filings.toolsHormel Foods 10-Q 2022-01-30
Filed 2022-03-08. 7 sections, 151K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 30, 2022
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________________________________ to ________________________________________
Commission File Number: 1-2402
HORMEL FOODS CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 41-0319970 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1 Hormel Place
Austin, MN 55912
(Address of Principal Executive Office, including zip code)
(507) 437-5611
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||||||||
| Common Stock | $0.01465 | par value | HRL | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at March 6, 2022 | ||||||||||||||||
| Common Stock | $.01465 | par value | 544,997,610 | ||||||||||||||
| Common Stock Non-Voting | $.01 | par value | 0 |
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts
Unaudited
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| January 30, 2022 | January 24, 2021 | ||||||||||||||||||||||||||||||||||
| Net Sales | $ | 3,044,358 | $ | 2,461,147 | |||||||||||||||||||||||||||||||
| Cost of Products Sold | 2,505,610 | 2,010,977 | |||||||||||||||||||||||||||||||||
| Gross Profit | 538,749 | 450,170 | |||||||||||||||||||||||||||||||||
| Selling, General and Administrative | 225,972 | 196,380 | |||||||||||||||||||||||||||||||||
| Equity in Earnings of Affiliates | 6,898 | 14,228 | |||||||||||||||||||||||||||||||||
| Operating Income | 319,675 | 268,018 | |||||||||||||||||||||||||||||||||
| Other Income and Expense: | |||||||||||||||||||||||||||||||||||
| Interest and Investment Income | 3,869 | 17,291 | |||||||||||||||||||||||||||||||||
| Interest Expense | (14,640) | (8,227) | |||||||||||||||||||||||||||||||||
| Earnings Before Income Taxes | 308,904 | 277,082 | |||||||||||||||||||||||||||||||||
| Provision for Income Taxes | 69,194 | 54,687 | |||||||||||||||||||||||||||||||||
| Net Earnings | 239,710 | 222,395 | |||||||||||||||||||||||||||||||||
| Less: Net Earnings (Loss) Attributable to Noncontrolling Interest | 139 | 112 | |||||||||||||||||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | $ | 239,571 | $ | 222,283 | |||||||||||||||||||||||||||||||
| Net Earnings Per Share | |||||||||||||||||||||||||||||||||||
| Basic | $ | 0.44 | $ | 0.41 | |||||||||||||||||||||||||||||||
| Diluted | $ | 0.44 | $ | 0.41 | |||||||||||||||||||||||||||||||
| Weighted-average Shares Outstanding | |||||||||||||||||||||||||||||||||||
| Basic | 542,680 | 539,913 | |||||||||||||||||||||||||||||||||
| Diluted | 547,928 | 547,444 |
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
Unaudited
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| January 30, 2022 | January 24, 2021 | ||||||||||||||||||||||||||||||||||
| Net Earnings | $ | 239,710 | $ | 222,395 | |||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss), Net of Tax: | |||||||||||||||||||||||||||||||||||
| Foreign Currency Translation | 925 | 17,888 | |||||||||||||||||||||||||||||||||
| Pension and Other Benefits | 2,535 | 4,199 | |||||||||||||||||||||||||||||||||
| Deferred Hedging | 8,404 | 12,599 | |||||||||||||||||||||||||||||||||
| Total Other Comprehensive Income (Loss) | 11,864 | 34,686 | |||||||||||||||||||||||||||||||||
| Comprehensive Income | 251,574 | 257,081 | |||||||||||||||||||||||||||||||||
| Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interest | 258 | 417 | |||||||||||||||||||||||||||||||||
| Comprehensive Income Attributable to Hormel Foods Corporation | $ | 251,316 | $ | 256,664 |
See Notes to Consolidated Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
In thousands, except share and per share amounts
Unaudited
| January 30, 2022 | October 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and Cash Equivalents | $ | 824,434 | $ | 613,530 | |||||||
| Short-term Marketable Securities | 22,194 | 21,162 | |||||||||
| Accounts Receivable (Net of Allowance for Doubtful Accounts of $3,739 at January 30, 2022, and $4,033 at October 31, 2021) | 812,706 | 895,719 | |||||||||
| Inventories | 1,385,705 | 1,369,198 | |||||||||
| Taxes Receivable | 7,699 | 8,293 | |||||||||
| Prepaid Expenses and Other Current Assets | 40,614 | 39,914 | |||||||||
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $0.44 for the first quarter of fiscal 2022, up 7 percent compared to last year. Significant factors impacting the quarter were:
-
Net sales for the first quarter were a record, driven by the inclusion of the Planters*®* snack nuts business and growth from the Company's foodservice businesses.
