HORMEL FOODS CORPORATION 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 M - 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
•The Company delivered record sales for the second quarter. Foodservice sales exceeded pre-pandemic levels after steep declines last year caused by the effects of the pandemic. Along with the strong foodservice sales and improved supply chain performance, demand remained elevated in the retail, deli and international channels during the quarter. •Segment profit for the quarter was flat, as increases inRefrigerated Foods and International & Other profits mostly offset lower earnings inGrocery Products and Jennie-O Turkey Store . •Earnings before income taxes for the quarter increased 2 percent compared to the prior year. •Refrigerated Foods segment profit improved, driven by foodservice growth, increased retail fresh pork profits and lower operational costs. •International & Other segment profit increased due to growth inChina andthe Philippines , and higher fresh pork export margins. •Grocery Products segment profit declined due to lower sales. For reference, the segment delivered exceptional growth in the second quarter of fiscal 2020 due to consumer stock-up during the onset of the pandemic. •Jennie-O Turkey Store segment profit decreased due to the impact of a dramatic increase in feed costs during the quarter. •Year-to-date cash flow from operations was$361 million , down 34 percent compared to last year. The primary driver of the decrease was due to the intentional increase in inventory to meet elevated demand. •InFebruary 2021 , the Company entered into a definitive agreement to acquire the Planters® snack nuts business for$3.35 billion in cash in a transaction that is expected to provide a tax benefit valued at approximately$560 million , equating to an effective purchase price of$2.79 billion . The proposed transaction is expected to close inJune 2021 . The acquisition includes the Planters®, NUT-rition®, Planters® Cheez Balls and Corn Nuts® brands.
Response to COVID-19
The Company is committed to making investments necessary to keep its team members safe. In the second quarter of fiscal 2021, the Company absorbed approximately$6 million ($19 million for the first six months of fiscal 2021) in direct incremental supply chain costs primarily related to enhanced safety measures in its production facilities. The Company estimates most of the incremental supply chain costs are temporary and will continue to decline as the pandemic subsides. Consolidated Results
Volume,
Thirteen Weeks Ended Twenty-Six Weeks Ended
(in thousands, except per share % %
amounts) April 25, 2021 April 26, 2020 Change April 25, 2021 April 26, 2020 Change
Volume (lbs.) 1,192,948 1,233,072 (3.3) 2,372,654 2,420,059 (2.0)
Net Sales $ 2,606,621 $ 2,422,465 7.6 $ 5,067,768 $ 4,806,899 5.4
Earnings Before Income Taxes 292,620 286,489 2.1 569,702 576,651 (1.2)
Net Earnings Attributable to Hormel 227,901 227,734 0.1 450,184 470,606 (4.3)
Foods Corporation
Diluted Earnings per Share 0.42 0.42 - 0.82 0.86 (4.7)
Net Sales
The Company delivered record second quarter sales driven by a significant
improvement in the foodservice businesses within Refrigerated Foods . Most
foodservice categories exhibited growth, led by strong demand for pizza
toppings, bacon and authentic Italian meats. Strength from Refrigerated Foods
and International & Other more than offset the decline in Grocery Products. For
reference, shelter-in-place orders and restaurant closures across the country
during the second quarter of fiscal 2020 dramatically shifted consumer shopping
patterns away from foodservice toward the retail channel.
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For the first six months of fiscal 2021, the Company delivered record sales. Net sales growth from the retail, deli and foodservice businesses withinRefrigerated Foods and continued strength within International & Other, driven byChina , overcame a slight decline in Grocery Products sales. Cost of Products Sold Thirteen Weeks Ended Twenty-Six Weeks Ended % % (in thousands) April 25, 2021 April 26, 2020 Change April 25, 2021 April 26, 2020 Change Cost of Products Sold$ 2,130,314 $ 1,945,113 9.5$ 4,141,291 $ 3,861,127 7.3 Cost of products sold for the second quarter and first six months of fiscal 2021 increased due to record net sales and higher raw material input costs. Direct incremental supply chain costs related to the COVID-19 pandemic for the second quarter and first six months of fiscal 2021 were approximately$6 million and$19 million , respectively. This compares to approximately$20 million of higher operational costs related to the COVID-19 pandemic incurred in the second quarter of fiscal 2020.
