UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 28, 2018
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________________________ to ________________________________________
Commission File Number: 1-2402
HORMEL FOODS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 41-0319970 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1 Hormel Place Austin, Minnesota | 55912-3680 | |
(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 | Name of each exchange on which registered | |
Common Stock, $0.01465 par value | New York Stock Exchange | |
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 X 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 No X
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 X 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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X | 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 X
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of April 29, 2018, was $9,908,981,177 based on the closing price of $36.47 on the last business day of the registrant’s most recently completed second fiscal quarter.
As of November 30, 2018, the number of shares outstanding of each of the registrant’s classes of common stock was as follows:
Common Stock, $0.01465 – Par Value 534,595,685 shares
Common Stock Non-Voting, $0.01 Par Value – 0 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held January 29, 2019, are incorporated by reference into Part III, Items 10-14. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
1
HORMEL FOODS CORPORATION
TABLE OF CONTENTS
2
PART I
Item 1. BUSINESS
(a) 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, new product development, 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 August 16, 2018, the Company entered into a definitive agreement to sell its Fremont, Nebraska, processing facility to WholeStone Farms, LLC. The transaction is subject to customary closing conditions and is expected to be completed in December 2018.
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 $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 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 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 has not been involved in any bankruptcy, receivership, or similar proceedings during its history. Substantially all the assets of the Company have been acquired in the ordinary course of business. 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 2018 fiscal year.
(b) Segments
The Company’s business is reported in four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS), and International & Other. Net sales to unaffiliated customers, operating profit, total assets, and the presentation of certain other financial information by segment, are reported in Note P of the Notes to Consolidated Financial Statements and in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.
3
(c) Description of Business
Products and Distribution
The Company’s products primarily consist of meat and other food products. The meat products are sold fresh, frozen, cooked, and canned. The percentages of total revenues contributed by classes of similar products for the last three fiscal years are as follows:
Fiscal Year Ended | |||||||||
October 28, 2018 | October 29, 2017 | October 30, 2016 | |||||||
Perishable | 55.9 | % | 53.7 | % | 53.1 | % | |||
Poultry | 19.3 | % | 19.1 | % | 20.5 | % | |||
Shelf-stable | 18.5 | % | 20.2 | % | 18.2 | % | |||
Miscellaneous | 6.3 | % | 7.0 | % | 8.2 | % | |||
Total | 100.0 | % | 100.0 | % | 100.0 | % | |||
Reporting of revenues from external customers is based on similarity of products, as the same or similar products are sold across multiple distribution channels such as retail, foodservice, or international. Revenues reported are based on financial information used to produce the Company’s general-purpose financial statements.
The Perishable category includes fresh meats, frozen items, refrigerated meal solutions, sausages, hams, guacamole, and bacon (excluding Jennie-O Turkey Store) products. Shelf-stable includes canned luncheon meats, peanut butter, chilies, shelf-stable microwaveable meals, hash, stews, flour and corn tortillas, salsas, tortilla chips, and other items that do not require refrigeration. The Poultry category is composed primarily of JOTS products. The Miscellaneous category primarily consists of nutritional food products and supplements, dessert and drink mixes, and industrial gelatin products.
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. As of October 28, 2018, the Company had approximately 1,030 sales personnel engaged in selling its products. 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 system. The Company, through HFIC, has licensed companies to manufacture various Company products internationally on a royalty basis, with the primary licensees being Tulip International of Denmark and CJ CheilJedang Corporation of South Korea.
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 by the Company are purchased under supply contracts from producers located principally in Minnesota, Iowa, Nebraska, and Kansas. 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 2018, the Company purchased 96 percent of its hogs under supply contracts. The Company also procures a portion of its hogs through farms it either owns or operates in Colorado.
In fiscal 2018, JOTS raised turkeys representing approximately 76 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. JOTS’ turkey-raising farms are located throughout Minnesota and Wisconsin.
Production costs in raising hogs and turkeys are subject primarily to fluctuations in feed grain prices and fuel costs. To manage this risk, the Company hedges a portion of its anticipated purchases of grain using futures contracts.
Additionally, the cost and supply of avocados, peanuts, whey, and natural and organic protein 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.
4
Manufacturing
The Company has one plant that harvests hogs for processing. Quality Pork Processors, Inc. of Dallas, Texas, operates the harvesting facility in Austin, Minnesota, under a custom harvesting arrangement. The Company currently has seven turkey harvest and processing operations, and 30 facilities that produce and distribute other manufactured items. Albert Lea Select Foods, Inc. operates the processing facility in Albert Lea, Minnesota, under a custom manufacturing agreement. Company products are also custom manufactured by several other companies. The following are the Company’s larger custom manufacturers: Abbyland Foods, Inc., Abbotsford, Wisconsin; Agropur Division Natrel USA, Maplewood, Minnesota; Algood Food Company, Louisville, Kentucky; Cargill Meat Solutions, Minneapolis, MN; Cooper Farms, Van Wert, Ohio: Deitz & Watson, Inc., Philadelphia, Pennsylvania; Harris Ranch Beef Company, Gilroy, California; HP Hood LLC, Lynnfield, Massachusetts; OSI Industries LLC, Chicago, Illinois; Reichel Foods, Inc., Rochester, Minnesota; Reser’s Fine Foods, Topeka, Kansas; and Steuben Foods, Jamaica, New York. Exel, Inc., based in Westerville, Ohio, operates distribution centers for the Company in Dayton, Ohio, and Osceola, Iowa.
Patents and Trademarks
There are numerous patents and trademarks important to the Company’s business. The Company holds 45 U.S. issued and 9 foreign patents. Most of the trademarks are registered. 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, CYTOSPORT, DAN’S PRIZE, DI LUSSO, DINTY MOORE, DON MIGUEL, DOÑA MARIA, EMBASA, EVOLVE, 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, MUSCLE MILK, NATURAL CHOICE, OLD SMOKEHOUSE, OVEN READY, PILLOW PACK, RANGE BRAND, ROSA GRANDE, SKIPPY, SPAM, SPECIAL RECIPE, THICK & EASY, VALLEY FRESH, and WHOLLY GUACAMOLE.
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 intends to continue using its trademarks, they are renewed indefinitely.
Customers and Backlog Orders
During fiscal 2018, sales to Walmart Inc. (Walmart) represented approximately 13.6 percent of the Company’s revenues (measured as gross sales less returns and allowances), compared to 14.4 percent in fiscal 2017. 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: 42 percent of Grocery Products, 38 percent of Refrigerated Foods, 42 percent of JOTS, and 18 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 are 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 2018 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 JOTS, 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 would then support higher value perceptions from customers.
Employees
As of October 28, 2018, the Company had approximately 20,100 active domestic and foreign employees.
(e) Available Information
The Company makes available, free of charge on its Web site at www.hormelfoods.com, 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. These reports are accessible under the caption, “Investors – Filings & Reports – SEC Filings” on the Company’s Web site and are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. The documents are also available in print, free of charge, to any stockholder who requests them.
