UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended July 28, 2024
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _______________ to _______________
Commission File Number: 1-2402
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(507 ) 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 | ||||||||||||||||||
| $0.01465 | par value | |||||||||||||||||||
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.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 September 1, 2024 | ||||||||||||||||
| Common Stock | $0.01465 | par value | |||||||||||||||
Common Stock Nonvoting | $0.01 | par value | |||||||||||||||
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION | ||||||||
Item 1. | ||||||||
Item 2. | ||||||||
Critical Accounting Estimates | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
PART II - OTHER INFORMATION | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 5. | ||||||||
Item 6. | ||||||||
2
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
In thousands, except per share amounts | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 2023 | |||||||||||||||||||
| Net Sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of Products Sold | |||||||||||||||||||||||
| Gross Profit | |||||||||||||||||||||||
| Selling, General, and Administrative | |||||||||||||||||||||||
Equity in Earnings of Affiliates | |||||||||||||||||||||||
| Operating Income | |||||||||||||||||||||||
| Interest and Investment Income | |||||||||||||||||||||||
| Interest Expense | |||||||||||||||||||||||
| Earnings Before Income Taxes | |||||||||||||||||||||||
Provision for Income Taxes | |||||||||||||||||||||||
| Net Earnings | |||||||||||||||||||||||
Less: Net Earnings (Loss) Attributable to Noncontrolling Interest | ( | ( | ( | ||||||||||||||||||||
Net Earnings Attributable to Hormel Foods Corporation | $ | $ | $ | $ | |||||||||||||||||||
Net Earnings Per Share | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Weighted-average Shares Outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See Notes to the Consolidated Financial Statements
3
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 2023 | |||||||||||||||||||
| Net Earnings | $ | $ | $ | $ | |||||||||||||||||||
| Other Comprehensive Income (Loss), Net of Tax: | |||||||||||||||||||||||
| Foreign Currency Translation | ( | ( | ( | ||||||||||||||||||||
| Pension and Other Benefits | |||||||||||||||||||||||
Derivatives and Hedging | ( | ( | ( | ||||||||||||||||||||
| Equity Method Investments | ( | ( | |||||||||||||||||||||
Total Other Comprehensive Income (Loss) | ( | ( | |||||||||||||||||||||
| Comprehensive Income | |||||||||||||||||||||||
Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interest | ( | ( | ( | ( | |||||||||||||||||||
Comprehensive Income Attributable to Hormel Foods Corporation | $ | $ | $ | $ | |||||||||||||||||||
See Notes to the Consolidated Financial Statements
4
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
In thousands, except share and per share amounts | July 28, 2024 | October 29, 2023 | |||||||||
| Assets | |||||||||||
| Cash and Cash Equivalents | $ | $ | |||||||||
| Short-term Marketable Securities | |||||||||||
Accounts Receivable (Net of Allowance for Doubtful Accounts of $ | |||||||||||
| Inventories | |||||||||||
Prepaid Expenses and Other Current Assets | |||||||||||
| Total Current Assets | |||||||||||
Goodwill | |||||||||||
Other Intangibles | |||||||||||
Pension Assets | |||||||||||
| Investments in Affiliates | |||||||||||
Other Assets | |||||||||||
| Property, Plant, and Equipment | |||||||||||
| Land | |||||||||||
| Buildings | |||||||||||
| Equipment | |||||||||||
| Construction in Progress | |||||||||||
| Less: Allowance for Depreciation | ( | ( | |||||||||
| Net Property, Plant, and Equipment | |||||||||||
| Total Assets | $ | $ | |||||||||
| Liabilities and Shareholders’ Investment | |||||||||||
Accounts Payable | $ | $ | |||||||||
| Accrued Expenses | |||||||||||
| Accrued Marketing Expenses | |||||||||||
Employee-related Expenses | |||||||||||
| Interest and Dividends Payable | |||||||||||
| Taxes Payable | |||||||||||
| Current Maturities of Long-term Debt | |||||||||||
| Total Current Liabilities | |||||||||||
| Long-term Debt Less Current Maturities | |||||||||||
| Pension and Post-retirement Benefits | |||||||||||
| Deferred Income Taxes | |||||||||||
| Other Long-term Liabilities | |||||||||||
Shareholders’ Investment | |||||||||||
Preferred Stock, Par Value $ Authorized | |||||||||||
Common Stock, Nonvoting, Par Value $ Authorized | |||||||||||
Common Stock, Par Value $ Shares Issued as of July 28, 2024: Shares Issued as of October 29, 2023: | |||||||||||
| Additional Paid-in Capital | |||||||||||
| Accumulated Other Comprehensive Loss | ( | ( | |||||||||
| Retained Earnings | |||||||||||
Hormel Foods Corporation Shareholders’ Investment | |||||||||||
| Noncontrolling Interest | |||||||||||
Total Shareholders’ Investment | |||||||||||
| Total Liabilities and Shareholders’ Investment | $ | $ | |||||||||
See Notes to the Consolidated Financial Statements
5
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT
Unaudited
| Quarter Ended July 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hormel Foods Corporation Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||||||||||||||||||||||
In thousands, except per share amounts | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 30, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Net Earnings (Loss) | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Comprehensive Income (Loss) | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based Compensation Expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of Stock Options/Restricted Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Declared Dividends – $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 30, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Quarter Ended July 28, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hormel Foods Corporation Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||||||||||||||||||||||
In thousands, except per share amounts | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 28, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Net Earnings (Loss) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Comprehensive Income (Loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based Compensation Expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of Stock Options/Restricted Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Declared Dividends – $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 28, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
See Notes to the Consolidated Financial Statements
6
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT
Unaudited
Nine Months Ended July 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hormel Foods Corporation Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||||||||||||||||||||||
In thousands, except per share amounts | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 30, 2022 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Net Earnings (Loss) | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of Common Stock | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation Expense | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of Stock Options/Restricted Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares Retired | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Declared Dividends – $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 30, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended July 28, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hormel Foods Corporation Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||||||||||||||||||||||
In thousands, except per share amounts | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 29, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Net Earnings (Loss) | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Contribution from Noncontrolling Interest | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation Expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of Stock Options/Restricted Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Declared Dividends – $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 28, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
See Notes to the Consolidated Financial Statements
7
HORMEL FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
| Nine Months Ended | |||||||||||
In thousands | July 28, 2024 | July 30, 2023 | |||||||||
| Operating Activities | |||||||||||
| Net Earnings | $ | $ | |||||||||
| Adjustments to Reconcile to Net Cash Provided by (Used in) Operating Activities: | |||||||||||
| Depreciation and Amortization | |||||||||||
| Equity in Earnings of Affiliates | ( | ( | |||||||||
| Distributions Received from Equity Method Investees | |||||||||||
| Provision for Deferred Income Taxes | ( | ( | |||||||||
| Non-cash Investment Activities | ( | ( | |||||||||
| Stock-based Compensation Expense | |||||||||||
Operating Lease Cost | |||||||||||
Other Non-cash, Net | |||||||||||
| Changes in Operating Assets and Liabilities: | |||||||||||
| Decrease (Increase) in Accounts Receivable | |||||||||||
| Decrease (Increase) in Inventories | ( | ||||||||||
| Decrease (Increase) in Prepaid Expenses and Other Assets | ( | ( | |||||||||
| Increase (Decrease) in Pension and Post-retirement Benefits | |||||||||||
| Increase (Decrease) in Accounts Payable and Accrued Expenses | ( | ( | |||||||||
| Increase (Decrease) in Net Income Taxes Payable | ( | ||||||||||
| Net Cash Provided by (Used in) Operating Activities | |||||||||||
| Investing Activities | |||||||||||
Net Sale (Purchase) of Securities | ( | ( | |||||||||
| Purchases of Property, Plant, and Equipment | ( | ( | |||||||||
| Proceeds from Sales of Property, Plant, and Equipment | |||||||||||
| Proceeds from (Purchases of) Affiliates and Other Investments | ( | ( | |||||||||
| Proceeds from Company-owned Life Insurance | |||||||||||
| Net Cash Provided by (Used in) Investing Activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Proceeds from Long-term Debt | |||||||||||
Payment of Debt Issuance Costs | ( | ||||||||||
| Repayments of Long-term Debt and Finance Leases | ( | ( | |||||||||
| Dividends Paid on Common Stock | ( | ( | |||||||||
| Share Repurchase | ( | ||||||||||
| Proceeds from Exercise of Stock Options | |||||||||||
| Proceeds from Noncontrolling Interest | |||||||||||
| Net Cash Provided by (Used in) Financing Activities | ( | ( | |||||||||
| Effect of Exchange Rate Changes on Cash | ( | ( | |||||||||
| Increase (Decrease) in Cash and Cash Equivalents | ( | ( | |||||||||
| Cash and Cash Equivalents at Beginning of Year | |||||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | |||||||||
Supplemental Non-cash Financing and Investing Activities: | |||||||||||
Purchases of property, plant, and equipment included in accounts payable | $ | $ | |||||||||
See Notes to the Consolidated Financial Statements
8
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.
