HORMEL FOODS CORP /DE/
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
January 28, 2024
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _______________ to _______________
Commission File Number:
1-2402
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
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| (Address of principal executive offices) | (Zip Code) | |||||||
(
507
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437-5611
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||||||||
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$0.01465 | par value |
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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 (or for such shorter period that the registrant was required to file such reports), 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 Regulation S-T (§232.405 of this chapter) 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.
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☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company |
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| Emerging growth company |
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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 Exchange Act).
☐
Yes
☒
No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class |
Outstanding at February 25, 2024
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| Common Stock | $0.01465 | par value |
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Common Stock Nonvoting
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$0.01 | par value |
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TABLE OF CONTENTS
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PART I
- FINANCIAL INFORMATION
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Item 1.
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Item 2.
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Critical Accounting
Estimates
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Item 3.
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Item 4.
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PART II
- OTHER INFORMATION
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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2
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
| Quarter Ended | |||||||||||
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In thousands, except per share amounts
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January 28, 2024 | January 29, 2023 | |||||||||
| Net Sales | $ |
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$ |
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| Cost of Products Sold |
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| Gross Profit |
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| Selling, General, and Administrative |
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Equity in Earnings of Affiliates
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| Operating Income |
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| Interest and Investment Income |
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| Interest Expense |
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| Earnings Before Income Taxes |
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Provision for Income Taxes
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| Net Earnings |
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Less: Net Earnings (Loss) Attributable to Noncontrolling Interest
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(
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(
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Net Earnings Attributable to Hormel Foods Corporation
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$ |
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$ |
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Net Earnings Per Share
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| Basic | $ |
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$ |
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| Diluted | $ |
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$ |
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Weighted-average Shares Outstanding
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| Basic |
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| Diluted |
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See Notes to the Consolidated Financial Statements
3
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
| Quarter Ended | |||||||||||
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In thousands
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January 28, 2024 | January 29, 2023 | |||||||||
| Net Earnings | $ |
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$ |
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| Other Comprehensive Income (Loss), Net of Tax: | |||||||||||
| Foreign Currency Translation |
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| Pension and Other Benefits |
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Derivatives and Hedging
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(
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| Equity Method Investments |
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Total Other Comprehensive Income (Loss)
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| Comprehensive Income |
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Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interest
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Comprehensive Income Attributable to Hormel Foods Corporation
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$ |
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$ |
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See Notes to the Consolidated Financial Statements
4
HORMEL FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
Unaudited
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In thousands, except share and per share amounts
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January 28, 2024 | October 29, 2023 | |||||||||
| Assets | |||||||||||
| Cash and Cash Equivalents | $ |
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$ |
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| Short-term Marketable Securities |
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Accounts Receivable (Net of Allowance for Doubtful Accounts of
$
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| Inventories |
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Prepaid Expenses and Other Current Assets
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| Total Current Assets |
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Goodwill
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Other Intangibles
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Pension Assets
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| Investments in Affiliates |
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Other Assets
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| Property, Plant, and Equipment | |||||||||||
| Land |
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| Buildings |
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| Equipment |
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| Construction in Progress |
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| Less: Allowance for Depreciation |
(
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(
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| Net Property, Plant, and Equipment |
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| Total Assets | $ |
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$ |
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| Liabilities and Shareholders’ Investment | |||||||||||
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Accounts Payable and Accrued Expenses
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$ |
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$ |
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| Accrued Marketing Expenses |
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Employee-related Expenses
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| Interest and Dividends Payable |
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| Taxes Payable |
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| Current Maturities of Long-term Debt |
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| Total Current Liabilities |
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| Long-term Debt Less Current Maturities |
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| Pension and Post-retirement Benefits |
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| Deferred Income Taxes |
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| Other Long-term Liabilities |
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Shareholders’ Investment
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Preferred Stock, Par Value $
Authorized
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Common Stock, Nonvoting, Par Value $
Authorized
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Common Stock, Par Value $
Shares Issued as of January 28, 2024:
Shares Issued as of October 29, 2023:
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| Additional Paid-in Capital |
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| Accumulated Other Comprehensive Loss |
(
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(
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| Retained Earnings |
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Hormel Foods Corporation Shareholders’ Investment
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| Noncontrolling Interest |
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Total Shareholders’ Investment
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| Total Liabilities and Shareholders’ Investment | $ |
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$ |
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See Notes to the Consolidated Financial Statement
s
5
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT
Unaudited
| Quarter Ended January 29, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hormel Foods Corporation Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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Common
Stock
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Treasury
Stock
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Additional
Paid-in
Capital
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Retained
Earnings
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Accumulated
Other Comprehensive Income (Loss) |
Non-
controlling
Interest
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Total
Shareholders’ Investment |
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In thousands, except per share amounts
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Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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Net Earnings (Loss)
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(
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Other Comprehensive Income (Loss)
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Stock-based Compensation Expense
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Exercise of Stock Options/Restricted Shares
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Declared Dividends – $
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(
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(
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| Balance at January 29, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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| Quarter Ended January 28, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hormel Foods Corporation Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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Common
Stock |
Treasury
Stock |
Additional
Paid-in Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Income (Loss) |
Non-
controlling Interest |
Total
Shareholders’ Investment |
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In thousands, except per share amounts
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Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 29, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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Net Earnings (Loss)
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(
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Other Comprehensive Income (Loss)
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Contribution from Noncontrolling Interest
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Stock-based Compensation Expense
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Exercise of Stock Options/Restricted Shares
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Declared Dividends – $
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(
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(
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| Balance at January 28, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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See Notes to the Consolidated Financial Statements
6
HORMEL FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
| Quarter Ended | |||||||||||
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In thousands
|
January 28, 2024 | January 29, 2023 | |||||||||
| Operating Activities | |||||||||||
| Net Earnings | $ |
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$ |
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| Adjustments to Reconcile to Net Cash Provided by (Used in) Operating Activities: | |||||||||||
| Depreciation and Amortization |
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|||||||||
| Equity in Earnings of Affiliates |
(
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(
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| Distributions Received from Equity Method Investees |
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|||||||||
| Provision for Deferred Income Taxes |
(
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(
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| Non-cash Investment Activities |
(
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(
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| Stock-based Compensation Expense |
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Operating Lease Cost
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Other Non-cash, Net
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| Changes in Operating Assets and Liabilities: | |||||||||||
| Decrease (Increase) in Accounts Receivable |
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| Decrease (Increase) in Inventories |
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(
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| Decrease (Increase) in Prepaid Expenses and Other Assets |
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(
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| Increase (Decrease) in Pension and Post-retirement Benefits |
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| Increase (Decrease) in Accounts Payable and Accrued Expenses |
(
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(
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| Increase (Decrease) in Net Income Taxes Payable |
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| Net Cash Provided by (Used in) Operating Activities |
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| Investing Activities | |||||||||||
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Net Sale (Purchase) of Securities
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(
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(
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| Purchases of Property, Plant, and Equipment |
(
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(
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| Proceeds from Sales of Property, Plant, and Equipment |
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| Proceeds from (Purchases of) Affiliates and Other Investments |
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(
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| Proceeds from Company-owned Life Insurance |
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| Net Cash Provided by (Used in) Investing Activities |
(
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(
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| Financing Activities | |||||||||||
| Repayments of Long-term Debt and Finance Leases |
(
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(
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| Dividends Paid on Common Stock |
(
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(
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| Proceeds from Exercise of Stock Options |
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| Proceeds from Noncontrolling Interest |
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| Net Cash Provided by (Used in) Financing Activities |
(
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(
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| Effect of Exchange Rate Changes on Cash |
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| Increase (Decrease) in Cash and Cash Equivalents |
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(
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| Cash and Cash Equivalents at Beginning of Year |
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|||||||||
| Cash and Cash Equivalents at End of Period | $ |
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$ |
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See Notes to the Consolidated Financial Statements
7
HORMEL FOODS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with accounting principles generally accepted in the United States (U.S.) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include certain information and footnotes required by U.S. generally accepted accounting principles (GAAP) for comprehensive financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results and cash flows for the interim period are not necessarily indicative of the results that may be expected for the full year.
Rounding:
Certain amounts in the Consolidated Financial Statements and associated notes may not foot due to rounding. All percentages have been calculated using unrounded amounts.
Accounting Changes and Recent Accounting Pronouncements:
New Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.
The update is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. The ASU requires disclosures to include significant segment expenses that are regularly provided to the chief operating decision maker (CODM), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. The ASU also requires all annual disclosures currently required by Topic 280 to be included in interim periods. The update is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted and requires retrospective application to all prior periods presented in the financial statements. The Company is currently assessing the timing and impact of adopting the updated provisions.
In December 2023, the FASB issued ASU 2023-09
Income Taxes (Topic 740): Improvements to Income Tax Disclosures.
The update is intended to enhance transparency and decision usefulness of income tax disclosures. This ASU updates income tax disclosure requirements by requiring specific categories and greater disaggregation within the rate reconciliation and disaggregation of income taxes paid by jurisdiction. The update is effective for fiscal years beginning after December 15, 2024 with early adoption permitted. The Company is currently assessing the timing and impact of adopting the updated provisions.
Recently issued accounting standards or pronouncements not disclosed have been excluded as they are currently not relevant to the Company.