-
Segment profit for the quarter increased 13 percent. In addition to the contribution of the Planters*®* snack nuts business, growth was due to excellent results from the value-added businesses in Refrigerated Foods and the Jennie-O Turkey Store business, which benefited from favorable market conditions and the Company's initial transformative efforts.
-
The Company grew earnings before income taxes, net earnings, and diluted earnings per share as its supply chain overcame significant labor shortages due to the omicron variant, severe upstream and downstream disruptions, and continued industrywide operational challenges.
-
Refrigerated Foods segment profit increased as higher foodservice sales and numerous pricing actions across the other value-added businesses overcame higher operational and logistics costs. Volume, sales, and segment profit were negatively impacted by production constraints due to labor shortages.
-
Jennie-O Turkey Store segment profit increased due to higher commodity prices and strong foodservice sales. The business absorbed significantly higher feed and logistics costs.
-
Grocery Products segment profit increased due to the contribution from the Planters*®* snack nuts business, which more than offset lower equity in earnings from MegaMex and higher operational and logistics costs. Volume, sales, and segment profit were negatively impacted by production constraints due to labor shortages.
-
International & Other segment profit declined due to lower sales across the portfolio and a decline in equity in earnings.
-
Year-to-date cash flow from operations was $383.8 million, up 87 percent compared to the prior year.
Consolidated Results
Volume, Net Sales, Earnings, and Diluted Earnings per Share
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands, except per share amounts | January 30, 2022 | January 24, 2021 | % Change | ||||||||||||||||||||||||||||||||
| Volume (lbs.) | 1,204,872 | 1,179,706 | 2.1 | ||||||||||||||||||||||||||||||||
| Organic Volume (1) | 1,131,365 | 1,179,706 | (4.1) | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 3,044,358 | $ | 2,461,147 | 23.7 | ||||||||||||||||||||||||||||||
| Organic Net Sales (1) | 2,772,534 | 2,461,147 | 12.7 | ||||||||||||||||||||||||||||||||
| Earnings Before Income Taxes | 308,904 | 277,082 | 11.5 | ||||||||||||||||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | 239,571 | 222,283 | 7.8 | ||||||||||||||||||||||||||||||||
| Diluted Earnings per Share | 0.44 | 0.41 | 7.3 | ||||||||||||||||||||||||||||||||
(1) See the "Non-GAAP Financial Measures" section below for a description of the Company's use of measures not defined by U.S. Generally Accepted Accounting Principles (GAAP).
Net Sales
Net sales for the first quarter were a record driven by the inclusion of the Planters*®* snack nuts business and growth from the Company's foodservice businesses. All segments also benefited from pricing actions during the quarter taken to offset inflationary pressures.
Cost of Products Sold
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 30, 2022 | January 24, 2021 | % Change | ||||||||||||||||||||||||||||||||
| Cost of Products Sold | $ | 2,505,610 | $ | 2,010,977 | 24.6 |
Cost of products sold for the first quarter of fiscal 2022 increased due to inflationary pressures stemming from raw materials, packaging, freight, labor and many other inputs. The inclusion of the Planters*®* snack nuts business was also a driver of higher costs.
Costs are expected to remain elevated due to the continued impacts of broad-based inflation. Raw material input costs for pork, beef, turkey, avocados, and feed are anticipated to remain above historical levels.
Gross Profit
| Quarter Ended | ||||||||||||||||||||||||||||||||||||||
| in thousands | January 30, 2022 | January 24, 2021 | % Change | |||||||||||||||||||||||||||||||||||
| Gross Profit | $ | 538,749 | $ | 450,170 | 19.7 | |||||||||||||||||||||||||||||||||
| Percentage of Net Sales | 17.7 | % | 18.3 | % |
Gross profit as a percentage of net sales for the first quarter declined, driven primarily by higher freight and operational
expenses. Gross profit as a percentage of net sales increased for the Jennie-O Turkey Store and International & Other segments but declined for Grocery Products and Refrigerated Foods during the first quarter.
