufacturer and marketer of branded food products. It operates in four reportable segments as described in Note N - Segment Reporting in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
The Company reported net earnings per diluted share of
• Pretax earnings declined, driven primarily by the divestiture of CytoSport
last year. Net earnings increased as a lower effective tax rate for the
quarter and profit growth from
Store more than offset the impact of the CytoSport divestiture and lower
earnings in the Grocery Products and International & Other segments.
•
commodity profits while higher raw material costs pressured the value-added businesses. • Grocery Products profit was negatively impacted by the divestiture of CytoSport, higher raw material costs, lower contract manufacturing profits, and decreased volumes.
•
profits and operational improvements.
• International & Other profit declined, driven by significantly higher pork
raw material costs for the Company's businesses inBrazil ,China , and other Asian countries such asSouth Korea andthe Philippines .
• Subsequent to the end of the quarter, the Company announced a definitive
agreement to acquire Sadler's Smokehouse for$270.0 million . The transaction closed onMarch 2, 2020 .
Consolidated Results
Volume,
Three Months
Ended
% (in thousands, except per share amounts) January 26, 2020 January 27, 2019 Change Volume (lbs.) 1,186,987 1,196,893 (0.8 ) Organic Volume (1) 1,186,987 1,161,059 2.2 Net Sales$ 2,384,434 $ 2,360,355 1.0 Organic Net Sales (1) 2,384,434 2,295,201 3.9 Net Earnings 242,872 241,425 0.6 Diluted Earnings per Share 0.45 0.44 2.3 (1)The non-GAAP adjusted financial measurements are presented to provide investors additional information to facilitate the comparison of past and present operations. The Company believes these non-GAAP financial measurements provide useful information to investors because they are measurements used to evaluate performance on a comparable year-over-year basis. These non-GAAP measurements are not in accordance with accounting principles generally accepted inthe United States (GAAP) nor intended to be a substitute for GAAP measurements in analyzing financial performance. These non-GAAP measurements may be different from measures used by other companies. Organic net sales and organic volume are defined as net sales and volume, excluding the impact of acquisitions and divestitures. Organic net sales and organic volume exclude the impacts of the CytoSport divestiture (April 2019 ) in the Grocery Products and International & Other segments. The tables below show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures in the first quarter of fiscal 2019. 24
--------------------------------------------------------------------------------
Table of Contents
Reconciliation of Non-GAAP Measures
First Quarter Fiscal 2020 Fiscal 2019 Organic Organic (in thousands) Reported GAAP Reported GAAP Divestitures (Non-GAAP) % Change Volume (lbs.) Grocery Products 292,919 338,743 (34,807 ) 303,936 (3.6 ) Refrigerated Foods 605,608 589,356 - 589,356 2.8 Jennie-O Turkey Store 197,200 182,159 - 182,159 8.3 International & Other 91,260 86,635 (1,027 ) 85,608 6.6 Total Volume 1,186,987 1,196,893 (35,834 ) 1,161,059 2.2 Net Sales Grocery Products$ 540,626 $ 606,825 $ (63,172 ) $ 543,653 (0.6 ) Refrigerated Foods 1,351,790 1,278,747 - 1,278,747 5.7 Jennie-O Turkey Store 330,128 321,234 - 321,234 2.8 International & Other 161,890 153,549 (1,982 ) 151,567 6.8 Total Net Sales$ 2,384,434 $ 2,360,355 $ (65,154 ) $ 2,295,201 3.9 The increase in net sales for the first quarter of fiscal 2020 was primarily related to higher sales of commodity items inRefrigerated Foods andJennie-O Turkey Store along with strong growth from brands such as Hormel® Black Label® bacon, Hormel® Gatherings® party trays, Hormel® Cure 81® ham, and Applegate®. These increases more than offset the impact from the CytoSport divestiture.
Cost of Products Sold
Three Months EndedJanuary 27 , %
(in thousands)
Cost of products sold for the first quarter of fiscal 2020 increased, driven by higher pork and beef raw material costs.