Reclassifications: Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Amortization related to operating leases and debt issuance costs were reclassified from Amortization to separate line items within the operating activities section of the Consolidated Condensed Statements of Cash Flows. These reclassifications had no impact on the Consolidated Statements of Operations, Consolidated Statements of Financial Position, or the Increase (Decrease) in Cash and Cash Equivalents in the Consolidated Condensed Statements of Cash Flows.
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.
9
NOTE B - GOODWILL AND INTANGIBLE ASSETS
Goodwill: The change in the carrying amount of goodwill for the nine months ended July 28, 2024, is:
In thousands | Retail | Foodservice | International | Total | |||||||||||||||||||
Balance at October 29, 2023 | $ | $ | $ | $ | |||||||||||||||||||
| Foreign Currency Translation | ( | ( | |||||||||||||||||||||
Balance at July 28, 2024 | $ | $ | $ | $ | |||||||||||||||||||
Intangible Assets: The carrying amounts for indefinite-lived intangible assets are:
In thousands | July 28, 2024 | October 29, 2023 | |||||||||
Brands/Trade Names/Trademarks | $ | $ | |||||||||
| Other Intangibles | |||||||||||
| Foreign Currency Translation | ( | ( | |||||||||
Total Indefinite-lived Intangible Assets | $ | $ | |||||||||
The gross carrying amount and accumulated amortization for definite-lived intangible assets are:
| July 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 Definite-lived Intangible Assets | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Amortization expense on intangible assets is as follows:
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 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 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
10
NOTE C - INVESTMENTS IN AFFILIATES
Equity in Earnings of Affiliates consists of:
| Quarter Ended | Nine Months Ended | |||||||||||||||||||||||||
In thousands | % Owned | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 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 consists of:
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 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 expanded the Company’s presence in Southeast Asia to support 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 July 28, 2024, the remaining basis difference was $304.1 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 $258.4 million as of July 26, 2024.
The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $8.7 million was remaining as of July 28, 2024. This difference is being amortized through Equity in Earnings of Affiliates.
NOTE D - INVENTORIES
Principal components of inventories are:
In thousands | July 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 various 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.
11
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 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 was amortized through earnings over the remaining life of the debt. In the third quarter of fiscal 2024, the fair value hedging adjustment was completely amortized to correspond with the payment of the 2024 Notes upon maturity.
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 was immaterial to the consolidated financial statements during the quarter and nine months ended July 28, 2024, and July 30, 2023.
Volume: The Company’s outstanding contracts related to its commodity hedging programs include:
In millions | July 28, 2024 | October 29, 2023 | |||||||||||||||
| Corn | bushels | bushels | |||||||||||||||
| Lean Hogs | pounds | pounds | |||||||||||||||
| Natural Gas | MMBtu | MMBtu | |||||||||||||||
Diesel Fuel | gallons | gallons | |||||||||||||||
Fair Value of Derivatives: The gross fair values of the Company’s derivative instruments designated as hedges are:
In thousands | Location on Consolidated Statements of Financial Position | July 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 Statements of Financial Position. The gross liability position as of July 28, 2024 was offset by the right to reclaim net cash collateral of $29.3 million contained within the master netting arrangement. The gross liability position as of October 29, 2023 was 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 Statements of Financial Position.
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Fair Value Hedge - Assets (Liabilities): The carrying amount of the Company’s fair value hedged assets (liabilities) are:
In thousands | Location on Consolidated Statements of Financial Position | July 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. The 2024 Notes were paid on June 3, 2024, and there was no cumulative fair value hedging adjustment from discontinued hedges.
Accumulated Other Comprehensive Loss Impact: As of July 28, 2024, the Company included in AOCL hedging losses (before tax) of $25.5 million on commodity contracts and gains (before tax) of $11.7 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 | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 2023 | ||||||||||||||||||||||
| Cash Flow Hedges | ||||||||||||||||||||||||||
| Commodity Contracts | $ | ( | $ | ( | $ | ( | $ | ( | Cost of Products Sold | |||||||||||||||||
Excluded Component(2) | ||||||||||||||||||||||||||
Interest Rate Contracts | Interest Expense | |||||||||||||||||||||||||
Gain/(Loss) Recognized in AOCL(1) | Gain/(Loss) Reclassified from AOCL into Earnings(1) | Location on Consolidated Statements of Operations | ||||||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| in thousands | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 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.
13
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 | Nine Months Ended | ||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 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 and nine months ended July 28, 2024, and July 30, 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.
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 | Nine Months Ended | ||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 2023 | |||||||||||||||||||
| Service Cost | $ | $ | $ | $ | |||||||||||||||||||
| ( | ( | ( | ( | ||||||||||||||||||||
| ( | ( | ( | ( | ||||||||||||||||||||
Net Periodic Cost | $ | $ | $ | $ | |||||||||||||||||||
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| Post-retirement Benefits | |||||||||||||||||||||||
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 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 April 28, 2024 | $ | ( | $ | ( | $ | $ | $ | ( | ||||||||||||||||||||||||||||||
| Unrecognized Gains (Losses) | — | — | ||||||||||||||||||||||||||||||||||||
| Gross | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||
| Tax Effect | ||||||||||||||||||||||||||||||||||||||
| Reclassification into Net Earnings | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Gross | (1) | (2) | ( | (3) | ||||||||||||||||||||||||||||||||||
| Tax Effect | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Change Net of Tax | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
Balance at July 28, 2024 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||
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 July 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.
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.
15
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 July 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 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
16
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 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 and nine months ended July 28, 2024, securities held by the rabbi trust generated gains of $4.9 million, and $18.8 million, respectively, compared to gains of $5.1 million and $12.1 million for the quarter and nine months ended July 30, 2023, respectively.
(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 Statements of Financial Position. As of July 28, 2024, the Company had recognized the right to reclaim net cash collateral of $29.3 million from various counterparties (including cash of $37.7 million less $8.4 million of realized loss). 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 Statements of Financial Position. The fair value of long-term debt, utilizing discounted cash flows (Level 2), was $2.4 billion as of July 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 and nine months ended July 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.
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 U.S. District Court for the District of Minnesota styled In re Pork Antitrust Litigation (the Pork Antitrust Litigation). Class Plaintiffs consist of Direct Purchaser Plaintiffs, Commercial and Institutional Indirect Purchaser Plaintiffs, and Consumer Indirect Purchaser Plaintiffs. The Class 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
17
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 Non-Class Direct-Action Plaintiffs including the Offices of the Attorney General in New Mexico and Alaska, have opted out of class treatment and are proceeding with individual direct actions making similar claims, and others may do so in the future.