Looking ahead to the second quarter of fiscal 2022, the Company expects gross profit as a percentage of net sales to improve compared to the prior year and sequentially compared to the first quarter. The Company expects to benefit from the intentional actions it has taken to offset inflationary pressures. These actions include pricing, improving promotional effectiveness, and shifting to a more profitable mix. Further input cost inflation poses the largest risk to this assumption.
Selling, General and Administrative (SG&A)
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 30, 2022 | January 24, 2021 | % Change | ||||||||||||||||||||||||||||||||
| SG&A | $ | 225,972 | $ | 196,380 | 15.1 | ||||||||||||||||||||||||||||||
| Percentage of Net Sales | 7.4 | % | 8.0 | % |
For the first quarter of fiscal 2022, SG&A expenses increased due to the addition of the Planters*®* snack nuts business and higher marketing and advertising investments. As a percent of net sales, SG&A expenses declined, driven by strong sales and disciplined cost management.
Advertising investments in the first quarter were $47 million compared to $34 million last year. The Company plans to continue to invest in its leading brands.
Equity in Earnings of Affiliates
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 30, 2022 | January 24, 2021 | % Change | ||||||||||||||||||||||||||||||||
| Equity in Earnings of Affiliates | $ | 6,898 | $ | 14,228 | (51.5) |
Equity in earnings of affiliates for the first quarter decreased significantly due to lower results for MegaMex and from the Company's joint venture in the Philippines. MegaMex results were negatively impacted by significantly higher costs for avocados.
Effective Tax Rate
| Quarter Ended | |||||||||||||||||||||||
| January 30, 2022 | January 24, 2021 | ||||||||||||||||||||||
| Effective Tax Rate | 22.4 | % | 19.7 | % |
The effective tax rate for the first quarter increased as last year's tax rate benefited from a state tax settlement. The effective tax rate for fiscal 2022 is expect to be between 20.5% and 22.5%. For further information, refer to Note K - Income Taxes.
Segment Results
Net sales and segment profit 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 profit and other financial information shown below.
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 30, 2022 | January 24, 2021 | % Change | ||||||||||||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||||||||||||||
| Grocery Products | $ | 855,591 | $ | 577,599 | 48.1 | ||||||||||||||||||||||||||||||
| Refrigerated Foods | 1,627,528 | 1,367,077 | 19.1 | ||||||||||||||||||||||||||||||||
| Jennie-O Turkey Store | 384,471 | 333,321 | 15.3 | ||||||||||||||||||||||||||||||||
| International & Other | 176,768 | 183,150 | (3.5) | ||||||||||||||||||||||||||||||||
| Total | $ | 3,044,358 | $ | 2,461,147 | 23.7 | ||||||||||||||||||||||||||||||
| Segment Profit | |||||||||||||||||||||||||||||||||||
| Grocery Products | $ | 99,486 | $ | 92,202 | 7.9 | ||||||||||||||||||||||||||||||
| Refrigerated Foods | 162,391 | 141,171 | 15.0 | ||||||||||||||||||||||||||||||||
| Jennie-O Turkey Store | 43,737 | 26,940 | 62.4 | ||||||||||||||||||||||||||||||||
| International & Other | 26,084 | 32,204 | (19.0) | ||||||||||||||||||||||||||||||||
| Total Segment Profit | 331,699 | 292,517 | 13.4 | ||||||||||||||||||||||||||||||||
| Net Unallocated Expense | 22,933 | 15,547 | 47.5 | ||||||||||||||||||||||||||||||||
| Noncontrolling Interest | 139 | 112 | 24.0 | ||||||||||||||||||||||||||||||||
| Earnings Before Income Taxes | $ | 308,904 | $ | 277,082 | 11.5 | ||||||||||||||||||||||||||||||
Grocery Products
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 30, 2022 | January 24, 2021 | % Change | ||||||||||||||||||||||||||||||||
| Volume (lbs.) | 371,515 | 304,334 | 22.1 | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 855,591 | $ | 577,599 | 48.1 | ||||||||||||||||||||||||||||||
| Segment Profit | 99,486 | 92,202 | 7.9 |
For the first quarter of fiscal 2022, volume and sales increased, driven by growth from the simple meals and Mexican foods portfolios and from the inclusion of the Planters*®* snack nuts business. Brands leading the sales growth included WHOLLY*®, SPAM®, Dinty Moore®,* and Mary Kitchen*®.*
Segment profit for the first quarter increased due to the contribution from the Planters*®* snack nuts business, which more than offset lower results from MegaMex and higher operational and logistics costs.