5
(f) Executive Officers of the Registrant
CURRENT OFFICE AND PREVIOUS | ||||||
NAME | AGE | FIVE YEARS EXPERIENCE | DATES | |||
James P. Snee | 51 | 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 | 63 | Senior Vice President and Chief Financial Officer | 10/31/16 to Present | |||
Vice President and Chief Accounting Officer | 05/30/16 to 10/30/16 | |||||
Vice President and Controller | 05/01/00 to 05/29/16 | |||||
Thomas R. Day | 60 | Executive Vice President (Refrigerated Foods) | 2/12/18 to Present | |||
Group Vice President (Refrigerated Foods) | 10/28/13 to 2/11/18 | |||||
Glenn R. Leitch | 58 | 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 | |||||
Deanna T. Brady | 53 | Group Vice President/President Consumer Product Sales | 10/26/15 to Present | |||
Group Vice President (Foodservice) | 10/28/13 to 10/25/15 | |||||
Luis G. Marconi | 52 | 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 | 56 | 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 | 55 | 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 | 56 | 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 | 54 | 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 | |||||
Vice President (Human Resources), Harsco Corporation | 06/01/11 to 05/01/14 | |||||
Steven J. Lykken | 48 | Senior Vice President/President Jennie-O Turkey Store, Inc. | 12/04/17 to Present | |||
President Applegate Farms, Inc. | 04/11/16 to 12/03/17 | |||||
Chief Operating Officer Applegate Farms, Inc. | 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 | 51 | 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. | 53 | 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 | 46 | Vice President and Controller | 05/30/16 to Present | |||
Director of Investor Relations | 10/28/13 to 05/29/16 | |||||
Gary L. Jamison | 53 | 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 to the Company’s Chief Executive Officer the authority to appoint and remove Vice Presidents (other than Executive Vice Presidents, Group Vice Presidents, and Senior Vice Presidents).
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 which may cause food contamination are found generally in livestock and in the environment and thus may be present in our products. These pathogens also can be introduced to our products as a result of improper handling 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 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.
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.
JOTS 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 levels. 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.
7
The supply 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 less foreign demand and increased domestic supply of proteins which could lower prices. The Company occasionally utilizes in-country production to limit this exposure.
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 disease 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. 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, these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
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, and whey. The bases 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 bases in the future.
The Company’s operations are subject to the general risks associated with acquisitions. The Company has made several acquisitions in recent years, most recently the acquisitions of Columbus, Fontanini, and Ceratti, and regularly reviews opportunities for strategic growth through acquisitions. Potential risks associated with acquisitions include the inability to integrate new operations successfully, the diversion of management's attention from other business concerns, the potential loss of key employees and customers of the acquired companies, the possible assumption of unknown liabilities, potential disputes with the sellers, potential impairment charges if purchase assumptions are not achieved or market conditions decline, 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 adversely 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.
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.
8
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, and the ability to comply with any modifications to these laws and regulations, is material to the Company’s business. New matters or sites may be identified in the future requiring additional investigation, assessment, or expenditures. In addition, 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. 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-attacks 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 an attempt to mitigate this risk, 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 28, 2018, the Company had approximately 20,100 employees worldwide, of which approximately 4,450 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. Union contracts at the Company's facilities in Algona, Iowa; Atlanta, Georgia; Austin, Minnesota; and Beloit, Wisconsin will expire during fiscal 2019, covering approximately 2,300 employees. Negotiations have not yet been initiated.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Location | Principal Segment (1) | Approximate Area (Square Feet, Unless Noted) | Owned or Leased | Lease Expiration Date | |||||
Harvest and Processing Plants | |||||||||
Austin, Minnesota | Refrigerated Foods | 1,464,000 | Owned | ||||||
Grocery Products | |||||||||
International & Other | |||||||||
Barron, Wisconsin | JOTS | 425,000 | Owned | ||||||
Faribault, Minnesota | JOTS | 191,000 | Owned | ||||||
Melrose, Minnesota | JOTS | 550,000 | Owned | ||||||
Willmar, Minnesota | JOTS | 339,000 | Owned | ||||||
Processing Plants | |||||||||
Albert Lea, Minnesota | Refrigerated Foods | 82,000 | Owned | ||||||
Algona, Iowa | Refrigerated Foods | 154,000 | Owned | ||||||
Alma, Kansas | Refrigerated Foods | 62,000 | Owned | ||||||
Aurora, Illinois | Grocery Products | 141,000 | Owned | ||||||
Beijing, China | International & Other | 95,000 | 80% Owned | ||||||
Beloit, Wisconsin | Grocery Products | 341,000 | Owned | ||||||
Browerville, Minnesota | Refrigerated Foods | 109,000 | Owned | ||||||
Dubuque, Iowa | Grocery Products | 344,000 | Owned | ||||||
Hayward, California | Refrigerated Foods | 128,000 | Leased | August 2032 | |||||
Hayward, California | Refrigerated Foods | 67,000 | Leased | May 2021 | |||||
9
Location | Principal Segment (1) | Approximate Area (Square Feet, Unless Noted) | Owned or Leased | Lease Expiration Date | |||||
Jiaxing, China | International & Other | 1,256,000 | Owned | ||||||
Knoxville, Iowa | Refrigerated Foods | 135,000 | Owned | ||||||
Lathrop, California | Refrigerated Foods | 88,000 | Owned | ||||||
Little Rock, Arkansas | Grocery Products | 153,000 | Owned | ||||||
