hrl-20221030
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the fiscal year ended October 30, 2022
or
For the transition period from ____________________ to _________________________
Commission File Number: 1-2402
HORMEL FOODS CORPORATION
(Exact name of registrant as specified in its charter)
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (507) 437-5611Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock $0.01465 par value HRL New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No☒
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 Regulations 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.
Large accelerated filer ☒ 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of May 1, 2022, was $15,095,914,678 based on the closing price of $52.39 on the last business day of the registrant’s most recently completed second fiscal quarter.
As of December 4, 2022, the number of shares outstanding of each of the registrant’s classes of common stock was as follows:
Common Stock, $0.01465 Par Value – 546,424,194 shares
Common Stock Non-Voting, $0.01 Par Value – 0 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held January 31, 2023, are incorporated by reference into Part III, Items 10-14. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
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HORMEL FOODS CORPORATION
TABLE OF CONTENTS
PART I
Item 1. Business 3
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 11
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Mine Safety Disclosures 12
PART II
Item 6. Reserved 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29
Item 8. Financial Statements and Supplemental Data 30
Item 9A. Controls and Procedures 66
Item 9B. Other Information 67
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 67
PART III
Item 10. Directors, Executive Officers, and Corporate Governance 67
Item 11. Executive Compensation 67
Item 14. Principal Accountant Fees and Services 68
PART IV
Item 15. Exhibits and Financial Statement Schedules 69
SIGNATURES 72
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PART I
Item 1. BUSINESS
General Development of Business
Hormel Foods Corporation, a Delaware corporation (collectively, the "Company", "we," "us,", "our"), was founded by George A. Hormel in 1891 in Austin, Minnesota, as Geo. A. Hormel & Company. The Company started as a processor of meat and food products and continues in this line of business with emphasis on the manufacturing and distribution of branded, value-added consumer items rather than commodity fresh meat products. The Company builds on its founder's legacy of innovation, quality, and integrity with focus on its purpose statement - Inspired People. Inspired Food.TM Today, the Company is a global branded food company bringing some of the most trusted and iconic brands to tables across the globe with over $12 billion in annual revenue in more than 80 countries.
The Company has continually expanded its product portfolio through organic growth and acquisitions. In fiscal 2021, the Company acquired the Planters® snack nuts business, expanding the Company's presence in the growing snacking space. Refer to Note B - Acquisitions and Divestitures for additional information.
Description of Business
Segments
The Company manages and reports its operating results in the following four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. Net sales to unaffiliated customers, segment profit, and the presentation of certain other financial information by segment are reported in Note P - Segment Reporting of the Notes to Consolidated Financial Statements and in the Management's Discussion and Analysis of Financial Condition and Results of Operations.
Grocery Products: The Grocery Products segment primarily consists of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market, along with the sale of nutritional and private label shelf-stable products to retail, foodservice, and industrial customers. This segment also includes the results from the Company’s MegaMex Foods, LLC (MegaMex) joint venture.
Refrigerated Foods: The Refrigerated Foods segment includes the processing, marketing, and sale of branded and unbranded pork, beef, and poultry products for retail, foodservice, deli, convenience store, and commercial customers.
Jennie-O Turkey Store: The Jennie-O Turkey Store segment primarily consists of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and commercial customers.
International & Other: The International & Other segment includes Hormel Foods International, which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Company’s international royalty arrangements and other joint ventures.
During the fourth quarter of fiscal 2022, the Company announced a new strategic operating model, which aligns its businesses to be more agile, consumer and customer focused, and market driven. Effective in fiscal 2023, the Company will transition to this new model with the following three operating and reportable segments: Retail, Foodservice, and International. Prior period results will be reclassified to reflect these new reportable segments.
Products and Distribution
The Company develops, processes, and distributes a wide array of food products in a variety of markets and manufactures its products through various processing facilities and trusted co-manufacturers. The Company’s products primarily consist of meat, nuts, and other food products sold across multiple distribution channels, such as U.S. Retail, U.S. Foodservice, and International.
Domestically, the Company sells its products in all 50 states. The Company’s products are sold through its sales personnel, who operate in assigned territories or in dedicated teams serving major customers and who are coordinated from sales offices predominately located in major U.S. cities. The Company also utilizes independent brokers and distributors. Products are primarily distributed by common carrier.
