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HRL > SEC Filings for HRL > Form 10-Q on 6-Sep-2013All Recent SEC Filings

Show all filings for HORMEL FOODS CORP /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HORMEL FOODS CORP /DE/


6-Sep-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CRITICAL ACCOUNTING POLICIES

There have been no material changes in the Company's Critical Accounting Policies, as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 28, 2012.

RESULTS OF OPERATIONS

Overview

The Company is a processor of branded and unbranded food products for retail, foodservice, and fresh product customers. It operates in five reportable segments as described in Note M in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

For the third quarter of fiscal 2013, the Company reported net earnings per diluted share of $0.42, an increase of 2.4 percent compared to $0.41 per diluted share in the third quarter of fiscal 2012. Significant factors impacting the third quarter of fiscal 2013 were:

† Grocery Products results were positively impacted by the new SKIPPY peanut butter business.

† Continued strength in export sales of the SPAM family of products and fresh pork, as well as the addition of the new SKIPPY peanut butter business, led to notable net sales and profit gains for the International & Other segment.

† Jennie-O Turkey Store delivered a strong quarter, with value-added growth and operational gains offsetting higher grain costs and lower commodity meat prices.

† Refrigerated Foods profits decreased during the quarter, as higher pork input costs negatively impacted margins.

† Profitability increased for Specialty Foods with the Diamond Crystal Brands and Century Foods International operating segments reporting improved results.

Consolidated Results

Net earnings attributable to the Company for the third quarter of fiscal 2013 increased 2.2 percent to $113.6 million compared to $111.2 million in the same quarter of fiscal 2012. Diluted earnings per share for the third quarter increased to $0.42 from $0.41 last year. Net earnings attributable to the Company for the first nine months of fiscal 2013 increased 0.4 percent to $368.9 million, from $367.4 million for the first nine months of fiscal 2012. Diluted earnings per share for the nine months were $1.37 for both fiscal 2013 and fiscal 2012.

Net sales for the third quarter of fiscal 2013 increased 7.5 percent to a record $2.16 billion, versus $2.01 billion in fiscal 2012. Tonnage increased 2.6 percent to 1.19 billion lbs. for the third quarter compared to 1.16 billion lbs. for the same quarter of last year. Net sales for the first nine months of fiscal 2013 increased 6.1 percent to a record $6.43 billion from $6.06 billion in the nine months of fiscal 2012. Tonnage for the first nine months increased 2.7 percent to 3.67 billion lbs. compared to 3.57 billion lbs. in 2012.

Net sales were enhanced by the addition of the SKIPPY peanut butter business acquired at the beginning of the second quarter. These sales contributed an incremental $90.9 million of net sales and 54.5 million lbs. for the quarter, and $177.9 million of net sales and 103.1 million lbs. for the first nine months of fiscal 2013. Additionally, top-line results for the first nine months were aided by the addition of Don Miguel Foods Corp. sales (additional product lines within the MegaMex joint venture) beginning in the third quarter of fiscal 2012 when the Company's retail sales force assumed responsibility for these sales. These sales contributed an incremental $103.2 million of net sales and 47.4 million lbs. to the top-line results for the first nine months of fiscal 2013. Higher export sales of the SPAM family of products and fresh pork by the Company's international business have also provided notable growth throughout fiscal 2013. Improved value-added sales within the Refrigerated Foods, Specialty Foods, and Jennie-O Turkey Store segments also contributed to the record top-lines results for the quarter.


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Gross profit for the third quarter and first nine months of fiscal 2013 was $330.3 million and $1.03 billion, respectively, compared to $307.1 million and $980.1 million for the same periods last year. Gross profit as a percentage of net sales for the third quarter and first nine months of fiscal 2013 was 15.3 percent and 16.0 percent, respectively, versus 15.3 percent and 16.2 percent for the comparable periods in the prior year. Lower margins in the Refrigerated Foods segment were offset by strong performances from the Grocery Products, International & Other and Jennie-O Turkey Store segments. The additional margins from SKIPPY sales boosted margins for both the Grocery Products and International & Other segments. Additionally, continued strong margin gains were experienced on export sales of the SPAM family of products and fresh pork in the International & Other segment during the quarter, and higher margins on value-added products at Jennie-O Turkey Store. These increases were able to overcome sharp increases in input costs which constricted operating margins in Refrigerated Foods. Additionally, shipping and handling expenses to date in fiscal 2013 increased in four of the Company's five segments.