Long Prairie, Minnesota | Refrigerated Foods | 92,000 | Owned | ||||||
McCook, Illinois | Refrigerated Foods | 177,000 | Owned | ||||||
Mendota Heights, Minnesota | Refrigerated Foods | 85,000 | Owned | ||||||
Montevideo, Minnesota | JOTS | 89,000 | Owned | ||||||
Nevada, Iowa | Refrigerated Foods | 239,000 | Owned | ||||||
Osceola, Iowa | Refrigerated Foods | 382,000 | Owned | ||||||
Pelican Rapids, Minnesota | JOTS | 375,000 | Owned | ||||||
Quakertown, Pennsylvania | Grocery Products | 13,000 | Owned | ||||||
Rochelle, Illinois | Refrigerated Foods | 409,000 | Owned | ||||||
Grocery Products | |||||||||
Sparta, Wisconsin | Grocery Products | 397,000 | Owned | ||||||
Tucker, Georgia | Grocery Products | 259,000 | Owned | ||||||
Refrigerated Foods | |||||||||
Vinhedo, Brazil | International & Other | 422,000 | Leased | June 2024 | |||||
Weifang, China | International & Other | 117,000 | Owned | ||||||
Wichita, Kansas | Refrigerated Foods | 247,000 | Owned | ||||||
Warehouse/Distribution Centers | |||||||||
Austin, Minnesota | Refrigerated Foods | 72,000 | Owned | ||||||
Grocery Products | |||||||||
Beijing, China | International & Other | 17,000 | Leased | June 2019 | |||||
8,000 | Leased | December 2018 | |||||||
Dayton, Ohio | Refrigerated Foods | 141,000 | Owned | ||||||
Grocery Products | |||||||||
Eldridge, Iowa | Grocery Products | 424,000 | Leased | July 2019 | |||||
Hayward, California | Refrigerated Foods | 41,000 | Leased | May 2021 | |||||
Hayward, California | Refrigerated Foods | 8,000 | Leased | August 2032 | |||||
Jiaxing, China | International & Other | 54,000 | Leased | August 2021 | |||||
Osceola, Iowa | Refrigerated Foods | 235,000 | Owned | ||||||
Sparta, Wisconsin | Grocery Products | 50,000 | Leased | April 2020 | |||||
Willmar, Minnesota | JOTS | 123,000 | Owned | ||||||
5,000 | Leased | September 2019 | |||||||
Hog Production Facilities | |||||||||
Las Animas, Colorado | Refrigerated Foods | 815,000 | Owned | ||||||
Hatcheries | |||||||||
Barron, Wisconsin | JOTS | 29,000 | Owned | ||||||
Detroit Lakes, Minnesota | JOTS | 27,000 | Owned | ||||||
Henning, Minnesota | JOTS | 22,000 | Owned | ||||||
Feed Mills | |||||||||
Atwater, Minnesota | JOTS | 19,000 | Owned | ||||||
Barron, Wisconsin | JOTS | 26,000 | Owned | ||||||
Dawson, Minnesota | JOTS | 37,000 | Owned | ||||||
Faribault, Minnesota | JOTS | 25,000 | Owned | ||||||
Henning, Minnesota | JOTS | 5,000 | Owned | ||||||
Northfield, Minnesota | JOTS | 17,000 | Owned | ||||||
Perham, Minnesota | JOTS | 26,000 | Owned | ||||||
Swanville, Minnesota | JOTS | 29,000 | Owned | ||||||
Turkey Farms | |||||||||
Minnesota and Wisconsin | JOTS | 13,700 | (2) | Owned | |||||
Research and Development | |||||||||
Austin, Minnesota | All Segments | 136,000 | Owned | ||||||
Willmar, Minnesota | JOTS | 10,000 | Owned | ||||||
10
Location | Principal Segment (1) | Approximate Area (Square Feet, Unless Noted) | Owned or Leased | Lease Expiration Date | |||||
Administrative Offices | |||||||||
Austin, Minnesota | All Segments | 292,000 | Owned | ||||||
Beijing, China | International & Other | 4,000 | Leased | May 2019 | |||||
Boulder, Colorado | Grocery Products | 7,000 | Leased | August 2019 | |||||
Bridgewater, New Jersey | Refrigerated Foods | 29,000 | Leased | January 2024 | |||||
Gainesville, Georgia | Refrigerated Foods | 5,000 | Leased | November 2019 | |||||
Hayward, California | Refrigerated Foods | 17,000 | Leased | May 2021 | |||||
Hayward, California | Refrigerated Foods | 12,000 | Leased | August 2032 | |||||
Las Animas, Colorado | Refrigerated Foods | 2,000 | Leased | July 2019 | |||||
Moorabbin, Australia | International & Other | 2,000 | Leased | September 2025 | |||||
Shanghai, China | International & Other | 22,000 | Leased | October 2023 | |||||
Vinhedo, Brazil | International & Other | 3,000 | Leased | October 2020 | |||||
Walnut Creek, California | Grocery Products | 22,000 | Leased | April 2023 | |||||
Willmar, Minnesota | JOTS | 56,000 | Owned | ||||||
(1) Many of the Company’s properties are not exclusive to any one segment, and a few of the properties are utilized in all four segments. For locations that support multiple segments, but with a substantial percentage of activity attributable to certain segments, only the principal segments have been listed.
(2) Acres.
The Company believes its operating facilities are well maintained and suitable for current production volumes, and expansion plans are either completed or in process to accommodate all volumes anticipated in the foreseeable future.
Item 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings related to the on-going operation of its business, including claims both by and against the Company. At any time, such proceedings typically involve claims related to product liability, 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.
11
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 126,900 stockholders whose shares are held in street name by brokerage firms and financial institutions.
Issuer purchases of equity securities in the fourth quarter of fiscal 2018 are shown below:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||
July 30, 2018 – September 2, 2018 | - | - | - | 9,121,823 | ||||
September 3, 2018 – September 30, 2018 | - | - | - | 9,121,823 | ||||
October 1, 2018 – October 28, 2018 | 54,667 | $39.45 | 54,667 | 9,067,156 | ||||
Total | 54,667 | $39.45 | 54,667 | |||||
(1) On January 31, 2013, the Company announced its Board of Directors had authorized the repurchase of 10,000,000 shares of its common stock with no expiration date. The repurchase program was authorized at a meeting of the Company’s Board of Directors on January 29, 2013. On November 23, 2015, the Board of Directors authorized a two-for-one split of the Company’s common stock. As part of the resolution to approve that stock split, the number of shares remaining to be repurchased was adjusted proportionately. The stock split was subsequently approved by stockholders at the Company’s Annual Meeting on January 26, 2016, and effected January 27, 2016. All numbers in the table above reflect the impact of this stock split.
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 26, 2018. The graph assumes $100 was invested in each, as of the market close on October 28, 2013. Note that historic stock price performance is not necessarily indicative of future stock price performance.
12
Item 6. SELECTED FINANCIAL DATA
The information set forth below for the five years ended October 28, 2018, is not necessarily indicative of results of future operations, and should be read in conjunction with 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 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below.
