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June 1, 2021, 3:32 p.m. EDT

10-Q: HORMEL FOODS CORP /DE/

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(EDGAR Online via COMTEX) -- 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 $0.42 for the second quarter of fiscal 2021, flat compared to last year. Significant factors impacting the quarter were:

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.

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, Net Sales, Earnings, and Diluted Earnings per Share
                                                                  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.

Table of Contents

For the first six months of fiscal 2021, the Company delivered record sales. Net sales growth from the retail, deli and foodservice businesses within Refrigerated Foods and continued strength within International & Other, driven by China, 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 Jennie-O Turkey Store and inflationary pressures. Incremental COVID-related costs are expected to decrease as the pandemic subsides.







        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.







        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               Change
        Equity in Earnings of         $    13,074             $  10,021                30.5           $     27,302               $  17,608                55.0
        Affiliates
        


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        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(R) 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(R) guacamole and Herdez(R) salsas and sauces.

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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(R) and Hormel(R) Bacon 1(TM). Retail and deli growth was driven by numerous brands, including Hormel(R) Black Label(R), Hormel(R) Gatherings(R), Sadlers(R) and Applegate(R). 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.

Refrigerated Foods is expecting improved results in the third quarter due to higher foodservice demand as the industry continues to recover.







        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 China and higher sales of branded exports.

The increase in segment profit for the quarter was due to growth in China and the 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 in China and higher income from the Company's partners in the Philippines, South Korea and Europe.

Table of Contents







        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 regarding Related Party Transactions as disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended October 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 in Papillion, 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 in April 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 of Equity 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 of April 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(R) 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(R) 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

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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 . . .

Jun 01, 2021

COMTEX_387677649/2041/2021-06-01T15:32:09

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