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HRL > SEC Filings for HRL > Form 10-Q on 7-Mar-2014All Recent SEC Filings

Show all filings for HORMEL FOODS CORP /DE/

Form 10-Q for HORMEL FOODS CORP /DE/


7-Mar-2014

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 27, 2013.

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.

The Company reported net earnings per diluted share of $0.57 for the first quarter of fiscal 2014, compared to $0.48 per diluted share in the first quarter of fiscal 2013. Significant factors impacting the quarter were:

The Refrigerated Foods segment delivered segment profit gains driven by positive pork operating margins and growth in both the retail and foodservice value-added franchises.

Grocery Products profits were positively impacted by strong sales of SKIPPY peanut butter products.

The International & Other segment delivered a solid quarter driven by strong export sales of the SPAM family of products and SKIPPY peanut butter products.

Jennie-O Turkey Store segment profit improved slightly as more favorable feed costs were mostly offset by weaker live production performance due to sustained extremely cold weather.

Profitability decreased for Specialty Foods driven by the July 2013 expiration of the agreement allowing DCB to sell certain sugar substitutes in the foodservice trade channels.

Consolidated Results

Net earnings attributable to the Company for the first quarter of fiscal 2014 increased 18.2 percent to $153.3 million from $129.7 million in the same quarter of fiscal 2013. Diluted earnings per share for the quarter increased to $0.57 from $0.48 in the first quarter of fiscal 2013.

Net sales for the first quarter of fiscal 2014 increased 6.0 percent to a record $2.24 billion from $2.12 billion in the first quarter of fiscal 2013, as four out of the five reporting segments of the Company experienced sales growth over the prior year first quarter. Tonnage increased 2.4 percent to 1.27 billion lbs. for the first quarter compared to 1.24 billion lbs. in the same quarter of last year.

Net sales were enhanced by the addition of the SKIPPY peanut butter business. These sales contributed an incremental $86.5 million of net sales and 57.1 million lbs. for the quarter, primarily in the Grocery Products and International & Other segments. Value-added sales growth for Refrigerated Foods and Jennie-O Turkey Store were also key drivers of the increase for the first quarter. Additionally, strong export sales of the SPAM family of products provided notable growth for the Company's international business.

Gross profit for the first quarter of fiscal 2014 was $398.6 million compared to $344.2 million for the first quarter last year. Gross profit as a percentage of net sales increased to 17.8 percent for the first quarter of fiscal 2014 from 16.3 percent in the same quarter of fiscal 2013. Positive pork operating margins for Refrigerated Foods and strong export sales of the SPAM family of products for the International & Other segment enhanced the margin gains. Additional margins from SKIPPY peanut butter sales boosted results for both the Grocery Products and International & Other segments. More favorable feed costs experienced during the quarter for Jennie-O Turkey Store were offset by weaker live production performance driven by the extreme, sustained cold weather. The Specialty Foods segment delivered lower margins while rebuilding its product portfolio following the expiration of the agreement allowing DCB to sell certain sugar substitutes into foodservice trade channels.


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The Company expects continued momentum for Refrigerated Foods heading into the second quarter. Tighter pork raw material supplies are anticipated due to the Porcine Epidemic Diarrhea Virus (PEDv) impact, but the overall impact to the industry remains unknown. The impact of unusually cold weather and high fuel costs will continue to inflate costs of goods for Jennie-O Turkey Store in the second and third quarters. The Grocery Products and International & Other segments will benefit from a full year of SKIPPY peanut butter sales. Sales and margin growth are expected across the Company's value-added product lines as the Company continues to generate growth with innovative new products.

Selling, general and administrative expenses for the first quarter of fiscal 2014 were $166.2 million compared to $155.8 million in the prior year. Selling, general and administrative expenses as a percentage of net sales remained flat at 7.4 percent for both the first quarter of 2014 and 2013. Advertising expenses increased $11.4 million in the first quarter of fiscal 2014 as compared to the prior year. The increase was a result of the new "Make the Switch" advertising campaign for Jennie-O Turkey Store and the national advertising campaign for Hormel REV snack wraps. The Company expects selling, general and administrative expenses to be between 7.3 percent and 7.6 percent for the full year in fiscal 2014.