(in thousands, except per share amounts) | 2018 | 2017 | 2016* | 2015** | 2014** | |||||||||||||||
Operations | ||||||||||||||||||||
Net Sales | $ | 9,545,700 | $ | 9,167,519 | $ | 9,523,224 | $ | 9,263,863 | $ | 9,316,256 | ||||||||||
Net Earnings | 1,012,582 | 847,103 | 890,517 | 687,264 | 606,026 | |||||||||||||||
Net Earnings Attributable to Hormel Foods Corporation | 1,012,140 | 846,735 | 890,052 | 686,088 | 602,677 | |||||||||||||||
% of net sales | 10.60 | % | 9.24 | % | 9.35 | % | 7.41 | % | 6.47 | % | ||||||||||
EBIT(1) | 1,198,479 | 1,280,101 | 1,323,430 | 1,066,144 | 928,271 | |||||||||||||||
% of net sales | 12.56 | % | 13.96 | % | 13.90 | % | 11.51 | % | 9.96 | % | ||||||||||
EBITDA(2) | 1,360,337 | 1,411,078 | 1,455,398 | 1,199,578 | 1,058,315 | |||||||||||||||
% of net sales | 14.25 | % | 15.39 | % | 15.28 | % | 12.95 | % | 11.36 | % | ||||||||||
Return on Invested Capital (3) | 16.50 | % | 16.35 | % | 19.04 | % | 15.62 | % | 15.79 | % | ||||||||||
Financial Position | ||||||||||||||||||||
Total Assets | $ | 8,142,292 | $ | 6,975,908 | $ | 6,370,067 | $ | 6,139,831 | $ | 5,455,619 | ||||||||||
Long-term Debt less Current Maturities | 624,840 | 250,000 | 250,000 | 250,000 | 250,000 | |||||||||||||||
Hormel Foods Corporation Shareholders’ Investment | 5,600,811 | 4,935,907 | 4,448,006 | 3,998,198 | 3,605,678 | |||||||||||||||
Selected Cash Flow Data | ||||||||||||||||||||
Depreciation and Amortization | $ | 161,858 | $ | 130,977 | $ | 131,968 | $ | 133,434 | $ | 130,044 | ||||||||||
Capital Expenditures | 389,607 | 221,286 | 255,524 | 144,063 | 159,138 | |||||||||||||||
Acquisitions of Businesses | 857,668 | 520,463 | 280,889 | 770,587 | 466,204 | |||||||||||||||
Share Repurchase | 46,898 | 94,487 | 87,885 | 24,928 | 58,937 | |||||||||||||||
Dividends Paid | 388,107 | 346,010 | 296,493 | 250,834 | 203,156 | |||||||||||||||
Common Stock | ||||||||||||||||||||
Weighted-Average Shares Outstanding – Basic | 530,742 | 528,363 | 529,290 | 528,143 | 527,624 | |||||||||||||||
Weighted-Average Shares Outstanding – Diluted | 543,869 | 539,116 | 542,473 | 541,002 | 540,431 | |||||||||||||||
Earnings per Share – Basic | $ | 1.91 | $ | 1.60 | $ | 1.68 | $ | 1.30 | $ | 1.14 | ||||||||||
Earnings per Share – Diluted | 1.86 | 1.57 | 1.64 | 1.27 | 1.12 | |||||||||||||||
Dividends per Share | 0.75 | 0.68 | 0.58 | 0.50 | 0.40 | |||||||||||||||
Hormel Foods Corporation Shareholders’ Investment Per Share | 10.49 | 9.34 | 8.42 | 7.57 | 6.84 | |||||||||||||||
The Company provides EBIT, EBITDA, and Return on Invested Capital because these measures are useful to investors as indicators of operating strength and performance relative to prior years and are typically used to benchmark our Company’s performance against other companies in our industry. Management uses EBIT as a component of certain executive incentive plans but does not utilize EBITDA for any material purpose. These measures are calculated as follows:
(in thousands) | 2018 | 2017 | 2016* | 2015 | 2014 | |||||||||||||||
(1) EBIT: | ||||||||||||||||||||
Net Earnings Attributable to Hormel Foods Corporation | $ | 1,012,140 | $ | 846,735 | $ | 890,052 | $ | 686,088 | $ | 602,677 | ||||||||||
Plus: Income Tax Expense | 168,702 | 431,542 | 426,698 | 369,879 | 316,126 | |||||||||||||||
Plus: Interest Expense | 26,494 | 12,683 | 12,871 | 13,111 | 12,704 | |||||||||||||||
Less: Interest and Investment Income | 8,857 | 10,859 | 6,191 | 2,934 | 3,236 | |||||||||||||||
EBIT | $ | 1,198,479 | $ | 1,280,101 | $ | 1,323,430 | $ | 1,066,144 | $ | 928,271 | ||||||||||
(2) EBITDA: | ||||||||||||||||||||
EBIT per (1) above | 1,198,479 | 1,280,101 | 1,323,430 | 1,066,144 | 928,271 | |||||||||||||||
Plus: Depreciation and Amortization | 161,858 | 130,977 | 131,968 | 133,434 | 130,044 | |||||||||||||||
EBITDA | $ | 1,360,337 | $ | 1,411,078 | $ | 1,455,398 | $ | 1,199,578 | $ | 1,058,315 | ||||||||||
(3) Return on Invested Capital: | ||||||||||||||||||||
EBIT per (1) above | 1,198,479 | 1,280,101 | 1,323,430 | 1,066,144 | 928,271 | |||||||||||||||
X (1 – Effective Tax Rate***) | 85.71 | % | 66.24 | % | 67.59 | % | 64.97 | % | 65.59 | % | ||||||||||
After-tax EBIT | $ | 1,027,336 | $ | 848,067 | $ | 894,506 | $ | 692,674 | $ | 608,887 | ||||||||||
Divided by: | ||||||||||||||||||||
Total Debt | 624,840 | 250,000 | 250,000 | 435,000 | 250,000 | |||||||||||||||
Hormel Foods Corporation Shareholders’ Investment | 5,600,811 | 4,935,907 | 4,448,006 | 3,998,198 | 3,605,678 | |||||||||||||||
Total Debt and Shareholders’ Investment | $ | 6,225,651 | $ | 5,185,907 | $ | 4,698,006 | $ | 4,433,198 | $ | 3,855,678 | ||||||||||
Return on Invested Capital | 16.50 | % | 16.35 | % | 19.04 | % | 15.62 | % | 15.79 | % | ||||||||||
* 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.
*** Excluding earnings attributable to noncontrolling interests.
13
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Executive Overview
Fiscal 2018: The Company delivered record sales and earnings. The impact of the Tax Cuts and Jobs Act (Tax Act) along with strong performances by Refrigerated Foods and International & Other contributed to these results. These factors were able to offset continued weakness at JOTS, higher freight costs, and reduced sales and profitability from the CytoSport and contract manufacturing business in Grocery Products. Sales for the year were $9.5 billion, a 4 percent increase from last year. Organic net sales1 were down 1%. Diluted earnings per share for fiscal 2018 were $1.86, an 18 percent increase compared to $1.57 per share last year. Adjusted diluted earnings per share1 were $1.89, a 20 percent increase. Fiscal 2018 net earnings attributable to the Company increased 20 percent to $1,012.1 million, compared to net earnings of $846.7 million last year. (1see explanation of non-GAAP financial measures in the Consolidated Results section).
Refrigerated Foods segment results exceeded last year with contributions from the Columbus and Fontanini acquisitions. Strength in value-added products such as Hormel® Natural Choice® and Hormel® FirebraisedTM Meats overcame lower commodity profits and higher freight expense. International & Other segment results surpassed last year due to strong growth from the China business, which benefited from lower input costs and the addition of the Ceratti acquisition. The JOTS segment continued to be negatively impacted by industry oversupply leading to low commodity prices in addition to increased freight. At the beginning of fiscal 2018, the Specialty Foods segment was merged into the Grocery Products segment. Despite sales growth of Wholly Guacamole® dips and Herdez® salsas, Grocery Products segment financial performance was down from fiscal 2017 as profits were impacted by weakness in the Company's contract manufacturing business, an impairment of the CytoSport trademark, and increased freight.