Although the Company strongly denies liability, continues to deny the allegations asserted by the Class Plaintiffs, and believes it has valid defenses, to avoid the uncertainty, risk, expense, and distraction of continued litigation involving the Class Plaintiffs, the Company executed settlement agreements providing for payments by the Company to the Direct Purchaser Plaintiffs of $4.9 million, the Commercial and Institutional Indirect Purchaser Plaintiffs of $2.4 million, and the Consumer Indirect Purchaser Plaintiffs of $4.5 million. The settlement amounts were recorded in Selling, General, and Administrative in the Consolidated Statements of Operations in the second quarter of fiscal 2024. Payments totaling $7.3 million were made in the third quarter of fiscal 2024, and $4.5 million is reflected within Accrued Expenses on the Consolidated Statements of Financial Position for the third quarter of fiscal 2024. The $4.5 million settlement amount was paid in August 2024, subsequent to the end of the third quarter.
The Company continues to defend against the claims of the Non-Class Direct-Action Plaintiffs. The Company has not recorded any liability for the non-class 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 U.S. filed an amended consolidated class action complaint against Jennie-O Turkey Store, Inc. and various other poultry processing companies in the U.S. District Court for the District of Maryland styled Jien, et al. v. Perdue Farms, Inc., et al. (the Poultry Wages Antitrust Litigation). In the operative amended complaint filed in February 2022, the plaintiffs allege that, since 2000, the defendants directly and through wage surveys and a 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 complaint sought, 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.
Although the Company strongly denies liability, continues to deny the allegations asserted by the plaintiffs, and believes it has valid defenses, to avoid the uncertainty, risk, expense, and distraction of continued litigation, the Company executed a settlement agreement with the plaintiffs on August 20, 2024, to settle this matter for the payment of $3.5 million. The settlement remains subject to Court approval. The Company recorded the agreed-upon settlement amount in Selling, General, and Administrative in the Consolidated Statements of Operations and in Accrued Expenses on the Consolidated Statements of Financial Position for the third quarter of fiscal 2024. The agreed-upon settlement amount will be paid following preliminary Court approval.
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 U.S. filed a class action complaint against the Company and various other beef- and pork-processing companies in the U.S. District Court for the District of Colorado styled Brown, et al. v. JBS USA Food Co., et al. (the Red Meat Wages Antitrust Litigation). In the operative amended complaint filed in January 2024, the plaintiffs allege that, since 2000, the defendants directly and through wage surveys and a 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 complaint sought, among other things, treble monetary damages, punitive damages, restitution, and pre- and post-judgment interest, as well as declaratory and injunctive relief.
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Although the Company strongly denies liability, continues to deny the allegations asserted by the plaintiffs, and believes it has valid defenses, to avoid the uncertainty, risk, expense, and distraction of continued litigation, the Company executed a settlement agreement with the plaintiffs on August 20, 2024, to settle this matter for the payment of $13.5 million and the provision of certain data and information. The settlement remains subject to Court approval. The Company recorded the agreed-upon settlement amount in Selling, General, and Administrative in the Consolidated Statements of Operations and in Accrued Expenses on the Consolidated Statements of Financial Position for the third quarter of fiscal 2024. The agreed-upon settlement amount will be paid following preliminary Court approval.
NOTE J - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term Debt consists of:
In thousands | July 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 March 2027 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 March 8, 2024, the Company issued senior notes in an aggregate principal amount of $500.0 million due March 2027. The notes bear interest at a fixed rate of 4.800 % per annum. Interest accrues on the notes from March 8, 2024, and is payable semi-annually in arrears on March 30 and September 30 of each year, commencing September 30, 2024. The notes may be redeemed in whole or in part at any time at the applicable redemption prices. 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 3, 2021, the Company issued $950.0 million aggregate principal amount of its 0.650 % notes due June 2024 (2024 Notes), $750.0 million aggregate principal amount of its 1.700 % notes due June 2028 (2028 Notes), and $600.0 million aggregate principal amount of its 3.050 % notes due June 2051 (2051 Notes). The notes may be redeemed in whole or in part at any time at the applicable redemption price. Interest accrues per annum at the stated rates and is 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 101 950.0 million 2024 Notes upon maturity on June 3, 2024.
On June 11, 2020, the Company issued senior notes in an aggregate principal amount of $1.0 billion due June 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 prices. 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.
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
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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 unsecured revolving credit agreement. The Amendment provided 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 % to 1.150 %. 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 July 28, 2024, and October 29, 2023, the Company had no
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 July 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 and nine months ended July 28, 2024, was 21.7 % and 22.6 %, respectively, compared to 21.7 % and 22.2 %, respectively, for the corresponding periods a year ago. The Company benefited from the purchase of federal transferable energy credits in the third quarter of fiscal 2024. The Company benefited from the impact of higher federal deductions in the third quarter of fiscal 2023.
Unrecognized tax benefits, including interest and penalties, are recorded in Other Long-term Liabilities. If recognized as of July 28, 2024, these benefits would impact the Company’s effective tax rate by $17.2 million compared to $19.6 million as of July 30, 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 July 28, 2024, and July 30, 2023. The amount of accrued interest and penalties associated with unrecognized tax benefits was $2.7 million at July 28, 2024, and $3.2 million at July 30, 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, as of July 28, 2024, it was not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.
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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 | Nine Months Ended | ||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 2023 | |||||||||||||||||||
Basic Weighted-average Shares Outstanding | |||||||||||||||||||||||
| Dilutive Potential Common Shares | |||||||||||||||||||||||
Diluted Weighted-average Shares Outstanding | |||||||||||||||||||||||
| Antidilutive Potential Common Shares | |||||||||||||||||||||||
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, international equity method investments, and international royalty arrangements.
Financial measures for each of the Company’s reportable segments are set forth below. Intersegment sales are eliminated in consolidation and are not reviewed when evaluating segment performance. The Company does not allocate deferred compensation, non-recurring expenses associated with the transform and modernize initiative, investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and expense items 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.
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.
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| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 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 | Nine Months Ended | ||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 2023 | |||||||||||||||||||
| Perishable | $ | $ | $ | $ | |||||||||||||||||||
| Shelf-stable | |||||||||||||||||||||||
| Total Net Sales | $ | $ | $ | $ | |||||||||||||||||||
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, Retail, Foodservice, and International, 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 $0.32 for the third quarter of fiscal 2024, up 7 percent compared to the same period last year. Adjusted diluted net earnings per share(1) was $0.37. Significant factors impacting the quarter are listed below. All comparisons are to the same period of the prior year unless otherwise noted.
•Net sales for the third quarter decreased 2 percent. The benefit from higher volume and net sales in the Foodservice segment was more than offset by lower volume and net sales in the Retail and International segments.
•Segment profit for the third quarter decreased 6 percent. Improved results in the International segment were more than offset by declines in profit for each of the Retail and Foodservice segments.
•Earnings before income taxes for the third quarter increased 9 percent, as the impact of lower net sales was more than offset by lower selling, general, and administrative (SG&A) expenses compared to the prior period, which included an unfavorable arbitration ruling. Adjusted earnings before income taxes(1) decreased 8 percent.
•Retail segment profit declined in the current quarter as the benefit from lower logistics expenses and savings from the transform and modernize initiative were more than offset by the impact of lower net sales.
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•Foodservice segment profit decreased in the current quarter, as higher sales were more than offset by higher SG&A expenses.
•International segment profit increased significantly in the current quarter, driven by improved export margins, growth from the Company’s investments in the Philippines and Indonesia, and favorable costs in China.
