UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended October 27, 2019
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) | ||
Registrant’s telephone number, including area code (507 ) 437-5611
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||||
$0.01465 | par value | |||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
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, 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 Regulations 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.
☒ | 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 Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of April 28, 2019, was $11,072,534,818 based on the closing price of $39.94 on the last business day of the registrant’s most recently completed second fiscal quarter.
As of November 29, 2019, the number of shares outstanding of each of the registrant’s classes of common stock was as follows:
Common Stock, $0.01465 – Par Value 534,736,743 shares
Common Stock Non-Voting, $0.01 Par Value – 0 shares
DOCUMENTS INCORPORATED BY REFERENCE
1
HORMEL FOODS CORPORATION
TABLE OF CONTENTS
2
PART I
Item 1. BUSINESS
General Development of Business
Hormel Foods Corporation, a Delaware corporation (the Company), was founded by George A. Hormel in 1891 in Austin, Minnesota, as Geo. A. Hormel & Company. The Company started as a processor of meat and food products and continues in this line of business. The Company’s name was changed to Hormel Foods Corporation on January 31, 1995. The Company is primarily engaged in the production of a variety of meat and food products and the marketing of those products throughout the United States and internationally. Although pork and turkey remain the major raw materials for its products, the Company has emphasized for several years the manufacturing and distribution of branded, value-added consumer items rather than the commodity fresh meat business. The Company has continually expanded its product portfolio through organic growth and acquisitions.
Internationally, the Company markets its products through Hormel Foods International Corporation (HFIC), a wholly owned subsidiary. HFIC has a global presence in the international marketplace through joint ventures and placement of personnel in strategic foreign locations such as Australia, Brazil, Canada, China, Japan, and the Philippines. HFIC has a minority position in a food company in the Philippines (The Purefoods-Hormel Company, Inc., 40% holding).
On April 15, 2019, the Company completed the sale of CytoSport, Inc. (CytoSport), which includes the Muscle Milk® and Evolve® brands, to PepsiCo, Inc., and received final proceeds of $479.8 million. The divestiture resulted in a pretax gain of $16.5 million recognized in Selling, General and Administrative expense and a tax benefit of $17.0 million recognized within the Provision for Income Taxes on the Consolidated Statements of Operations.
On December 3, 2018, the Company completed the sale of its Fremont, Nebraska, processing facility to Wholestone Farms, LLC, for a final purchase price of $30.6 million.
On November 27, 2017, the Company acquired Columbus Manufacturing, Inc. (Columbus), an authentic premium deli meat and salami company, from Chicago-based Arbor Investments, for a final purchase price of $857.4 million. The transaction was funded with cash on hand along with borrowing $375.0 million under a term loan facility and $375.0 million under a revolving credit facility. Columbus specializes in authentic premium deli meat and salami and allows the Company to enhance its scale in the deli by broadening its portfolio of products, customers, and consumers.
On August 22, 2017, the Company acquired Cidade do Sol (Ceratti) for a final purchase price of $103.3 million. The transaction was funded by the Company with cash on hand. The acquisition of the Ceratti® brand allows the Company to establish a full in-country presence in the fast-growing Brazilian market with a premium brand.
On August 16, 2017, the Company acquired Fontanini Italian Meats and Sausages (Fontanini), a branded foodservice business, from Capitol Wholesale Meats, Inc. for a final purchase price of $425.7 million. The transaction was funded by the Company with cash on hand and by utilizing short-term financing. Fontanini specializes in authentic Italian meats and sausages, as well as a variety of other premium meat products including pizza toppings and meatballs and allows the Company to expand its foodservice business.
On January 3, 2017, the Company completed the sale of Clougherty Packing, LLC, parent company of Farmer John and Saag’s Specialty Meats, along with PFFJ, LLC, farm operations in California, Arizona, and Wyoming. The closing price was $145.0 million in cash.
On May 26, 2016, the Company acquired Justin’s, LLC (Justin’s) of Boulder, Colorado, for a purchase price of $280.9 million. The purchase price was funded by the Company with cash on hand and by utilizing short-term financing. This acquisition allowed the Company to enhance its presence in the specialty natural and organic nut butter category.
On May 9, 2016, the Company completed the sale of Diamond Crystal Brands resulting in proceeds of $110.1 million, net of selling costs.
On July 13, 2015, the Company acquired Applegate Farms, LLC (Applegate) of Bridgewater, New Jersey, for a final purchase price of $774.1 million in cash. The purchase price was funded by the Company with cash on hand and by utilizing short-term financing. This acquisition allows the Company to expand the breadth of its protein offerings to provide consumers more choice in this fast growing category.
The Company had no other significant change in the type of products produced or services rendered, or in the markets or methods of distribution, since the beginning of the 2019 fiscal year. The Company has not been involved in any bankruptcy, receivership, or similar proceedings during its history.
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Segments
The Company develops, processes, and distributes a wide array of food products in a variety of markets. The Company reports results in the following four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. At the beginning of fiscal 2019, the Hormel Deli Solutions division combined all deli businesses, including the Jennie-O Turkey Store deli division, into one division within the Refrigerated Foods segment. In addition, the ingredients business was realigned from the Grocery Products segment to the Refrigerated Foods segment. Segment results for fiscal years prior to 2019 have been adjusted to reflect these changes. Net sales to unaffiliated customers, operating profit, total assets, and the presentation of certain other financial information by segment, are reported in Note P - Segment Reporting of the Notes to Consolidated Financial Statements and in the Management's Discussion and Analysis of Financial Condition and Results of Operations.
Description of Business
Products and Distribution
The Company’s products primarily consist of meat and other food products sold across multiple distribution channels such as U.S. Retail, U.S. Foodservice, U.S. Deli, and International. Total revenues contributed by classes of similar products and sales channels for the last three fiscal years are reported in Note P - Segment Reporting of the Notes to Consolidated Financial Statements.
Domestically, the Company sells its products in all 50 states. The Company’s products are sold through its sales personnel, operating in assigned territories or as dedicated teams serving major customers, coordinated from sales offices located in most of the larger U.S. cities. The Company also utilizes independent brokers and distributors. Distribution of products to customers is primarily by common carrier.
Through HFIC, the Company markets its products in various locations throughout the world. Some of the larger markets include Australia, Brazil, Canada, China, England, Japan, Mexico, Micronesia, the Philippines, Singapore, and South Korea. The distribution of export sales to customers is by common carrier, while the China and Brazil operations own and operate their own delivery systems. The Company, through HFIC, has licensed companies to manufacture various products internationally on a royalty basis, with the primary licensees being Danish Crown UK Ltd. and CJ CheilJedang Corporation.
As of October 27, 2019, the Company had approximately 970 direct sales representatives engaged in selling its products globally.