8
NOTE B - GOODWILL AND INTANGIBLE ASSETS
Goodwill:
The change in the carrying amount of goodwill for the quarter ended January 28, 2024, is:
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In thousands
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Retail | Foodservice | International | Total | |||||||||||||||||||
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Balance at October 29, 2023
|
$ |
|
$ |
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$ |
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$ |
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|||||||||||||||
| Foreign Currency Translation |
|
|
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|||||||||||||||||||
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Balance at January 28, 2024
|
$ |
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$ |
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$ |
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$ |
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Intangible Assets:
The carrying amounts for indefinite-lived intangible assets are:
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In thousands
|
January 28, 2024 | October 29, 2023 | |||||||||
|
Brands/Trade Names/Trademarks
|
$ |
|
$ |
|
|||||||
| Other Intangibles |
|
|
|||||||||
| Foreign Currency Translation |
(
|
(
|
|||||||||
| Total | $ |
|
$ |
|
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The gross carrying amount and accumulated amortization for definite-lived intangible assets are:
| January 28, 2024 | October 29, 2023 | ||||||||||||||||||||||
|
In thousands
|
Gross Carrying
Amount |
Accumulated
Amortization |
Gross Carrying
Amount |
Accumulated
Amortization |
|||||||||||||||||||
| Customer Lists/Relationships | $ |
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
| Other Intangibles |
|
(
|
|
(
|
|||||||||||||||||||
|
Trade Names/Trademarks
|
|
(
|
|
(
|
|||||||||||||||||||
| Foreign Currency Translation |
|
(
|
|
(
|
|||||||||||||||||||
| Total | $ |
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
Amortization expense on intangible assets is as follows:
| Quarter Ended | |||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | |||||||||
| Amortization Expense | $ |
|
$ |
|
|||||||
Estimated annual amortization expense on intangible assets for the five fiscal years after October 29, 2023, is as follows:
|
In thousands
|
Amortization
Expense
|
||||
| 2024 | $ |
|
|||
| 2025 |
|
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| 2026 |
|
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| 2027 |
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| 2028 |
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9
NOTE C - INVESTMENTS IN AFFILIATES
Equity in Earnings of Affiliates consists of:
| Quarter Ended | ||||||||||||||
|
In thousands
|
% Owned | January 28, 2024 | January 29, 2023 | |||||||||||
|
MegaMex Foods, LLC
(1)
|
|
$ |
|
$ |
|
|||||||||
|
Other Equity Method Investments
(2)
|
Various (
|
|
|
|||||||||||
|
Total Equity in Earnings of Affiliates
|
$ |
|
$ |
|
||||||||||
(1) MegaMex, Foods, LLC, is reflected in the Retail Segment.
(2) Other Equity Method Investments are primarily reflected in the International Segment but also include corporate venturing investments.
Distributions received from equity method investees include:
| Quarter Ended | |||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | |||||||||
| Dividends | $ |
|
$ |
|
|||||||
On December 15, 2022, the Company purchased from various minority shareholders a
29
% common stock interest in PT Garudafood Putra Putri Jaya Tbk (Garudafood), a food and beverage company in Indonesia. On April 12, 2023, the Company purchased additional shares increasing the ownership interest to
30
%. This investment expands the Company’s presence in Southeast Asia and supports the global execution of the entertaining and snacking strategy. The Company has the ability to exercise significant influence, but not control, over Garudafood; therefore, the investment is accounted for under the equity method.
The Company obtained its Garudafood interest for a purchase price of $
425.8
million, including associated transaction costs. The transaction was funded using the Company’s cash on hand. Based on a third-party valuation, the Company’s basis difference between the fair value of the investment and proportionate share of the carrying value of Garudafood’s net assets is $
324.8
million. The basis difference related to inventory, property, plant and equipment, and certain intangible assets is being amortized through Equity in Earnings of Affiliates over the associated useful lives. As of January 28, 2024, the remaining basis difference was $
324.9
million, which includes the impact of foreign currency translation. Based on quoted market prices, the fair value of the common stock held in Garudafood was $
279.4
million as of January 26, 2024.
The Company recognized a basis difference of $
21.3
million associated with the formation of MegaMex Foods, LLC, of which $
9.1
million is remaining as of January 28, 2024. This difference is being amortized through Equity in Earnings of Affiliates.
NOTE D - INVENTORIES
Principal components of inventories are:
|
In thousands
|
January 28, 2024 | October 29, 2023 | |||||||||
| Finished Products | $ |
|
$ |
|
|||||||
| Raw Materials and Work-in-Process |
|
|
|||||||||
| Operating Supplies |
|
|
|||||||||
| Maintenance Materials and Parts |
|
|
|||||||||
|
Total Inventories
|
$ |
|
$ |
|
|||||||
NOTE E - DERIVATIVES AND HEDGING
The Company uses hedging programs to manage risk associated with commodity purchases and interest rates. These programs utilize futures, swaps, and options contracts to manage the Company’s exposure to market fluctuations. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Effectiveness testing is performed on a quarterly basis to ascertain a high level of effectiveness for cash flow and fair value hedging programs. If the requirements of hedge accounting are no longer met, hedge accounting is discontinued immediately and any future changes to fair value are recorded directly through earnings.
10
Cash Flow Commodity Hedges:
The Company uses futures, swaps, and options contracts to offset price fluctuations in the Company's future purchases of grain, lean hogs, natural gas, and diesel fuel. These contracts are designated as cash flow hedges; therefore, effective gains or losses related to these cash flow hedges are reported in Accumulated Other Comprehensive Loss (AOCL) and reclassified into earnings, through Cost of Products Sold, in the periods in which the hedged transactions affect earnings. The Company typically does not hedge its grain, natural gas, or diesel fuel exposure beyond the next
upcoming fiscal years and its lean hog exposure beyond the next fiscal year.
Fair Value Commodity Hedges:
The Company designates the futures it uses to minimize the price risk assumed when fixed forward priced contracts are offered to the Company’s lean hog and grain suppliers as fair value hedges. The programs are intended to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery. Changes in the fair value of the futures contracts and the gain or loss on the hedged purchase commitment are marked-to-market through earnings and recorded on the Consolidated Condensed Statements of Financial Position as a Current Asset and Current Liability, respectively. Gains or losses related to these fair value hedges are recognized through Cost of Products Sold in the periods in which the hedged transactions affect earnings.
Cash Flow Interest Rate Hedges:
In the second quarter of fiscal 2021, the Company designated
two
separate interest rate locks as cash flow hedges to manage interest rate risk associated with the anticipated debt transactions required to fund the acquisition of the
Planters
®
snack nuts business. The total notional amount of the Company’s locks was $
1.25
billion. In the third quarter of fiscal 2021, the associated unsecured senior notes were issued with a tenor of
and
thirty years
and both locks were lifted (See Note J - Long-Term Debt and Other Borrowing Arrangements). Mark-to-market gains and losses on these instruments were deferred as a component of AOCL. The resulting gain in AOCL is reclassified to Interest Expense in the period in which the hedged transactions affect earnings.
Fair Value Interest Rate Hedge:
In the first quarter of fiscal 2022, the Company entered into an interest rate swap to protect against changes in the fair value of a portion of previously issued senior unsecured notes attributable to the change in the benchmark interest rate. The hedge specifically designated the last $
450
million of the notes due June 2024 (the 2024 Notes). The Company terminated the swap in the fourth quarter of fiscal 2022. The loss related to the swap was recorded as a fair value hedging adjustment to the hedged debt and will be amortized through earnings over the remaining life of the debt.
Other Derivatives:
The Company holds certain futures and swap contracts to manage the Company’s exposure to fluctuations in grain and pork commodity markets. The Company has not applied hedge accounting to these positions. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.
Volume:
The Company's outstanding contracts related to its commodity hedging programs include:
|
In millions
|
January 28, 2024 | October 29, 2023 | |||||||||
| Corn |
|
|
|||||||||
| Lean Hogs |
|
|
|||||||||
| Natural Gas |
|
|
|||||||||
|
Diesel Fuel
|
|
|
|||||||||
Fair Value of Derivatives:
The gross fair values of the Company’s derivative instruments designated as hedges are:
|
In thousands
|
Location on Consolidated Condensed Statements of Financial Position | January 28, 2024 | October 29, 2023 | |||||||||||
|
Commodity Contracts
(1)
|
Other Current Assets | $ |
(
|
$ |
(
|
|||||||||
(1) Amounts represent the gross fair value of commodity derivative assets and liabilities. The Company nets the derivative assets and liabilities for each of its commodity hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The amount or timing of cash collateral balances may impact the classification of the commodity derivative on the Consolidated Condensed Statements of Financial Position. The gross liability position as of January 28, 2024, is offset by the right to reclaim net cash collateral of $
24.5
million contained within the master netting arrangement. The gross liability position as of October 29, 2023, is offset by the right to reclaim net cash collateral of $
32.2
million. See Note H - Fair Value Measurements for a discussion of these net amounts as reported on the Consolidated Condensed Statements of Financial Position.
Fair Value Hedge - Assets (Liabilities):
The carrying amount of the Company’s fair value hedged assets (liabilities) are:
|
In thousands
|
Location on Consolidated Condensed Statements of Financial Position | January 28, 2024 | October 29, 2023 | |||||||||||
|
Commodity Contracts
|
Accounts Payable
(1)
|
$ |
(
|
$ |
(
|
|||||||||
| Interest Rate Contracts |
Current Maturities of Long-term Debt
(2)
|
(
|
(
|
|||||||||||
(1)
Represents the carrying amount of fair value hedged assets and liabilities, which are offset by other assets included in master netting arrangements described above.
(2) Represents the carrying amount of the hedged portion of the 2024 Notes. As of January 28, 2024, the carrying amount of the 2024 Notes included a cumulative fair value hedging adjustment of $
4.3
million from discontinued hedges.
11
Accumulated Other Comprehensive Loss Impact:
As of January 28, 2024, the Company included in AOCL hedging losses (before tax) of $
17.3
million on commodity contracts and gains (before tax) of $
12.2
million related to interest rate settled positions. The Company expects to recognize the majority of the losses on commodity contracts over the next twelve months. Gains on interest rate contracts offset the hedged interest payments over the tenor of the associated debt instruments.