Gross Profit Three Months Ended January 27, % (in thousands) January 26, 2020 2019 Change Gross Profit$ 468,421 $ 488,334 (4.1 ) Percentage of Net Sales 19.6 % 20.7 % Gross profit as a percentage of net sales declined for the first quarter. Higher pork and beef raw material costs impacted theRefrigerated Foods , Grocery Products, and International & Other segments. Grocery Products was further impacted by a weaker sales mix due to the divestiture of CytoSport and lower Skippy® peanut butter pricing. International & Other saw pork costs for its multinational and affiliated businesses increase significantly over the first quarter of fiscal 2019 due to supply shortages caused by African swine fever.Jennie-O Turkey Store declined on lower retail and foodservice sales. Looking ahead to the second quarter of fiscal 2020, the Company expects the value-added businesses inRefrigerated Foods and continued improvement atJennie-O Turkey Store to help offset declines in the International & Other and Grocery Products segments. The divestiture of the CytoSport business and lower Skippy® peanut butter pricing will continue to impact Grocery Products in the second quarter. 25
--------------------------------------------------------------------------------
Table of Contents
Selling, General and Administrative (SG&A)
Three Months Ended January 27, % (in thousands) January 26, 2020 2019 Change SG&A$ 195,521 $ 193,544 1.0 Percentage of Net Sales 8.2 % 8.2 %
For the first quarter of fiscal 2020, SG&A expenses increased primarily due to a one-time benefit from a legal settlement in fiscal 2019.
Due to the CytoSport divestiture, advertising investments in the first quarter declined. Advertising investments for the full year are expected to be in line with the prior year.
Equity in Earnings of Affiliates
Three Months Ended % (in thousands) January 26, 2020 January 27, 2019 Change Equity in Earnings of Affiliates $ 7,588 $ 11,458
(33.8 )
Equity in earnings of affiliates for the first quarter of fiscal 2020 was lower as the Company's international affiliates were impacted by higher pork raw material costs due to African swine fever.
Effective Tax Rate
Three Months Ended January 26, 2020 January 27, 2019 Effective Tax Rate 16.3 % 21.3 % The effective tax rate in fiscal 2020 was impacted by a large volume of stock option exercises during the first quarter. The Company still expects a full-year effective tax rate between 20.5 and 22.5 percent for fiscal 2020. For further information, refer to Note I - Income Taxes. 26
--------------------------------------------------------------------------------
Table of Contents
Segment Results
Net sales and operating profits for each of the Company's reportable segments are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent these segments, if operated independently, would report the operating profit and other financial information shown below. Three Months Ended (in thousands) January 26, 2020 January 27, 2019 % ChangeNet Sales Grocery Products $ 540,626 $ 606,825 (10.9 ) Refrigerated Foods 1,351,790 1,278,747 5.7 Jennie-O Turkey Store 330,128 321,234 2.8 International & Other 161,890 153,549 5.4 Total$ 2,384,434 $ 2,360,355 1.0 Segment Profit Grocery Products $ 68,435 $ 95,297 (28.2 ) Refrigerated Foods 167,343 162,593 2.9 Jennie-O Turkey Store 38,551 37,904 1.7 International & Other 19,952 24,978 (20.1 ) Total Segment Profit 294,280 320,772 (8.3 ) Net Unallocated Expense 4,199 13,891 (69.8 ) Noncontrolling Interest 81 94
(13.8 ) Earnings Before Income Taxes $ 290,162 $ 306,975 (5.5 )
Grocery Products Three Months Ended January 26, January 27, % (in thousands) 2020 2019 Change Volume (lbs.) 292,919 338,743 (13.5 ) Net Sales$ 540,626 $ 606,825 (10.9 ) Segment Profit 68,435 95,297 (28.2 ) Net sales for the first quarter of fiscal 2020 decreased due to the CytoSport divestiture and lower Skippy® peanut butter sales. These declines more than offset growth from the SPAM® family of products, Justin's® branded items, Wholly® guacamole dips, and Herdez® salsas and sauces. For the first quarter, segment profit declined primarily due to the divestiture of CytoSport, higher raw material costs, lower contract manufacturing profits, and decreased volumes. Grocery Products also benefited from a legal settlement in fiscal 2019. The Company anticipates lower volume and sales in the second quarter due to the divestiture of CytoSport and lower prices on Skippy® peanut butter products. Segment profit is also expected to decline, primarily due to the impact from the divestiture of CytoSport.