Volume, sales and segment profit during the quarter were negatively impacted by production constraints due to labor shortages.
Grocery Products expects year-over-year volume, sales, and segment profit growth in the second quarter related to the impact from the Planters*®* snack nuts business. Risks to profitability include additional inflationary pressures and labor shortages impacting production on key product lines.
Refrigerated Foods
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 30, 2022 | January 24, 2021 | % Change | ||||||||||||||||||||||||||||||||
| Volume (lbs.) | 572,752 | 595,315 | (3.8) | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 1,627,528 | $ | 1,367,077 | 19.1 | ||||||||||||||||||||||||||||||
| Segment Profit | 162,391 | 141,171 | 15.0 |
For the first quarter, value-added volume and sales increased due to strong results from the foodservice businesses and pricing actions across most categories. Consistent with the Company's long-term strategy to better align resources to value-added growth, the overall decline in volume was due to planned lower commodity sales. Foodservice volume and sales increased with growth in every branded category and from the inclusion of the Planters*®* snack nuts business. Retail and deli sales increased with growth led by products such as Applegate*®* natural and organic meats and Hormel*®* Gatherings*®* party trays. Products such as Columbus*®* grab-and-go charcuterie also benefited from new production capacity in the Nebraska facility.
Segment profit increased during the first quarter as higher foodservice sales and numerous pricing actions across the other value-added businesses overcame higher operational and logistics costs.
Volume, sales and segment profit were negatively impacted by production constraints due to labor shortages.
Refrigerated Foods expects higher sales and segment profit in the second quarter, led by continued strength in the foodservice business. Risks to profitability include additional inflationary pressures and labor shortages impacting production on key product lines.
Jennie-O Turkey Store
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 30, 2022 | January 24, 2021 | % Change | ||||||||||||||||||||||||||||||||
| Volume (lbs.) | 188,500 | 193,569 | (2.6) | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 384,471 | $ | 333,321 | 15.3 | ||||||||||||||||||||||||||||||
| Segment Profit | 43,737 | 26,940 | 62.3 |
Sales for the first quarter of fiscal 2022 increased due to improved foodservice performance, increased whole bird shipments and pricing actions across the portfolio. The decline in volume was largely due to lower commodity volumes as a result of labor shortages.
For the first quarter, higher commodity prices and strong foodservice sales drove the significant improvement in segment profit. The business absorbed significantly higher feed and logistics costs.
Jennie-O Turkey Store expects improved results in the second quarter due to favorable market conditions and continued strength in the foodservice business. Labor shortages, supply chain disruption, and the domestic emergence of Highly Pathogenic Avian Influenza present the largest risks to the business.
International & Other
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 30, 2022 | January 24, 2021 | % Change | ||||||||||||||||||||||||||||||||
| Volume (lbs.) | 72,106 | 86,489 | (16.6) | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 176,768 | $ | 183,150 | (3.5) | ||||||||||||||||||||||||||||||
| Segment Profit | 26,084 | 32,204 | (19.0) |
Volume and sales declined during the first quarter due to demand softness in China caused by COVID-related restrictions, current export logistics challenges, and lower fresh pork export volume resulting from the Company's new pork supply agreement.
For the first quarter, segment profit declined due to lower sales across the portfolio and a decline in equity in earnings.
International & Other expects growth in the second quarter due to strength from exports and an improvement in equity in earnings. Continued demand softness in China and export logistics challenges pose the largest risks to 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.
| Quarter Ended | |||||||||||||||||||||||
| in thousands | January 30, 2022 | January 24, 2021 | |||||||||||||||||||||
| Net Unallocated Expense | $ | 22,933 | $ | 15,547 | |||||||||||||||||||
| Noncontrolling Interest | 139 | 112 |
For the first quarter, net unallocated expense increased due to lower investment income from the Company's Rabbi Trust and higher interest expense.