The effect on AOCL for gains or losses (before tax) related to the Company's derivative instruments are:
|
Gain/(Loss)
Recognized
in AOCL
(1)
|
Gain/(Loss)
Reclassified from
AOCL into Earnings
(1)
|
Location on
Consolidated Statements of Operations |
||||||||||||||||||||||||
| Quarter Ended | Quarter Ended | |||||||||||||||||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | January 28, 2024 | January 29, 2023 | ||||||||||||||||||||||
| Cash Flow Hedges | ||||||||||||||||||||||||||
| Commodity Contracts | $ |
(
|
$ |
(
|
$ |
(
|
$ |
|
Cost of Products Sold | |||||||||||||||||
|
Excluded Component
(2)
|
|
|
|
|
||||||||||||||||||||||
|
Interest Rate Contracts
|
|
|
|
|
Interest Expense | |||||||||||||||||||||
(1) See Note G - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on Net Earnings.
(2) Represents the time value of commodity options excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in AOCL.
Consolidated Statements of Operations Impact:
The effect on the Consolidated Statements of Operations for gains or losses (before tax) related to the Company’s derivative instruments are:
| Quarter Ended | |||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | |||||||||
| Net Earnings Attributable to Hormel Foods Corporation | $ |
|
$ |
|
|||||||
| Cash Flow Hedges - Commodity Contracts | |||||||||||
| Gain (Loss) Reclassified from AOCL |
(
|
|
|||||||||
| Amortization of Excluded Component from Options |
(
|
(
|
|||||||||
| Fair Value Hedges - Commodity Contracts | |||||||||||
|
Gain (Loss) on Commodity Futures
(1)
|
|
(
|
|||||||||
|
Total Gain (Loss) on Commodity Contracts
(2)
|
(
|
|
|||||||||
|
Cash Flow Hedges - Interest Rate Contracts
|
|||||||||||
| Gain (Loss) Reclassified from AOCL |
|
|
|||||||||
|
Fair Value Hedge - Interest Rate Contracts
|
|||||||||||
|
Amortization of Loss Due to Discontinuance of Fair Value Hedge
(3)
|
(
|
(
|
|||||||||
|
Total Gain (Loss) on Interest Rate Contracts
(4)
|
(
|
(
|
|||||||||
| Total Gain (Loss) Recognized in Earnings | $ |
(
|
$ |
|
|||||||
(1)
Represents gains or losses on commodity contracts designated as fair value hedges that were closed during the quarter ended January 28, 2024, and January 29, 2023, which were offset by a corresponding gain or loss on the underlying hedged purchase commitment. Additional gains or losses related to changes in the fair value of open commodity contracts, along with the offsetting gain or loss on the hedged purchase commitment, are also marked-to-market through earnings with no impact on a net basis.
(2) Total Gain (Loss) on Commodity Contracts is recognized in earnings through Cost of Products Sold.
(3) Represents the fair value hedging adjustment amortized through earnings.
(4) Total Gain (Loss) on Interest Rate Contracts is recognized in earnings through Interest Expense.
12
NOTE F - PENSION AND OTHER POST-RETIREMENT BENEFITS
Net periodic cost for pension and other post-retirement benefit plans consists of:
| Pension Benefits | |||||||||||
| Quarter Ended | |||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | |||||||||
| Service Cost | $ |
|
$ |
|
|||||||
|
|
|
||||||||||
|
(
|
(
|
||||||||||
|
(
|
(
|
||||||||||
|
|
|
||||||||||
|
Net Periodic Cost
|
$ |
|
$ |
|
|||||||
| Post-retirement Benefits | |||||||||||
| Quarter Ended | |||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | |||||||||
| Service Cost | $ |
|
$ |
|
|||||||
| Interest Cost |
|
|
|||||||||
| Amortization of Prior Service Cost |
|
|
|||||||||
| Recognized Actuarial (Gain) Loss |
(
|
(
|
|||||||||
|
Net Periodic Cost
|
$ |
|
$ |
|
|||||||
Non-service cost components of net pension and post-retirement benefit cost are presented within Interest and Investment Income in the Consolidated Statements of Operations.
NOTE G - ACCUMULATED OTHER COMPREHENSIVE LOSS
Components of Accumulated Other Comprehensive Loss are as follows:
|
In thousands
|
Foreign
Currency Translation |
Pension &
Other Benefits |
Derivatives &
Hedging
|
Equity
Method Investments |
Accumulated
Other Comprehensive Loss |
|||||||||||||||||||||||||||||||||
|
Balance at October 29, 2023
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
||||||||||||||||||||||||||||
| Unrecognized Gains (Losses) | ||||||||||||||||||||||||||||||||||||||
| Gross |
|
|
(
|
|
|
|||||||||||||||||||||||||||||||||
| Tax Effect |
|
|
|
|
|
|||||||||||||||||||||||||||||||||
| Reclassification into Net Earnings | ||||||||||||||||||||||||||||||||||||||
| Gross |
|
|
(1)
|
|
(2)
|
(
|
(3)
|
|
||||||||||||||||||||||||||||||
| Tax Effect |
|
(
|
(
|
|
(
|
|||||||||||||||||||||||||||||||||
| Change Net of Tax |
|
|
|
|
|
|||||||||||||||||||||||||||||||||
|
Balance at January 28, 2024
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
||||||||||||||||||||||||||||
(1) Included in computation of net periodic cost. See Note F - Pension and Other Post-Retirement Benefits for additional information.
(2) Included in Cost of Products Sold and Interest Expense in the Consolidated Statements of Operations. See Note E - Derivatives and Hedging for additional information.
(3) Included in Equity in Earnings of Affiliates in the Consolidated Statements of Operations.
13
NOTE H - FAIR VALUE MEASUREMENTS
Accounting guidance establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of the three levels below based on the inputs used in the valuation.
Level 1:
Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
Observable inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.
Level 3:
Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.
The Company’s financial assets and liabilities carried at fair value on a recurring basis and their level within the fair value hierarchy are presented in the tables below.
| Fair Value Measurements at January 28, 2024 | |||||||||||||||||||||||
|
In thousands
|
Total Fair
Value |
Quoted Prices
in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
|||||||||||||||||||
| Assets at Fair Value | |||||||||||||||||||||||
|
Cash and Cash Equivalents
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Short-term Marketable Securities
(2)
|
|
|
|
|
|||||||||||||||||||
|
Other Trading Securities
(3)
|
|
|
|
|
|||||||||||||||||||
|
|
|
|
(
|
|
|||||||||||||||||||
| Total Assets at Fair Value | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Liabilities at Fair Value | |||||||||||||||||||||||
|
Deferred Compensation
(3)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total Liabilities at Fair Value | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Fair Value Measurements at October 29, 2023 | |||||||||||||||||||||||
|
In thousands
|
Total Fair
Value |
Quoted Prices
in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
|||||||||||||||||||
| Assets at Fair Value | |||||||||||||||||||||||
|
Cash and Cash Equivalents
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Short-term Marketable Securities
(2)
|
|
|
|
|
|||||||||||||||||||
|
Other Trading Securities
(3)
|
|
|
|
|
|||||||||||||||||||
|
|
|
|
(
|
|
|||||||||||||||||||
| Total Assets at Fair Value | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Liabilities at Fair Value | |||||||||||||||||||||||
|
Deferred Compensation
(3)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total Liabilities at Fair Value | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
The following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:
(1) The Company’s cash equivalents considered Level 1 consist primarily of bank deposits, money market funds rated AAA, or other highly liquid investment accounts, and have a maturity date of three months or less. Cash equivalents considered Level 2 are funds holding agency bonds or securities recognized at amortized cost.
(2) The Company holds securities as part of a portfolio maintained to generate investment income and to provide cash for operations of the Company, if necessary. The portfolio is managed by a third party who is responsible for daily trading activities, and all assets within the portfolio are highly liquid. The cash, U.S. government securities, and money market funds rated AAA held by the portfolio are classified as
14
Level 1. The current investment portfolio also includes corporate bonds and other asset backed securities for which there is an active, quoted market. Market prices are obtained from a variety of industry providers, large financial institutions, and other third-party sources to calculate a representative daily market value, and therefore, these securities are classified as Level 2.
(3) The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred compensation plans. The majority of the funds held in the rabbi trust relate to supplemental executive retirement plans and have been invested primarily in fixed income funds managed by a third party. The declared rate on these funds is set based on a formula using the yield of the general account investment portfolio supporting the fund as adjusted for expenses and other charges. The rate is guaranteed for one year at issue and may be reset annually on the policy anniversary, subject to a guaranteed minimum rate. As the value is based on adjusted market rates and the fixed rate is only reset on an annual basis, these funds are classified as Level 2.
Under the Company’s deferred compensation plans, participants can defer certain types of compensation and elect to receive a return based on the changes in fair value of various investment options, which include equity securities, money market accounts, bond funds, or other portfolios for which there is an active quoted market. The Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based on a specified percent of the U.S. Internal Revenue Service (IRS) applicable federal rates. These liabilities are classified as Level 2. The Company maintains funding in the rabbi trust generally mirroring the selections within the deferred compensation plans. These funds are managed by a third-party insurance policy, the values of which represent their cash surrender value based on the fair value of the underlying investments in the account. These policies are classified as Level 2.
The rabbi trust is included in Other Assets and deferred compensation liabilities in Other Long-term Liabilities on the Consolidated Condensed Statements of Financial Position. Securities held by the rabbi trust are classified as trading securities. Unrealized gains and losses associated with these investments are included in the Company's earnings. During the quarter ended January 28, 2024, securities held by the rabbi trust generated gains of $
11.5
million, compared to gains of $
7.0
million for the quarter ended January 29, 2023.