Entering the fourth quarter, the Company expects continued improved results from the Grocery Products and International & Other segments aided by the addition of SKIPPY sales. In addition, the Jennie-O Turkey Store segment began turning the corner in the third quarter and should maintain their momentum in the fourth quarter. While higher input costs are negatively impacting our value-added margins in Refrigerated Foods, these headwinds are expected to moderate towards the end of the fiscal year. The contract allowing Diamond Crystal Brands to sell SPLENDA® sweetener into foodservice trade channels expired at the end of July 2013 in the ordinary course of business, and results for the Specialty Foods segment will be challenged by the loss of these sales in the fourth quarter.

Selling, general and administrative expenses for the third quarter and nine months of fiscal 2013 were $151.0 million and $479.9 million, respectively, compared to $145.0 million and $446.2 million last year. Selling, general and administrative expenses as a percentage of net sales was 7.0 percent and 7.5 percent for the third quarter and first nine months of fiscal 2013, respectively, compared to 7.2 percent and 7.4 percent for the comparable periods of the prior year. Transition and transaction costs incurred related to the SKIPPY acquisition were the main drivers of the increased expense for first nine months of fiscal 2013 compared to the prior year. Within the third quarter, a reduction in advertising expenses partially offset higher employee-related expenses. The Company expects selling, general and administrative expenses to be approximately 7.5 percent of net sales for the full year in fiscal 2013.

Equity in earnings of affiliates was $1.3 million and $18.4 million for the third quarter and first nine months of fiscal 2013, respectively, compared to $9.8 million and $28.6 million last year. The decrease is a result of lower earnings from the Company's 50 percent owned MegaMex joint venture, which experienced higher incentive expense on the Fresherized Foods acquisition, unfavorable exchange rates, and higher input costs. Results have been mixed for the Company's international joint ventures, but resulted in an overall decline for those operations during the first nine months of fiscal 2013 compared to the prior year.

The effective tax rate for the third quarter and first nine months of fiscal 2013 was 35.7 and 33.5 percent, respectively, compared to 33.7 and 33.5 percent for the comparable quarter and first nine months of fiscal 2012. The higher rate for the third quarter is primarily related to lower earnings in affiliates. The Company expects a full-year effective tax rate of approximately 34.0 percent for fiscal 2013.


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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. Additional segment financial information can be found in Note M of the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

                                 Three Months Ended                     Nine Months Ended
                         July 28,      July 29,        %        July 28,      July 29,        %
(in thousands)              2013          2012       Change       2013          2012        Change
Net Sales
Grocery Products        $   370,297   $   297,177       24.6   $ 1,097,942   $   830,649       32.2
Refrigerated Foods        1,068,587     1,043,311        2.4     3,143,358     3,158,811       (0.5 )
Jennie-O Turkey Store       367,125       351,604        4.4     1,142,198     1,120,028        2.0
Specialty Foods             240,512       230,072        4.5       720,048       677,043        6.4
International & Other       113,004        86,024       31.4       324,906       273,955       18.6
Total                   $ 2,159,525   $ 2,008,188        7.5   $ 6,428,452   $ 6,060,486        6.1

Segment Operating
Profit
Grocery Products        $    52,962   $    40,052       32.2   $   150,170   $   127,003       18.2
Refrigerated Foods           44,769        60,757      (26.3 )     153,239       167,515       (8.5 )
Jennie-O Turkey Store        45,623        39,106       16.7       156,567       186,066      (15.9 )
Specialty Foods              23,170        21,490        7.8        72,898        58,996       23.6
International & Other        16,692        12,437       34.2        49,421        37,763       30.9

Total segment
operating profit        $   183,216   $   173,842        5.4   $   582,295   $   577,343        0.9
Net interest and
investment expense
(income)                      3,577         2,363       51.4         6,887         4,932       39.6
General corporate
expense                       2,833         3,225      (12.2 )      19,228        18,040        6.6
Noncontrolling
interest                        270         1,240      (78.2 )       2,720         3,226      (15.7 )

Earnings before
income taxes            $   177,076   $   169,494        4.5   $   558,900   $   557,597        0.2

Grocery Products

The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market. This segment also includes the results from the Company's MegaMex joint venture.