Internationally, the Company markets its products through Hormel Foods International Corporation (HFIC), a wholly-owned subsidiary. HFIC has a global presence within several major international markets, including Australia, Brazil, Canada, China, England, Japan, Mexico, Micronesia, the Philippines, Singapore, and South Korea. Distribution of export sales to customers is by common carrier, while the China and Brazil operations own and operate their own delivery systems. The Company, through HFIC, has licensed companies to manufacture various products internationally on a royalty basis, with the primary licensees
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being Danish Crown UK Ltd., and CJ CheilJedang Corporation. HFIC also has a minority position in a food company in the Philippines (The Purefoods-Hormel Company, Inc., 40 percent holding).
Raw Materials
The Company concentrates on the marketing and sale of branded, value-added food products. The principal raw materials used by the Company include pork, turkey, beef, chicken, and nuts. The Company takes a balanced approach to sourcing pork raw materials, including hogs purchased for the Austin, Minnesota processing facility, long-term supply agreements for pork, and spot market purchases of pork. The majority of the turkeys needed to meet raw material requirements are raised by the Company. Production costs from raising turkeys are subject to fluctuations in grain prices and fuel costs. To manage these risks, the Company uses futures, swaps, and options contracts to hedge a portion of its anticipated purchases.
The Company also purchases raw materials from various suppliers. As the Company shifts its focus toward a more value-added portfolio, it has become increasingly dependent on these suppliers to meet its raw material needs. Certain raw materials, such as cashews, are sourced internationally, which may cause additional risks to pricing and availability. The Company utilizes supply contracts and forward buying strategies to ensure an adequate supply and mitigate price fluctuations.
Human Capital
The Company’s employees are the driving force behind innovation, improvement, and success. As of October 30, 2022, the Company had more than 20,000 active employees, with over 90 percent located within the U.S. Approximately 20 percent of employees are covered by collective bargaining agreements.
Talent Acquisition, Development, and Retention
Hormel’s team members are the cornerstone of the Company and of the fulfillment of its purpose — Inspired People. Inspired Food.TM The Company places great importance on the growth, development, and engagement of its team members. The Company offers a competitive compensation package and a multitude of benefits, including medical, life and disability insurance, contributory and non-contributory retirement savings plans, tuition reimbursement, and two years of tuition-free community and technical college for U.S. employees’ dependent children.
The Company believes investing in the education, training, and development of employees contributes to the overall success of the business. The Company provides learning opportunities for employees through various training courses, including instructor-led internal and external programs and on-the-job training.
The Company considers the tenure of its team members to be an important indicator of overall performance and is proud of its tenure figures. As of October 30, 2022, approximately 50 percent of the Company's team members had five or more years of service, and the 37-person officer team had an average of 25 years of service.
During fiscal 2022, the Company faced productivity challenges related to high turnover and the need to train new team members at its manufacturing facilities. Overall, the turnover rate was 11 percent for salaried team members and 44 percent for hourly team members. The Company is focused on onboarding and training new team members and creating a best-in-class experience throughout the organization.
Diversity, Equity, and Inclusion
The Company welcomes the diversity of all team members, customers, and consumers, and encourages the integration of their unique skills, thoughts, experiences, and identities. The Company’s workforce is made up of approximately 40 percent female and over 55 percent underrepresented minorities. The Company’s salaried employees are made up of over 30 percent female and approximately 20 percent underrepresented minorities. By fostering an inclusive culture, the Company enables every member of the workforce to leverage unique talents and high performance standards to drive innovation and success.
Executives of the Company are held accountable for creating an inclusive, diverse workplace through their annual incentive plan, which includes a component focused on overall belonging scores and the representation of female and underrepresented minorities in salaried positions.
The Company supports eleven employee resource groups (ERGs) that support the Company’s mission to create a workplace where all people feel welcomed, respected, and valued. These employee-driven groups play a critical role in diversity, equity, and inclusion efforts and provide professional development and mentorship opportunities.
Safety, Health, and Wellness
The Company’s dedicated corporate safety department develops and administers company-wide policies to ensure the safety of each employee and compliance with Occupational Safety and Health Administration standards. The corporate safety department also conducts regular audits of production facilities to ensure compliance with Company safety policies. The Company conducts safety training for all team members and completes approximately 1,000 safety assessments each month.
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The Company recognizes that team members perform best when they are healthy and that optimal performance is necessary for the Company to achieve its key results. In addition to the health care benefits package, the Company’s Inspired Health program aims to cultivate and maintain a culture of health and wellness that is focused on encouraging and empowering team members to make healthy lifestyle choices through awareness, prevention, and positive health behavior changes. This program includes biometric screenings, on-site fitness centers and fitness center discounts, an online health university with robust information and resources, a tobacco cessation program, wellness challenges, and confidential health and wellness support.