(4) The Company’s commodity derivatives represent futures, swaps, and options contracts used in its hedging or other programs to offset price fluctuations associated with purchases of corn, natural gas, diesel fuel, hogs, and pork, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers. The Company’s futures and options contracts for corn are traded on the Chicago Board of Trade, while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange. These are active markets with quoted prices available, and these contracts are classified as Level 1. The Company holds natural gas, diesel fuel, and pork swap contracts that are over-the-counter instruments classified as Level 2. The value of the natural gas and diesel fuel swap contracts is calculated using quoted prices from the New York Mercantile Exchange, and the value of the pork swap contracts are calculated using a futures implied USDA estimated pork cut-out value. All derivatives are reviewed for potential credit risk and risk of nonperformance. The net balance for commodity derivatives is included in Other Current Assets or Accounts Payable, as appropriate, on the Consolidated Condensed Statements of Financial Position. As of January 28, 2024, the Company has recognized the right to reclaim net cash collateral of $
24.5
million from various counterparties (including cash of $
22.3
million plus $
2.2
million of realized gain). As of October 29, 2023, the Company had recognized the right to reclaim net cash collateral of $
32.2
million from various counterparties (including cash of $
42.6
million less $
10.4
million of realized loss).
The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value. The Company does not carry its long-term debt at fair value on the Consolidated Condensed Statements of Financial Position. The fair value of long-term debt, utilizing discounted cash flows (Level 2), was $
2.8
billion as of January 28, 2024, and $
2.7
billion as of October 29, 2023. See Note J - Long-Term Debt and Other Borrowing Arrangements for additional information.
NOTE I - COMMITMENTS AND CONTINGENCIES
Except as described below, there were no material changes outside the ordinary course of business during the quarter ended January 28, 2024, to the contractual obligations and other commitments last disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 29, 2023.
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, labeling, contracts, antitrust regulations, intellectual property, competition laws, employment practices, or other actions brought by employees, customers, consumers, competitors, or suppliers. The Company establishes accruals for its potential exposure, as appropriate, for claims against the Company when losses become probable and reasonably estimable. However, future developments or settlements are uncertain and may require the Company to change such accruals as proceedings progress. Resolution of any currently known matter, 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.
15
Pork Antitrust Litigation
Beginning in June 2018, a series of putative class action complaints were filed against the Company, as well as several other pork-processing companies and a benchmarking service called Agri Stats in the United States District Court for the District of Minnesota styled
In re Pork Antitrust Litigation
(the Pork Antitrust Civil Litigation). The plaintiffs allege, among other things, that beginning in January 2009, the defendants conspired and combined to fix, raise, maintain, and stabilize the price of pork and pork products—including through the use of Agri Stats—in violation of federal antitrust laws. The complaints on behalf of the putative classes of indirect purchasers also include causes of action under various state unfair competition laws, consumer protection laws, and unjust enrichment common laws. The plaintiffs seek treble damages, injunctive relief, pre-and post-judgment interest, costs, and attorneys’ fees. Since the original filing, certain direct-action plaintiffs have opted out of class treatment and are proceeding with individual direct actions making similar claims, and others may do so in the future. The Company has not recorded any liability for these matters as it does not believe a loss is probable, and it cannot reasonably estimate any reasonably possible loss as the Company believes that it has valid and meritorious defenses against the allegations.
The Offices of the Attorney General in New Mexico and Alaska have filed complaints against the Company and certain of its pork subsidiaries, as well as several other pork processing companies and Agri Stats. The complaints are based on allegations similar to those asserted in the Pork Antitrust Civil Litigation and allege violations of state antitrust, unfair trade practice, and unjust enrichment laws based on allegations of conspiracies to exchange information and manipulate the supply of pork. The Company has not recorded any liability for these matters as it does not believe a loss is probable, and it cannot reasonably estimate any reasonably possible loss as the Company believes that it has valid and meritorious defenses against the allegations.
Turkey Antitrust Litigation
Beginning in December 2019, a series of putative class action complaints were filed against the Company, as well as several other turkey-processing companies and a benchmarking service called Agri Stats, in the U.S. District Court for the Northern District of Illinois styled
In re Turkey Antitrust Litigation
. The plaintiffs allege, among other things, that from at least 2010 to 2017, the defendants conspired and combined to fix, raise, maintain, and stabilize the price of turkey products—including through the use of Agri Stats—in violation of federal antitrust laws. The complaints on behalf of the putative classes of indirect purchasers also include causes of action under various state unfair competition laws, consumer protection laws, and unjust enrichment common laws. The plaintiffs seek treble damages, injunctive relief, pre-and post-judgment interest, costs, and attorneys’ fees. Since the original filing, certain direct-action plaintiffs have opted out of class treatment and are proceeding with individual direct actions making similar claims, and others may do so in the future. The Company has not recorded any liability for these matters as it does not believe a loss is probable, and it cannot reasonably estimate any reasonably possible loss as the Company believes that it has valid and meritorious defenses against the allegations.
Poultry Wages Antitrust Litigation
In December 2019, a putative class of non-supervisory production and maintenance employees at poultry-processing plants in the continental United States filed an amended consolidated class action complaint against the Company and various other poultry processing companies in the United States District Court for the District of Maryland styled
Jien, et al. v. Perdue Farms, Inc., et al
. The plaintiffs allege that since 2009, the defendants directly and through a wage survey and benchmarking service exchanged information regarding compensation in an effort to depress and fix wages and benefits for employees at poultry-processing plants, feed mills, and hatcheries in violation of federal antitrust laws. The plaintiffs seek, among other things, treble monetary damages, punitive damages, restitution, and pre-and post-judgment interest, as well as declaratory and injunctive relief. In July 2022, the Court partially granted the Company’s motion to dismiss, and dismissed plaintiffs’
per se
wage-fixing
claim as to the Company. The Company has not recorded any liability for this matter as it does not believe a loss is probable, and it cannot reasonably estimate any reasonably possible loss as the Company believes that it has valid and meritorious defenses against the allegations.
Red Meat Wages Antitrust Litigation
In November 2022, a putative class of non-supervisory production and maintenance employees at “red meat” processing plants in the continental United States filed a class action complaint against the Company and various other beef- and pork-processing companies in the United States District Court for the District of Colorado styled
Brown, et al. v. JBS USA Food Co., et al
. The plaintiffs allege that since 2014, the defendants directly and through a wage survey and benchmarking service exchanged information regarding compensation in an effort to depress and fix wages and benefits for employees at beef- and pork-processing plants in violation of federal antitrust laws. The plaintiffs seek, among other things, treble monetary damages, punitive damages, restitution, and pre-and post-judgment interest, as well as declaratory and injunctive relief. The Company has not recorded any liability for this matter as it does not believe a loss is probable, and it cannot reasonably estimate any reasonably possible loss as the Company believes that it has valid and meritorious defenses against the allegations.
16
NOTE J - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term Debt consists of:
|
In thousands
|
January 28, 2024 | October 29, 2023 | |||||||||
|
Senior Unsecured Notes, with Interest at
Interest Due Semi-annually through June 2051 Maturity Date
|
$ |
|
$ |
|
|||||||
|
Senior Unsecured Notes, with Interest at
Interest Due Semi-annually through June 2030 Maturity Date
|
|
|
|||||||||
|
Senior Unsecured Notes, with Interest at
Interest Due Semi-annually through June 2028 Maturity Date
|
|
|
|||||||||
|
Senior Unsecured Notes, with Interest at
Interest Due Semi-annually through June 2024 Maturity Date
|
|
|
|||||||||
| Unamortized Discount on Senior Notes |
(
|
(
|
|||||||||
| Unamortized Debt Issuance Costs |
(
|
(
|
|||||||||
|
Interest Rate Swap Liabilities
(1)
|
(
|
(
|
|||||||||
| Finance Lease Liabilities |
|
|
|||||||||
| Other Financing Arrangements |
|
|
|||||||||
| Total |
|
|
|||||||||
| Less: Current Maturities of Long-term Debt |
|
|
|||||||||
| Long-term Debt Less Current Maturities | $ |
|
$ |
|
|||||||
(1) See Note E - Derivatives and Hedging for additional information.
Senior Unsecured Notes:
On June 3, 2021, the Company issued $
950.0
million aggregate principal amount of its
0.650
% notes due 2024 (2024 Notes), $
750.0
million aggregate principal amount of its
1.700
% notes due 2028 (2028 Notes), and $
600.0
million aggregate principal amount of its
3.050
% notes due 2051 (2051 Notes). The 2024 Notes may be redeemed in whole or in part
one year
after their issuance without penalty for early partial payments or full redemption. The 2028 Notes and 2051 Notes may be redeemed in whole or in part at any time at the applicable redemption price. Interest will accrue per annum at the stated rates with interest on the notes being paid semi-annually in arrears on June 3 and December 3 of each year, commencing December 3, 2021. Interest rate risk was hedged utilizing interest rate locks on the 2028 Notes and 2051 Notes. The Company lifted the hedges in conjunction with the issuance of these notes. See Note E - Derivatives and Hedging for additional information. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to
101
% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
On June 11, 2020, the Company issued senior notes in an aggregate principal amount of $
1.0
billion due 2030. The notes bear interest at a fixed rate of
1.800
% per annum, with interest paid semi-annually in arrears on June 11 and December 11 of each year, commencing December 11, 2020. The notes may be redeemed in whole or in part at any time at the applicable redemption price set forth in the prospectus supplement. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to
101
% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
Subsequent to the end of the first quarter of fiscal 2024, the Company's Board of Directors approved up to $
500
million of new long-term financing which is intended, along with cash on hand, to pay the 2024 Notes upon maturity.