•The pre-tax impact of expenses related to the Company’s transform and modernize initiative and antitrust litigation settlements in the third quarter of fiscal 2024 was $30.5 million, most of which was recorded in SG&A expense. The pre-tax impact of expenses related to the Company's arbitration ruling in the third quarter of fiscal 2023 was $70.0 million, all of which was recorded in SG&A expense.
•Year-to-date cash flow from operations was $858 million, an increase of 18 percent compared to the prior year.
•Subsequent to the end of the quarter, storms in the Midwest U.S. caused roof and other damage at the Company’s Papillion, Nebraska, manufacturing facility. The Company is assessing the financial impact for the fourth quarter of fiscal year 2024.
Consolidated Results
Volume, Net Sales, Earnings, and Diluted Earnings Per Share
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
In thousands, except per share amounts | July 28, 2024 | July 30, 2023 | % Change | July 28, 2024 | July 30, 2023 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 1,018,690 | 1,094,518 | (6.9) | 3,180,087 | 3,256,292 | (2.3) | |||||||||||||||||||||||||||||
| Net Sales | $ | 2,898,443 | $ | 2,963,299 | (2.2) | $ | 8,782,706 | $ | 8,911,930 | (1.5) | |||||||||||||||||||||||||
| Earnings Before Income Taxes | 225,719 | 207,626 | 8.7 | 755,404 | 767,666 | (1.6) | |||||||||||||||||||||||||||||
Net Earnings Attributable to Hormel Foods Corporation | 176,701 | 162,679 | 8.6 | 584,842 | 597,637 | (2.1) | |||||||||||||||||||||||||||||
| Diluted Earnings Per Share | 0.32 | 0.30 | 6.7 | 1.07 | 1.09 | (1.8) | |||||||||||||||||||||||||||||
Adjusted Diluted Earnings Per Share (1) | 0.37 | 0.40 | (7.5) | 1.16 | 1.19 | (2.5) | |||||||||||||||||||||||||||||
(1) See the “Non-GAAP 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 third quarter of fiscal 2024 decreased as the benefit from higher volume and net sales in the Foodservice segment was more than offset by lower volume and net sales in each of the Retail and International segments. In the Retail segment, lower volume and net sales were driven by significant year-over-year volume and pricing declines for whole bird turkeys, lower sales of Planters® snack nuts resulting from production disruptions at the Suffolk, Virginia, facility, and lower center-store and contract manufacturing volumes. In the International segment, top-line declines were driven by lower commodity export volumes and lower net sales in China.
For the first nine months of fiscal 2024, the benefit from improved volume in the Foodservice segment was more than offset by lower net sales in the Retail and International segments. The declines in net sales are related to a significant year-over-year decline in pricing within the whole bird turkey markets, which primarily impact the Retail segment, lower volumes in contract manufacturing, which primarily impact the Retail segment, and lower commodity export sales and lower net sales in China, which impact the International segment.
Cost of Products Sold
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | % Change | July 28, 2024 | July 30, 2023 | % Change | |||||||||||||||||||||||||||||
| Cost of Products Sold | $ | 2,410,075 | $ | 2,465,251 | (2.2) | $ | 7,281,798 | $ | 7,426,514 | (1.9) | |||||||||||||||||||||||||
Cost of products sold for the third quarter and the first nine months of fiscal 2024 decreased due primarily to lower sales. On a per pound basis, cost of products sold for the first nine months of fiscal 2024 was comparable to the same period of the prior year.
The Company expects costs of products sold to continue to moderate relative to the high levels of inflation the business has absorbed since the beginning of fiscal 2021. The Company expects its transform and modernize initiative to deliver cost savings,
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throughout fiscal 2024. The initiative targets costs throughout the Company’s organization, with a particular focus during 2024 on packaging, logistics, and production costs.
Gross Profit
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | % Change | July 28, 2024 | July 30, 2023 | % Change | |||||||||||||||||||||||||||||
| Gross Profit | $ | 488,369 | $ | 498,048 | (1.9) | $ | 1,500,908 | $ | 1,485,417 | 1.0 | |||||||||||||||||||||||||
| Percent of Net Sales | 16.8 | % | 16.8 | % | 17.1 | % | 16.7 | % | |||||||||||||||||||||||||||
For the third quarter of fiscal 2024, gross profit as a percent of net sales was flat. For the first nine months of fiscal 2024, gross profit as a percent of net sales increased in the International segment and was comparable for the Retail and Foodservice segments. All segments benefited from savings realized as part of the Company’s transform and modernize initiative.
Looking ahead to the fourth quarter of fiscal 2024, the Company expects gross profit as a percent of net sales to increase compared to last year. The Company expects gross profit as a percent of net sales to increase for the International segment and be comparable for the Retail and Foodservice segments.
Selling, General, and Administrative (SG&A)
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | % Change | July 28, 2024 | July 30, 2023 | % Change | |||||||||||||||||||||||||||||
| SG&A | $ | 259,653 | $ | 291,073 | (10.8) | $ | 766,707 | $ | 725,621 | 5.7 | |||||||||||||||||||||||||
| Percent of Net Sales | 9.0 | % | 9.8 | % | 8.7 | % | 8.1 | % | |||||||||||||||||||||||||||
Adjusted SG&A(1) | $ | 230,373 | $ | 221,073 | 4.2 | $ | 706,941 | $ | 655,621 | 7.8 | |||||||||||||||||||||||||
Adjusted Percent of Net Sales(1) | 7.9 | % | 7.5 | % | 8.0 | % | 7.4 | % | |||||||||||||||||||||||||||
(1) See the “Non-GAAP Measures” section below for a description of the Company’s use of measures not defined by GAAP.
For the third quarter, SG&A and SG&A as a percent of net sales decreased due to the accrual for an unfavorable arbitration ruling in the prior year, which was partially offset by current year litigation settlements. Adjusted SG&A as a percent of net sales(1) increased compared to last year. For the first nine months of fiscal 2024, SG&A and SG&A as a percent of net sales increased, primarily due to higher employee-related expenses.
Advertising investments in the third quarter were $40 million, a decrease of 6 percent compared to last year. The decline was partially due to lower support for the Planters® brand due to production disruptions at the Suffolk, Virginia, facility. For the first nine months of fiscal 2024, advertising investments were $128 million, an increase of 4 percent compared to last year. The Company expects full-year advertising expense to increase compared to the prior year.
Equity in Earnings of Affiliates
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| In thousands | July 28, 2024 | July 30, 2023 | % Change | July 28, 2024 | July 30, 2023 | % Change | |||||||||||||||||||||||||||||
| Equity in Earnings of Affiliates | $ | 7,977 | $ | 9,784 | (18.5) | $ | 39,250 | $ | 42,213 | (7.0) | |||||||||||||||||||||||||
Equity in earnings of affiliates for the third quarter and the first nine months of fiscal 2024 decreased due to lower results for MegaMex Foods, LLC, partially offset by improvements from the Company’s international investments.
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Interest and Investment Income and Interest Expense
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| In thousands | July 28, 2024 | July 30, 2023 | % Change | July 28, 2024 | July 30, 2023 | % Change | |||||||||||||||||||||||||||||
| Interest and Investment Income | $ | 10,484 | $ | 9,239 | 13.5 | $ | 43,416 | $ | 20,700 | 109.7 | |||||||||||||||||||||||||
| Interest Expense | 21,459 | 18,372 | 16.8 | 61,464 | 55,042 | 11.7 | |||||||||||||||||||||||||||||
Interest and investment income for the third quarter and the first nine months of fiscal 2024 increased due to a higher average cash balance, favorable market interest rates, and improved performance from the rabbi trust. Interest expense increased in the third quarter and first nine months of fiscal 2024 due to the second quarter debt issuance.