Equity in earnings of affiliates was $4.7 million for the first quarter of fiscal 2014 compared to $9.8 million in the first quarter last year. Unfavorable exchange rates and lower results from the Company's 50 percent owned MegaMex joint venture reflecting higher input costs drove the decrease for fiscal 2014 compared to the prior year.

The effective tax rate for the first quarter of fiscal 2014 was 34.3 percent compared to 33.5 percent for the comparable period of fiscal 2013. The higher tax rate for the first quarter is primarily due to a net favorable discrete item in the first quarter of fiscal 2013 related to the reinstatement of the research and development credit for calendar year 2012. The Company expects a full-year effective tax rate between 34.0 and 35.0 percent for fiscal 2014.


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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
                                               January 26,    January 27      %
(in thousands)                                     2014          2013       Change
Net Sales
Grocery Products                                $   401,520   $   334,140     20.2
Refrigerated Foods                                1,128,421     1,063,401      6.1
Jennie-O Turkey Store                               399,400       390,334      2.3
Specialty Foods                                     195,979       233,845   (16.2)
International & Other                               117,352        94,521     24.2
Total                                           $ 2,242,672   $ 2,116,241      6.0

Segment Operating Profit
Grocery Products                                $    56,342   $    49,913     12.9
Refrigerated Foods                                   85,299        53,790     58.6
Jennie-O Turkey Store                                59,545        58,945      1.0
Specialty Foods                                      21,255        23,761   (10.5)
International & Other                                22,557        17,111     31.8

Total segment operating profit                  $   244,998   $   203,520     20.4
Net interest and investment expense (income)          1,921         1,284     49.6
General corporate expense                             8,916         6,644     34.2
Noncontrolling interest                               1,110         1,329   (16.5)

Earnings before income taxes                    $   235,271   $   196,921     19.5

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 and tonnage increased 20.2 percent and 24.0 percent, respectively, for the first quarter of fiscal 2014 compared to the same period in fiscal 2013. The comparative results reflect the addition of the SKIPPY peanut butter business acquired at the beginning of the second quarter of fiscal 2013. This business contributed an incremental $73.3 million of net sales and 49.1 million lbs. to the top-line results for the quarter.

Improved sales results in other key items in the first quarter, including Hormel chili and bacon toppings and the Herdez Mexican products within the Company's MegaMex Foods joint venture, partially offset sales declines in categories such as the SPAM family of products and the Hormel Compleats line of microwave meals.

Segment profit for Grocery Products increased 12.9 percent for the first quarter compared to the prior year results. Along with the positive performance from the SKIPPY peanut butter products, profit results for the first quarter benefitted from volume increases in core products noted above. Higher pork and beef input costs compressed margins for the SPAM family of products, Hormel chili, and Don Miguel frozen Mexican foods.


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The Company expects continued top-line growth for Grocery Products in the second quarter of the year, driven by national advertising of the SPAM family of products and strong promotional support for the MegaMex portfolio and Hormel Compleats microwave meals. Commodity cost volatility remains a concern and pricing actions will be implemented in the second quarter to protect margins where possible.

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 6.1 percent and tonnage decreased 1.4 percent for the first quarter of fiscal 2014, compared to the first quarter of fiscal 2013. On the retail side, sales gains within the Meat Products business unit were generated on Black Label bacon items, Hormel REV snack wraps, and Lloyd's ribs. Within the Foodservice business unit, sales of Hormel Fire Braised meats and Old Smokehouse pecanwood smoked bacon led the sales gains for the quarter. The planned reductions in the Company's feed sales business beginning late in the first quarter of fiscal 2013 and the increased internal utilization of raw materials impacted volume comparisons in the quarter.