Unsecured Revolving Credit Facility:
On May 6, 2021, the Company entered into an unsecured revolving credit agreement with Wells Fargo Bank, National Association as administrative agent, swingline lender and issuing lender, U.S. Bank National Association, JPMorgan Chase Bank, N.A. and BofA Securities, Inc. as syndication agents and the lenders party thereto. The revolving credit agreement provides for an unsecured revolving credit facility with an aggregate principal commitment amount at any time outstanding of up to $
750.0
million with an uncommitted increase option of an additional $
375.0
million upon the satisfaction of certain conditions.
On April 17, 2023, the Company entered into a first amendment (Amendment) to the Company’s $
750.0
million revolving credit agreement. The Amendment provides for, among other things (i) the replacement of London Interbank Offered Rate (LIBOR) with Term Secured Overnight Financing Rate (SOFR) and Daily Simple Singapore Overnight Rate Average (SORA) for the Eurocurrency Rate for U.S. Dollars and Singapore Dollars, including applicable credit spread adjustments and relevant SOFR benchmark provisions, (ii) permitting
two
one-year
extension options to be exercised at any anniversary, (iii) removing the change in debt ratings notice requirement, (iv) shortening the notice period requirements for Base Rate Loans to allow for same day notice, and (v) increasing the number of permitted interest periods from
8
to
15
.
The unsecured revolving line of credit bears interest, at the Company’s election, at either a Base Rate plus margin of
0.0
% to
0.150
% or the Adjusted Term SOFR, Adjusted Daily Simple Risk-Free Rate (RFR) or Eurocurrency Rate plus margin of
0.575
%
17
to
1.150
% and a variable fee of
0.050
% to
0.100
% is paid for the availability of this credit line. Extensions of credit under the facility may be made in the form of revolving loans, swingline loans, and letters of credit. The lending commitments under the agreement are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding. As of January 28, 2024, and October 29, 2023, the Company had
no
outstanding draws from this facility.
Debt Covenants:
The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of January 28, 2024, the Company was in compliance with all covenants.
NOTE K - INCOME TAXES
The Company’s tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter. The effects of tax legislation are recognized in the period in which the law is enacted. The deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years the related temporary differences are anticipated to reverse.
The Company’s effective tax rate for the quarter ended January 28, 2024, was
23.4
% compared to
22.6
% for the corresponding period a year ago. The Company benefited from the impact of certain discrete items and higher federal deductions in the prior year.
Unrecognized tax benefits, including interest and penalties, are recorded in Other Long-term Liabilities. If recognized as of January 28, 2024, these benefits would impact the Company’s effective tax rate by $
17.7
million compared to $
18.2
million as of January 29, 2023. The Company includes accrued interest and penalties related to uncertain tax positions in Provision for Income Taxes, with immaterial losses included during the quarter ended January 28, 2024, and January 29, 2023. The amount of accrued interest and penalties associated with unrecognized tax benefits was $
2.7
million at January 28, 2024, and $
2.6
million at January 29, 2023.
The Company is regularly audited by federal and state taxing authorities. The IRS concluded its examination of fiscal 2021 in the second quarter of fiscal 2023. The IRS placed the Company in the Bridge phase of the Compliance Assurance Process (CAP) for fiscal years 2020 and 2023. In this phase, the IRS will not accept any disclosures, conduct any reviews, or provide any assurances. The Company has elected to participate in CAP for fiscal years through 2025. The objective of CAP is to contemporaneously work with the IRS to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return. The Company may elect to continue participating in CAP for future tax years; the Company may withdraw from the program at any time.
The Company is in various stages of audit by several state taxing authorities on a variety of fiscal years, as far back as 2015. While it is reasonably possible that one or more of these audits may be completed within the next 12 months and the related unrecognized tax benefits may change based on the status of the examinations, it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.
NOTE L - EARNINGS PER SHARE DATA
The reported net earnings attributable to the Company were used when computing basic and diluted earnings per share. Diluted earnings per share was calculated using the treasury stock method.
The shares used as the denominator for those computations are as follows:
| Quarter Ended | |||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | |||||||||
|
Basic Weighted-average Shares Outstanding
|
|
|
|||||||||
| Dilutive Potential Common Shares |
|
|
|||||||||
|
Diluted Weighted-average Shares Outstanding
|
|
|
|||||||||
| Antidilutive Potential Common Shares |
|
|
|||||||||
18
NOTE M - SEGMENT REPORTING
The Company develops, processes, and distributes a wide array of food products in a variety of markets. The Company reports its results in the following
three
segments: Retail, Foodservice, and International, which is consistent with how the Company's chief operating decision maker (CODM) assesses performance and allocates resources.
The Retail segment consists primarily of the processing, marketing, and sale of food products sold predominantly in the retail market. This segment also includes the results from the Company’s MegaMex Foods, LLC joint venture.
The Foodservice segment consists primarily of the processing, marketing, and sale of food and nutritional products for foodservice, convenience store, and commercial customers.
The International segment processes, markets, and sells Company products internationally. This segment also includes the results from the Company’s international joint ventures, equity method investments, and royalty arrangements.
Intersegment sales are eliminated in consolidation and are not reviewed when evaluating segment performance. The Company does not allocate deferred compensation, expenses associated with the transformation and modernization initiative, investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and expenses at the corporate level. Equity in Earnings of Affiliates is included in segment profit; however, earnings attributable to the Company’s corporate venturing investments and noncontrolling interests are excluded. These items are included below as Net Unallocated Expense and Noncontrolling Interest when reconciling to Earnings Before Income Taxes.
Financial measures for each of the Company’s reportable segments and reconciliation to consolidated Earnings Before Income Taxes 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 profit and other financial information shown below.
| Quarter Ended | |||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | |||||||||
| Net Sales | |||||||||||
| Retail | $ |
|
$ |
|
|||||||
| Foodservice |
|
|
|||||||||
| International |
|
|
|||||||||
| Total Net Sales | $ |
|
$ |
|
|||||||
| Segment Profit | |||||||||||
| Retail | $ |
|
$ |
|
|||||||
| Foodservice |
|
|
|||||||||
| International |
|
|
|||||||||
| Total Segment Profit |
|
|
|||||||||
| Net Unallocated Expense |
|
|
|||||||||
| Noncontrolling Interest |
(
|
(
|
|||||||||
| Earnings Before Income Taxes | $ |
|
$ |
|
|||||||
The Company’s products primarily consist of meat and other food products.
Total revenue contributed by classes of similar products are:
| Quarter Ended | |||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | |||||||||
| Perishable | $ |
|
$ |
|
|||||||
| Shelf-stable |
|
|
|||||||||
| Total Net Sales | $ |
|
$ |
|
|||||||
19
Perishable includes fresh meats, frozen items, refrigerated meal solutions, bacon, sausages, hams, guacamole, and other items that require refrigeration. Shelf-stable includes canned luncheon meats, nut butters, snack nuts, chili, shelf-stable microwaveable meals, hash, stews, tortillas, salsas, tortilla chips, nutritional food supplements, and other items that do not require refrigeration.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
The Company is a global manufacturer and marketer of branded food products. The Company’s three reportable segments are described in Note M - Segment Reporting in the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
The Company reported diluted net earnings per share of $0.40 for the first quarter of fiscal 2024, flat compared to last year. Adjusted diluted net earnings per share
(1)
was $0.41. Significant factors impacting the quarter were:
•
Net sales for the first quarter increased 1 percent. The benefit from higher volumes in each segment and strong results in Foodservice more than offset lower sales in the Retail and International segments.
•
Segment profit for the first quarter increased 3 percent, driven primarily by improved results in the Foodservice segment.
•
Earnings before income taxes for the first quarter increased 2 percent, as the benefit from higher net sales, lower logistics expenses, and higher interest and investment income more than offset higher selling, general, and administrative expenses. Adjusted earnings before income taxes
(1)
, excluding the impact of expenses related to the Company's transformation and modernization initiative, increased 5 percent compared to last year.
•
Foodservice segment profit increased primarily due to higher sales and favorable logistics expenses.
•
International segment profit increased due to the inclusion of our investment in Indonesia and significantly higher results from our partnership in the Philippines, which more than offset the impact from lower branded export demand and lower sales in China.
•
Retail segment profit declined, as the benefit from higher sales in the snacking and entertaining vertical and lower logistics expenses was more than offset by the impact from lower commodity turkey pricing and lower equity in earnings from MegaMex Foods, LLC (MegaMex Foods).
•
Year-to-date cash flow from operations was $404 million, up 98 percent compared to the prior year.
Consolidated Results
Volume, Net Sales, Earnings, and Diluted Earnings Per Share
| Quarter Ended | |||||||||||||||||
|
In thousands, except per share amounts
|
January 28, 2024 | January 29, 2023 |
%
Change |
||||||||||||||
| Volume (lbs.) | 1,101,554 | 1,062,211 | 3.7 | ||||||||||||||
| Net Sales | $ | 2,996,911 | $ | 2,970,992 | 0.9 | ||||||||||||
| Earnings Before Income Taxes | 285,547 | 281,201 | 1.5 | ||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | 218,863 | 217,719 | 0.5 | ||||||||||||||
| Diluted Earnings Per Share | 0.40 | 0.40 | — | ||||||||||||||
|
Adjusted Diluted Earnings Per Share
(1)
|
0.41 | 0.40 | 2.5 | ||||||||||||||
(1) See the “Non-GAAP Financial Measures” section below for a description of the Company's use of measures not defined by United States Generally Accepted Accounting Principles (GAAP).
Net Sales
Net sales for the first quarter increased, led by the benefit from higher volumes in each segment and strong growth in Foodservice, more than offsetting lower sales in the Retail and International segments.