Non-GAAP Financial Measures
The non-GAAP adjusted financial measures of organic net sales and organic volume are presented to provide investors with additional information to facilitate the comparison of past and present operations. 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 impact of the acquisition of the Planters*®* snack nuts business (June 2021) in the Grocery Products, Refrigerated Foods and International & Other segments.
The Company believes these non-GAAP financial measures provide useful information to investors, because they are the measures used to evaluate performance on a comparable year-over-year basis. Non-GAAP measures are not intended to be a substitute for U.S. GAAP measures in analyzing financial performance. These non-GAAP measures are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.
The tables below show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures.
| RECONCILIATION OF NON-GAAP MEASURES | |||||||||||||||||||||||||||||
| ORGANIC VOLUME AND NET SALES (NON-GAAP) | |||||||||||||||||||||||||||||
| Quarter Ended | |||||||||||||||||||||||||||||
| January 30, 2022 | January 24, 2021 | ||||||||||||||||||||||||||||
| in thousands | Reported GAAP | Acquisitions | Organic (Non-GAAP) | Reported GAAP | Organic % Change | ||||||||||||||||||||||||
| Volume (lbs.) | |||||||||||||||||||||||||||||
| Grocery Products | 371,515 | (63,212) | 308,303 | 304,334 | 1.3 | ||||||||||||||||||||||||
| Refrigerated Foods | 572,752 | (8,573) | 564,179 | 595,315 | (5.2) | ||||||||||||||||||||||||
| Jennie-O Turkey Store | 188,500 | — | 188,500 | 193,569 | (2.6) | ||||||||||||||||||||||||
| International & Other | 72,106 | (1,722) | 70,384 | 86,489 | (18.6) | ||||||||||||||||||||||||
| Total Volume | 1,204,872 | (73,507) | 1,131,365 | 1,179,706 | (4.1) | ||||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||||||||
| Grocery Products | $ | 855,591 | $ | (235,732) | $ | 619,859 | $ | 577,599 | 7.3 | ||||||||||||||||||||
| Refrigerated Foods | 1,627,528 | (31,253) | 1,596,275 | 1,367,077 | 16.8 | ||||||||||||||||||||||||
| Jennie-O Turkey Store | 384,471 | — | 384,471 | 333,321 | 15.3 | ||||||||||||||||||||||||
| International & Other | 176,768 | (4,839) | 171,929 | 183,150 | (6.1) | ||||||||||||||||||||||||
| Total Net Sales | $ | 3,044,358 | $ | (271,824) | $ | 2,772,534 | $ | 2,461,147 | 12.7 | ||||||||||||||||||||
Related Party Transactions
There has been no material change in the information regarding Related Party Transactions as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
LIQUIDITY AND CAPITAL RESOURCES
When assessing liquidity and capital resources, the Company evaluates cash and cash equivalents, short-term and long-term investments, income from operations, and borrowing capacity.
Cash Flow Highlights
| Quarter Ended | ||||||||
| in millions | January 30, 2022 | January 24, 2021 | ||||||
| Cash and Cash Equivalents | $ | 824 | $ | 1,752 | ||||
| Cash Provided by (Used in) Operating Activities | 384 | 206 | ||||||
| Cash Provided by (Used in) Investing Activities | (50) | (39) | ||||||
| Cash Provided by (Used in) Financing Activities | (124) | (135) |
Cash and cash equivalents increased $211 million in the first quarter of fiscal 2022 as cash from operating activities was sufficient to cover dividend payments and capital expenditures. Cash and cash equivalents decreased compared to the prior year due to funding the purchase of the Planters*®* snack nuts business. Additional details related to significant drivers of cash flows are provided below.
Cash Provided by (Used in) Operating Activities
- Cash flows from operating activities benefited from earnings and favorable working capital in the first quarter of fiscal 2022.
–Accounts receivable declined $85 million in the first quarter of fiscal 2022 as a result of the timing of sales and collections following holiday shipments. In comparison, accounts receivable increased $3 million in the first quarter of fiscal 2021.