Raw Materials
The Company has, for the past several years, been concentrating on branded products for consumers with year-round demand to minimize the seasonal variation experienced with commodity-type products. Pork continues to be the primary raw material for Company products. The Company’s expanding line of branded products has reduced, but not eliminated, the sensitivity of Company results to raw material supply and price fluctuations.
The majority of the hogs harvested for the Company are purchased under supply contracts from producers located principally in Minnesota and Iowa. The cost of hogs and the utilization of the Company’s facilities are affected by both the level and the methods of pork production in the United States. The Company uses supply contracts to ensure a stable supply of raw materials. The Company’s contracts are based on market-based formulas and/or markets of certain swine production inputs, to better balance input costs with customer pricing, and all contract costs are fully reflected in the Company’s reported financial statements. In fiscal 2019, the Company purchased 93 percent of its hogs under supply contracts.
In fiscal 2019, Jennie-O Turkey Store raised turkeys representing approximately 79 percent of the volume needed to meet its raw material requirements for branded turkey products and whole birds. Turkeys not sourced within the Company are contracted with independent turkey growers. Jennie-O Turkey Store’s turkey-raising farms are located throughout Minnesota and Wisconsin.
Production costs in raising hogs and turkeys are subject primarily to fluctuations in grain prices and fuel costs. To manage this risk, the Company hedges a portion of its anticipated purchases of grain using futures contracts.
The Company purchases other commodity based raw materials such as beef, pork, and chicken for use across all segments. Raw materials are obtained from various suppliers and manufacturers. The Company has long standing relationships with its sources of raw materials and expects to have an adequate supply for its present needs.
Additionally, the cost and supply of avocados, peanuts, and whey are impacted by the changing market forces of supply and demand, which can impact the cost of the Company’s products. The Company uses long-term supply contracts and forward buying in an attempt to manage these risks.
Manufacturing
The Company manufactures its products through various harvest and processing facilities along with custom manufacturers.
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Environmental Matters
In addition to creating economic value, the Company is committed to building social value. The Company recently launched its corporate responsibility platform, Our Food JourneyTM. This journey consists of producing food responsibly for customers and consumers around the world by focusing on investing in people and partners, improving communities around the world, and creating products to improve the lives of others. The capital expenditures associated with these commitments are not material with respect to the Company’s capital expenditures, earnings, or competitive position.
Patents and Trademarks
There are numerous patents and trademarks important to the Company’s business. The Company holds 34 U.S. issued and 9 foreign patents. Most of the trademarks the Company uses are registered in the U.S. and other countries. Some of the more significant owned or licensed trademarks used by the Company or its affiliates are:
HORMEL, ALWAYS TENDER, APPLEGATE, AUSTIN BLUES, BACON 1, BLACK LABEL, BREAD READY, BURKE, CAFÉ H, CERATTI, CHI-CHI’S, COLUMBUS, COMPLEATS, CURE 81, DAN’S PRIZE, DI LUSSO, DINTY MOORE, DON MIGUEL, DOÑA MARIA, EMBASA, FAST ‘N EASY, FIRE BRAISED, FONTANINI, HERDEZ, HORMEL GATHERINGS, HORMEL VITAL CUISINE, HOUSE OF TSANG, JENNIE-O, JUSTIN’S, LA VICTORIA, LAYOUT, LLOYD’S, MARY KITCHEN, NATURAL CHOICE, OLD SMOKEHOUSE, OVEN READY, PILLOW PACK, ROSA GRANDE, SKIPPY, SPAM, SPECIAL RECIPE, THICK & EASY, VALLEY FRESH, and WHOLLY.
The Company’s patents expire after a term that is typically 20 years from the date of filing, with earlier expiration possible based on the Company’s decision to pay required maintenance fees. As long as the Company continues to use its trademarks, they are renewed indefinitely.
Customers and Backlog Orders
During fiscal 2019, sales to Walmart Inc. (Walmart) represented approximately 13.5 percent of the Company’s revenues (measured as gross sales less returns and allowances), compared to 13.6 percent in fiscal 2018. Walmart is a customer for all four segments of the Company. The five largest customers in each segment make up approximately the following percentage of segment sales: 45 percent of Grocery Products, 35 percent of Refrigerated Foods, 52 percent of Jennie-O Turkey Store, and 16 percent of International & Other. The loss of one or more of the top customers in any of these segments could have a material adverse effect on the results of such segment. Backlog orders are not significant due to the perishable nature of a large portion of the products. Orders are accepted and shipped on a current basis.
Competition
The production and sale of meat and food products in the United States and internationally is highly competitive. The Company competes with manufacturers of pork and turkey products, as well as national and regional producers of other meat and protein sources, such as beef, chicken, fish, peanut butter, and whey. The Company believes its largest domestic competitors for its Refrigerated Foods segment in 2019 were Tyson Foods, Inc. and Smithfield Foods, Inc.; for its Grocery Products segment, Conagra Brands, Inc., General Mills, Inc., Campbell Soup Co., J. M. Smucker Co., and Treehouse Foods Inc.; and for Jennie-O Turkey Store, Cargill, Inc. and Butterball, LLC.
All segments compete on the basis of price, product quality and attributes, brand identification, breadth of product line, and customer service. Through aggressive marketing and strong quality assurance programs, the Company’s strategy is to provide higher quality products that possess strong brand recognition, which then supports higher value perceptions from customers.
Employees
As of October 27, 2019, the Company had approximately 18,800 active domestic and foreign employees.
Available Information
The Company makes available its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 on its website at www.hormelfoods.com. These reports are accessible under the caption, “Investors – Filings & Reports – SEC Filings” on the Company’s website and are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). These filings are also available on the SEC's website at www.sec.gov. The documents are available in print, free of charge, to any stockholder who requests them.