In Retail, net sales increased in the global flavors and snacking and entertaining verticals, and declined in the value-added meats, convenient meals and proteins, and bacon verticals. Demand was strong for many products, including
Skippy
®
peanut
20
butter,
Planters
®
snack nuts,
Wholly
®
dips,
Herdez
®
salsas and sauces,
La Victoria
®
salsas,
Jennie-O
®
ground turkey,
Hormel
®
Square Table™
entrees and
Hormel
®
pepperoni, which each delivered volume and net sales improvement during the quarter. Foodservice net sales growth was broad-based, led by the Heritage Premium meats business and growth from
Hormel
®
Bacon 1™
precooked bacon, premium prepared proteins,
Jennie-O
®
branded turkey items, and pepperoni. International net sales declined due to lower branded export sales and lower sales in China.
Cost of Products Sold
| Quarter Ended | |||||||||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 |
%
Change |
||||||||||||||
| Cost of Products Sold | $ | 2,488,178 | $ | 2,475,043 | 0.5 | ||||||||||||
Total cost of products sold for the first quarter of fiscal 2024 increased due primarily to higher sales. On a per pound basis, cost of products sold decreased 3 percent, consistent with the Company's assumption for cost moderation in fiscal 2024.
Costs are expected to continue to moderate relative to the high levels of inflation the business has absorbed since the beginning of fiscal 2021. Raw material input costs for pork, beef, and feed are anticipated to remain volatile and above historical levels. The Company expects its transformation and modernization initiative to deliver cost savings throughout fiscal 2024, targeting packaging, logistics, and production costs.
Gross Profit
| Quarter Ended | |||||||||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 |
%
Change |
||||||||||||||
| Gross Profit | $ | 508,733 | $ | 495,949 | 2.6 | ||||||||||||
| Percent of Net Sales | 17.0 | % | 16.7 | % | |||||||||||||
Gross profit as a percent of net sales for the first quarter of fiscal 2024 increased due to improvement in the Foodservice and Retail segments, more than offsetting a decline in International. Both the Foodservice and Retail segments benefited from lower logistics expenses on a volume basis. Lower logistics expenses are due to lower industrywide freight rates and savings realized as part of our transformation and modernization initiative.
Looking ahead to the second quarter of fiscal 2024, the Company expects gross profit as a percent of net sales to be comparable to last year. The Company expects gross profit as a percent of net sales to increase for the International segment but decline for the Retail and Foodservice segments.
Selling, General, and Administrative (SG&A)
| Quarter Ended | |||||||||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 |
%
Change |
||||||||||||||
| SG&A | $ | 240,386 | $ | 222,056 | 8.3 | ||||||||||||
| Percent of Net Sales | 8.0 | % | 7.5 | % | |||||||||||||
|
Adjusted SG&A
(1)
|
$ | 231,671 | $ | 222,056 | 4.3 | ||||||||||||
|
Adjusted Percent of Net Sales
(1)
|
7.7 | % | 7.5 | % | |||||||||||||
(1) See the “Non-GAAP Financial Measures” section below for a description of the Company's use of measures not defined by GAAP.
For the first quarter of fiscal 2024, SG&A and SG&A as a percent of net sales increased. This was due to higher employee and external expenses, driven in part by the Company's transformation and modernization initiative. Adjusted SG&A as a percent of net sales
(1)
increased
marginally compared to last year.
Advertising investments in the first quarter were $44 million, a decrease of 5 percent compared to last year. The Company expects full-year advertising expense to increase compared to the prior year.
21
Equity in Earnings of Affiliates
| Quarter Ended | |||||||||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 |
%
Change |
||||||||||||||
| Equity in Earnings of Affiliates | $ | 16,091 | $ | 15,559 | 3.4 | ||||||||||||
Equity in earnings of affiliates for the first quarter of fiscal 2024 increased due to the inclusion of our investment in Indonesia and significantly higher results from our partnership in the Philippines, offsetting lower results for MegaMex Foods.
Interest and Investment Income and Interest Expense
| Quarter Ended | |||||||||||||||||
| In thousands | January 28, 2024 | January 29, 2023 |
%
Change |
||||||||||||||
| Interest and Investment Income | $ | 19,434 | $ | 10,096 | 92.5 | ||||||||||||
| Interest Expense | 18,326 | 18,347 | (0.1) | ||||||||||||||
Interest and investment income for the first quarter of fiscal 2024 increased primarily due to improved performance from the rabbi trust and higher interest income.
Effective Tax Rate
| Quarter Ended | |||||||||||
| January 28, 2024 | January 29, 2023 | ||||||||||
| Effective Tax Rate | 23.4 | % | 22.6 | % | |||||||
The higher effective tax rate in the first quarter of fiscal 2024 is primarily due to the impact of certain discrete items and higher federal deductions last year. The effective tax rate for fiscal 2024 is expected to be between 21.0% and 23.0%. For further information, refer to Note K - Income Taxes of the Notes to the Consolidated Financial Statements.
Segment Results
Net sales and segment profit for each of the Company’s reportable segments are set forth below. The Company does not allocate deferred compensation, expenses associated with the transformation and modernization initiative, investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and expenses at the corporate level. Equity in Earnings of Affiliates is included in segment profit; however, earnings attributable to the Company’s corporate venturing investments and noncontrolling interests are excluded. These items are included below as Net Unallocated Expense and Noncontrolling Interest when reconciling to Earnings Before Income Taxes.
22
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 profit and other financial information shown below.
| Quarter Ended | |||||||||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | % Change | ||||||||||||||
| Net Sales | |||||||||||||||||
| Retail | $ | 1,911,272 | $ | 1,957,797 | (2.4) | ||||||||||||
| Foodservice | 913,087 | 834,750 | 9.4 | ||||||||||||||
| International | 172,552 | 178,445 | (3.3) | ||||||||||||||
| Total | $ | 2,996,911 | $ | 2,970,992 | 0.9 | ||||||||||||
| Segment Profit | |||||||||||||||||
| Retail | $ | 149,505 | $ | 154,677 | (3.3) | ||||||||||||
| Foodservice | 150,164 | 136,442 | 10.1 | ||||||||||||||
| International | 20,031 | 19,905 | 0.6 | ||||||||||||||
|
Total Segment Profit
|
319,700 | 311,025 | 2.8 | ||||||||||||||
|
Net Unallocated Expense
|
34,020 | 29,755 | 14.3 | ||||||||||||||
|
Noncontrolling Interest
|
(134) | (69) | (95.4) | ||||||||||||||
|
Earnings Before Income Taxes
|
$ | 285,547 | $ | 281,201 | 1.5 | ||||||||||||
Retail
| Quarter Ended | |||||||||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 |
%
Change |
||||||||||||||
| Volume (lbs.) | 765,412 | 752,887 | 1.7 | ||||||||||||||
| Net Sales | $ | 1,911,272 | $ | 1,957,797 | (2.4) | ||||||||||||
| Segment Profit | 149,505 | 154,677 | (3.3) | ||||||||||||||
For the first quarter of fiscal 2024, volume growth was driven by the value-added meats, global flavors, emerging brands and bacon verticals. Net sales declined primarily due to lower contract manufacturing volume and lower commodity turkey pricing. Demand was strong for many products, including
Skippy
®
peanut butter,
Planters
®
snack nuts,
Wholly
®
dips,
Herdez
®
salsas and sauces,
La Victoria
®
salsas,
Jennie-O
®
ground turkey,
Hormel
®
Square Table™
entrees and
Hormel
®
pepperoni, which each delivered volume and net sales improvement during the quarter.
Segment profit declined, as the benefit from higher sales in the snacking and entertaining vertical and lower logistics expenses was more than offset by the impact from lower commodity turkey pricing and lower equity in earnings from MegaMex Foods.
Looking to the second quarter of fiscal 2024, the Retail segment expects lower segment profit compared to last year. Segment profit is expected to be pressured by lower pricing in whole bird turkey markets and higher SG&A. Risks to this outlook include a further slowing in consumer demand, a higher-than-expected impact from elasticities as a result of pricing actions, and greater-than-expected pricing headwinds in the whole bird turkey business.
Foodservice
| Quarter Ended | |||||||||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 |
%
Change |
||||||||||||||
| Volume (lbs.) | 256,007 | 237,087 | 8.0 | ||||||||||||||
| Net Sales | $ | 913,087 | $ | 834,750 | 9.4 | ||||||||||||
| Segment Profit | 150,164 | 136,442 | 10.1 | ||||||||||||||
23
Volume and net sales growth for the first quarter of fiscal 2024 was broad-based and across numerous categories, led by
Jennie-O
®
turkey and double-digit gains for products such as
Hormel
®
Bacon 1™
cooked bacon, pepperoni,
Austin Blues
®
smoked meats and
Café H
®
globally inspired proteins. Additionally, the Company's Heritage Premium Meats group drove strong volume and double-digit net sales improvement for the quarter.
Segment profit increased primarily due to higher sales and favorable logistics expenses.
For the second quarter, the Foodservice segment expects higher segment profit compared to the prior year. Continued volume growth is expected to be offset by lower margins and higher SG&A compared to last year. Risks to this outlook include a softening of foodservice industry demand and higher-than-expected operating costs.
International
| Quarter Ended | |||||||||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 |
%
Change |
||||||||||||||
| Volume (lbs.) | 80,135 | 72,237 | 10.9 | ||||||||||||||
| Net Sales | $ | 172,552 | $ | 178,445 | (3.3) | ||||||||||||
| Segment Profit | 20,031 | 19,905 | 0.6 | ||||||||||||||
During the first quarter of fiscal 2024, higher commodity exports led to volume gains compared to last year. Net sales declined due to lower branded export sales and lower sales in China. Also in China, foodservice results improved as we lapped COVID-related disruption last year. This benefit was more than offset by continued weakness in the retail channel.