–Accounts payable and accrued expenses decreased $86 million and $124 million in the first quarter of fiscal 2022 and 2021, respectively, primarily due to annual incentive compensation and deferred livestock payments.
Cash Provided by (Used in) Investing Activities
- Capital expenditures were $50 million and $40 million in the first quarter of fiscal 2022 and 2021, respectively. Capital expenditures for fiscal 2022 are estimated to be $310 million. The largest spend in both years was related to capacity expansion in Omaha, Nebraska. Looking to the remainder of the year, the Company will prioritize projects which increase value added production capacity, drive cost savings and leverage automation.
Cash Provided by (Used in) Financing Activities
- Cash dividends paid to the Company’s shareholders continue to be an ongoing financing activity for the Company with payments totaling $133 million in the first quarter of fiscal 2022 compared to $126 million in the comparable period of fiscal 2021. For fiscal 2022, the annual dividend rate was increased 6 percent to $1.04 per share, representing the 56th consecutive annual dividend increase. The Company has paid dividends for 374 consecutive quarters.
Sources and Uses of Cash
The Company believes its balanced business model, with diversification across raw material inputs, channels, and categories, provides stability in ever changing economic environments. The Company applies a waterfall approach to capital resource allocation, which focuses first on required uses of cash such as capital expenditures to maintain facilities, dividend returns to investors, and mandatory debt repayments. Next, the Company looks to strategic items in support of growth initiatives such as acquisitions and innovation investments, which is followed by opportunistic uses including incremental debt repayment and share repurchases. The Company believes its anticipated income from operations, cash on hand, and borrowing capacity under the current credit facility will be adequate to meet all short-term and long-term commitments. The Company's ability to leverage its balance sheet through the issuance of debt provides the flexibility to take advantage of strategic opportunities which may require additional funding.
There have been no 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 October 31, 2021.
The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of January 30, 2022, the Company was in compliance with all of these debt covenants and expects to maintain this compliance.
Trademarks
References to the Company’s brands or products in italics within this report represent valuable trademarks owned or licensed by Hormel Foods, LLC or other subsidiaries of Hormel Foods Corporation.
CRITICAL ACCOUNTING ESTIMATES
This 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 with U.S. GAAP. The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. The significant accounting policies used in preparing these Consolidated Financial Statements are consistent with those described in Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements in the Form 10-K with the exception of new requirements adopted in the first quarter of fiscal 2022.
Critical accounting estimates 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 Estimates as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 31, 2021. 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 the Securities 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.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various forms of market risk as a part of its ongoing business practices. The Company utilizes derivative instruments to mitigate earnings fluctuations due to market volatility.
Hog Markets: The Company’s earnings are affected by fluctuations in the live hog market. To minimize the impact on earnings, and ensure a steady supply of quality hogs, the Company has entered into contracts with producers for the purchase of hogs at formula-based prices over periods of up to 10 years. Hogs purchased under contract accounted for 98 and 94 percent of the total hogs purchased by the Company during the first quarter of fiscal years 2022 and 2021, respectively. The majority of these contracts use market-based formulas based on hog futures, hog primal values, or industry reported hog markets. Other contracts use a formula based on the cost of production, which can fluctuate independently from hog markets. The Company’s value-added branded portfolio helps mitigate changes in hog and pork market prices. Therefore, a hypothetical 10 percent change in the cash hog market would have had an immaterial effect on the Company’s results of operations.
The Company utilizes a hedge program to reduce exposure and offset the fluctuations in the Company's future direct hog purchases. This program utilizes lean hog futures which are accounted for under cash flow hedge accounting. The fair value of the Company's open futures contracts in this program as of January 30, 2022 was $9.2 million compared to $(0.2) million as of October 31, 2021. The Company measures its market risk exposure on its lean hog futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for lean hogs. A 10 percent decrease in the market price for lean hogs would have negatively impacted the fair value of the Company's January 30, 2022, open lean hog contracts by $10.3 million, which in turn would lower the Company's future cost on purchased hogs by a similar amount.