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Information About Executive Officers
CURRENT OFFICE AND PREVIOUS | ||||||
NAME | AGE | FIVE YEARS EXPERIENCE | DATES | |||
James P. Snee | 52 | Chairman of the Board, President and Chief Executive Officer | 11/20/17 to Present | |||
President and Chief Executive Officer | 10/31/16 to 11/19/17 | |||||
President and Chief Operating Officer | 10/26/15 to 10/30/16 | |||||
Group Vice President/President Hormel Foods International Corporation | 10/29/12 to 10/25/15 | |||||
James N. Sheehan | 64 | Executive Vice President and Chief Financial Officer | 01/29/19 to Present | |||
Senior Vice President and Chief Financial Officer | 10/31/16 to 01/28/19 | |||||
Vice President and Chief Accounting Officer | 05/30/16 to 10/30/16 | |||||
Vice President and Controller | 05/01/00 to 05/29/16 | |||||
Deanna T. Brady | 54 | Executive Vice President (Refrigerated Foods) | 10/28/19 to Present | |||
Group Vice President/President Consumer Product Sales | 10/26/15 to 10/27/19 | |||||
Group Vice President (Foodservice) | 10/28/13 to 10/25/15 | |||||
Thomas R. Day | 61 | Executive Vice President (Refrigerated Foods) | 2/12/18 to Present | |||
(retires 01/26/20) | ||||||
Group Vice President (Refrigerated Foods) | 10/28/13 to 2/11/18 | |||||
Glenn R. Leitch | 59 | Executive Vice President (Supply Chain) | 12/04/17 to Present | |||
Group Vice President/President Jennie-O Turkey Store, Inc. | 10/31/11 to 12/03/17 | |||||
PJ Connor | 50 | Group Vice President/President Consumer Product Sales | 10/28/19 to Present | |||
Vice President (Senior Vice President Consumer Product Sales) | 10/31/11 to 10/27/19 | |||||
Luis G. Marconi | 53 | Group Vice President (Grocery Products) | 10/31/16 to Present | |||
Vice President (Grocery Products Marketing) | 03/05/12 to 10/30/16 | |||||
James M. Splinter | 57 | Group Vice President (Corporate Strategy) | 10/31/16 to Present | |||
Group Vice President (Grocery Products) | 11/01/10 to 10/30/16 | |||||
Larry L. Vorpahl | 56 | Group Vice President/President Hormel Foods International Corporation | 10/26/15 to Present | |||
Group Vice President/President Consumer Products Sales | 10/31/05 to 10/25/15 | |||||
Mark A. Coffey | 57 | Senior Vice President (Supply Chain and Manufacturing) | 03/28/17 to Present | |||
Vice President (Supply Chain) | 02/06/17 to 03/27/17 | |||||
Vice President (Affiliated Businesses) | 10/31/11 to 02/05/17 | |||||
Janet L. Hogan | 55 | Senior Vice President (Human Resources) | 03/28/17 to Present | |||
Vice President (Human Resources) | 01/18/17 to 03/27/17 | |||||
Senior Vice President (Human Resources), ProQuest LLC | 02/02/16 to 01/17/17 | |||||
Executive Vice President, Chief Human Resources Officer, Oshkosh Corporation | 05/02/14 to 02/01/16 | |||||
Steven J. Lykken | 49 | Senior Vice President/President Jennie-O Turkey Store, Inc. | 12/04/17 to Present | |||
President Applegate Farms, LLC | 04/11/16 to 12/03/17 | |||||
Chief Operating Officer Applegate Farms, LLC | 08/17/15 to 04/10/16 | |||||
Senior Vice President Jennie-O Turkey Store, Inc. (Commodity/ Supply Chain) | 06/06/11 to 08/16/15 | |||||
Lori J. Marco | 52 | Senior Vice President (External Affairs) and General Counsel | 03/30/15 to Present | |||
Vice President (External Affairs) and General Counsel | 01/24/11 to 03/29/15 | |||||
Kevin L. Myers, Ph.D. | 54 | Senior Vice President (Research and Development and Quality Control) | 03/30/15 to Present | |||
Vice President (Research and Development) | 10/28/13 to 03/29/15 | |||||
Jana L. Haynes | 47 | Vice President and Controller | 05/30/16 to Present | |||
Director of Investor Relations | 10/28/13 to 05/29/16 | |||||
Gary L. Jamison | 54 | Vice President and Treasurer | 5/30/16 to Present | |||
Vice President and Chief Financial Officer Jennie-O Turkey Store, Inc. | 12/31/12 to 05/29/16 | |||||
No family relationship exists among the executive officers.
Executive officers are designated annually by the Board of Directors at the first meeting following the Annual Meeting of Stockholders. Vacancies may be filled and additional officers elected at any time. The May 2018 bylaw amendments delegated the authority to appoint and remove Vice Presidents (other than Executive Vice Presidents, Group Vice Presidents, and Senior Vice Presidents) to the Company’s Chief Executive Officer.
6
Item 1A. RISK FACTORS
The Company’s operations are subject to the general risks of the food industry. The food products manufacturing industry is subject to the risks posed by:
▪ | food spoilage; |
▪ | food contamination caused by disease-producing organisms or pathogens, such as Listeria monocytogenes, Salmonella, and pathogenic E coli.; |
▪ | food allergens; |
▪ | nutritional and health-related concerns; |
▪ | federal, state, and local food processing controls; |
▪ | consumer product liability claims; |
▪ | product tampering; and |
▪ | the possible unavailability and/or expense of liability insurance. |
The pathogens that may cause food contamination are found generally in livestock and in the environment and thus may be present in our products. These pathogens can also be introduced to our products as a result of improper handling or cooking by customers or consumers. We do not have control over handling procedures once our products have been shipped for distribution. If one or more of these risks were to materialize, the Company’s brand and business reputation could be negatively impacted. In addition, revenues could decrease, costs of doing business could increase, and the Company’s operating results could be adversely affected.
Deterioration of economic conditions could harm the Company’s business. The Company's business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, availability of capital, energy availability and costs (including fuel surcharges), and the effects of governmental initiatives to manage economic conditions. Decreases in consumer spending rates and shifts in consumer product preferences could also negatively impact the Company.
Volatility in financial markets and the deterioration of national and global economic conditions could impact the Company’s operations as follows:
▪ | The financial stability of our customers and suppliers may be compromised, which could result in additional bad debts for the Company or non-performance by suppliers; and |
▪ | The value of our investments in debt and equity securities may decline, including most significantly the Company’s trading securities held as part of a rabbi trust to fund supplemental executive retirement plans and deferred income plans, and the Company’s assets held in pension plans. |
The Company utilizes hedging programs to manage its exposure to various commodity market risks, which qualify for hedge accounting for financial reporting purposes. Volatile fluctuations in market conditions could cause these instruments to become ineffective, which could require any gains or losses associated with these instruments to be reported in the Company’s earnings each period. These instruments may limit the Company’s ability to benefit from market gains if commodity prices become more favorable than those secured under the Company’s hedging programs.
Additionally, if a highly pathogenic human disease outbreak developed in the United States, it may negatively impact the national economy, demand for Company products, and/or the Company’s workforce availability, and the Company’s financial results could suffer. The Company has developed contingency plans to address infectious disease scenarios and the potential impact on its operations, and will continue to update these plans as necessary. There can be no assurance given, however, these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
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.
Most recently, the outbreak of ASF in China has eliminated over 30 percent of that country's hog herd compared to last year, according to the Ministry of Agriculture and Rural Affairs of the People's Republic of China. The disease has also spread to additional countries in Asia and Europe. If an outbreak of ASF were to occur in the United States, the Company's supply of hogs and pork could be materially impacted.
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.
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Fluctuations in commodity prices and availability of pork, poultry, beef, feed grains, avocados, peanuts, energy, and whey could harm the Company’s earnings. The Company’s results of operations and financial condition are largely dependent upon the cost and supply of pork, poultry, beef, feed grains, avocados, peanuts, and whey as well as energy costs and the selling prices for many of our products, which are determined by constantly changing market forces of supply and demand.