Governmental Regulation and Environmental Matters
The Company’s operations are subject to regulation by various governmental agencies which oversee areas such as food safety, workforce immigration, environmental laws, animal welfare, tax regulations, and the processing, packaging, storage, distribution, advertising, and labeling of the Company’s products. The Company believes it is in compliance with current laws and regulations and does not expect continued compliance to have a material impact on capital expenditures, earnings, or competitive position. The Company continues to monitor existing and pending laws and regulations and, while the impact of regulatory changes cannot be predicted with certainty, the Company does not expect compliance to have a material adverse effect on the Company's business. In addition to compliance with environmental laws and regulations, the Company sets goals to further improve its sustainability efforts and reduce its environmental impact. These goals are outlined in the Company’s 20 by 30 Challenge and include matching energy with renewable sourcing, reducing organic waste and greenhouse gas emissions, supporting regenerative agriculture, focusing on packaging sustainability, and reducing food waste.
Significant Customers
The Company serves many customers throughout the world across various sales channels. Sales to the Company's largest customer, Walmart Inc. (Walmart), accounted for approximately 16 percent of consolidated gross sales less returns and allowances during fiscal 2022. Walmart is a customer in all four reportable segments. The Company's top five customers collectively represent approximately 36 percent of consolidated gross sales less returns and allowances. The loss of one or more of the top customers in any of the reportable segments could have a material adverse effect upon such segment's financial results.
Competition
The production and sale of meat and food products in the U.S. and internationally is highly competitive. The Company competes with manufacturers of pork and turkey products as well as national and regional producers of other meat and protein sources, such as beef, chicken, fish, nuts, and plant-based proteins.
All operating segments compete on the basis of price, product quality and attributes, brand identification, breadth of product line, and customer service. Through effective marketing and strong quality assurance programs, the Company’s strategy is to provide high quality products that possess strong brand recognition, which support higher value perceptions with customers.
Patents and Trademarks
There are numerous patents and trademarks important to the Company’s business. The Company holds 41 U.S. and seven foreign patents. Most of the trademarks the Company uses are registered in the U.S. and other countries. Some of the more significant owned or licensed trademarks used by the Company or its affiliates are:
HORMEL, ALWAYS TENDER, APPLEGATE, AUSTIN BLUES, BACON 1, BLACK LABEL, BREAD READY, BURKE, CAFÉ H, CERATTI, CHI-CHI’S, COLUMBUS, COMPLEATS, CORN NUTS, CURE 81, DAN’S PRIZE, DI LUSSO, DINTY MOORE, DON MIGUEL, DOÑA MARIA, EMBASA, FAST ‘N EASY, FIRE BRAISED, FONTANINI, HAPPY LITTLE PLANTS, HERDEZ, HORMEL GATHERINGS, HORMEL VITAL CUISINE, HOUSE OF TSANG, JENNIE-O, JUSTIN’S, LA VICTORIA, LAYOUT, LLOYD’S, MARY KITCHEN, NATURAL CHOICE, NUT-RITION, OLD SMOKEHOUSE, OVEN READY, PILLOW PACK, PLANTERS, ROSA GRANDE, SADLER'S SMOKEHOUSE, SKIPPY, SPAM, SPECIAL RECIPE, THICK & EASY, VALLEY FRESH, and WHOLLY.
The Company’s patents expire after a term that is typically 20 years from the date of filing, with earlier expiration possible based on the Company’s decision whether to pay required maintenance fees. As long as the Company continues to use its trademarks, they are renewed indefinitely.
Available Information
The Company makes available its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 on its website at www.hormelfoods.com. These reports are accessible under the caption, “Investors – Filings & Reports – SEC Filings” on the Company’s website and are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). These filings are also available on the SEC's website at www.sec.gov. The documents are available in print, free of charge, to any stockholder who requests them.
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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 the Company’s Annual Report to Stockholders, other filings by the Company with the SEC, 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 following discussion of risk factors contains certain cautionary statements regarding the Company’s business, which should be considered by investors and others. Such risk factors should be considered in conjunction with any discussions of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the Company.
In making these statements, the Company is not undertaking, and specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the Company’s business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the Company has attempted to list comprehensively these important cautionary risk factors, the Company wishes to caution investors and others that other factors may in the future prove to be important in affecting the Company’s business or results of operations.