Turkey Production Costs: The Company raises or contracts for live turkeys to meet the majority of its raw material supply requirements. Production costs in raising turkeys are subject primarily to fluctuations in feed prices, and to a lesser extent, fuel costs. Under normal, long-term market conditions, changes in the cost to produce turkeys are offset by proportional changes in the turkey market.
The Company utilizes a hedge program to reduce exposure and offset the fluctuation in the Company's future direct grain purchases. This program utilizes grain futures, swaps, and options for Jennie-O Turkey Store, and these contracts are accounted for under cash flow hedge accounting. The fair value of the Company’s open grain contracts as of January 30, 2022, was $28.4 million compared to $25.5 million as of October 31, 2021. The Company measures its market risk exposure on its grain contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for grain. A 10 percent decrease in the market price for grain would have negatively impacted the fair value of the Company’s January 30, 2022, open grain contracts by $15.9 million, which in turn would lower the Company’s future cost on purchased grain by a similar amount.
Interest Rate Risk: The Company is subject to interest rate risk primarily from changes in fair value of long-term fixed rate debt. As of January 30, 2022, the Company’s long-term debt had a carrying amount of $3,309.2 million compared to $3,315.1 million as of October 31, 2021. The Company measures its market risk exposure of long-term fixed rate debt using a sensitivity analysis, which considers a 10 percent change in interest rates. As of January 30, 2022, a 10 percent decrease in interest rates would have positively impacted the fair value of the Company’s long-term debt by $69.0 million, while a 10 percent increase would have negatively impacted the long-term debt by $65.7 million.
To reduce the risk of changes in fair value of long-term debt, the Company has entered into an interest rate swap on a portion of the debt that receives a fixed rate and pays a variable rate. The notional amount of the Company's interest rate swap, which is designated and qualifies as a fair value hedge, is $450.0 million. The Company measures its market risk exposure on interest rate contracts using sensitivity analysis, which considers a hypothetical change of 25 basis points in the underlying benchmark interest rate. A hypothetical change in the benchmark interest rate of 25 basis points would have minimal impact on the Company's interest expense.
Other Input Costs: The costs of raw materials, packaging materials, freight, fuel, and energy may cause the Company's results to fluctuate significantly. To manage input cost volatility, the Company pursues cost saving measures, forward pricing, derivatives, and pricing actions when necessary.
Investments: The Company has corporate-owned life insurance policies classified as trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. As of January 30, 2022, the balance of these securities totaled $197.6 million compared to $203.0 million as of October 31, 2021. The rabbi trust is invested primarily in fixed income funds. The Company is subject to market risk due to fluctuations in the value of the remaining investments as unrealized gains and losses associated with these securities are included in the Company’s net earnings on a mark-to-market basis. A 10 percent decline in the value of the investments not held in fixed income funds would have a negative impact to the Company’s pretax earnings of approximately $9.5 million, while a 10 percent increase in value would have a positive impact of the same amount.
International Assets: The fair values of certain Company assets are subject to fluctuations in foreign currencies. The Company's net asset position in foreign currencies as of January 30, 2022 was $623.4 million, compared to $657.2 million as of October 31, 2021, with most of the exposure existing in Chinese yuan and Brazilian real. Changes in currency exchange rates impact the fair values of the Company assets either currently through the Consolidated Statements of Operations within Interest and Investment Income or through the Consolidated Condensed Statements of Financial Position within Accumulated Other Comprehensive Loss.
The Company measures its foreign currency exchange risk by using a 10 percent sensitivity analysis on the Company's primary foreign net asset position, the Chinese yuan and Brazilian real, as of January 30, 2022. A 10 percent strengthening in the value of the Chinese yuan relative to the U.S. dollar would result in other comprehensive income of approximately $40.9 million pretax. A 10 percent weakening in the value of the Chinese yuan relative to the U.S. dollar would result in other comprehensive loss of approximately $33.5 million pretax. A 10 percent strengthening in the value of the Brazilian real relative to the U.S. dollar would result in other comprehensive income of approximately $11.8 million pretax. A 10 percent weakening in the value of the Brazilian real relative to the U.S. dollar would result in other comprehensive loss of approximately $9.6 million pretax.
Item 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
As of the end of the period covered by this report (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information the Company is required to disclose in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Internal Controls.