The live hog industry has evolved to large, vertically-integrated operations using long-term supply agreements. This has resulted in fewer hogs being available on the cash spot market. Consequently, the Company uses long-term supply contracts based on market-based formulas or the cost of production to ensure a stable supply of raw materials while minimizing extreme fluctuations in costs over the long-term. This may result, in the short-term, in higher live hog costs compared to the cash spot market depending on the relationship of the cash spot market to contract prices. Market-based pricing on certain product lines, and lead time required to implement pricing adjustments, may prevent all or part of these cost increases from being recovered, and these higher costs could adversely affect our short-term financial results.
Jennie-O Turkey Store raises turkeys and contracts with turkey growers to meet its raw material requirements for whole birds and processed turkey products. Results in these operations are affected by the cost and supply of feed grains, which fluctuate due to climate conditions, production forecasts, and supply and demand conditions at local, regional, national, and worldwide markets. The Company attempts to manage some of its short-term exposure to fluctuations in feed prices by forward buying, using futures contracts, and pursuing pricing advances. However, these strategies may not be adequate to overcome sustained increases in market prices due to alternate uses for feed grains or other changes in these market conditions.
The supplies of natural and organic proteins may impact the Company’s ability to ensure a continuing supply of these products. To mitigate this risk, the Company partners with multiple long-term suppliers.
International trade barriers and other restrictions could result in decreased foreign demand and increased domestic supply of proteins, thereby potentially lowering prices. The Company occasionally utilizes in-country production to limit this exposure.
Market demand for the Company’s products may fluctuate. The Company faces competition from producers of alternative meats and protein sources, including pork, beef, turkey, chicken, fish, nut butters, whey, and plant-based proteins. The factors on which the Company competes include:
▪ | price; |
▪ | product quality and attributes; |
▪ | brand identification; |
▪ | breadth of product line; and |
▪ | customer service. |
Demand for the Company’s products is also affected by competitors’ promotional spending, the effectiveness of the Company’s advertising and marketing programs, and consumer perceptions. Failure to identify and react to changes in food trends such as sustainability of product sources and animal welfare could lead to, among other things, reduced demand for the Company’s brands and products. The Company may be unable to compete successfully on any or all of these factors in the future.
The Company’s operations are subject to the general risks associated with acquisitions and divestitures. The Company has made several acquisitions and divestitures in recent years that align with the Company’s strategic initiative of delivering long-term value to shareholders. The Company regularly reviews strategic opportunities to grow through acquisitions and to divest non-strategic assets. Potential risks associated with these transactions include the the inability to consummate a transaction on favorable terms, the diversion of management's attention from other business concerns, the potential loss of key employees and customers of current or acquired companies, the inability to integrate or divest operations successfully, the possible assumption of unknown liabilities, potential disputes with buyers or sellers, potential impairment charges if purchase assumptions are not achieved, and the inherent risks in entering markets or lines of business in which the Company has limited or no prior experience. Any or all of these risks could impact the Company’s financial results and business reputation. In addition, acquisitions outside the United States may present unique challenges and increase the Company's exposure to the risks associated with foreign operations.
The Company is subject to disruption of operations at co-packers or other suppliers. Disruption of operations at co‑packers or other suppliers may impact the Company’s product or raw material supply, which could have an adverse effect on the Company’s financial results. Additionally, actions taken to mitigate the impact of any potential disruption, including increasing inventory in anticipation of a potential production or supply interruption, may adversely affect the Company’s financial results.
The Company’s operations are subject to the general risks of litigation. The Company is involved on an ongoing basis in litigation arising in the ordinary course of business. Trends in litigation may include class actions involving employees, consumers, competitors, suppliers, shareholders, or injured persons, and claims relating to product liability, contract disputes, intellectual property, advertising, labeling, wage and hour laws, employment practices, or environmental matters. Litigation trends and the outcome of litigation cannot be predicted with certainty and adverse litigation trends and outcomes could negatively affect the Company’s financial results.
The Company is subject to the loss of a material contract. The Company is a party to several supply, distribution, contract packaging, and other material contracts. The loss of a material contract could adversely affect the Company’s financial results.
8
Government regulation, present and future, exposes the Company to potential sanctions and compliance costs that could adversely affect the Company’s business. The Company’s operations are subject to extensive regulation by the U.S. Department of Homeland Security, the U.S. Department of Agriculture, the U.S. Food and Drug Administration, federal and state taxing authorities, and other federal, state, and local authorities who oversee workforce immigration laws, tax regulations, animal welfare, food safety standards, and the processing, packaging, storage, distribution, advertising, and labeling of the Company’s products. The Company’s manufacturing facilities and products are subject to continuous inspection by federal, state, and local authorities. Claims or enforcement proceedings could be brought against the Company in the future. The availability of government inspectors due to a government furlough could also cause disruption to the Company’s manufacturing facilities. Additionally, the Company is subject to new or modified laws, regulations, and accounting standards. The Company’s failure or inability to comply with such requirements could subject the Company to civil remedies, including fines, injunctions, recalls, or seizures, as well as potential criminal sanctions.
The Company is subject to stringent environmental regulation and potentially subject to environmental litigation, proceedings, and investigations. The Company’s past and present business operations and ownership and operation of real property are subject to stringent federal, state, and local environmental laws and regulations pertaining to the discharge of materials into the environment and the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment. Compliance with these laws and regulations, as well as any modifications, is material to the Company’s business. Some of the Company’s facilities have been in operation for many years and, over time, the Company and other prior operators of these facilities may have generated and disposed of wastes that now may be considered hazardous. Future discovery of contamination of property underlying or in the vicinity of the Company’s present or former properties or manufacturing facilities and/or waste disposal sites could require the Company to incur additional expenses related to additional investigation, assessment or other requirements. The occurrence of any of these events, the implementation of new laws and regulations, or stricter interpretation of existing laws or regulations could adversely affect the Company’s financial results.
The Company’s foreign operations pose additional risks to the Company’s business. The Company operates its business and markets its products internationally. The Company’s foreign operations are subject to the risks described above, as well as risks related to fluctuations in currency values, foreign currency exchange controls, compliance with foreign laws, compliance with applicable U.S. laws, including the Foreign Corrupt Practices Act, and other economic or political uncertainties. International sales are subject to risks related to general economic conditions, imposition of tariffs, quotas, trade barriers and other restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws, and other economic and political uncertainties. All of these risks could result in increased costs or decreased revenues, which could adversely affect the Company’s financial results.
The Company may be adversely impacted if the Company is unable to protect information technology systems against, or effectively respond to, cyber-attacks or security breaches. Information technology systems are an important part of the Company’s business operations. Attempted cyber-attack and other cyber incidents are occurring more frequently and are being made by groups and individuals with a wide range of motives and expertise.