Effective Tax Rate
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 2023 | ||||||||||||||||||||
| Effective Tax Rate | 21.7 | % | 21.7 | % | 22.6 | % | 22.2 | % | |||||||||||||||
The effective tax rate in the third quarter was flat to last year. The higher effective tax rate for the first nine months of fiscal 2024 is primarily due to higher federal deductions in the prior year partially offset by the purchase of federal transferable energy credits in the current year. The effective tax rate for fiscal 2024 is expected to be between 22.0% 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, non-recurring expenses associated with the transform and modernize 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.
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 | Nine Months Ended | ||||||||||||||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | % Change | July 28, 2024 | July 30, 2023 | % Change | |||||||||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||||||||||||||
| Retail | $ | 1,767,251 | $ | 1,891,746 | (6.6) | $ | 5,467,078 | $ | 5,765,786 | (5.2) | |||||||||||||||||||||||||
| Foodservice | 954,021 | 890,949 | 7.1 | 2,799,110 | 2,607,140 | 7.4 | |||||||||||||||||||||||||||||
| International | 177,171 | 180,605 | (1.9) | 516,517 | 539,005 | (4.2) | |||||||||||||||||||||||||||||
Total Net Sales | $ | 2,898,443 | $ | 2,963,299 | (2.2) | $ | 8,782,706 | $ | 8,911,930 | (1.5) | |||||||||||||||||||||||||
| Segment Profit | |||||||||||||||||||||||||||||||||||
| Retail | $ | 127,932 | $ | 151,128 | (15.3) | $ | 409,836 | $ | 459,031 | (10.7) | |||||||||||||||||||||||||
| Foodservice | 142,487 | 146,270 | (2.6) | 441,952 | 428,110 | 3.2 | |||||||||||||||||||||||||||||
| International | 21,792 | 12,222 | 78.3 | 65,026 | 45,723 | 42.2 | |||||||||||||||||||||||||||||
Total Segment Profit | 292,211 | 309,619 | (5.6) | 916,814 | 932,863 | (1.7) | |||||||||||||||||||||||||||||
Net Unallocated Expense | 66,526 | 101,886 | (34.7) | 161,239 | 164,997 | (2.3) | |||||||||||||||||||||||||||||
Noncontrolling Interest | 34 | (108) | 131.5 | (170) | (200) | 14.9 | |||||||||||||||||||||||||||||
Earnings Before Income Taxes | $ | 225,719 | $ | 207,626 | 8.7 | $ | 755,404 | $ | 767,666 | (1.6) | |||||||||||||||||||||||||
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Retail
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | % Change | July 28, 2024 | July 30, 2023 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 680,214 | 748,146 | (9.1) | 2,170,621 | 2,267,363 | (4.3) | |||||||||||||||||||||||||||||
| Net Sales | $ | 1,767,251 | $ | 1,891,746 | (6.6) | $ | 5,467,078 | $ | 5,765,786 | (5.2) | |||||||||||||||||||||||||
| Segment Profit | 127,932 | 151,128 | (15.3) | 409,836 | 459,031 | (10.7) | |||||||||||||||||||||||||||||
In the third quarter of fiscal 2024, volume and net sales declined, primarily due to significant year-over-year volume and pricing declines for whole bird turkeys, lower sales of Planters® snack nuts resulting from production disruptions at the Suffolk, Virginia, facility, and lower center-store and contract manufacturing volumes. Partially offsetting these declines were net sales growth for many key brands, including Hormel® Black Label® bacon, Applegate® natural and organic meats, Jennie-O® ground turkey, Skippy® peanut butter, Wholly® guacamole, Herdez® salsas and sauces, and Hormel® Square Table™ entrees. For the first nine months of fiscal 2024, net sales declined primarily due to significant year-over-year declines in whole bird turkey sales and lower contract manufacturing volumes.
For the third quarter and first nine months of fiscal 2024, segment profit declined due to lower sales and higher SG&A. These factors more than offset the benefit from lower logistics expenses and savings from the transform and modernize initiative.
For the fourth quarter of fiscal 2024, Retail segment profit is expected to be comparable to the prior year, excluding the impact of last year's non-cash impairment charge. The Company expects continued benefits from lower logistics expenses and incremental savings from the transform and modernize initiative to mitigate the negative impacts from lower volumes, unfavorable commodity whole turkey dynamics, and lingering production disruptions at the Suffolk facility.
Foodservice
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | % Change | July 28, 2024 | July 30, 2023 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 259,947 | 255,822 | 1.6 | 777,785 | 747,484 | 4.1 | |||||||||||||||||||||||||||||
| Net Sales | $ | 954,021 | $ | 890,949 | 7.1 | $ | 2,799,110 | $ | 2,607,140 | 7.4 | |||||||||||||||||||||||||
| Segment Profit | 142,487 | 146,270 | (2.6) | 441,952 | 428,110 | 3.2 | |||||||||||||||||||||||||||||
Volume and net sales growth in the third quarter of fiscal 2024 were driven primarily by strong performance across the turkey, premium prepared proteins, bacon, and pepperoni categories. Notable products such as Hormel® Fire Braised™ meats, Hormel® Bacon 1™ cooked bacon, Café H® globally inspired proteins, and Rosa Grande® premium pepperoni delivered strong volume and net sales growth. Growth from branded Jennie-O® turkey items continued to benefit top-line results. For the first nine months of fiscal 2024, volume and net sales growth was broad-based and across numerous categories.
Segment profit decreased for the third quarter of fiscal 2024 as higher sales were more than offset by higher SG&A expenses. Segment profit increased for the first nine months of fiscal 2024 primarily due to higher sales.
For the fourth quarter, the Company expects Foodservice segment profit to be in line with prior year, with the impact from volume growth expected to be offset by higher SG&A compared to last year.
International
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | % Change | July 28, 2024 | July 30, 2023 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 78,529 | 90,550 | (13.3) | 231,681 | 241,445 | (4.0) | |||||||||||||||||||||||||||||
| Net Sales | $ | 177,171 | $ | 180,605 | (1.9) | $ | 516,517 | $ | 539,005 | (4.2) | |||||||||||||||||||||||||
| Segment Profit | 21,792 | 12,222 | 78.3 | 65,026 | 45,723 | 42.2 | |||||||||||||||||||||||||||||
During the third quarter of fiscal 2024, robust volume and net sales growth for SPAM® luncheon meat, refrigerated foodservice exports, and Skippy® peanut butter exports were more than offset by the difficult comparison in the prior year to significantly
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higher export volumes of low-margin commodity fresh pork and turkey. For the first nine months of fiscal 2024, net sales declined due to lower commodity export sales and lower net sales in China.
Segment profit in the third quarter of fiscal 2024 increased significantly, due to improved export margins, growth from the Company's investments in the Philippines and Indonesia, and favorable costs in China. For the first nine months of fiscal 2024, segment profit increased due to improvement from the Company's international investments, favorable costs in China, and growth in Brazil.
In the fourth quarter of fiscal 2024, the Company expects International segment profit to increase significantly compared to last year. This recovery is expected to be driven by improvement across the business, including increased branded exports, growth in China and Brazil, and contributions from investments in the Philippines and Indonesia.
Unallocated Income and Expense
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
In thousands | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 2023 | |||||||||||||||||||
| Net Unallocated Expense | $ | 66,526 | $ | 101,886 | $ | 161,239 | $ | 164,997 | |||||||||||||||
| Noncontrolling Interest | 34 | (108) | (170) | (200) | |||||||||||||||||||
Net unallocated expense decreased for the third quarter of fiscal 2024 due to the accrual for an unfavorable arbitration ruling in the prior year. For the first nine months of fiscal 2024, net unallocated expense decreased as the benefit from lapping the arbitration ruling, higher interest income, and favorable rabbi trust performance was partially offset by transform and modernize initiative costs, litigation settlements, and higher employee-related expenses.