Our Company continued to generate record operating cash flows, which were reinvested into the business through acquisitions and capital expenditures while returning cash back to shareholders in the form of dividends and share repurchases. We completed the acquisition of Columbus, an authentic, premium deli meat and salami company, for $857.4 million. This strategic acquisition positions us as a total deli solutions provider and enhances our other strong deli brands such as Hormel®, Jennie-O®, Applegate®, and DiLusso®. In connection with the acquisition, the Company borrowed $375.0 million under a term loan facility and $375.0 million under a revolving credit facility. As of the close of the year, we repaid the short-term debt. The annual dividend for 2019 will be $0.84 per share and marks the 53rd consecutive year of dividend increases, representing an increase of 12 percent after a 10 percent increase in fiscal 2018. We repurchased 1.4 million shares of common stock in fiscal 2018, spending $46.9 million.
Fiscal 2019 Outlook: We expect to grow sales and operating profits in fiscal 2019, with each segment contributing to growth. Momentum in branded, value-added businesses within Refrigerated Foods, especially foodservice and our newly created deli division, should more than offset the expected decline in commodity profits, increased freight, and expenses associated with the divestiture of the Fremont facility. Innovation from brands including Hormel® Bacon 1TM, Hormel® Natural Choice®, and Hormel® Fire BraisedTM meats is expected to provide incremental growth. The contributions from branded items such as the SPAM® family of products, Wholly Guacamole® dips, Herdez® salsas, and Muscle Milk are expected to drive improved Grocery Products results. We expect the JOTS segment to return to growth as industry conditions improve. We anticipate value-added sales and volume growth led by Jennie-O® lean ground turkey and Jennie-O® Oven Ready® items. The International & Other segment plans to grow sales and earnings in both the China and Brazil businesses and expects to increase sales of the SPAM® and Skippy® families of products. Additionally, our supply chain organization is expected to provide cost reductions in numerous areas across the supply chain.
On December 3, 2018, the Company completed the sale of the Fremont processing facility with WholeStone Farms. The transaction included a processing facility and a multiyear agreement to supply the Company pork raw materials. Up until the date of sale, this facility manufactured and harvested hogs for processing.
We plan to support our numerous iconic brands with continued advertising in fiscal 2019. 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.
Critical Accounting Policies
This discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company evaluates, on an ongoing basis, its estimates for reasonableness as changes occur in its business environment. The Company bases its estimates on experience, the use of independent third-party specialists, and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
14
Critical accounting policies are defined as those reflective of significant judgments, estimates, and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company believes the following are its critical accounting policies:
Revenue Recognition: The Company recognizes sales when title passes upon delivery of its products to customers, net of applicable provisions for discounts, returns, and allowances. Products are delivered upon receipt of customer purchase orders with acceptable terms, including price and reasonably assured collectability.
The Company offers various sales incentives to customers and consumers. Incentives offered off-invoice include prompt pay allowances, will call allowances, spoilage allowances, and temporary price reductions. These incentives are recognized as reductions of revenue at the time title passes. Coupons are used as an incentive for consumers to purchase various products. The coupons reduce revenues at the time they are offered, based on estimated redemption rates. Promotional contracts are performed by customers to promote the Company’s products to consumers. These incentives reduce revenues at the time of performance through direct payments and accrued promotional funds. Accrued promotional funds are unpaid liabilities for promotional contracts in process or completed at the end of a quarter or fiscal year. Promotional contractual accruals are based on agreements with customers for defined performance. The liability relating to these agreements is based on a review of the outstanding contracts on which performance has taken place but which the promotional payments relating to such contracts remain unpaid as of the end of the fiscal year. The level of customer performance and the historical spend rate versus contracted rates are significant estimates used to determine these liabilities.
Inventory Valuation: The Company values inventories at the lower of cost or net realizable value. For pork inventories, when the carcasses are disassembled and transferred from primal processing to various manufacturing departments, the primal values, as adjusted by the Company for product specifications and further processing, become the basis for calculating inventory values. Turkey raw materials are represented by the deboned meat quantities. The Company values these raw materials using a concept referred to as the “meat cost pool.” The meat cost pool is determined by combining the cost to grow turkeys with processing costs, less any net sales revenue from by-products created from the processing and not used in producing Company products. The Company has developed a series of ratios using historical data and current market conditions (which themselves involve estimates and judgment determinations by the Company) to allocate the meat cost pool to each meat component. Substantially all inventoriable expenses, meat, packaging, and supplies are valued by the average cost method.
Goodwill and Other Indefinite-Lived Intangibles: Estimating the fair value of the Company’s goodwill reporting units and intangible assets requires significant judgement. Accordingly, the Company obtains the assistance of third-party valuation specialists who utilize available historical information along with future expectations to value the assets. Determining the useful life of an intangible asset also requires judgement. Certain acquired brands are expected to have indefinite lives based on their history and the Company’s plans to continue to support and build the brands. Other acquired assets such as customer relationships, are expected to have determinable useful lives.
Indefinite-lived intangible assets are originally recorded at their estimated fair values at the date of acquisition and the residual of the purchase price is recorded to goodwill. Goodwill and other indefinite-lived intangible assets are allocated to reporting units that will receive the related sales and income. Goodwill and indefinite-lived intangible assets are tested annually for impairment, or more frequently if impairment indicators arise.
In conducting the annual impairment test for goodwill, the Company has the option to first assess qualitative factors to determine whether it is more likely than not (> 50% likelihood) the fair value of any reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines an impairment is more likely than not, the Company is required to perform a quantitative impairment test. Otherwise, no further analysis is required. Alternatively, the Company may elect not to perform the qualitative assessment and proceed directly to the quantitative impairment test.
Prior to the fourth quarter of fiscal 2017, if the carrying value of a reporting unit exceeded its fair value, the Company completed the second step of the test to determine the amount of goodwill impairment loss, if any, to be recognized. In the second step, the Company estimated an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The impairment loss was equal to the excess of the carrying value of the goodwill over the implied fair value of that goodwill. In the fourth quarter of fiscal 2017, the Company adopted Accounting Standards Update (ASU) 2017-04, Simplifying the Test for Goodwill Impairment. As a result, the Company recognizes an impairment loss equal to the difference between the carrying value and estimated fair value of the reporting unit if the carrying value of a reporting unit exceeds its fair value.
In conducting a qualitative assessment, the Company analyzes actual and projected growth trends for net sales, gross margin, and segment profit for each reporting unit, as well as historical performance versus plan and the results of prior quantitative tests performed. Additionally, the Company assesses critical areas that may impact its business, including macroeconomic conditions and the related impact, market-related exposures, any plans to market for sale all or a portion of their business, competitive changes, new or discontinued product lines, changes in key personnel, or any potential risks to their projected financial results.
If performed, the quantitative goodwill impairment test is performed at the reporting unit level. First, the fair value of each reporting unit is compared to its corresponding carrying value, including goodwill. The fair value of each reporting unit is estimated using discounted cash flow valuations (Level 3), which incorporate assumptions regarding future growth rates,
15
terminal values, and discount rates. The estimates and assumptions used consider historical performance and are consistent with the assumptions used in determining future profit plans for each reporting unit, which are approved by the Company’s Board of Directors. If the quantitative assessment results in the carrying value exceeding the fair value of any reporting unit, then the results from the quantitative analysis will be relied upon to determine both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.