In addition, the Company is in the middle of a transformation project (Project Orion) to achieve better analytics, customer service, and process efficiencies through the use of Oracle Cloud Solutions. This project is expected to improve the efficiency and effectiveness of certain financial and business transaction processes and the underlying systems environment. Implementation is expected to occur in phases over the next several years, beginning in fiscal 2020. Such an implementation is a major undertaking from a financial, management, and personnel perspective. The implementation of the enterprise resource planning system may prove to be more difficult, costly, or time consuming than expected, and there can be no assurance that this system will be beneficial to the extent anticipated.
In an attempt to mitigate these risks, the Company has implemented and continues to evaluate security initiatives and business continuity plans.
Deterioration of labor relations or increases in labor costs could harm the Company’s Business. As of October 27, 2019, the Company had approximately 18,800 employees worldwide, of which approximately 3,310 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 contracted hog processing facilities resulting in work slowdowns or stoppages could harm the Company’s financial results. The union contract at one of the Company's facilities will expire during fiscal 2020, covering less than 200 employees. Negotiations are expected to begin in December 2019.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
9
Item 2. PROPERTIES
The Company's global headquarters are located in Austin, Minnesota. The Company has various processing plants, warehouses, and operational facilities, mainly in the states of Iowa, Minnesota, Illinois, and Wisconsin. The Company maintains a national sales force through strategic placement of sales offices throughout the United States. Properties are also maintained internationally to support global processing and sales. The majority of Company property is owned. Leased property is used as needed for Company production and sales. Property leases range in duration from one to twelve years.
Area* (Square feet) | Refrigerated Foods | Grocery Products | Jennie-O Turkey Store | International & Other | Corporate | Total | ||||||||||||
Processing Plants | 4,528,000 | 1,648,000 | 1,987,000 | 1,243,000 | 9,406,000 | |||||||||||||
Warehouse/Distribution Centers | 497,000 | 832,000 | 140,000 | 79,000 | 1,548,000 | |||||||||||||
Live Production | 815,000 | 313,000 | 1,128,000 | |||||||||||||||
Administrative/Sales/Research | 65,000 | 6,000 | 66,000 | 34,000 | 559,000 | 730,000 | ||||||||||||
Total | 5,905,000 | 2,486,000 | 2,506,000 | 1,356,000 | 559,000 | 12,812,000 | ||||||||||||
*Many of the Company’s properties are utilized by more than one segment. These facilities are reflected in the principal segment for presentation purposes. Additionally, turkey growout facilities are excluded.
The Company believes its operating facilities are well maintained and suitable for current production volumes. The Company regularly engages in construction and other capital improvement projects with a focus on value-added capacity projects and automation.
Item 3. 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, intellectual property, contract disputes, wage and hour laws, employment practices, or other actions brought by employees, consumers, competitors, or suppliers. 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.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
10
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market information
Hormel Foods Corporation’s common stock is traded on the New York Stock Exchange under the symbol HRL. The CUSIP number is 440452100.
Holders
There are approximately 12,600 record stockholders and 136,000 stockholders whose shares are held in street name by brokerage firms and financial institutions.
There were no issuer purchases of equity securities in the fourth quarter of fiscal 2019. The maximum number of shares that may yet be purchased under the plans or programs as of October 27, 2019 is 4,758,235. 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.
Dividends
The Company has paid dividends for 365 consecutive quarters. The annual dividend rate for fiscal 2020 was increased 11 percent percent to $0.93 per share, representing the 54th consecutive annual dividend increase. The Company is dedicated to returning excess cash flow to shareholders through dividend payments.
Shareholder return performance graph
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend-reinvested basis, for the Company, the S&P 500 Index, and the S&P 500 Packaged Foods & Meats Index for the five years ended October 27, 2019. The graph assumes $100 was invested in each, as of the market close on October 27, 2014. Note that historic stock price performance is not necessarily indicative of future stock price performance.
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Item 6. SELECTED FINANCIAL DATA
The information set forth below for the five years ended October 27, 2019, is not necessarily indicative of results of future operations. To fully understand factors that may affect the comparability of the information presented below, this information should be read in conjunction with Part I-Item 1 Business, Part II-Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the consolidated financial statements and related notes thereto included in Part II-Item 8 Financial Statements and Supplementary Data of this Form 10-K.
(in thousands, except per share amounts) | 2019 | 2018 | 2017 | 2016* | 2015** | |||||||||||||||
Operations | ||||||||||||||||||||
Net Sales | $ | 9,497,317 | $ | 9,545,700 | $ | 9,167,519 | $ | 9,523,224 | $ | 9,263,863 | ||||||||||
Net Earnings Attributable to Hormel Foods Corporation | 978,806 | 1,012,140 | 846,735 | 890,052 | 686,088 | |||||||||||||||
% of net sales | 10.31 | % | 10.60 | % | 9.24 | % | 9.35 | % | 7.41 | % | ||||||||||
EBIT(1) | 1,195,923 | 1,179,519 | 1,276,374 | 1,312,918 | 1,055,612 | |||||||||||||||
% of net sales | 12.59 | % | 12.36 | % | 13.92 | % | 13.79 | % | 11.39 | % | ||||||||||
EBITDA(2) | 1,361,132 | 1,341,377 | 1,407,351 | 1,444,886 | 1,189,046 | |||||||||||||||
% of net sales | 14.33 | % | 14.05 | % | 15.35 | % | 15.17 | % | 12.84 | % | ||||||||||
Return on Invested Capital(3) | 15.63 | % | 16.24 | % | 16.30 | % | 18.89 | % | 15.47 | % | ||||||||||
Financial Position | ||||||||||||||||||||
Total Assets | $ | 8,109,004 | $ | 8,142,292 | $ | 6,975,908 | $ | 6,370,067 | $ | 6,139,831 | ||||||||||
Long-term Obligations, including capital leases | 269,713 | 624,840 | 250,000 | 250,000 | 250,000 | |||||||||||||||