Three Months Ended (in thousands) January 26, January 27, % 2020 2019 Change Volume (lbs.) 605,608 589,356 2.8 Net Sales$ 1,351,790 $ 1,278,747 5.7 Segment Profit 167,343 162,593 2.9 27
--------------------------------------------------------------------------------
Table of Contents
First quarter volume and net sales increases were led by strong demand for value-added products and higher commodity sales. Branded sales growth was led by Hormel® Black Label® bacon and Hormel® Cure 81® ham in retail, Hormel® pizza toppings and Fontanini® items in foodservice, and Hormel® Gatherings® party trays in deli. Applegate® branded items in retail and foodservice also contributed to sales growth.
Looking ahead to the second quarter,Refrigerated Foods is expected to grow volume, sales, and segment profit due to strong demand for value-added products. The impact of African swine fever and the outbreak of coronavirus inChina could create market volatility which presents risk to input costs.
Three Months Ended January 26, January 27, % (in thousands) 2020 2019 Change Volume (lbs.) 197,200 182,159 8.3 Net Sales$ 330,128 $ 321,234 2.8 Segment Profit 38,551 37,904 1.7
For the first quarter, sales increased due to higher commodity and whole-bird volume and pricing. Jennie-O® lean ground tray pack volume increased as incremental distribution was regained during the quarter.
Segment profit for the first quarter increased due to higher commodity profits and operational improvements.
Jennie-O Turkey Store anticipates increased volume, sales, and earnings in the second quarter compared to last year driven by higher prices of commodity items and significant improvements in operations.
International & Other
Three Months Ended January 26, January 27, % (in thousands) 2020 2019 Change Volume (lbs.) 91,260 86,635 5.3 Net Sales$ 161,890 $ 153,549 5.4 Segment Profit 19,952 24,978 (20.1 )
Volume and sales for the first quarter increased, driven by higher fresh pork
export volume and strong demand in
Segment profit for the quarter decreased due to significantly higher pork raw material costs for our businesses inBrazil ,China , and other Asian countries such asSouth Korea andthe Philippines . Due to the recent outbreak of coronavirus, International & Other anticipates a difficult second quarter. The impact for the remainder of the year is currently unknown as it will depend on how swiftly the outbreak is contained, the sales pipeline is refilled, and plants return to full capacity.
Unallocated Income and Expenses
The Company does not allocate investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at the corporate level. Equity in earnings of affiliates is included in segment profit; however, earnings attributable to the Company's noncontrolling interests are excluded. These items are included in the segment table for the purpose of reconciling segment results to earnings before income taxes. Three Months Ended January 26, January 27, (in thousands) 2020 2019
Net Unallocated Expense
94 28
--------------------------------------------------------------------------------
Table of Contents
Net unallocated expense declined for the first quarter of fiscal 2020 driven by higher investment income. Expenses incurred in fiscal 2019 associated with the sale of theFremont plant offset the benefit from a legal settlement last year. Related Party Transactions There has been no material change in the information regardingRelated Party Transactions as disclosed in the Company's Annual Report on Form 10-K for the fiscal year endedOctober 27, 2019 .
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were$724.4 million at the end of the first quarter of fiscal 2020 compared to$512.7 million at the end of the comparable fiscal 2019 period. Cash provided by operating activities was$188.4 million in the first three months of fiscal 2020 compared to$187.4 million in the same period of fiscal 2019. Cash flows from operating activities continue to provide the Company with its principal source of liquidity. The Company does not anticipate a significant risk to cash flows from this source in the foreseeable future because the Company operates in a relatively stable industry and has strong brands across many product lines. Cash used in investing activities was$60.5 million in the first three months of fiscal 2020 compared to$1.7 million in the same period of fiscal 2019. Capital expenditures in the first three months of fiscal 2020 increased to$58.2 million from$39.4 million in the comparable period of fiscal 2019. The Company currently estimates its fiscal 2020 capital expenditures to be approximately$360.0 million . Key projects for the full year include an expansion of the Company'sBurke Corporation pizza-toppings facility inNevada, Iowa ; a new dry sausage production facility inNebraska ; Project Orion; and other projects to support growth of branded products. Fiscal 2019 included$30.6 million of proceeds from the sale of theFremont, Nebraska , production facility. Cash used in financing activities was$77.9 million in the first three months of fiscal 2020 compared to$128.9 million in the same period of fiscal 2019. The Company repurchased no shares of common stock in the first three months of fiscal 2020 compared to$44.8 million repurchased during the same period of the prior year. For additional information pertaining to the Company's share repurchase plans or programs, see Part II, Item 2 - Unregistered Sales ofEquity Securities and Use of Proceeds. Cash dividends paid to the Company's shareholders continue to be an ongoing financing activity for the Company. Dividends paid in the first three months of fiscal 2020 were$112.2 million compared to$100.1 million in the comparable period of fiscal 2019. For fiscal 2020, the annual dividend rate was increased to$0.93 per share, representing the 54th consecutive annual dividend increase. The Company has paid dividends for 366 consecutive quarters and expects to continue doing so. The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. At the end of the first quarter of fiscal 2020, the Company was in compliance with all of these debt covenants.