During the fourth quarter of fiscal 2018, the Company completed its annual goodwill impairment tests and elected to perform a qualitative assessment. As a result of the qualitative testing during fiscal 2018 and 2016 and quantitative testing during fiscal 2017, no material goodwill impairment charges were recorded. An immaterial impairment charge was recorded in the second quarter of fiscal 2016 for the Company's Diamond Crystal Brands (DCB) business based on the agreed-upon sales price for the business.
In conducting the annual impairment test for its indefinite-lived intangible assets, the Company first performs a qualitative assessment to determine whether it is more likely than not (> 50% likelihood) that an indefinite-lived intangible asset is impaired. If the Company concludes this is the case, then a quantitative test for impairment must be performed. Otherwise, the Company does not need to perform a quantitative test.
In conducting the initial qualitative assessment, the Company analyzes growth rates for historical and projected net sales and the results of prior quantitative tests performed. Additionally, the Company assesses critical areas that may impact its intangible assets or the applicable royalty rates to determine if there are factors that could indicate impairment of the asset.
If performed, the quantitative impairment test compares the fair value to the carrying value of the indefinite-lived intangible asset. The fair value of indefinite-lived intangible assets is primarily determined on the basis of estimated discounted value, using the relief from royalty method (Level 3). This method incorporates assumptions regarding future sales projections and discount rates. If the carrying value exceeds fair value, the indefinite-lived intangible asset is considered impaired and an impairment charge is recorded. Even if not required, the Company periodically elects to perform the quantitative test in order to confirm the qualitative assessment.
During the 2017 annual impairment review, the Company completed a quantitative assessment of indefinite-lived intangible assets. As a result of the review, no material impairment charges were recorded; however, four trademarks were determined to have fair values exceeding their carrying values by less than a 10 percent margin. Due to the lack of excess value of these assets, the Company elected to test these assets using a quantitative analysis during fiscal 2018. For all other indefinite-lived intangible assets, the Company tested the assets using a qualitative analysis. During the qualitative review, it was determined that further assessment in the form of a quantitative test was necessary for two additional indefinite-lived intangible assets. In total, the Company performed a quantitative test for six trademarks in fiscal 2018, one of which was determined to be impaired. During the fourth quarter of fiscal 2018, a $17.3 million intangible asset impairment charge was recorded for the CytoSport trademark. As a result of the 2018 quantitative test, one trademark was determined to have fair value exceeding its carrying value by approximately a 10 percent margin. See additional discussion regarding the Company’s goodwill and intangible assets in Note D. During fiscal years 2018, 2017, and 2016, there were no other material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
Employee Benefit Plans: The Company incurs expenses relating to employee benefits, such as noncontributory defined benefit pension plans and post-retirement health care benefits. In accounting for these employment costs, management must make a variety of assumptions and estimates including mortality rates, discount rates, overall compensation increases, expected return on plan assets, and health care cost trend rates. The Company considers historical data as well as current facts and circumstances when determining these estimates. The Company uses third-party specialists to assist management in the determination of these estimates and the calculation of certain employee benefit expenses and the outstanding obligation.
Income Taxes: The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur. Due to passage of the Tax Act, the tax provision at the end of fiscal 2018 was provisional. The Company will continue to refine such amounts within the measurement period allowed, which will be completed no later than the first quarter of fiscal 2019.
The Company computes its provision for income taxes based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it operates. Significant judgment is required in evaluating the Company’s tax positions and determining its annual tax provision. While the Company considers all of its tax positions fully supportable, the Company is occasionally challenged by various tax authorities regarding the amount of taxes due. The Company recognizes a tax position in its financial statements when it is more likely than not the position will be sustained upon examination, based on the technical merits of the position. This position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. A change in judgment related to the expected ultimate resolution of uncertain tax positions will be recognized in earnings in the quarter of such change.
Contingent Liabilities: At any time, the Company may be subject to investigations, legal proceedings, or claims related to the on-going operation of its business, including claims both by and against the Company. Such proceedings typically involve claims
16
related to product liability, contract disputes, wage and hour laws, employment practices, or other actions brought by employees, consumers, competitors, or suppliers. The Company routinely assesses the likelihood of any adverse outcomes related to these matters on a case by case basis, as well as the potential ranges of losses and fees. The Company establishes accruals for its potential exposure, as appropriate, for claims against the Company when losses become probable and reasonably estimable. Where the Company is able to reasonably estimate a range of potential losses, the Company records the amount within that range which constitutes the Company’s best estimate. The Company also discloses the nature and range of loss for claims against the Company when losses are reasonably possible and material. These accruals and disclosures are determined based on the facts and circumstances related to the individual cases and require estimates and judgments regarding the interpretation of facts and laws, as well as the effectiveness of strategies or factors beyond our control.
Results of Operations
OVERVIEW
The Company is a processor of branded and unbranded food products for retail, foodservice, and commercial customers. As a result of a business realignment at the beginning of fiscal 2018, the former Specialty Foods segment results are now reported as part of the Grocery products segment. Periods presented herein have been recast to reflect this change. 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 2018 and 2017. Fiscal 2016 consisted of 53 weeks.
FISCAL YEARS 2018 AND 2017:
Consolidated Results
Net Earnings and Diluted Earnings per Share
Fourth Quarter Ended | Year Ended | |||||||||||||||||||
(in thousands, except per share amounts) | October 28, 2018 | October 29, 2017 | % Change | October 28, 2018 | October 29, 2017 | % Change | ||||||||||||||
Net earnings | $ | 261,406 | $ | 218,154 | 19.8 | $ | 1,012,140 | $ | 846,735 | 19.5 | ||||||||||
Diluted earnings per share | 0.48 | 0.41 | 17.1 | 1.86 | 1.57 | 18.5 | ||||||||||||||
Volume and Net Sales
Fourth Quarter Ended | Year Ended | |||||||||||||||||||||
(in thousands) | October 28, 2018 | October 29, 2017 | % Change | October 28, 2018 | October 29, 2017 | % Change | ||||||||||||||||
Volume (lbs.) | 1,265,292 | 1,275,270 | (0.8 | ) | 4,798,178 | 4,770,485 | 0.6 | |||||||||||||||
Organic volume(1) | 1,232,728 | 1,275,270 | (3.3 | ) | 4,622,170 | 4,690,031 | (1.4 | ) | ||||||||||||||
Net sales | $ | 2,524,697 | $ | 2,492,608 | 1.3 | $ | 9,545,700 | $ | 9,167,519 | 4.1 | ||||||||||||
Organic net sales(1) | 2,407,405 | 2,492,608 | (3.4 | ) | 8,984,841 | 9,067,288 | (0.9 | ) | ||||||||||||||
(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
17
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 acquisition of Columbus Craft Meats (November 2017), the acquisition of Fontanini Italian Meats and Sausages (August 2017), and the divestiture of Farmer John (January 2017), in Refrigerated Foods and the acquisition of Ceratti (August 2017) in International. The tables below show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in the fourth quarter and fourth quarter and full year of fiscal 2018.