Hormel Foods Corporation Shareholders’ Investment | 5,921,458 | 5,600,811 | 4,935,907 | 4,448,006 | 3,998,198 | |||||||||||||||
Cash Flows | ||||||||||||||||||||
Capital Expenditures | 293,838 | 389,607 | 221,286 | 255,524 | 144,063 | |||||||||||||||
Acquisitions of Businesses | — | 857,668 | 520,463 | 280,889 | 770,587 | |||||||||||||||
Proceeds from Sale of Business | 479,806 | — | 135,944 | 110,149 | — | |||||||||||||||
Share Repurchase | 174,246 | 46,898 | 94,487 | 87,885 | 24,928 | |||||||||||||||
Dividends Paid | 437,053 | 388,107 | 346,010 | 296,493 | 250,834 | |||||||||||||||
Common Stock | ||||||||||||||||||||
Weighted-Average Shares Outstanding – Basic | 534,578 | 530,742 | 528,363 | 529,290 | 528,143 | |||||||||||||||
Weighted-Average Shares Outstanding – Diluted | 545,232 | 543,869 | 539,116 | 542,473 | 541,002 | |||||||||||||||
Earnings Per Share – Basic | $ | 1.83 | $ | 1.91 | $ | 1.60 | $ | 1.68 | $ | 1.30 | ||||||||||
Earnings Per Share – Diluted | 1.80 | 1.86 | 1.57 | 1.64 | 1.27 | |||||||||||||||
Dividends Declared per Share | 0.84 | 0.75 | 0.68 | 0.58 | 0.50 | |||||||||||||||
Hormel Foods Corporation Shareholders’ Investment per Share | 11.08 | 10.49 | 9.34 | 8.42 | 7.57 | |||||||||||||||
The Company provides EBIT, EBITDA, and Return on Invested Capital because these measures are useful to management and investors as indicators of operating strength relative to prior years and are commonly used to benchmark the Company’s performance. These measures are calculated as follows:
(in thousands) | 2019 | 2018 | 2017 | 2016* | 2015** | |||||||||||||||
(1) EBIT: | ||||||||||||||||||||
Net Earnings Attributable to Hormel Foods Corporation | $ | 978,806 | $ | 1,012,140 | $ | 846,735 | $ | 890,052 | $ | 686,088 | ||||||||||
Plus: Income Tax Expense | 230,567 | 168,702 | 431,542 | 426,698 | 369,879 | |||||||||||||||
Plus: Interest Expense | 18,070 | 26,494 | 12,683 | 12,871 | 13,111 | |||||||||||||||
Less: Interest and Investment Income*** | 31,520 | 27,817 | 14,586 | 16,703 | 13,466 | |||||||||||||||
EBIT | $ | 1,195,923 | $ | 1,179,519 | $ | 1,276,374 | $ | 1,312,918 | $ | 1,055,612 | ||||||||||
(2) EBITDA: | ||||||||||||||||||||
EBIT per (1) above | 1,195,923 | 1,179,519 | 1,276,374 | 1,312,918 | 1,055,612 | |||||||||||||||
Plus: Depreciation and Amortization | 165,209 | 161,858 | 130,977 | 131,968 | 133,434 | |||||||||||||||
EBITDA | $ | 1,361,132 | $ | 1,341,377 | $ | 1,407,351 | $ | 1,444,886 | $ | 1,189,046 | ||||||||||
(3) Return on Invested Capital: | ||||||||||||||||||||
EBIT per (1) above | 1,195,923 | 1,179,519 | 1,276,374 | 1,312,918 | 1,055,612 | |||||||||||||||
X (1 – Effective Tax Rate****) | 80.93 | % | 85.71 | % | 66.24 | % | 67.59 | % | 64.97 | % | ||||||||||
After-tax EBIT | $ | 967,860 | $ | 1,010,966 | $ | 845,470 | $ | 887,401 | $ | 685,831 | ||||||||||
Divided by: | ||||||||||||||||||||
Total Debt, including capital leases | 269,713 | 624,840 | 250,000 | 250,000 | 435,000 | |||||||||||||||
Hormel Foods Corporation Shareholders’ Investment | 5,921,458 | 5,600,811 | 4,935,907 | 4,448,006 | 3,998,198 | |||||||||||||||
Total Debt and Shareholders’ Investment | $ | 6,191,171 | $ | 6,225,651 | $ | 5,185,907 | $ | 4,698,006 | $ | 4,433,198 | ||||||||||
Return on Invested Capital | 15.63 | % | 16.24 | % | 16.30 | % | 18.89 | % | 15.47 | % | ||||||||||
* Fiscal 2016 included 53 weeks.
** Shares and per share figures have been restated to reflect the two-for-one stock split distributed on February 9, 2016.
*** Adjusted due to the adoption of Accounting Standards Update (ASU) 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). See Note A - Summary of Significant Accounting Policies.
**** Excluding earnings attributable to noncontrolling interests.
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Executive Overview
Fiscal 2019: Sales for the year were $9.5 billion, a 1 percent decline from last year. Sales decreased primarily due to the divestiture of CytoSport. Organic net sales1 were up 1 percent. (1See explanation of non-GAAP financial measures in the Consolidated Results section). Pretax earnings increased 2 percent to $1,209.7 million. Profit growth from the value-added businesses in Refrigerated Foods and lower selling, general and administrative expenses more than offset a significant decline in commodity profits and lower equity in earnings of affiliates. A higher effective tax rate drove net earnings attributable to the Company lower by 3 percent to $978.8 million, compared to net earnings of $1,012.1 million last year. The effective tax rate in fiscal 2019 increased primarily due to the impact of the Tax Cuts and Jobs Act (Tax Act) recognized in fiscal 2018. Diluted earnings per share for fiscal 2019 were $1.80, a 3 percent decrease compared to $1.86 per share last year.
Refrigerated Foods segment results exceeded last year due to growth from the value-added businesses, including strong results from foodservice products such as Hormel® FirebraisedTM meats and pizza toppings. Retail sales of Hormel® Black Label® convenience bacon and Columbus® deli items also contributed to overall growth, helping to offset a significant decline in commodity profits. The Jennie-O Turkey Store segment was negatively impacted by lost retail distribution due to two voluntary product recalls in the first quarter of fiscal 2019 and low commodity prices resulting from continued industry oversupply. Grocery Products segment financial performance was down due to lower Skippy® peanut butter pricing and a reduction in MegaMex Foods, LLC (MegaMex) equity in earnings compared to fiscal 2018. International & Other segment results declined primarily by the impact of tariffs and global trade uncertainty affecting fresh pork exports.
Our Company continued to reinvest into the business through capital expenditures while returning cash back to shareholders in the form of dividends and share repurchases. Capital expenditures were $293.8 million in fiscal 2019. Notable projects included the preliminary phases of the Burke pizza toppings plant expansion, a new dry sausage facility in Nebraska, Project Orion, and many other items to support growth of branded products. The annual dividend for 2020 will be $0.93 per share and marks the 54th consecutive year of dividend increases, representing an increase of 11 percent after a 12 percent increase in fiscal 2019. We repurchased 4.3 million shares of common stock in fiscal 2019, spending $174.2 million.
In December, the Company completed the sale of its Fremont, Nebraska, processing facility to Wholestone Farms, LLC, for $30.6 million. Additionally, in April, the Company completed the sale of its CytoSport business to PepsiCo, Inc., for $479.8 million.