Segment profit for Refrigerated Foods increased 58.6 percent for the first quarter compared to the prior year. Higher pork operating margins and continued strong demand for bacon products drove the bottom-line results for the quarter. Solid growth in the value-added Meat Products and Foodservice businesses also contributed to the profitability, offsetting lower results in the Affiliated Business Units.

Looking forward, the Company expects favorable pork operating margins and continued solid performance from its value-added product lines within Refrigerated Foods. The spread of PEDv in the industry remains a concern as it has impacted the Company's internal farm operations and several of the Company's independent hog suppliers. The Company is closely monitoring the effects of PEDv on pork raw material supplies and is making plans to meet customer needs as supply tightens over the next several months.

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 2.3 percent while tonnage decreased 0.5 percent for the first quarter of fiscal 2014, compared to the first quarter of fiscal 2013. The top-line growth was primarily driven by increased sales of value-added product lines. Strong sales of Jennie-O Turkey Store lean ground turkey chubs and tray pack items were aided by a new "Make the Switch" advertising campaign featuring lean ground turkey that kicked off in January. Timing differences of whole bird shipments for the holiday season accounted for the year-over-year volume decreases for the quarter.

Segment profit for JOTS increased 1.0 percent for the first quarter of fiscal 2014. In addition to value-added growth, the segment also benefitted from more favorable feed costs and improved commodity pricing during the quarter. These gains offset weaker live production performance due to the sustained extremely cold temperatures experienced.

Looking ahead in fiscal 2014, the benefit of the "Make the Switch" advertising campaign is expected to continue to drive growth in the lean ground turkey chubs and tray pack items. The unusually cold weather is driving up the cost of fuels significantly, which will continue to inflate costs at JOTS in the second and third quarters.

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


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private label shelf stable products, nutritional products, sugar, and condiments to industrial, 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 and tonnage decreased 16.2 percent and 9.6 percent, respectively, compared to the same quarter of fiscal 2013. Sales declines were driven by the expiration of the agreement in July 2013 allowing DCB to sell certain sugar substitutes into foodservice trade channels. Softer sales of nutritional items at CFI also contributed to the year-over-year decline. HSP posted overall sales gains led by sales of canned meats for the quarter.

Segment profit for Specialty Foods decreased 10.5 percent compared to the prior year first quarter. The results were primarily driven by the expiration of the sugar substitute agreement noted above. Unusually strong nutritional and ready-to-drink sales posted a year ago created difficult comparisons for CFI also contributing to the decline. HSP was also challenged with higher raw material costs in the quarter, partially offset by favorable conditions of a contract manufacturing agreement.

Looking forward in fiscal 2014, the Company anticipates continued sales and profit declines due to the expiration of the sugar substitute agreement, but is focused on rebuilding the product portfolio within the segment as quickly as possible.

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.

International & Other net sales increased 24.2 percent for the first quarter of fiscal 2014 compared to the same quarter of fiscal 2013. Strong export sales of the SPAM family of products drove top-line results for the quarter. The addition of worldwide SKIPPY sales also enhanced the top-line results, contributing $11.9 million of net sales and 7.2 million lbs. in the quarter.

Segment profit also improved in the first quarter of fiscal 2014, increasing 31.8 percent compared to prior year results. The improved bottom-line results were primarily attributable to strong exports of the SPAM family of products. The positive performance from the SKIPPY peanut butter products further enhanced bottom-line results despite one time closing and start-up costs associated with the SKIPPY China purchase. Partially offsetting these gains were lower overall results from the Company's international joint ventures.

Looking ahead, the Company expects continued significant growth in the International & Other segment. Strong export SPAM sales and margins along with positive results from the Company's China operations are expected, coupled with a full year of SKIPPY product sales.

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 first quarter of fiscal 2014 was a net expense of $1.9 million, compared to a net expense of $1.3 million in the first quarter of fiscal 2013. The increase was driven by lower returns on the Company's rabbi trust for supplemental executive retirement plans, partially offset by improved currency exchange results during the quarter. Interest expense was flat with the prior year at $3.1 million. The Company anticipates that interest expense will approximate $12.0 to $14.0 million for fiscal 2014.