The Company expects to operate in a high cost environment for the remainder of
the year, impacted by higher hog and pork markets, increased feed costs at
Gross Profit
Thirteen Weeks Ended Twenty-Six Weeks Ended
% %
(in thousands) April 25, 2021 April 26, 2020 Change April 25, 2021 April 26, 2020 Change
Gross Profit $ 476,307 $ 477,352 (0.2) $ 926,477 $ 945,773 (2.0)
Percentage of Net Sales 18.3 % 19.7 % 18.3 % 19.7 %
Gross profit as a percentage of sales for the second quarter and first six
months of 2021 declined. Record sales were more than offset by higher pork raw
material costs and higher feed costs at Jennie-O Turkey Store . Refrigerated
Foods margins in the second quarter improved slightly compared to the prior
year, while gross profit as a percentage of sales for all four segments declined
for the first half of fiscal 2021.
Looking ahead to the third quarter of fiscal 2021, the Company expects to
benefit from continued foodservice strength and from the impact of pricing
actions across the portfolio. These factors may help offset some of the
inflationary pressures to margin, including higher pork raw material input costs
and increased feed costs at Jennie-O Turkey Store . Due to extreme market
volatility, subsequent to the end of the second quarter, the Company took
strategic hedges to cover a significant portion of expected grain purchases for
the remainder of the fiscal year.
Selling, General and Administrative (SG&A)
Thirteen Weeks Ended Twenty-Six Weeks Ended
% %
(in thousands) April 25, 2021 April 26, 2020 Change April 25, 2021 April 26, 2020 Change
SG&A $ 199,966 $ 193,912 3.1 $ 396,346 $ 389,433 1.8
Percentage of Net Sales 7.7 % 8.0 % 7.8 % 8.1 %
For the second quarter and first six months of fiscal 2021, SG&A expenses increased compared to the prior year due to higher employee-related expenses.
Advertising spend in the second quarter was$31 million , compared to$35 million last year. Advertising investments for the first half of fiscal 2021 were down 7.2 percent compared to last year. The Company plans to continue to invest behind its leading brands.
Equity in Earnings of Affiliates
Thirteen Weeks Ended Twenty-Six Weeks Ended
April 26, % April 26, %
(in thousands) April 25, 2021 2020 Change April 25, 2021 2020 ChangeEquity in Earnings of$ 13,074 $ 10,021 30.5$ 27,302 $ 17,608 55.0 Affiliates 24
-------------------------------------------------------------------------------- Table of Contents Equity in earnings of affiliates for the second quarter and first six months increased significantly due to stronger performances at MegaMex and from the Company's joint venture inthe Philippines .
Effective Tax Rate
Thirteen Weeks Ended Twenty-Six Weeks Ended
April 25, 2021 April 26, 2020 April 25, 2021 April 26, 2020
Effective Tax Rate 22.1 % 20.6 % 21.0 % 18.4 %
The lower effective tax rate in the prior year was driven by a higher volume of stock option exercises. For further information, refer to Note K - Income Taxes.
Excluding the estimated impact from the pending acquisition of the Planters® snack nuts business, the Company expects the effective tax rate in fiscal 2021 to be between 20.0 and 21.5 percent.
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 that these segments, if operated
independently, would report the operating profit and other financial information
shown below.
Thirteen Weeks Ended Twenty-Six Weeks Ended
(in thousands) April 25, 2021 April 26, 2020 % Change April 25, 2021 April 26, 2020 % Change
Net Sales
Grocery Products $ 628,232 $ 683,250 (8.1) $ 1,205,831 $ 1,223,876 (1.5)
Refrigerated Foods 1,453,380 1,247,336 16.5 2,820,457 2,599,127 8.5
Jennie-O Turkey Store 351,179 343,056 2.4 684,500 673,183 1.7
International & Other 173,830 148,823 16.8 356,980 310,714 14.9
Total $ 2,606,621 $ 2,422,465 7.6 $ 5,067,768 $ 4,806,899 5.4
Segment Profit
Grocery Products $ 97,970 $ 127,763 (23.3) $ 190,172 $ 196,198 (3.1)
Refrigerated Foods 173,352 131,431 31.9 314,524 298,775 5.3
Jennie-O Turkey Store 12,700 27,348 (53.6) 39,640 65,899 (39.8)
International & Other 24,481 23,164 5.7 56,685 43,115 31.5
Total Segment Profit 308,503 309,706 (0.4) 601,020 603,986 (0.5)
Net Unallocated Expense 15,904 23,098 (31.1) 31,451 27,297 15.2
Noncontrolling Interest 21 (119) 117.4 133 (39) 444.1
Earnings Before Income Taxes $ 292,620 $ 286,489 2.1 $ 569,702 $ 576,651 (1.2)
Grocery Products
Thirteen Weeks Ended Twenty-Six Weeks Ended
% %
(in thousands) April 25, 2021 April 26, 2020 Change April 25, 2021 April 26, 2020 Change
Volume (lbs.) 313,795 363,703 (13.7) 618,129 656,621 (5.9)
Net Sales $ 628,232 $ 683,250 (8.1) $ 1,205,831 $ 1,223,876 (1.5)
Segment Profit 97,970 127,763 (23.3) 190,172 196,198 (3.1)
Volume and sales for the second quarter and first half of fiscal 2021 declined
due to the extremely high levels of demand last year, especially in the second
quarter of fiscal 2020. Demand for branded retail products remained elevated
compared to pre-pandemic levels, led by growth in the second quarter from
Wholly® guacamole and Herdez® salsas and sauces.