Fiscal 2020 Outlook: We expect to grow sales and pretax profits in fiscal 2020. Our branded, value-added businesses within Refrigerated Foods continue to be well-positioned for growth in the foodservice, retail, and deli channels. Positive momentum in brands such as Hormel® Bacon 1TM, Hormel® Natural Choice®, Applegate®, Columbus® and Hormel® Fire BraisedTM should help mitigate the risk of higher input prices and volatility due to African swine fever. Operational improvements, continued industry recovery, and regained lean ground turkey distribution at Jennie-O Turkey Store are expected to return the segment to growth. The International & Other segment plans to grow sales and earnings while managing through challenges due to African swine fever and global trade uncertainty. We expect contributions from branded items such as the SPAM® family of products, Wholly® guacamole dips, Herdez® salsas and sauces, and Skippy® peanut butter to help offset the impact of the CytoSport sale to the Grocery Products segment in fiscal 2019. Additionally, we expect continued cost reductions from our supply chain organization and will begin implementation of Project Orion during fiscal 2020.
We plan to support our numerous iconic brands with continued advertising in fiscal 2020. Strong cash flow, along with a solid balance sheet, will enable us to continue to return cash to shareholders while investing capital into our value-added businesses. We will open a new $150 million expansion at our Burke facility in the third quarter of fiscal 2020, which will provide much needed capacity to grow our pizza toppings business in foodservice.
Results of Operations
OVERVIEW
The Company is a processor of branded and unbranded food products for retail, foodservice, deli, and commercial customers. At the beginning of fiscal 2019, the Hormel Deli Solutions division combined all deli businesses, including the Jennie-O Turkey Store deli division, into one division within the Refrigerated Foods segment. In addition, the ingredients business was realigned from the Grocery Products segment to the Refrigerated Foods segment. Periods presented herein have been recast to reflect this change. Periods presented have also been adjusted due to the adoption of Accounting Standards Update (ASU) 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). See Note A - Summary of Significant Accounting Policies for more information.
13
The Company operates in the following four reportable segments:
Segment | Business Conducted |
Grocery Products | This segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market, along with the sale of nutritional and private label shelf-stable products to retail, foodservice, and industrial customers. This segment also includes the results from the Company’s MegaMex Foods, LLC (MegaMex) joint venture. |
Refrigerated Foods | This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork, beef, chicken, and turkey products for retail, foodservice, deli, and commercial customers. |
Jennie-O Turkey Store | This segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and commercial customers. |
International & Other | This segment includes Hormel Foods International, which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Company’s international joint ventures and royalty arrangements. |
The Company’s fiscal year consisted of 52 weeks in fiscal years 2019, 2018, and 2017.
FISCAL YEARS 2019 AND 2018
CONSOLIDATED RESULTS
Net Earnings and Diluted Earnings Per Share
Fourth Quarter Ended | Year Ended | |||||||||||||||||||||
(in thousands, except per share amounts) | October 27, 2019 | October 28, 2018 | % Change | October 27, 2019 | October 28, 2018 | % Change | ||||||||||||||||
Net Earnings | $ | 255,503 | $ | 261,406 | (2.3 | ) | $ | 978,806 | $ | 1,012,140 | (3.3 | ) | ||||||||||
Diluted Earnings Per Share | 0.47 | 0.48 | (2.1 | ) | 1.80 | 1.86 | (3.2 | ) | ||||||||||||||
Volume and Net Sales
Fourth Quarter Ended | Year Ended | |||||||||||||||||||||
(in thousands) | October 27, 2019 | October 28, 2018 | % Change | October 27, 2019 | October 28, 2018 | % Change | ||||||||||||||||
Volume (lbs.) | 1,236,877 | 1,265,292 | (2.2 | ) | 4,737,281 | 4,798,178 | (1.3 | ) | ||||||||||||||
Organic Volume(1) | 1,236,877 | 1,226,641 | 0.8 | 4,737,281 | 4,721,637 | 0.3 | ||||||||||||||||
Net Sales | $ | 2,501,513 | $ | 2,524,697 | (0.9 | ) | $ | 9,497,317 | $ | 9,545,700 | (0.5 | ) | ||||||||||
Organic Net Sales(1) | 2,501,513 | 2,451,049 | 2.1 | 9,497,317 | 9,399,603 | 1.0 | ||||||||||||||||
(1) COMPARISON OF U.S. GAAP TO NON-GAAP FINANCIAL MEASUREMENTS
The non-GAAP adjusted financial measurements of organic volume and organic net sales are presented to provide investors additional information to facilitate the comparison of past and present operations. The Company believes these non-GAAP financial measurements provide useful information to investors because they are the measurements used to evaluate performance on a comparable year-over-year basis. Non-GAAP measurements are not intended to be a substitute for U.S. GAAP measurements in analyzing financial performance. These non-GAAP measurements are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.
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 impacts of the CytoSport divestiture (April 2019) in the Grocery Products and International & Other segments. The tables below show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures in the fourth quarter and year-to-date of fiscal 2019 and fiscal 2018.
14
Reconciliation of Non-GAAP Measures
4th Quarter
Volume (lbs.)
FY19 | FY 2018 | ||||||||||||||
(in thousands) | Reported (GAAP) | Reported (GAAP) | Divestitures | Organic (Non-GAAP) | Organic % change | ||||||||||
Grocery Products | 313,489 | 346,214 | (37,394 | ) | 308,820 | 1.5 | |||||||||
Refrigerated Foods | 598,474 | 592,298 | — | 592,298 | 1.0 | ||||||||||
Jennie-O Turkey Store | 242,421 | 231,180 | — | 231,180 | 4.9 | ||||||||||
International & Other | 82,493 | 95,600 | (1,257 | ) | 94,343 | (12.6 | ) | ||||||||
Total Volume | 1,236,877 | 1,265,292 | (38,651 | ) | 1,226,641 | 0.8 | |||||||||
Net Sales
FY 2019 | FY 2018 | ||||||||||||||||||
(in thousands) | Reported (GAAP) | Reported (GAAP) | Divestitures | Organic (Non-GAAP) | Organic % change | ||||||||||||||
Grocery Products | $ | 584,085 | $ | 648,244 | $ | (71,415 | ) | $ | 576,829 | 1.3 | |||||||||
Refrigerated Foods | 1,373,009 | 1,321,784 | — | 1,321,784 | 3.9 | ||||||||||||||
Jennie-O Turkey Store | 398,512 | 388,278 | — | 388,278 | 2.6 | ||||||||||||||
International & Other | 145,907 | 166,391 | (2,233 | ) | 164,158 | (11.1 | ) | ||||||||||||
Total Net Sales | $ | 2,501,513 | $ | 2,524,697 | $ | (73,648 | ) | $ | 2,451,049 | 2.1 | |||||||||
Full Year
Volume (lbs.)