Adjusted segment profit and adjusted earnings per share exclude the impact of a non-cash impairment charge associated with the CytoSport business which was recognized in the Grocery Products segment. The tables below show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in the fourth quarter and fourth quarter and full year of fiscal 2018. The effective tax rate was used to determine the tax effect of the impairment.
4th Quarter
Volume (lbs.)
FY 2018 | FY 2017 | ||||||||||||||
(in thousands) | Reported (GAAP) | Acquisitions | Organic (Non-GAAP) | Reported (GAAP) | Organic % change | ||||||||||
Grocery Products | 350,399 | — | 350,399 | 366,485 | (4.4 | ) | |||||||||
Refrigerated Foods | 558,843 | (22,757 | ) | 536,086 | 547,196 | (2.0 | ) | ||||||||
Jennie-O Turkey Store | 260,450 | — | 260,450 | 270,175 | (3.6 | ) | |||||||||
International & Other | 95,600 | (9,807 | ) | 85,793 | 91,414 | (6.1 | ) | ||||||||
Total Volume | 1,265,292 | (32,564 | ) | 1,232,728 | 1,275,270 | (3.3 | ) | ||||||||
Net Sales
FY 2018 | FY 2017 | ||||||||||||||||||
(in thousands) | Reported (GAAP) | Acquisitions | Organic (Non-GAAP) | Reported (GAAP) | Organic % change | ||||||||||||||
Grocery Products | $ | 658,845 | $ | — | $ | 658,845 | $ | 685,961 | (4.0 | ) | |||||||||
Refrigerated Foods | 1,232,650 | (102,262 | ) | 1,130,388 | 1,166,661 | (3.1 | ) | ||||||||||||
Jennie-O Turkey Store | 466,811 | — | 466,811 | 484,856 | (3.7 | ) | |||||||||||||
International & Other | 166,391 | (15,030 | ) | 151,361 | 155,130 | (2.4 | ) | ||||||||||||
Total Net Sales | $ | 2,524,697 | $ | (117,292 | ) | $ | 2,407,405 | $ | 2,492,608 | (3.4 | ) | ||||||||
Full Year
Volume (lbs.)
FY 2018 | FY 2017 | ||||||||||||||||||||
(in thousands) | Reported (GAAP) | Acquisitions | Organic (Non-GAAP) | Reported (GAAP) | Divestitures | Organic (Non-GAAP) | Organic % change | ||||||||||||||
Grocery Products | 1,345,904 | — | 1,345,904 | 1,374,665 | — | 1,374,665 | (2.1 | ) | |||||||||||||
Refrigerated Foods | 2,199,994 | (130,301 | ) | 2,069,693 | 2,180,407 | (80,454 | ) | 2,099,953 | (1.4 | ) | |||||||||||
Jennie-O Turkey Store | 894,590 | — | 894,590 | 890,518 | — | 890,518 | 0.5 | ||||||||||||||
International & Other | 357,690 | (45,707 | ) | 311,983 | 324,895 | — | 324,895 | (4.0 | ) | ||||||||||||
Total Volume | 4,798,178 | (176,008 | ) | 4,622,170 | 4,770,485 | (80,454 | ) | 4,690,031 | (1.4 | ) | |||||||||||
Net Sales
FY 2018 | FY 2017 | ||||||||||||||||||||||||||
(in thousands) | Reported (GAAP) | Acquisitions | Organic (Non-GAAP) | Reported (GAAP) | Divestitures | Organic (Non-GAAP) | Organic % change | ||||||||||||||||||||
Grocery Products | $ | 2,521,992 | $ | — | $ | 2,521,992 | $ | 2,555,613 | $ | — | $ | 2,555,613 | (1.3 | ) | |||||||||||||
Refrigerated Foods | 4,771,836 | (485,960 | ) | 4,285,876 | 4,403,732 | (100,231 | ) | 4,303,501 | (0.4 | ) | |||||||||||||||||
Jennie-O Turkey Store | 1,627,433 | — | 1,627,433 | 1,663,160 | — | 1,663,160 | (2.1 | ) | |||||||||||||||||||
International & Other | 624,439 | (74,899 | ) | 549,540 | 545,014 | — | 545,014 | 0.8 | |||||||||||||||||||
Total Net Sales | $ | 9,545,700 | $ | (560,859 | ) | $ | 8,984,841 | $ | 9,167,519 | $ | (100,231 | ) | $ | 9,067,288 | (0.9 | ) | |||||||||||
18
4th Quarter and Full Year
Segment Profit and Diluted Earnings per Share
FY 2018 | ||||||
Grocery Products | ||||||
4th Quarter | Full Year | |||||
Non-GAAP Adjusted Segment Profit | $ | 98,861 | $ | 380,029 | ||
Cytosport Impairment | (17,279 | ) | (17,279 | ) | ||
GAAP Segment Profit | $ | 81,582 | $ | 362,750 | ||
Total Company | ||||||
4th Quarter | Full Year | |||||
Non-GAAP Adjusted Diluted EPS | $ | 0.51 | $ | 1.89 | ||
Cytosport Impairment | (0.03 | ) | (0.03 | ) | ||
GAAP Diluted EPS | $ | 0.48 | $ | 1.86 | ||
The increase in net sales for the fourth quarter of fiscal 2018 was driven by the inclusion of sales from the acquisitions of the Columbus, Fontanini, and Ceratti. Higher sales of Wholly Guacamole® dips, Hormel® Natural Choice® products, Hormel® pepperoni, and foodservice sales of Jennie-O® turkey breast and Austin Blues® smoked barbecue products were more than offset by declines due to lower whole bird sales at JOTS, declines in the Company's contract manufacturing business in Grocery Products, and lower hog harvest volumes.
For fiscal 2018, the increase in net sales was primarily related to the inclusion of the Columbus, Fontanini, and Ceratti acquisitions, more than offsetting declines at JOTS, the Company's contract manufacturing business and CytoSport in Grocery Products.
In fiscal 2019, the Company expects net sales growth with contributions from value-added products and innovation. The new deli organization in Refrigerated Foods is expected to drive sales of the Columbus® brand. Foodservice sales should benefit from the full integration of Fontanini and new capacity for Hormel® Bacon 1™ fully cooked bacon and Hormel® FirebraisedTM meats. The Company anticipates sales growth from products such as Wholly Guacamole® dips, Herdez® salsas, and Muscle Milk® protein beverages in the Grocery Products segment. JOTS is expecting sales growth due to increases in turkey commodity markets, improved whole-bird pricing, and continued demand for Jennie-O® branded products. 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.
Cost of Products Sold
Fourth Quarter Ended | Year Ended | |||||||||||||||||||
October 28, | October 29, | October 28, | October 29, | |||||||||||||||||
(in thousands) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||
Cost of products sold | $ | 1,987,301 | $ | 1,981,054 | 0.3 | $ | 7,550,267 | $ | 7,164,356 | 5.4 | ||||||||||
The cost of products sold for the fourth quarter and fiscal year of fiscal 2018 were higher as a result of the inclusion of the Columbus, Fontanini, and Ceratti acquisitions along with higher freight costs, especially in the Refrigerated Foods and JOTS segments.