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 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 measures provide useful information to investors because they aid analysis and understanding of the Company’s results and business trends relative to past performance and the Company’s competitors. Non-GAAP measures are not intended to be a substitute for GAAP measures in analyzing financial performance. These non-GAAP measures are not calculated in accordance with GAAP and may be different from non-GAAP measures used by other companies.
Transform and Modernize Initiative
In the fourth quarter of fiscal 2023, the Company announced a multi-year transform and modernize initiative. In presenting non-GAAP measures, the Company adjusts for (i.e., excludes) expenses for this initiative that are non-recurring, comprised primarily of project-based external consulting fees and asset write-offs related to portfolio optimization (i.e., reducing the complexity and optimizing the assortment of the product portfolio). The Company believes that non-recurring costs associated with the transform and modernize initiative are not reflective of the Company’s ongoing operating cost structure; therefore, the Company is excluding these discrete costs. The Company does not adjust for (i.e., does not exclude) certain costs related to the transform and modernize initiative that are expected to continue after the project ends, such as software license fees and internal employee expenses, because those costs are considered ongoing in nature as a component of normal operating costs.
Legal Matters
From time to time, the Company incurs expenses related to discrete legal matters that the Company believes are not indicative of the Company’s core operating performance, do not reflect expected future operating costs, and may not be meaningful when comparing the Company’s operating performance against that of prior periods. The Company adjusts for (i.e., excludes) these expenses.
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Litigation Settlements
In the second and third quarters of fiscal 2024, the Company entered into settlement agreements with certain plaintiffs in its pending antitrust litigation. See Note I - Commitments and Contingencies of the Notes to the Consolidated Financial Statements for additional information.
Arbitration Ruling
In the third quarter of fiscal 2023, the Company received an unexpected, unfavorable arbitration ruling involving an isolated commercial dispute with a third party.
The table below shows the calculations to reconcile from the GAAP measures to the non-GAAP measures presented in this Quarterly Report on Form 10-Q. The tax impacts were calculated using the effective tax rate for the quarter in which the expenses were incurred.
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| In thousands, except per share amounts | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 2023 | |||||||||||||||||||
| Cost of Products Sold (GAAP) | $ | 2,410,075 | $ | 2,465,251 | $ | 7,281,798 | $ | 7,426,514 | |||||||||||||||
Transform and Modernize Initiative(1) | (1,226) | — | (4,646) | — | |||||||||||||||||||
| Adjusted Cost of Products Sold (Non-GAAP) | $ | 2,408,848 | $ | 2,465,251 | $ | 7,277,152 | $ | 7,426,514 | |||||||||||||||
| Gross Profit (GAAP) | $ | 488,369 | $ | 498,048 | $ | 1,500,908 | $ | 1,485,417 | |||||||||||||||
Transform and Modernize Initiative(1) | 1,226 | — | 4,646 | — | |||||||||||||||||||
| Adjusted Gross Profit (Non-GAAP) | $ | 489,595 | $ | 498,048 | $ | 1,505,554 | $ | 1,485,417 | |||||||||||||||
| SG&A (GAAP) | $ | 259,653 | $ | 291,073 | $ | 766,707 | $ | 725,621 | |||||||||||||||
Transform and Modernize Initiative(2) | (12,280) | — | (31,016) | — | |||||||||||||||||||
| Pork Antitrust Litigation Settlements | — | — | (11,750) | — | |||||||||||||||||||
| Red Meat Wages Antitrust Litigation Settlement | (13,500) | — | (13,500) | — | |||||||||||||||||||
Poultry Wages Antitrust Litigation Settlement | (3,500) | — | (3,500) | — | |||||||||||||||||||
Arbitration Ruling | — | (70,000) | — | (70,000) | |||||||||||||||||||
| Adjusted SG&A (Non-GAAP) | $ | 230,373 | $ | 221,073 | $ | 706,941 | $ | 655,621 | |||||||||||||||
| Operating Income (GAAP) | $ | 236,693 | $ | 216,759 | $ | 773,452 | $ | 802,009 | |||||||||||||||
Transform and Modernize Initiative(1)(2) | 13,506 | — | 35,663 | — | |||||||||||||||||||
| Pork Antitrust Litigation Settlements | — | — | 11,750 | — | |||||||||||||||||||
| Red Meat Wages Antitrust Litigation Settlement | 13,500 | — | 13,500 | — | |||||||||||||||||||
Poultry Wages Antitrust Litigation Settlement | 3,500 | — | 3,500 | — | |||||||||||||||||||
Arbitration Ruling | — | 70,000 | — | 70,000 | |||||||||||||||||||
| Adjusted Operating Income (Non-GAAP) | $ | 267,200 | $ | 286,759 | $ | 837,864 | $ | 872,009 | |||||||||||||||
| Earnings Before Income Taxes (GAAP) | $ | 225,719 | $ | 207,626 | $ | 755,404 | $ | 767,666 | |||||||||||||||
Transform and Modernize Initiative(1)(2) | 13,506 | — | 35,663 | — | |||||||||||||||||||
| Pork Antitrust Litigation Settlements | — | — | 11,750 | — | |||||||||||||||||||
| Red Meat Wages Antitrust Litigation Settlement | 13,500 | — | 13,500 | — | |||||||||||||||||||
Poultry Wages Antitrust Litigation Settlement | 3,500 | — | 3,500 | — | |||||||||||||||||||
Arbitration Ruling | — | 70,000 | — | 70,000 | |||||||||||||||||||
| Adjusted Earnings Before Income Taxes (Non-GAAP) | $ | 256,225 | $ | 277,626 | $ | 819,816 | $ | 837,666 | |||||||||||||||
| Provision for Income Taxes (GAAP) | $ | 48,984 | $ | 45,055 | $ | 170,733 | $ | 170,230 | |||||||||||||||
Transform and Modernize Initiative(1)(2) | 2,931 | — | 8,009 | — | |||||||||||||||||||
| Pork Antitrust Litigation Settlements | — | — | 2,644 | — | |||||||||||||||||||
| Red Meat Wages Antitrust Litigation Settlement | 2,930 | — | 2,930 | — | |||||||||||||||||||
Poultry Wages Antitrust Litigation Settlement | 760 | — | 760 | — | |||||||||||||||||||
Arbitration Ruling | — | 15,190 | — | 15,190 | |||||||||||||||||||
| Adjusted Provision for Income Taxes (Non-GAAP) | $ | 55,603 | $ | 60,245 | $ | 185,074 | $ | 185,420 | |||||||||||||||
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| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| In thousands, except per share amounts | July 28, 2024 | July 30, 2023 | July 28, 2024 | July 30, 2023 | |||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation (GAAP) | $ | 176,701 | $ | 162,679 | $ | 584,842 | $ | 597,637 | |||||||||||||||
Transform and Modernize Initiative(1)(2) | 10,575 | — | 27,654 | — | |||||||||||||||||||
| Pork Antitrust Litigation Settlements | — | — | 9,106 | — | |||||||||||||||||||
| Red Meat Wages Antitrust Litigation Settlement | 10,571 | — | 10,571 | — | |||||||||||||||||||
Poultry Wages Antitrust Litigation Settlement | 2,741 | — | 2,741 | — | |||||||||||||||||||
Arbitration Ruling | — | 54,810 | — | 54,810 | |||||||||||||||||||
| Adjusted Net Earnings Attributable to Hormel Foods Corporation (Non-GAAP) | $ | 200,588 | $ | 217,489 | $ | 634,913 | $ | 652,447 | |||||||||||||||
| Diluted Net Earnings Per Share (GAAP) | $ | 0.32 | $ | 0.30 | $ | 1.07 | $ | 1.09 | |||||||||||||||
Transform and Modernize Initiative(1)(2) | 0.02 | — | 0.05 | — | |||||||||||||||||||
| Pork Antitrust Litigation Settlements | — | — | 0.02 | — | |||||||||||||||||||
| Red Meat Wages Antitrust Litigation Settlement | 0.02 | — | 0.02 | — | |||||||||||||||||||
Poultry Wages Antitrust Litigation Settlement | — | — | — | — | |||||||||||||||||||
Arbitration Ruling | — | 0.10 | — | 0.10 | |||||||||||||||||||
| Adjusted Diluted Net Earnings Per Share (Non-GAAP) | $ | 0.37 | $ | 0.40 | $ | 1.16 | $ | 1.19 | |||||||||||||||
| SG&A as a Percent of Net Sales (GAAP) | 9.0 | % | 9.8 | % | 8.7 | % | 8.1 | % | |||||||||||||||