Grocery Products net sales increased 24.6 percent and 32.2 percent for the third quarter and nine months of fiscal 2013, respectively, compared to the same fiscal 2012 periods. Tonnage increased 27.1 percent for the third quarter and 31.1 percent for the first nine months compared to the prior year. The comparative results reflect the addition of the newly acquired SKIPPY peanut butter business beginning in the second quarter of fiscal 2013 and Don Miguel Foods Corp. sales (additional product lines within the MegaMex joint venture) beginning in the third quarter of fiscal 2012 when the Company's retail sales force assumed responsibility for these sales. The addition of the SKIPPY peanut butter business contributed an incremental $72.5 million of net sales and 44.1 million lbs. to the top-line results for the quarter. On a combined basis, these businesses contributed an incremental $246.2 million of net sales and 132.6 million lbs. to the top-line results for the first nine months of fiscal 2013.


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This segment experienced sales growth for Dinty Moore stew, Hormel Mary Kitchen hash, and Hormel bacon toppings during the quarter. Largely offsetting these gains were lower sales of the SPAM family of products due to the advertising campaigns around the 75th anniversary of SPAM in the third quarter of fiscal 2012, and reduced sales of Hormel Compleats microwave meals. The Company introduced new Compleats breakfast trays and MVP snack kits at the end of the third quarter, which are expected to enhance results going forward.

Segment profit for Grocery Products increased 32.2 percent for the third quarter and 18.2 percent for the first nine months compared to fiscal 2012. Along with the positive performance from the SKIPPY products, profit results for the third quarter benefitted from improved margin performance in Hormel bacon toppings, Hormel hash, and Dinty Moore beef stew. Lower equity in earnings results from the MegaMex joint venture in the quarter offset profits due to higher incentive expense on the Fresherized Food acquisition, unfavorable exchange rates, and higher input costs.

Although increased input costs will remain a concern for Grocery Products during the remainder of the fiscal year, the Company believes the initiatives in place to drive sales growth should result in a strong finish to fiscal 2013.

Refrigerated Foods

The Refrigerated Foods segment includes the Hormel Refrigerated operating segment and the Affiliated Business Units. This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork and beef products for retail, foodservice, and fresh product customers. The Affiliated Business Units include the Farmer John, Burke Corporation, Dan's Prize, Saag's Products, Inc., and Precept Foods businesses. Precept Foods, LLC, is a 50.01 percent owned joint venture.

Net sales for the Refrigerated Foods segment increased 2.4 percent for the third quarter and decreased 0.5 percent for the first nine months of fiscal 2013, compared to the same periods of fiscal 2012. Tonnage decreased 3.5 percent and 3.3 percent for the third quarter and first nine months compared to the prior year, as planned reductions in this segment's feed sales business in the second quarter of fiscal 2013 impacted volume comparisons. Increased net sales for the third quarter were seen across the Refrigerated Foods portfolio. Within the Foodservice business unit, sales of branded products such as Hormel pecanwood bacon, Hormel Fire Braised meats, and Hormel Natural Choice deli meats experienced significant growth. On the retail side, this segment enjoyed strong sales of Hormel party trays, Hormel Natural Choice deli meats, and Hormel Cure 81 hams. The new Hormel REV wraps were supported by an advertising campaign which began in late July. Declines for the first nine months of 2013 primarily reflect lower sales of commodity pork items as harvest levels were reduced to limit the Company's exposure to unfavorable pork operating margins.

Segment profit for Refrigerated Foods decreased 26.3 percent and 8.5 percent for the third quarter and first nine months of fiscal 2013, respectively, compared to the prior year. Although processing margins improved during the quarter, continued high raw material costs constricted margins in certain retail categories, with bacon impacted most notably in the third quarter.

Going into the fourth quarter, the Company expects Refrigerated Foods to benefit from its value-added product lines, driven by a decline in pork input costs along with the benefit of earlier pricing actions. Pork operating margins are expected to improve in the fourth quarter from third quarter performance. Additionally, the Company is excited about the new product introductions of Hormel REV wraps and Hormel Fire Braised meats this year, which are expected to continue to benefit sales in the fourth quarter.