FY 2019 | FY 2018 | ||||||||||||||
(in thousands) | Reported (GAAP) | Reported (GAAP) | Divestitures | Organic (Non-GAAP) | Organic % change | ||||||||||
Grocery Products | 1,283,492 | 1,328,693 | (73,915 | ) | 1,254,778 | 2.3 | |||||||||
Refrigerated Foods | 2,325,156 | 2,327,140 | — | 2,327,140 | (0.1 | ) | |||||||||
Jennie-O Turkey Store | 789,337 | 784,655 | — | 784,655 | 0.6 | ||||||||||
International & Other | 339,296 | 357,690 | (2,626 | ) | 355,064 | (4.4 | ) | ||||||||
Total Volume | 4,737,281 | 4,798,178 | (76,541 | ) | 4,721,637 | 0.3 | |||||||||
Net Sales
FY 2019 | FY 2018 | ||||||||||||||||||
(in thousands) | Reported (GAAP) | Reported (GAAP) | Divestitures | Organic (Non-GAAP) | Organic % change | ||||||||||||||
Grocery Products | $ | 2,369,317 | $ | 2,480,367 | $ | (141,401 | ) | $ | 2,338,966 | 1.3 | |||||||||
Refrigerated Foods | 5,210,741 | 5,109,881 | — | 5,109,881 | 2.0 | ||||||||||||||
Jennie-O Turkey Store | 1,323,783 | 1,331,013 | — | 1,331,013 | (0.5 | ) | |||||||||||||
International & Other | 593,476 | 624,439 | (4,696 | ) | 619,743 | (4.2 | ) | ||||||||||||
Total Net Sales | $ | 9,497,317 | $ | 9,545,700 | $ | (146,097 | ) | $ | 9,399,603 | 1.0 | |||||||||
The decrease in net sales for the fourth quarter of fiscal 2019 was related primarily to the divestiture of CytoSport. Organic net sales increased 2 percent as increased sales of whole-bird and commodity business at Jennie-O Turkey Store, Hormel® Black Label® bacon, the SPAM® family of products, and Hormel® Bacon 1TM cooked bacon more than offset lower retail sales at Jennie-O Turkey Store and lower sales of Skippy® peanut butter.
For fiscal 2019, the decrease in net sales was related primarily to the divestiture of CytoSport. Organic net sales grew 1 percent over last year driven by strong value-added sales in Refrigerated Foods, led by Hormel® Bacon 1TM cooked bacon, Hormel® Fire BraisedTM products, and Hormel® Natural Choice® items, despite weak retail sales of Jennie-O Turkey Store products and declines in international pork exports.
In fiscal 2020, the Company expects net sales growth with contributions from value-added products and innovation. Momentum in Refrigerated Foods across the foodservice and retail channels is expected to continue, with meaningful growth coming from brands such as Hormel® Natural Choice®, Applegate®, Hormel® Bacon 1TM, and Hormel® Fire BraisedTM. The deli division is expected to continue to grow the Columbus® brand. The International & Other segment plans to show growth in China, Brazil, and through increased branded export sales of SPAM® luncheon meat and Skippy® peanut butter. Jennie-O Turkey Store is expecting sales growth due to increases in turkey commodity markets and regained distribution of Jennie-O® branded products. Growth from products such as Wholly® guacamole dips, Herdez® salsas and sauces, the SPAM® family of products, and Skippy® P.B. and Jelly Minis in the Grocery Products segment should offset the impact of the CytoSport divestiture.
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Cost of Products Sold
Fourth Quarter Ended | Year Ended | |||||||||||||||||||
October 27, | October 28, | October 27, | October 28, | |||||||||||||||||
(in thousands) | 2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||
Cost of Products Sold | $ | 2,007,790 | $ | 1,991,369 | 0.8 | $ | 7,612,669 | $ | 7,566,227 | 0.6 | ||||||||||
Cost of products sold for the fourth quarter and full year increased as higher raw material and operational costs more than offset the impact from the divestiture of CytoSport and supply chain cost savings.
Gross Profit
Fourth Quarter Ended | Year Ended | |||||||||||||||||||||
October 27, | October 28, | October 27, | October 28, | |||||||||||||||||||
(in thousands) | 2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||||
Gross Profit | $ | 493,723 | $ | 533,328 | (7.4 | ) | $ | 1,884,648 | $ | 1,979,473 | (4.8 | ) | ||||||||||
Percentage of Net Sales | 19.7 | % | 21.1 | % | 19.8 | % | 20.7 | % | ||||||||||||||
Consolidated gross profit as a percentage of net sales declined in the fourth quarter due to reduced commodity profitability in Refrigerated Foods and weaker margins for the International & Other segment. For the full year, reduced commodity profitability in Refrigerated Foods, weaker sales mix at Jennie-O Turkey Store, and lower Skippy® peanut butter pricing in Grocery Products drove the decline in gross profit as a percentage of net sales.
In fiscal 2020, protein input costs are expected to be higher and demonstrate volatility. This could negatively impact the Refrigerated Foods, Grocery Products, and International & Other segments until pricing can be passed through. Positive mix shift and, higher pricing, if necessary, are expected to mitigate higher input costs. Jennie-O Turkey Store should benefit from improvements to operations, higher commodity markets, and improved sales mix. The global trade environment, potential impact of African swine fever, and market volatility pose the largest threats to the Company's profitability.
Selling, General and Administrative (SG&A)
Fourth Quarter Ended | Year Ended | |||||||||||||||||||||
October 27, | October 28, | October 27, | October 28, | |||||||||||||||||||
(in thousands) | 2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||||
SG&A | $ | 183,795 | $ | 205,287 | (10.5 | ) | $ | 727,584 | $ | 841,205 | (13.5 | ) | ||||||||||
Percentage of Net Sales | 7.3 | % | 8.1 | % | 7.7 | % | 8.8 | % | ||||||||||||||
For the fourth quarter of fiscal 2019, SG&A expenses decreased primarily due to the CytoSport divestiture. For fiscal 2019, SG&A expenses declined due to the impacts from the CytoSport divestiture and a legal settlement. Selling expenses were also favorable compared to fiscal 2018.
Due to the CytoSport divestiture, advertising investments in the fourth quarter and full year declined.
In fiscal 2020, the Company intends to continue building brand awareness through advertising investments in key brands such as Hormel® Natural Choice®, Hormel® Black Label®, SPAM®, Skippy®, Wholly®, Herdez®, and Jennie-O®.
Research and development continues to be a vital part of the Company's strategy to extend existing brands and expand into new branded items. Research and development expenses were $8.4 million and $32.5 million for the fiscal 2019 fourth quarter and year, respectively, compared to $8.7 million and $33.8 million for the corresponding periods in fiscal 2018.
Goodwill/Intangible Impairment
An impairment charge related to the CytoSport trademark totaling $17.3 million was recorded in the fourth quarter of fiscal 2018.
Equity in Earnings of Affiliates
Fourth Quarter Ended | Year Ended | ||||||||||||||||||||
October 27, | October 28, | October 27, | October 28, | ||||||||||||||||||
(in thousands) | 2019 | 2018 | % Change | ||||||||||||||||||