Transform and Modernize Initiative(2) | (0.4) | — | (0.4) | — | |||||||||||||||||||
| Pork Antitrust Litigation Settlements | — | — | (0.1) | — | |||||||||||||||||||
| Red Meat Wages Antitrust Litigation Settlement | (0.5) | — | (0.2) | — | |||||||||||||||||||
Poultry Wages Antitrust Litigation Settlement | (0.1) | — | — | — | |||||||||||||||||||
Arbitration Ruling | — | (2.4) | — | (0.8) | |||||||||||||||||||
| Adjusted SG&A as a Percent of Net Sales (Non-GAAP) | 7.9 | % | 7.5 | % | 8.0 | % | 7.4 | % | |||||||||||||||
| Operating Margin (GAAP) | 8.2 | % | 7.3 | % | 8.8 | % | 9.0 | % | |||||||||||||||
Transform and Modernize Initiative(1)(2) | 0.5 | — | 0.4 | — | |||||||||||||||||||
| Pork Antitrust Litigation Settlements | — | — | 0.1 | — | |||||||||||||||||||
| Red Meat Wages Antitrust Litigation Settlement | 0.5 | — | 0.2 | — | |||||||||||||||||||
Poultry Wages Antitrust Litigation Settlement | 0.1 | — | — | — | |||||||||||||||||||
Arbitration Ruling | — | 2.4 | — | 0.8 | |||||||||||||||||||
| Adjusted Operating Margin (Non-GAAP) | 9.2 | % | 9.7 | % | 9.5 | % | 9.8 | % | |||||||||||||||
(1) Comprised primarily of asset write-offs related to portfolio optimization.
(2) Comprised primarily of project-based external consulting fees.
LIQUIDITY AND CAPITAL RESOURCES
When assessing its 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
| Nine Months Ended | |||||||||||
In thousands | July 28, 2024 | July 30, 2023 | |||||||||
Cash and Cash Equivalents at End of Period | $ | 537,476 | $ | 669,124 | |||||||
| Cash Provided by (Used in) Operating Activities | 858,117 | 728,756 | |||||||||
| Cash Provided by (Used in) Investing Activities | (176,899) | (588,489) | |||||||||
| Cash Provided by (Used in) Financing Activities | (879,823) | (450,977) | |||||||||
| Increase (Decrease) in Cash and Cash Equivalents | (199,057) | (312,983) | |||||||||
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Cash and cash equivalents decreased $199 million during the first nine months of fiscal 2024, primarily as a result of the Company repaying a portion of long-term debt by using existing cash on hand and the proceeds from new debt issued in fiscal 2024. Cash provided by operating activities has been sufficient to cover dividend payments and capital expenditures during the first nine months of fiscal 2024. 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 during the first nine months of fiscal 2024 were largely impacted by changes in operating assets and liabilities.
–Accounts receivable decreased $89 million and $81 million during the nine months ended July 28, 2024 and July 30, 2023, respectively, primarily due to lower sales.
–Inventory decreased $31 million during the first nine months of fiscal 2024 compared to an increase of $21 million in the comparable period of the prior year. The decrease in inventory during fiscal 2024 was due to benefits in supply chain processes associated with the Company's transform and modernize initiative as well as the impact of production disruptions at the Suffolk, Virginia manufacturing facility. These reduced levels of inventory were partially offset by higher levels of turkey on hand in fiscal 2024. The increase in inventory during fiscal 2023 was due to production outpacing sales.
–Accounts payable and accrued expenses decreased $95 million during the first nine months of fiscal 2024 due to the general timing of payments, feed and livestock deferral payments, and annual incentive payments. These decreases were partially offset by higher accruals for marketing and legal expenses. Accounts payable and accrued expenses decreased $131 million during the first nine months of fiscal 2023 due to the general timing of payments and annual incentive payments, partially offset by higher accruals for legal expenses.
–Prepaid expenses and other assets increased $8 million during the nine months ended July 28, 2024, compared to an increase of $52 million during the nine months ended July 30, 2023. This activity was primarily related to settlements associated with the Company’s hedging activities.
Cash Provided by (Used in) Investing Activities
•Capital expenditures were $173 million and $169 million during the first nine months of fiscal 2024 and fiscal 2023, respectively. The largest spend during fiscal 2024 was for the transition from harvest to value-added capacity at the facility in Barron, Wisconsin and wastewater infrastructure to support operations in Austin, Minnesota. The largest spend during fiscal 2023 was related to capacity expansion for pepperoni and the SPAM® family of products.
•During the first nine months of fiscal 2023, the Company purchased a minority interest in Garudafood for $426 million.
Cash Provided by (Used in) Financing Activities
•The Company paid $950 million of its senior unsecured notes upon maturity on June 3, 2024.
•Proceeds from the issuance of long-term debt were $498 million during the first nine months of fiscal 2024. The Company issued senior unsecured notes with aggregate principal amount of $500 million.
•Cash dividends paid to the Company’s shareholders were $460 million during the first nine months of fiscal 2024, compared to $443 million in the comparable period of fiscal 2023.
•Proceeds from the exercise of stock options were $34 million in the first nine months of fiscal 2024, compared to $8 million in the first nine months of fiscal 2023. The increase in proceeds was due to more options exercised during fiscal 2024 compared to fiscal 2023.
•There were no share repurchases during the first nine months of fiscal 2024. Share repurchases of $12 million were made during the first nine months of fiscal 2023.
Sources and Uses of Cash
The Company believes its 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 and uses a waterfall approach, which focuses first on core uses of cash, such as capital expenditures to maintain facilities, dividend returns to investors, mandatory debt repayments, and fulfillment of 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 unsecured revolving 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 has multiple sources of liquidity to complete such investments and acquisitions. For example, the Company’s historic ability to leverage its balance sheet through the issuance of debt has provided the flexibility to pursue strategic opportunities.
Dividend Payments
The Company remains committed to providing returns to investors through cash dividends. The Company has paid 384 consecutive quarterly dividends since becoming a public company in 1928. The Board of Directors approved an increased
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annual dividend rate for fiscal 2024 raising it to $1.13 per share from $1.10 per share, representing the 58th consecutive annual dividend increase.
Capital Expenditures
Capital expenditures are allocated to required maintenance and 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 July 28, 2024, the Company’s outstanding debt included $2.9 billion of fixed rate unsecured senior notes due in fiscal 2027, 2028, 2030, and 2051 with interest payable semi-annually. During the first nine months of fiscal 2024, the Company made $55 million of interest payments and the Company expects to make an additional $13 million of interest payments during fiscal 2024 on these notes. On March 8, 2024, the Company issued senior unsecured notes with an aggregate principal amount of $500 million. These proceeds were used, along with cash on hand, to repay $950 million in senior unsecured notes which matured on June 3, 2024. 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 for general corporate purposes, which may include repaying existing debt, funding acquisitions, and for working capital or other general purposes. 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 July 28, 2024, the Company had no outstanding draws from this facility.