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Jennie-O Turkey Store

The Jennie-O Turkey Store (JOTS) segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers.

JOTS net sales increased 4.4 percent and 2.0 percent for the third quarter and first nine months of fiscal 2013, respectively, versus the comparable periods of fiscal 2012. Tonnage increased 1.0 percent for the third quarter and decreased 1.3 percent for the first nine months, compared to prior year results. JOTS value-added products within the foodservice and deli business units delivered sales gains for the quarter. Retail sales of Jennie-O Turkey Store ground turkey chubs and turkey bacon also improved. Total harvest volume during recent quarters was intentionally reduced compared to the prior year to reduce the segment's exposure to weak commodity turkey prices, which tempered overall top-line results for the segment.

Segment profit for JOTS increased 16.7 percent for the third quarter and decreased 15.9 percent for the first nine months of fiscal 2013, compared to the prior year. Higher value-added pricing helped cover a portion of increased input costs while lower commodity pricing reduced contributions compared to a year ago. Corn and soybean meal input costs remain volatile and are expected to continue throughout the harvest season.

As JOTS began turning the corner in the third quarter, the Company anticipates that this segment will maintain its momentum through the remainder of the fiscal year. However, recent volatile grain markets have been impacting the effectiveness of the Company's hedging programs. If this volatility continues and results in ineffective programs, JOTS may be required to take market gains or losses on its positions through earnings in future quarters. Effectiveness will continue to be monitored and reassessed at the end of the fourth quarter. At this time, the fourth quarter results are still expected to exceed last year on improved value-added results, continued operational improvements, and live production gains.

Specialty Foods

The Specialty Foods segment includes the Diamond Crystal Brands (DCB), Century Foods International (CFI), and Hormel Specialty Products (HSP) operating segments. This segment consists of the packaging and sale of various sugar and sugar substitute products, salt and pepper products, liquid portion products, dessert mixes, ready-to-drink products, sports nutrition products, gelatin products, and private label canned meats to retail and foodservice customers. This segment also includes the processing, marketing, and sale of nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products.

Specialty Foods net sales increased 4.5 percent for the third quarter and 6.4 percent for the first nine months of fiscal 2013, compared to the same periods of fiscal 2012. Tonnage decreased 4.7 percent for the third quarter and was flat for the first nine months compared to the prior year. Sales growth in DCB for the quarter was led by strong sweetener sales, and robust ingredient and canned meat sales in HSP also drove top-line increases. Despite strong nutritional product and ready-to-drink sales, third quarter net sales for CFI were flat versus last year due to lower bulk sales.

Specialty Foods segment profit increased 7.8 percent in the third quarter and 23.6 percent for the first nine months, compared to fiscal 2012 results. DCB posted segment profit results well ahead of last year driven by strong sweetener sales, as the Company negotiated a one month contract extension allowing DCB to sell SPLENDA® sweetener into foodservice trade channels through the end of July 2013. CFI segment profit exceeded last year primarily due to a favorable ready-to-drink sales mix, which was partially offset by lower production efficiencies due to lower volumes. HSP results were negatively impacted by high canned meat raw material costs, which were partially offset by stronger ingredient margins.

The Company expects fourth quarter results for Specialty Foods to be below last year due to the loss of the SPLENDA® sweetener contract and continued higher raw material costs.


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International & Other

The International & Other segment includes the Hormel Foods International (HFI) operating segment, which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Company's international joint ventures and miscellaneous corporate sales. This segment was previously the All Other segment, and was renamed in the second quarter of fiscal 2013 with no change in the composition of the segment.

International & Other net sales increased 31.4 percent and 18.6 percent for the third quarter and first nine months of fiscal 2013, respectively, compared to fiscal 2012. Strong export sales of the SPAM family of products and fresh pork along with improved performance by the Company's China operations were the principal drivers of the top-line results for the third quarter. The addition of worldwide SKIPPY sales (excluding Mainland China) also enhanced the top-line results, contributing $17.0 million of net sales and 9.6 million lbs. in the third quarter and $33.5 million of net sales and 17.1 million lbs. for the first nine months of fiscal 2013.

Segment profit also increased, up 34.2 percent for the third quarter and 30.9 percent for the first nine months of fiscal 2013, compared to fiscal 2012 results. Robust exports of the SPAM family of products and fresh pork enhanced profits. In addition, continued improved China performance resulted from strong sales growth, favorable input costs, and production efficiencies.