The Company is dedicated to returning excess cash flow to shareholders through dividend payments. Growing the business through innovation and evaluating opportunities for strategic acquisitions remain a focus for the Company. Reinvestments in the business to ensure employee and food safety are a top priority for the Company. Capital spending to enhance and expand current operations will also be a significant cash outflow for fiscal 2020.
Contractual Obligations and Commercial Commitments
The Company records income taxes in accordance with the provisions of ASC 740, Income Taxes. The Company is unable to determine its contractual obligations by year related to this pronouncement, as the ultimate amount or timing of settlement of its reserves for income taxes cannot be reasonably estimated. The total liability for unrecognized tax benefits, including interest and penalties, atJanuary 26, 2020 , was$23.3 million .
There have been no other material changes to the information regarding the
Company's future contractual financial obligations previously disclosed in the
Company's Annual Report on Form 10-K for the fiscal year ended
Off-Balance Sheet Arrangements
As ofJanuary 26, 2020 , andOctober 27, 2019 , the Company had$45.3 million and$44.8 million , respectively, of standby letters of credit issued on its behalf. The standby letters of credit are primarily related to the Company's self-insured workers compensation programs. This amount includes$2.7 million as ofJanuary 26, 2020 , andOctober 27, 2019 , of revocable standby letters of credit for obligations of an affiliated party that may arise under workers compensation claims. Letters of credit are not reflected in the Company's Consolidated Statements of Financial Position. 29
--------------------------------------------------------------------------------
Table of Contents
Trademarks
References to the Company's brands or products in italics within this report represent valuable trademarks owned or licensed byHormel Foods, LLC or other subsidiaries ofHormel Foods Corporation .
FORWARD-LOOKING STATEMENTS
This report contains "forward-looking" information within the meaning of the federal securities laws. The "forward-looking" information may include statements concerning the Company's outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts.
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information. The Company is filing this cautionary statement in connection with the Reform Act. When used in this Quarterly Report on Form 10-Q, the Company's Annual Report to Stockholders, other filings by the Company with theSecurities and Exchange Commission (the Commission), the Company's press releases, and oral statements made by the Company's representatives, the words or phrases "should result," "believe," "intend," "plan," "are expected to," "targeted," "will continue," "will approximate," "is anticipated," "estimate," "project," or similar expressions are intended to identify forward-looking statements within the meaning of the Reform Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected. In connection with the "safe harbor" provisions of the Reform Act, the Company is identifying risk factors that could affect financial performance and cause the Company's actual results to differ materially from opinions or statements expressed with respect to future periods. The discussion of risk factors in Part II, Item 1A of this Quarterly Report on Form 10-Q contains certain cautionary statements regarding the Company's business, which should be considered by investors and others. Such risk factors should be considered in conjunction with any discussions of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the Company. In making these statements, the Company is not undertaking, and specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the Company's business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the Company has attempted to list comprehensively these important cautionary risk factors, the Company wishes to caution investors and others that other factors may in the future prove to be important in affecting the Company's business or results of operations. The Company cautions readers not to place undue reliance on forward-looking statements, which represent current views as of the date made. Forward-looking statements are inherently at risk to any changes in the national and worldwide economic environment, which could include, among other things, economic conditions, political developments, currency exchange rates, interest and inflation rates, accounting standards, taxes, and laws and regulations affecting the Company and its markets.
© Edgar Online, source