Debt Covenants
The Company’s debt 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, or engage in certain sale and leaseback transactions, and the covenants require the Company to maintain certain consolidated leverage ratios. As of July 28, 2024, the Company was in compliance with all covenants in its debt agreements and expects to maintain compliance in the future.
Cash Held by International Subsidiaries
As of July 28, 2024, the Company's international subsidiaries held $197 million of cash and cash equivalents. 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. Under the share repurchase authorization, the Company may repurchase shares periodically, depending on market conditions and other factors, and may do so in open market purchases or privately negotiated transactions. The share repurchase authorization has no expiration date. The Company did not repurchase any shares of stock during the first nine months of fiscal 2024. The Company continues to evaluate share repurchases as part of its capital allocation strategy.
Commitments
As previously described, on March 8, 2024, the Company issued senior unsecured notes with an aggregate principal amount of $500 million with a three-year tenor due March 2027. The notes bear interest at a fixed rate of 4.800% per annum and pay semi-annually. See Note J - Long-Term Debt and Other Borrowing Arrangements of the Notes to the Consolidated Financial Statements for additional information.
The Company used cash on hand to pay approximately $7 million during the third quarter of fiscal 2024 in respect of legal settlements. Subsequent to quarter-end but prior to the filing of this Quarterly Report on Form 10-Q, the Company used an additional $4 million of cash on hand to complete payment of these legal settlements. Also subsequent to quarter-end, the Company entered into additional legal settlements totaling $17 million, which remain subject to Court approval. Following such approval, the Company expects to pay the associated amounts using cash on hand. See Note I - Commitments and Contingencies of the Notes to the Consolidated Financial Statements for additional information.
Outside of the items mentioned above, 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.
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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.
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 Company’s business as well as the national and worldwide economic environment. The risks and uncertainties that could cause actual results to differ from those anticipated or projected include, among other things, risks related to the deterioration of economic conditions; risks associated with acquisitions, joint ventures, equity investments, and divestitures; the risk of disruption of operations, including at owned facilities, co-manufacturers, suppliers, logistics providers, customers, or other third-party service providers; risk related to the remediation of production disruptions at the Suffolk, Virginia, facility; the risk that the Company will fail to realize anticipated cost savings or operating efficiencies associated with strategic initiatives, including the transform and modernize initiative; risk of loss of a material contract; risk of the Company’s inability to protect information technology systems against, or effectively respond to, cyber attacks against it or others with whom it does business, security breaches or other IT interruptions; deterioration of labor
32
relations or labor availability or increases to labor costs; general risks of the food industry, including food contamination or 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; risks related to the Company's ability to respond to changing consumer preferences and the success of innovation and marketing investments; damage to the Company’s reputation or brand image; risks associated with 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; risks and uncertainties associated with intangible assets, including any future goodwill or intangible assets impairment charges; and risks arising from the Company’s foreign operations, including geopolitical risk, exchange rate risk, and risks associated with tariffs.
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 July 28, 2024 was $(22.9) 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 contracts as of July 28, 2024 by $25.6 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 July 28, 2024, the Company’s long-term debt had a fair value of $2.4 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 July 28, 2024 by $76.0 million. A 10 percent increase would have negatively impacted the long-term debt by $70.9 million.
Foreign Currency Exchange Rate Risk: The fair values of certain of the Company’s assets are subject to fluctuations in foreign currency exchange rates. The Company’s net asset position in foreign currencies as of July 28, 2024 and October 29, 2023 was $1.1 billion, with most of the exposure existing in Chinese yuan, Indonesian rupiah, 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 July 28, 2024, the balance of these securities totaled $207.0 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 pre-tax earnings by approximately $9.8 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
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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 third 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.
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, except as follows:
Business and Operational Risks
Deterioration of labor relations, labor availability or increases in labor costs could harm the Company’s business. As of October 29, 2023, the Company employed approximately 20,000 people worldwide, of which approximately 20 percent were represented by labor unions, principally the United Food and Commercial Workers Union. Union contracts at two of the Company's manufacturing facilities, covering approximately 250 employees, expired and new union agreements were ratified at both locations during fiscal 2024. A significant increase in labor costs or a deterioration of labor relations at any of the Company’s facilities or co-manufacturing facilities resulting in work slowdowns or stoppages could harm the Company’s financial results. Labor and skilled labor availability challenges could continue to have an adverse effect on the Company's business.
Industry Risks
Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins. The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including African swine fever (ASF), Bovine Spongiform Encephalopathy (BSE), pneumo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease (FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI). The outbreak of such diseases could adversely affect the Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins. The impact of global climate change may increase these risks due to changes in weather or migratory patterns, which may result in certain types of diseases occurring more frequently or with more intense effects. Additionally, the outbreak of disease may hinder the Company’s ability to market and sell products both domestically and internationally.
In recent years, the outbreak of ASF has impacted hog herds in China, Asia, Europe, and the Caribbean. If an outbreak of ASF were to occur in the U.S., the Company’s supply of hogs and pork could be materially impacted.
HPAI was detected within the Company’s turkey supply chain during the first nine months of fiscal 2024. The impact of HPAI has reduced and the Company believes it will continue to reduce production volume in the Company’s turkey facilities throughout fiscal 2024. The Company is continuing to monitor the situation and will take appropriate actions to protect the health of the turkeys across the supply chain.
The Company has developed business continuity plans for various disease scenarios and will continue to update these plans as necessary. There can be no assurance given, however, that these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
Climate change, or legal, regulatory or market measures to address climate change, could have an adverse impact on the Company’s business and results of operations. There is growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns, and the frequency and severity
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of extreme weather and natural disasters. If such climate change has a negative impact on agricultural productivity, the Company may have decreased availability or less favorable pricing for the raw materials necessary for its operations. Climate change may also cause decreased availability or less favorable pricing for water, which could have an adverse effect on the Company’s operations and supply chain. In addition, natural disasters and extreme weather, including those caused by climate change, have caused and could continue to cause disruption in the Company’s operations and supply chain.
The increasing concern over climate change may also result in greater local, state, federal, and foreign legal requirements, including requirements to limit greenhouse gas emissions or conserve water usage. If such requirements are enacted, the Company could experience significant cost increases in its operations and supply chain.
The Company has developed and publicly announced goals to reduce its impact on the environment such as the 20 by 30 Challenge and the recently announced validation of its greenhouse gas reduction targets by the Science Based Targets initiative. The Company's ability to achieve these goals is subject to numerous factors and conditions, many of which are outside of its control. Examples include, among others, evolving regulatory requirements, disclosure frameworks, and methodologies for reporting data. Failure to accomplish goals set by the Company related to climate change or meet expectations of various Company stakeholders may cause decreased demand for the Company’s products and have an adverse effect on results of operations.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no issuer purchases of equity securities in the quarter ended July 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 July 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 July 28, 2024, no director or officer of the Company adopted terminated
Item 6. EXHIBITS
| 101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 28, 2024, formatted in Inline XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated 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 July 28, 2024, formatted in Inline XBRL (included as Exhibit 101). | ||||
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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: September 4, 2024 | By: | /s/ JACINTH C. SMILEY | ||||||
| JACINTH C. SMILEY | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| Date: September 4, 2024 | By: | /s/ PAUL R. KUEHNEMAN | ||||||
| PAUL R. KUEHNEMAN | ||||||||
| Vice President and Controller | ||||||||
| (Principal Accounting Officer) | ||||||||
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