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For the second quarter and first six months of fiscal 2021, segment profit
declined due to lower sales. For reference, the segment delivered exceptional
growth in the second quarter of fiscal 2020 due to consumer stock-up during the
onset of the pandemic.
Grocery Products expects strong demand for its branded retail items to continue
in the third quarter. Inventory levels across the portfolio are expected to
improve sequentially. Profits may be impacted by higher pork trim prices.
Refrigerated Foods
Thirteen Weeks Ended Twenty-Six Weeks Ended
(in thousands) % %
April 25, 2021 April 26, 2020 Change April 25, 2021 April 26, 2020 Change
Volume (lbs.) 593,271 576,543 2.9 1,188,586 1,182,152 0.5
Net Sales $ 1,453,380 $ 1,247,336 16.5 $ 2,820,457 $ 2,599,127 8.5
Segment Profit 173,352 131,431 31.9 314,524 298,775 5.3
Strong sales growth in the second quarter of fiscal 2021 was led by a
significant recovery in foodservice, growth from retail and deli brands, and
higher commodity sales. Nearly every foodservice category experienced growth,
led by pizza toppings and brands such as Fontanini® and Hormel® Bacon 1™. Retail
and deli growth was driven by numerous brands, including Hormel® Black Label®,
Hormel® Gatherings®, Sadlers® and Applegate®. For the first six months of fiscal
2021, net sales increases were driven by a recovery in foodservice and higher
sales of value-added retail and deli products.
For the second quarter, Refrigerated Foods segment profit improved driven by
foodservice growth, increased retail fresh pork profits and lower operational
costs. Segment profit increased for the first half of fiscal 2021 due to higher
value-added profits.
Jennie-O Turkey Store Thirteen Weeks Ended Twenty-Six Weeks Ended % % (in thousands) April 25, 2021 April 26, 2020 Change April 25, 2021 April 26, 2020 Change Volume (lbs.) 202,624 209,477 (3.3) 396,193 406,676 (2.6) Net Sales$ 351,179 $ 343,056 2.4$ 684,500 $ 673,183 1.7 Segment Profit 12,700 27,348 (53.6) 39,640 65,899 (39.8) Sales increased for the second quarter due to a recovery in foodservice and higher whole bird shipments. Retail sales declined but remain elevated compared to pre-pandemic levels. For the first six months of 2021, sales increased due to higher retail and whole bird sales. Segment profit for the second quarter decreased due to the impact of a dramatic increase in feed costs during the quarter. The decline in segment profit for the first half of fiscal 2021 was due primarily to higher feeds costs and a decline in foodservice sales. In the third quarter,Jennie-O Turkey Store expects the impact from dramatically higher grain costs to be partially offset by pricing actions across the portfolio. International & Other Thirteen Weeks Ended Twenty-Six Weeks Ended % % (in thousands) April 25, 2021 April 26, 2020 Change April 25, 2021 April 26, 2020 Change Volume (lbs.) 83,257 83,350 (0.1) 169,746 174,610 (2.8) Net Sales$ 173,830 $ 148,823 16.8$ 356,980 $ 310,714 14.9 Segment Profit 24,481 23,164 5.7 56,685 43,115 31.5
For the second quarter and first six months of fiscal 2021, sales increased,
driven by continued strong results in
The increase in segment profit for the quarter was due to growth inChina andthe Philippines , and higher fresh pork export margins. The significant increase in segment profit for the first half was due to improved results for branded exports, strong results inChina and higher income from the Company's partners inthe Philippines ,South Korea andEurope . 26 -------------------------------------------------------------------------------- Table of Contents International & Other expects improved results in the third quarter from branded and fresh pork exports. International shipping interruptions pose a risk to export sales and profit growth.