General corporate expense for the first quarter of fiscal 2014 was $8.9 million compared to $6.6 million for the comparable period of fiscal 2013. Several factors affected general corporate expense which, in aggregate,


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resulted in higher expenses. No single factor was material in relationship to the total expenses incurred in the first quarter.

Net earnings attributable to the Company's noncontrolling interests were $1.1 million for the first quarter of fiscal 2014, compared to $1.3 million in the first quarter of fiscal 2013. The change largely reflects decreases in performance from the Company's Precept Foods business, partially offset by gains in the Company's China operations compared to the prior year.

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 27, 2013.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $639.8 million at the end of the first quarter of fiscal year 2014 compared to $887.7 million at the end of the comparable fiscal 2013 period.

Cash provided by operating activities was $314.3 million in the first quarter of fiscal 2014 compared to $141.8 million in the same period of fiscal 2013. Increased earnings and favorable overall changes in working capital balances were the primary drivers of the improved cash flows.

Cash used in investing activities was $70.1 million in the first quarter of fiscal 2014 compared to cash provided by investing activities of $66.3 million in the comparable quarter of fiscal 2013. During the first quarter of fiscal 2014, the Company spent $41.4 million to purchase the China based SKIPPY peanut butter business in Weifang, China from Unilever United States Inc. This purchase follows the acquisition of the United States based SKIPPY peanut butter business during the second quarter of fiscal 2013. In anticipation of that purchase in the prior year, the Company liquidated its marketable securities portfolio at the end of the first quarter of fiscal 2013, which generated $77.6 million in cash. Additionally, capital expenditures increased $15.0 million in the first quarter of fiscal 2014 compared to the prior year. The Company currently estimates its fiscal 2014 capital expenditures will be between $130.0 and $140.0 million.

Cash used in financing activities was $37.3 million in the first quarter of fiscal 2014 compared to $3.0 million in the same period of fiscal 2013. Proceeds generated from the Company's stock option plan exercises decreased $19.8 million in the first quarter of fiscal 2014 compared to the prior year. The Company did not repurchase any of its common stock in the first quarter of fiscal 2014 or fiscal 2013. 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 quarter of fiscal 2014 were $44.8 million compared to $39.4 million in the comparable period of fiscal 2013. For fiscal 2014, the annual dividend rate has been increased to $0.80 per share, representing the 48th consecutive annual dividend increase. The Company has paid dividends for 342 consecutive quarters and expects to continue doing so.

The Company is required, by certain covenants in its debt agreements, to maintain specified levels of financial ratios and financial position. At the end of the first quarter of fiscal 2014, 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 Company operates in a relatively stable industry and has strong brands across many product lines.

Maximizing the value returned to shareholders through dividend payments remains a priority in fiscal 2014. A strong balance sheet and free cash flow continue to leave the Company well positioned to take advantage of


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strategic acquisition opportunities. Additional share repurchase activity and capital spending to enhance and expand current operations is also expected to continue throughout the year.

Contractual Obligations and Commercial Commitments

The Company records income taxes in accordance with the provisions of ASC 740, Income Taxes. The Company is unable to determine its contractual obligations by year related to this pronouncement, as the ultimate amount or timing of settlement of its reserves for income taxes cannot be reasonably estimated. The total liability for unrecognized tax benefits, including interest and penalties, at January 26, 2014, was $24.6 million.

There have been no other material changes to the information regarding the Company's future contractual financial obligations that was disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended October 27, 2013.

Off-Balance Sheet Arrangements

As of January 26, 2014, and October 27, 2013, the Company had $42.5 million and $42.6 million, respectively, of standby letters of credit issued on its behalf. The standby letters of credit are primarily related to the Company's self-insured workers' compensation programs. However, that amount also includes $4.9 million of revocable standby letters of credit for obligations of an affiliated party that may arise under workers' compensation claims. Letters of credit are not reflected in the Company's Consolidated Statements of Financial Position.

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 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.


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The Company cautions readers not to place undue reliance on forward-looking . . .

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