Gross Profit
Fourth Quarter Ended | Year Ended | ||||||||||||||||||||
October 28, | October 29, | October 28, | October 29, | ||||||||||||||||||
(in thousands) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | |||||||||||||||
Gross profit | $ | 537,396 | $ | 511,554 | 5.1 | $ | 1,995,433 | $ | 2,003,163 | (0.4 | ) | ||||||||||
Percentage of net sales | 21.3 | % | 20.5 | % | 20.9 | % | 21.9 | % | |||||||||||||
Consolidated gross profit as a percentage of net sales declined due to reduced commodity profitability, higher freight costs, and input cost volatility.
The Company expects favorable pork input costs in 2019 and modestly-improved conditions in the turkey industry. Refrigerated Foods will benefit from new manufacturing capacity and continued growth of the value-added businesses. Grocery Products and International & Other should see improvement from lower input costs on core branded items and branded exports, respectively. Turkey breast prices are anticipated to increase throughout the year, leading to a steady improvement for JOTS. The global trade environment, potential impact of hog disease in China, and market volatility pose the largest threats to the Company's profitability.
19
Selling, General and Administrative (SG&A)
Fourth Quarter Ended | Year Ended | |||||||||||||||||||
October 28, | October 29, | October 28, | October 29, | |||||||||||||||||
(in thousands) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||
SG&A | $ | 204,537 | $ | 194,218 | 5.3 | $ | 838,205 | $ | 762,104 | 10.0 | ||||||||||
Percentage of net sales | 8.1 | % | 7.8 | % | 8.8 | % | 8.3 | % | ||||||||||||
For the fourth quarter and fiscal 2018, SG&A expenses increased due to the inclusion of the Columbus, Fontanini, and Ceratti acquisitions, higher advertising investments, and higher employee-related expenses.
In fiscal 2019, the Company intends to continue building brand awareness through advertising investments in key brands such as Hormel® pepperoni, Columbus® Craft Meats, the SPAM® family of products, Wholly Guacamole® dips, and Jennie-O® Oven ReadyTM products.
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 $8.7 million and $33.8 million for the fiscal 2018 fourth quarter and year, respectively, compared to $8.2 million and $34.2 million for the corresponding periods in fiscal 2017.
Goodwill/Intangible Impairment: An impairment charge related to the CytoSport trademark totaling $17.3 million was recorded in the fourth quarter of fiscal 2018. Impairment charges related to an indefinite-lived intangible asset of $0.2 million were recorded in the fourth quarter of fiscal 2017.
Equity in Earnings of Affiliates
Fourth Quarter Ended | Year Ended | ||||||||||||||||||||
October 28, | October 29, | October 28, | October 29, | ||||||||||||||||||
(in thousands) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | |||||||||||||||
Equity in earnings of affiliates | $ | 8,814 | $ | 12,214 | (27.8 | ) | $ | 58,972 | $ | 39,590 | 49.0 | ||||||||||
Results for the fourth quarter and fiscal 2018 were negatively impacted by increases in advertising and freight costs at MegaMex. For fiscal 2018, strong MegaMex results and tax reform drove the significant increase over the prior year.
The Company accounts for its majority-owned operations under the consolidation method. Investments in which the Company owns a minority interest, and for which there are no other indicators of control, are accounted for under the equity or cost method. These investments, along with receivables from other affiliates, are included in the Consolidated Statements of Financial Position as investments in and receivables from affiliates. The composition of this line item at October 28, 2018, was as follows:
(in thousands) | Investments/Receivables | ||
Country | |||
United States | $ | 205,148 | |
Foreign | 68,005 | ||
Total | $ | 273,153 | |
Effective Tax Rate
Fourth Quarter Ended | Year Ended | |||||||||||
October 28, | October 29, | October 28, | October 29, | |||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
Effective tax rate % | 18.7 | % | 33.8 | % | 14.3 | % | 33.7 | % | ||||
The lower effective tax rate for both the fourth quarter and fiscal year reflects the impact of The Tax Cuts and Jobs Act, signed into law on December 22, 2017. For fiscal 2018, the Company recorded a net tax benefit of $72.9 million. This provisional net tax benefit arises from a benefit of $81.2 million from re-measuring the Company’s net U.S. deferred tax liabilities, partially offset by the Company’s accrual for the transition tax and other U.S. tax law changes of $8.3 million. These one-time tax events and reduction in the federal statutory tax rate were the main drivers of the Company's effective tax rates for the fourth quarter and fiscal year of 18.7 percent and 14.3 percent, respectively, compared to 33.8 percent and 33.7 percent for the respective periods last year. For a further description, refer to Note K "Income Taxes".
The Company expects the effective tax rate in fiscal 2019 to be between 20.5 and 23.0 percent.
20
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 P “Segment Reporting.”)
Fourth Quarter Ended | Year Ended | |||||||||||||||||||||
October 28, | October 29, | October 28, | October 29, | |||||||||||||||||||
(in thousands) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||
Net Sales | ||||||||||||||||||||||
Grocery Products | $ | 658,845 | $ | 685,961 | (4.0 | ) | $ | 2,521,992 | $ | 2,555,613 | (1.3 | ) | ||||||||||
Refrigerated Foods | 1,232,650 | 1,166,661 | 5.7 | 4,771,836 | 4,403,732 | 8.4 | ||||||||||||||||
Jennie-O Turkey Store | 466,811 | 484,856 | (3.7 | ) | 1,627,433 | 1,663,160 | (2.1 | ) | ||||||||||||||
International & Other | 166,391 | 155,130 | 7.3 | 624,439 | 545,014 | 14.6 | ||||||||||||||||
Total Net Sales | $ | 2,524,697 | $ | 2,492,608 | 1.3 | $ | 9,545,700 | $ | 9,167,519 | 4.1 | ||||||||||||
Segment Operating Profit | ||||||||||||||||||||||
Grocery Products | $ | 81,582 | $ | 104,848 | (22.2 | ) | $ | 362,750 | $ | 387,637 | (6.4 | ) | ||||||||||
Refrigerated Foods | 181,988 | 145,613 | 25.0 | 617,626 | 587,929 | 5.1 | ||||||||||||||||
Jennie-O Turkey Store | 48,829 | 70,370 | (30.6 | ) | 175,684 | 247,322 | (29.0 | ) | ||||||||||||||
International & Other | 24,802 | 23,113 | 7.3 | 88,953 | 85,304 | 4.3 | ||||||||||||||||
Total Segment Operating Profit | 337,201 | 343,944 | (2.0 | ) | 1,245,013 | 1,308,192 | (4.8 | ) | ||||||||||||||
Net interest and investment (income) expense | 2,890 | (639 | ) | 552.3 | 17,637 | 1,824 | 866.9 | |||||||||||||||
General corporate expense | 12,897 | 14,783 | (12.8 | ) | 46,534 | 28,091 | ||||||||||||||||