Unallocated Income and Expenses
The Company does not allocate deferred compensation, 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.
Thirteen Weeks Ended Twenty-Six Weeks Ended
(in thousands) April 25, 2021 April 26, 2020 April 25, 2021 April 26, 2020
Net Unallocated Expense $ 15,904 $ 23,098 $ 31,451 $ 27,297
Noncontrolling Interest 21 (119) 133 (39)
For the second quarter, net unallocated expense decreased as higher investment
income partially offset the additional interest expense from the bond issuance
in the prior year. For the first six months of fiscal 2021, net unallocated
expense increased as higher investment income was more than offset by higher
interest expense and expenses related to tax settlements and deal fees.
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 25, 2020 .
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents were$1,485 million at the end of the first twenty-six weeks of fiscal 2021 compared to$606 million at the end of the comparable fiscal 2020 period. The primary driver of the increased cash is the issuance of$1 billion in debt in the third quarter of fiscal 2020. Cash provided by operating activities was$361 million in the first twenty-six weeks of fiscal 2021 compared to$548 million in the same period of fiscal 2020. The decline was primarily due to the strategic increase in inventory. Cash flows from operating activities continue to provide a consistent source of liquidity. The Company believes its balanced business model and strong balance sheet make it well-positioned to continue to weather the effects of the COVID-19 pandemic. Cash used in investing activities was$87 million in the first twenty-six weeks of fiscal 2021 compared to$423 million in the same period of fiscal 2020. In the second quarter of 2020, the Company acquired Sadler's Smokehouse for$269 million . Capital expenditures in the first twenty-six weeks of fiscal 2021 were$86 million compared to$139 million in the same period of fiscal 2020. The Company estimates its fiscal 2021 capital expenditures to be approximately$260 million . Key projects for the full year include expansion of the Company's dry sausage operations inPapillion, Nebraska ; Project Orion; and other projects to support growth of branded products. Cash used in financing activities was$508 million in the first twenty-six weeks of fiscal 2021 compared to$189 million in the same period of fiscal 2020. The Company repaid$250 million of its senior unsecured notes upon maturity inApril 2021 . The Company also used$10 million for common stock repurchases in the first twenty-six weeks of fiscal 2021 compared to$12 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 twenty-six weeks of fiscal 2021 were$258 million compared to$237 million in the comparable period of fiscal 2020. For fiscal 2021, the annual dividend rate was increased to$0.98 per share, representing the 55th consecutive annual dividend increase. The Company has paid dividends for 371 consecutive quarters. The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As ofApril 25, 2021 , the Company was in compliance with all of these debt covenants. Subsequent to the end of the quarter, the Company entered into an underwriting agreement with several investment banks providing for the issuance and sale of senior unsecured notes. The proceeds of these notes, along with short-term debt and cash on hand, will be used to fund the acquisition of the Planters® snack nuts business and for general corporate purposes. Details regarding these financing activities can be found in Note J - Long-term Debt and Other Borrowing Arrangements. The Company expects the pending Planters® acquisition will responsibly leverage its balance sheet without compromising its disciplined capital allocation policy. The Company remains confident in its ability to meet its current and future cash flow needs and is dedicated to 27 -------------------------------------------------------------------------------- Table of Contents returning cash to shareholders through dividend payments. Other top priorities include reinvestments to ensure employee and food safety, capital expenditures to enhance and expand operations, and growing the business through innovation. The Company continues to evaluate opportunities for strategic acquisitions.
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, atApril 25, 2021 , was$28 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 ofApril 25, 2021 , andOctober 25, 2020 , the Company had$47 million and$47 million , respectively, of standby letters of credit issued on its behalf. The standby letters of credit are related primarily to the Company's self-insured workers compensation programs. This amount includes$3 million as ofApril 25, 2021 , andOctober 25, 2020 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.
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 .
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful impact on the reporting of consolidated financial statements. See Note A - Summary of Significant Accounting Policies for a discussion of significant accounting policies. Critical accounting policies are defined as those reflective of significant judgments, estimates, and uncertainties, which may result in materially different results under different assumptions and conditions. The Company has considered the impact of COVID-19 and determined 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 endedOctober 25, 2020 . As conditions resulting from the COVID-19 pandemic evolve, the Company expects these judgments and estimates may be subject to change, which could materially impact future periods. 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 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. 28
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Table of Contents 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, changes resulting from the COVID-19 pandemic, economic conditions, political developments, civil unrest, currency exchange rates, interest and inflation rates, accounting standards, taxes, and laws and regulations affecting the Company and its markets.
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