On June 7, 2021, the Company completed its acquisition of the Planters*®* snack nuts business. The acquired business is in process of being fully integrated into the Company's existing operations.
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the first quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings related to the ongoing operation of its business, including claims both by and against the Company. At any time, such proceedings typically involve claims related to product liability, labeling, contracts, antitrust regulations, intellectual property, competition laws, employment practices, or other actions brought by employees, customers, consumers, competitors or suppliers. The Company establishes accruals for its potential exposure, as appropriate, for claims against the Company when losses become probable and reasonably estimable. However, future developments or settlements are uncertain and may require the Company to change such accruals as proceedings progress. Resolution of any currently known matters, either individually or in the aggregate, is not expected to have a material effect on the Company’s financial condition, results of operations, or liquidity.
The Company is a defendant in three sets of antitrust lawsuits broadly targeting the pork and turkey industries. None of these cases involve allegations of bid rigging or other criminal conduct. The Company has not established reserves as it does not believe it will have liability in any of these cases.
Item 1A. RISK FACTORS
The Company's business, operations, and financial condition are subject to various risks and uncertainties. There were no material changes during the first quarter of fiscal 2022 to the risk factors previously disclosed in Part I, Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021, except as follows:
BUSINESS AND OPERATIONAL RISKS
Deterioration of labor relations, labor availability or increases in labor costs could harm the Company’s business. As of January 30, 2022, the Company employed more than 20,000 people worldwide, of which approximately 20 percent were represented by labor unions, principally the United Food and Commercial Workers Union. A significant increase in labor costs or a deterioration of labor relations at any of the Company’s facilities or co-manufacturing facilities resulting in work slowdowns or stoppages could harm the Company’s financial results. Labor and skilled labor availability challenges could continue to have an adverse effect on the Company's business. The union contract at the Company's facility in Rochelle, Illinois, covering approximately 700 employees, will expire on March 18, 2022. Negotiations are ongoing.
INDUSTRY RISKS
Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins.
The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including African swine fever (ASF), Bovine Spongiform Encephalopathy (BSE), pneumo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease (FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI). The outbreak of such diseases could adversely affect the Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins. Additionally, the outbreak of disease may hinder the Company’s ability to market and sell products both domestically and internationally.
In recent years, the outbreak of ASF has impacted hog herds in China, Asia, Europe, and the Caribbean. If an outbreak of ASF were to occur in the United States, the Company's supply of hogs and pork could be materially impacted.
HPAI has been detected within the United States in 2022. Spreading of the disease by wild birds during the spring migration poses a risk which could adversely impact the Company's poultry business.
The Company has developed business continuity plans for various disease scenarios and will continue to update these plans as necessary. There can be no assurance given, however, that these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no issuer purchases of equity securities in the quarter ended January 30, 2022. The maximum number of shares that may yet be purchased under the plans or programs as of January 30, 2022 is 3,987,494. On January 29, 2013, the Company's Board of Directors authorized the repurchase of 10,000,000 shares of its common stock with no expiration date. On January 26, 2016, the Board of Directors approved a two-for-one split of the Company’s common stock to be effective January 27, 2016. As part of the stock split resolution, the number of shares remaining to be repurchased was adjusted proportionately.
Item 6. EXHIBITS
| 31.1 | Certification Required Under Section 302 of the Sarbanes-Oxley Act of 2002 | ||||
| 31.2 | Certification Required Under Section 302 of the Sarbanes-Oxley Act of 2002 | ||||
| 32.1 | Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||
| 101 | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended January 30, 2022, formatted in Inline XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Condensed Statements of Financial Position, (iv) Consolidated Statements of Changes in Shareholders' Investment, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. | ||||
| 104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended January 30, 2022, formatted in Inline XBRL (included as Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HORMEL FOODS CORPORATION | ||||||||
| (Registrant) | ||||||||
| Date: March 8, 2022 | By | /s/ JACINTH C. SMILEY | ||||||
| JACINTH C. SMILEY | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| Date: March 8, 2022 | By | /s/ PAUL R. KUEHNEMAN | ||||||
| PAUL R. KUEHNEMAN | ||||||||
| Vice President and Controller | ||||||||
| (Principal Accounting Officer) |