Segment profit increased for the quarter due to the inclusion of our investment in Indonesia and significantly higher results from our partnership in the Philippines, which offset the impact from lower branded export demand and lower sales in China.
In the second quarter of fiscal 2024, the International segment anticipates segment profit to increase significantly compared to last year. This recovery is expected to be driven by improvement across the business, including from its branded exports, partnership in the Philippines, and multinational business in Brazil. The Company also expects a benefit from the inclusion of its investment in Indonesia. Risks to this outlook include continued softness in China and commodity headwinds impacting the export business.
Unallocated Income and Expense
| Quarter Ended | |||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | |||||||||
| Net Unallocated Expense | $ | 34,020 | $ | 29,755 | |||||||
| Noncontrolling Interest | (134) | (69) | |||||||||
For the first quarter of fiscal 2024, net unallocated expense increased driven by transformation and modernization initiative costs and higher employee-related expenses, partially offset by favorable rabbi trust performance and higher interest income.
Related Party Transactions
There has been no material change in the information regarding Related Party Transactions as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 29, 2023.
(1)
Non-GAAP Financial Measures
This filing includes measures of financial performance that are not defined by GAAP. The Company utilizes these non-GAAP measures to understand and evaluate operating performance on a consistent basis. These measures may also be used when making decisions regarding resource allocation and in determining incentive compensation. The Company believes these non-GAAP financial measures provide useful information to investors because they facilitate year-over-year comparison and comparison with peer companies as well as provide additional information about trends in the Company’s operations. Non-GAAP measures are not intended to be a substitute for GAAP measures in analyzing financial performance. These non-GAAP
24
measures are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.
In the fourth quarter of fiscal 2023, the Company announced a multi-year transformation and modernization initiative. The strategic investments in this initiative are expected to cease at the end of the investment period, are not expected to recur in the foreseeable future and are not considered representative of the Company's underlying operating performance. The Company does not believe such costs to be reflective of the ongoing operating cost structure; therefore, the Company is excluding certain discrete costs related to the transformation and modernization initiative from the non-GAAP financial measures. Expenses for this initiative are comprised primarily of non-recurring charges for consulting fees, which are reflected in SG&A, and charges related to portfolio optimization, which are reflected in Cost of Products Sold. This presentation is consistent with the information the Company’s management is using to evaluate performance and allocate resources and facilitates comparison of operating performance across multiple periods.
Adjusted cost of products sold, adjusted SG&A, adjusted operating income, adjusted earnings before income taxes, adjusted net earnings attributable to Hormel Foods Corporation, adjusted diluted net earnings per share, adjusted SG&A as a percent of net sales, and adjusted operating margin exclude certain costs associated with the transformation and modernization initiative. The tax impact was calculated using the effective tax rate for the quarter in which the expense was incurred.
The table below shows the calculations to reconcile from the GAAP measures to the non-GAAP financial measures.
| Quarter Ended | |||||||||||
|
In thousands, except per share amounts
|
January 28, 2024 | January 29, 2023 | |||||||||
| Cost of Products Sold (GAAP) | $ | 2,488,178 | $ | 2,475,043 | |||||||
| Transformation and Modernization Initiative | (1,598) | — | |||||||||
| Adjusted Cost of Products Sold (Non-GAAP) | $ | 2,486,580 | $ | 2,475,043 | |||||||
|
SG&A (GAAP)
|
$ | 240,386 | $ | 222,056 | |||||||
| Transformation and Modernization Initiative | (8,715) | — | |||||||||
|
Adjusted SG&A (Non-GAAP)
|
$ | 231,671 | $ | 222,056 | |||||||
| Operating Income (GAAP) | $ | 284,438 | $ | 289,452 | |||||||
| Transformation and Modernization Initiative | 10,313 | — | |||||||||
| Adjusted Operating Income (Non-GAAP) | $ | 294,751 | $ | 289,452 | |||||||
| Earnings Before Income Taxes (GAAP) | $ | 285,547 | $ | 281,201 | |||||||
| Transformation and Modernization Initiative | 10,313 | — | |||||||||
|
Adjusted Earnings Before Income Taxes (Non-GAAP)
|
$ | 295,859 | $ | 281,201 | |||||||
|
Net Earnings Attributable to Hormel Foods Corporation (GAAP)
|
$ | 218,863 | $ | 217,719 | |||||||
| Transformation and Modernization Initiative | 7,900 | — | |||||||||
|
Adjusted Net Earnings Attributable to Hormel Foods Corporation (Non-GAAP)
|
$ | 226,763 | $ | 217,719 | |||||||
|
Diluted Net Earnings Per Share (GAAP)
|
$ | 0.40 | $ | 0.40 | |||||||
| Transformation and Modernization Initiative | 0.01 | — | |||||||||
|
Adjusted Diluted Net Earnings Per Share (Non-GAAP)
|
$ | 0.41 | $ | 0.40 | |||||||
|
SG&A as a Percent of Net Sales (GAAP)
|
8.0 | % | 7.5 | % | |||||||
| Transformation and Modernization Initiative | (0.3) | — | |||||||||
|
Adjusted SG&A as a Percent of Net Sales (Non-GAAP)
|
7.7 | % | 7.5 | % | |||||||
|
Operating Margin (GAAP)
|
9.5 | % | 9.7 | % | |||||||
| Transformation and Modernization Initiative | 0.3 | — | |||||||||
|
Adjusted Operating Margin (Non-GAAP)
|
9.8 | % | 9.7 | % | |||||||
25
LIQUIDITY AND CAPITAL RESOURCES
When assessing liquidity and capital resources, the Company evaluates cash and cash equivalents, short-term and long-term investments, income from operations, and borrowing capacity.
Cash Flow Highlights
| Quarter Ended | |||||||||||
|
In thousands
|
January 28, 2024 | January 29, 2023 | |||||||||
| Cash and Cash Equivalents | $ | 963,212 | $ | 599,789 | |||||||
| Cash Provided by (Used in) Operating Activities | 403,980 | 203,629 | |||||||||
| Cash Provided by (Used in) Investing Activities | (48,154) | (451,469) | |||||||||
| Cash Provided by (Used in) Financing Activities | (133,365) | (141,570) | |||||||||
| Increase (Decrease) in Cash and Cash Equivalents | 226,680 | (382,318) | |||||||||
Cash and cash equivalents increased $227 million for the first quarter of fiscal 2024, as cash from operating activities was sufficient to cover dividend payments and capital expenditures. The purchase of a minority interest in PT Garudafood Putra Putri Jaya Tbk (Garudafood) was the primary driver of the decline in cash and cash equivalents in the prior year. Additional details related to significant drivers of cash flows are provided below.
Cash Provided by (Used in) Operating Activities
•
Cash flows from operating activities were largely impacted by changes in operating assets and liabilities.
–
Inventory decreased $104 million for the first quarter of fiscal 2024 compared to an increase of $12 million in the prior year. The decrease in inventory during fiscal 2024 was due to improvement in the Company's supply chain and the negative impact of Highly Pathogenic Avian Influenza on turkey operations. The increase in inventory during fiscal 2023 was due to production outpacing sales.
–
Accounts receivable decreased $68 million and $80 million during the first quarter of fiscal 2024 and fiscal 2023, respectively primarily due to lower sales.
–
Accounts payable and accrued expenses decreased $132 million and $171 million in the first quarter of fiscal 2024 and fiscal 2023, respectively, due to annual incentive payments, feed and livestock deferral payments, and general timing of payments.
Cash Provided by (Used in) Investing Activities
•
Capital expenditures were $47 million and $37 million in the first quarter of fiscal 2024, and fiscal 2023, respectively. The largest spend in the first quarter of fiscal 2024 was for the transition from harvest to value-added capacity at our facility in Barron, Wisconsin and wastewater infrastructure to support our operations in Austin, Minnesota. The largest spend in the first quarter of fiscal 2023 was related to capacity expansion for pepperoni and the
SPAM
®
family of products.
•
During the first quarter of fiscal 2023, the Company purchased a minority interest in Garudafood for $411 million.
Cash Provided by (Used in) Financing Activities
•
Cash dividends paid to the Company’s shareholders are an ongoing financing activity for the Company with payments totaling $150 million during the first quarter of fiscal 2024, compared to $142 million in the first quarter of fiscal 2023.
•
Proceeds from the exercise of stock options were $19 million in the first quarter of fiscal 2024, compared to $3 million in the first quarter of fiscal 2023. The increase in proceeds was due to more options exercised during fiscal 2024 compared to fiscal 2023.
Sources and Uses of Cash
The Company’s balanced business model, with diversification across raw material inputs, channels, and categories, provides stability in ever-changing economic environments. The Company maintains a disciplined capital allocation strategy by applying a waterfall approach, which focuses first on required uses of cash, such as capital expenditures to maintain facilities, dividend returns to investors, mandatory debt repayments, and pension obligations. Next, the Company looks to strategic items in support of growth initiatives, such as capital projects, acquisitions, additional dividend increases, and working capital investments. Finally, the Company evaluates opportunistic uses, including incremental debt repayment and share repurchases.
The Company believes its anticipated income from operations, cash on hand, borrowing capacity under the current credit facility, and access to capital markets will be adequate to meet all short-term and long-term commitments. The Company continues to look for opportunities to make investments and acquisitions that align with its strategic priorities. The Company's ability to leverage its balance sheet through the issuance of debt provides the flexibility to pursue strategic opportunities which may require additional funding.
26
Dividend Payments
The Company remains committed to providing returns to investors through cash dividends. The Company has paid 382 consecutive quarterly dividends since becoming a public company in 1928. The annual dividend rate for fiscal 2024 increased to $1.13 per share, representing the 58th consecutive annual dividend increase.