The Company expects HFI to continue to provide strong results again in the fourth quarter, as export sales of the SPAM family of products and fresh pork and continued positive results in China will drive performance over last year. Additionally, SKIPPY sales will continue to have a positive impact on profit for the remainder of the year. The Company expects to close on the acquisition of the SKIPPY China based business located in Weifang by the end of the fiscal year, subject to regulatory approvals.

Unallocated Income and Expenses

The Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at corporate. Equity in earnings of affiliates is included in segment operating 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.

Net interest and investment expense (income) for the third quarter and first nine months of fiscal 2013 represented a net expense of $3.6 million and $6.9 million, respectively, compared to a net expense of $2.4 million and $4.9 million for the comparable quarter and nine months of fiscal 2012. The increased net expense for both the third quarter and nine months primarily reflects lower interest income, as the acquisition of the United States based SKIPPY peanut butter business decreased invested funds in the current year. The Company's rabbi trust has also experienced lower results in fiscal 2013. Interest expense of $9.4 million for the first nine months of fiscal 2013 has decreased from $9.7 million in the prior year, and the Company anticipates that interest expense will approximate $12.0 to $14.0 million for the full year in fiscal 2013.

General corporate expense for the third quarter and first nine months of fiscal 2013 was $2.8 million and $19.2 million, respectively, compared to $3.2 million and $18.0 million for the comparable periods of fiscal 2012. The lower third quarter expense resulted from reduced compensation and medical expenses.

Net earnings attributable to the Company's noncontrolling interests were $0.3 million and $2.7 million for the third quarter and first nine months of fiscal 2013, respectively, compared to $1.2 million and $3.2 million for the comparable periods of fiscal 2012. The decreased earnings for both the third quarter and nine months primarily reflect lower results from the Company's Precept Foods business.

Related Party Transactions

There has been no material change in the information regarding Related Party Transactions that was disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended October 28, 2012.


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LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $329.5 million at the end of the third quarter of fiscal year 2013 compared to $533.2 million at the end of the comparable fiscal 2012 period.

Cash provided by operating activities was $428.8 million in the first nine months of fiscal 2013 compared to $284.1 million in the same period of fiscal 2012. Favorable overall changes in working capital balances and increased dividends received from the Company's joint ventures compared to the prior year largely generated the increase. Additionally, the Company made a discretionary contribution of $22.1 million in the third quarter of fiscal 2013 to fund its pension plans, compared to a contribution of $27.3 million in the third quarter of fiscal 2012.

Cash used in investing activities was $654.9 million in the first nine months of fiscal 2013, compared to $72.9 million in the same period of fiscal 2012. In anticipation of the second quarter acquisition of the United States based SKIPPY peanut butter business from Unilever United States Inc., the Company liquidated its marketable securities portfolio at the end of the first quarter, which generated $77.6 million in cash. The Company then completed that acquisition on January 31, 2013, for a purchase price of $665.4 million in cash, plus related expenses. Fixed asset expenditures were $68.7 million in the first nine months of fiscal 2013 versus $93.9 million in the comparable period of fiscal 2012. The Company currently estimates its fiscal 2013 fixed asset expenditures to be approximately $110.0 to $120.0 million.

Cash used in financing activities was $126.9 million in the first nine months of fiscal 2013 compared to $141.9 million in the same period of fiscal 2012. The Company used $45.7 million for common stock repurchases in the first nine months of fiscal 2013, compared to $50.7 million in 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 also continue to be an ongoing financing activity for the Company. Dividends paid in the first nine months of fiscal 2013 were $129.4 million compared to $112.7 million in the comparable period of fiscal 2012. For fiscal 2013, the annual dividend rate was increased to $0.68 per share, representing the 47th consecutive annual dividend increase. The Company has paid dividends for 340 consecutive quarters and expects to continue doing so.

The Company is required, by certain covenants in its debt agreements, to maintain specified levels of financial ratios and financial position. At the end of the third quarter of fiscal 2013, the Company was in compliance with all of these debt covenants.

Cash flows from operating activities continue to provide the Company with its principal source of liquidity. The Company does not anticipate a significant risk to cash flows from this source in the foreseeable future because the . . .

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