Capital Expenditures
Capital expenditures are first allocated to required maintenance and then growth opportunities based on the needs of the business. Capital expenditures supporting growth opportunities in fiscal 2024 are expected to focus on projects related to value-added capacity, infrastructure, and new technology. Capital expenditures for fiscal 2024 are estimated to be $280 million.
Debt
As of January 28, 2024, the Company’s outstanding debt included $3.3 billion of fixed rate unsecured senior notes due in fiscal 2024, 2028, 2030, and 2051 with interest payable semi-annually. During the first quarter of fiscal 2024, the Company made $28 million of interest payments and expects to make an additional $28 million of interest payments during fiscal 2024 on these notes. On January 30, 2024, the Company's Board of Directors approved up to $500 million of new long-term financing which is intended, along with cash on hand, to pay the $950 million notes due June 2024 upon maturity. See Note J - Long-Term Debt and Other Borrowing Arrangements of the Notes to the Consolidated Financial Statements for additional information.
Borrowing Capacity
As a source of short-term financing, the Company maintains a $750 million unsecured revolving credit facility. The maximum commitment under this credit facility may be further increased by $375 million, generally by mutual agreement of the lenders and the Company, subject to certain customary conditions. Funds drawn from this facility may be used by the Company to refinance existing debt, for working capital or other general corporate purposes, and for funding acquisitions. The lending commitments under the facility are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding. As of January 28, 2024, the Company had no outstanding draws from this facility.
Debt Covenants
The Company’s debt and credit agreements contain customary terms and conditions including representations, warranties, and covenants. These debt covenants limit the ability of the Company to, among other things, incur debt for borrowed money secured by certain liens, engage in certain sale and leaseback transactions, and require maintenance of certain consolidated leverage ratios. As of January 28, 2024, the Company was in compliance with all covenants and expects to maintain compliance in the future.
Cash Held by International Subsidiaries
As of January 28, 2024, the Company had $190 million of cash and cash equivalents held by international subsidiaries. The Company maintains all undistributed earnings as permanently reinvested. The Company evaluates the balance and uses of cash held internationally based on the needs of the business.
Share Repurchases
The Company is authorized to repurchase 3,677,494 shares of common stock as part of an existing plan approved by the Company’s Board of Directors. During the first quarter of fiscal 2024, the Company did not repurchase any shares of stock. The Company continues to evaluate share repurchases as part of its capital allocation strategy.
Commitments
There have been no material changes to the information regarding the Company’s future contractual financial obligations previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 29, 2023.
TRADEMARKS
References to the Company’s brands or products in italics within this report represent valuable trademarks owned or licensed by Hormel Foods, LLC or other subsidiaries of Hormel Foods Corporation.
CRITICAL ACCOUNTING ESTIMATES
Management's 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 GAAP. The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. The significant accounting policies used in preparing these Consolidated Financial Statements are consistent with those described in Note A - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Form 10-K.
27
Critical accounting estimates are defined as those reflective of significant judgments, estimates, and uncertainties, which may result in materially different results under different assumptions and conditions. There have been no material changes in the Company’s Critical Accounting Estimates as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 29, 2023.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking” information within the meaning of the federal securities laws. The “forward-looking” information may include statements concerning the Company’s outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts.
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. The Company is filing this cautionary statement in connection with the Reform Act. When used in this Quarterly Report on Form 10-Q, the Company’s Annual Report to Stockholders, other filings by the Company with the Securities and Exchange Commission, the Company’s press releases, and oral statements made by the Company’s representatives, the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify forward-looking statements within the meaning of the Reform Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected.
In connection with the “safe harbor” provisions of the Reform Act, the Company is identifying risk factors that could affect financial performance and cause the Company’s actual results to differ materially from opinions or statements expressed with respect to future periods. The discussions of risk factors in the Company's most recent Annual Report on Form 10-K and in Part II, Item 1A of this Quarterly Report on Form 10-Q contain certain cautionary statements regarding the Company’s business, which should be considered by investors and others. Such risk factors should be considered in conjunction with any discussions of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the Company.
In making these statements, the Company is not undertaking, and specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the Company’s business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the Company has attempted to list comprehensively these important cautionary risk factors, the Company wishes to caution investors and others that other factors may in the future prove to be important in affecting the Company’s business or results of operations.
The Company cautions readers not to place undue reliance on forward-looking statements, which represent current views as of the date made. Forward-looking statements are inherently at risk to changes in the national and worldwide economic environment, which could include, among other things, risks related to the deterioration of economic conditions; risks associated with acquisitions, joint ventures, equity investments, and divestitures; potential disruption of operations, including at co-manufacturers, suppliers, logistics providers, customers, or other third-party service providers; failure to realize anticipated cost savings or operating efficiencies associated with strategic initiatives; risk of loss of a material contract; the Company’s inability to protect information technology systems against, or effectively respond to, cyber attacks or security breaches; deterioration of labor relations, labor availability or increases to labor costs; general risks of the food industry, including food contamination; outbreaks of disease among livestock and poultry flocks; fluctuations in commodity prices and availability of raw materials and other inputs; fluctuations in market demand for the Company’s products; damage to the Company’s reputation or brand image; climate change, or legal, regulatory, or market measures to address climate change; risks of litigation; potential sanctions and compliance costs arising from government regulation; compliance with stringent environmental regulations and potential environmental litigation; and risks arising from the Company’s foreign operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various forms of market risk as a part of its ongoing business practices. The Company utilizes derivative instruments to mitigate earnings fluctuations due to market volatility.
Commodity Price Risk:
The Company is subject to commodity price risk primarily through grain, lean hog, natural gas, and diesel fuel markets. To reduce these exposures and offset the fluctuations caused by changes in market conditions, the Company employs hedging programs. These programs utilize futures, swaps, and options contracts and are accounted for as cash flow hedges. The fair value of the Company’s cash flow commodity contracts as of January 28, 2024 was $(10.5) million, compared to $(17.1) million as of October 29, 2023. The Company measures its market risk exposure on its cash flow commodity contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices. A 10 percent decrease in the market price would have negatively impacted the fair value of the Company's cash flow commodity
28
contracts as of January 28, 2024 by $25.4 million, which in turn would lower the Company's future cost on purchased commodities by a similar amount.
Interest Rate Risk
: The Company is subject to interest rate risk primarily from changes in fair value of long-term fixed rate debt. As of January 28, 2024, the Company’s long-term debt had a fair value of $2.8 billion compared to $2.7 billion as of October 29, 2023. The Company measures its market risk exposure of long-term fixed rate debt using a sensitivity analysis, which considers a 10 percent change in interest rates. A 10 percent decrease in interest rates would have positively impacted the fair value of the Company’s long-term debt as of January 28, 2024 by $76.9 million. A 10 percent increase would have negatively impacted the long-term debt by $71.6 million.
Foreign Currency Exchange Rate Risk:
The fair values of certain assets are subject to fluctuations in foreign currency exchange rates. The Company's net asset position in foreign currencies as of January 28, 2024 and October 29, 2023 was $1.1 billion, with most of the exposure existing in Indonesian rupiah, Chinese yuan, and Brazilian real. The Company currently does not use market risk sensitive instruments to manage this risk.
Investment Risk:
The Company has corporate-owned life insurance policies classified as trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. As of January 28, 2024, the balance of these securities totaled $199.7 million compared to $188.2 million as of October 29, 2023. The rabbi trust is invested primarily in fixed income funds. The Company is subject to market risk due to fluctuations in the value of the remaining investments as unrealized gains and losses associated with these securities are included in the Company’s net earnings on a mark-to-market basis. A 10 percent decline in the value of the investments not held in fixed income funds would have negatively impacted the Company’s pretax earnings by approximately $8.9 million, while a 10 percent increase in value would have a positive impact of the same amount.
Item 4. CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures.
As of the end of the period covered by this report (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information the Company is required to disclose in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b)
Internal Controls.
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) through the first quarter of fiscal 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Information regarding legal proceedings is available in Note I - Commitments and Contingencies of the Notes to the Consolidated Financial Statements.
29
Item 1A. RISK FACTORS
The Company’s business, operations, and financial condition are subject to various risks and uncertainties. There have been no material changes to the risk factors previously disclosed in Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended October 29, 2023.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no issuer purchases of equity securities in the quarter ended January 28, 2024. 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. The maximum number of shares that may yet be purchased under the repurchase plans or programs as of January 28, 2024, is 3,677,494.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
None.
Item 5. OTHER INFORMATION
During the fiscal quarter ended January 28, 2024, no director or officer of the Company
adopted
or
terminated
a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as the terms are defined in Item 408(a) of Regulation S-K.
Item 6. EXHIBITS
| 101 |
The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended January 28, 2024, formatted in Inline XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Condensed Statements of Financial Position, (iv) Consolidated Statements of Changes in Shareholders’ Investment, (v) Consolidated Condensed Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements.
|
||||
| 104 |
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended January 28, 2024, formatted in Inline XBRL (included as Exhibit 101).
|
||||
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HORMEL FOODS CORPORATION | ||||||||
| (Registrant) | ||||||||
| Date: February 29, 2024 |
By:
|
/s/ JACINTH C. SMILEY | ||||||
| JACINTH C. SMILEY | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| Date: February 29, 2024 |
By:
|
/s/ PAUL R. KUEHNEMAN | ||||||
| PAUL R. KUEHNEMAN | ||||||||
| Vice President and Controller | ||||||||
| (Principal Accounting Officer) | ||||||||
31
TABLE OF CONTENTS
Part I Financial InformationprintItem 1. Financial StatementsprintItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II - Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 3. Defaults Upon Senior SecuritiesprintItem 4. Mine Safety DisclosuresprintItem 5. Other InformationprintItem 6. Exhibitsprint