The Company cautions readers not to place undue reliance on forward-looking statements, which represent current views as of the date made. Forward-looking statements are inherently at risk to changes in the national and worldwide economic environment, which could include, among other things, risks related to the deterioration of economic conditions; the COVID-19 pandemic; risks associated with acquisitions and divestitures; potential disruption of operations including at co-manufacturers, suppliers, logistics providers, customers, or other third-party service providers; risk of loss of a material contract; the Company’s inability to protect information technology systems against, or effectively respond to, cyber attacks or security breaches; deterioration of labor relations, labor availability or increases to labor costs; general risks of the food industry, including food contamination; outbreaks of disease among livestock and poultry flocks; fluctuations in commodity prices and availability of raw materials and other inputs; fluctuations in market demand for the Company’s products; damage to the Company's reputation or brand image; climate change, or legal, regulatory, or market measures to address climate change; risks of litigation; potential sanctions and compliance costs arising from government regulation; compliance with stringent environmental regulations and potential environmental litigation; and risks arising from the Company’s foreign operations.
Item 1A. RISK FACTORS
Business and Operational Risks
Deterioration of economic conditions could harm the Company’s business. The Company's business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, tax rates, availability of capital, energy availability and costs (including fuel surcharges), political developments, civil unrest, and the effects of governmental initiatives to manage economic conditions. Decreases in consumer spending rates and shifts in consumer product preferences could also negatively impact the Company.
Volatility in financial markets and the deterioration of national and global economic conditions could impact the Company’s operations as follows:
▪The financial stability of the Company's customers and suppliers may be compromised, which could result in additional bad debts or non-performance by suppliers.
▪The value of the Company's investments in debt and equity securities may decline, including most significantly the trading securities held as part of a rabbi trust to fund supplemental executive retirement plans and deferred income plans, and the Company’s assets held in pension plans.
▪Future volatility or disruption in the capital and credit markets could impair the Company's liquidity or increase costs of borrowing.
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▪The Company may be required to redirect cash flow from operations or explore alternative strategies, such as disposing of assets, to fulfill the payment of principal and interest on its indebtedness.
The Company has no operations in Russia or Ukraine, yet it has experienced inflated fuel costs and supply chain shortages and delays due to the impact of the military conflict on the global economy. Further escalation related to the conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, additional supply chain disruptions, rising prices for oil and other commodities, volatility in capital markets and foreign exchange rates, rising interest rates or heightened cybersecurity risks, any of which may adversely affect the Company's business. In addition, the effects of the ongoing conflict could heighten many of the other risk factors included in Item 1A.
The Company utilizes hedging programs to manage its exposure to various market risks, such as commodity prices and interest rates, which qualify for hedge accounting for financial reporting purposes. Volatile fluctuations in market conditions could cause these instruments to become ineffective, which could require any gains or losses associated with these instruments to be reported in the Company’s earnings each period. These instruments may limit the Company’s ability to benefit from market gains if commodity prices and/or interest rates become more favorable than those secured under the Company’s hedging programs.
The Company's goodwill and indefinite lived intangible assets are initially recorded at fair value and are not amortized, but are reviewed for impairment annually or more frequently if impairment indicators arise. Impairment testing requires judgment around estimates and assumptions and is impacted by factors such as revenue growth rates, operating margins, tax rates, royalty rates, and discount rates. An unfavorable change in these factors may lead to the impairment of goodwill and/or intangible assets.
Additionally, if another highly pathogenic human disease outbreak developed, it may negatively impact the global economy, demand for Company products, and/or the Company’s workforce availability, and the Company’s financial results could suffer. The Company has developed contingency plans to address infectious disease scenarios and the potential impact on its operations, and will continue to update these plans as necessary. There can be no assurance given, however, that these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
The COVID-19 pandemic could adversely affect the Company’s business, financial condition and results of operations. The COVID-19 global pandemic has had, and may continue to have, negative impacts across many of the Company's business units and facilities. The near- and long-term impacts of COVID-19 are unknown and impossible to predict with any level of certainty. The following potential risk factors arising from the COVID-19 pandemic have had and/or may continue to have one or more of the following impacts on the Company's operations:
▪One or more of the Company's manufacturing facilities may be shut down or have their operations significantly impacted due to employee illnesses, increased absenteeism, and/or actions by government agencies. Capital projects may be delayed as additional capacity is no longer currently needed or materials are unavailable. The Company's co-manufacturers and material suppliers may face similar impacts.
▪Operating costs may increase as measures are put in place to prevent or slow down the spread of COVID-19, such as compliance with regulatory restrictions, vaccine mandates, facility improvements, employee testing, short-term disability policies, and manufacturing employee bonus payments.
▪Operations may be negatively impacted if members of the Company's leadership team, or other key employees, become ill with COVID-19 or otherwise terminate their employment as a result of COVID-19. Further, the Company may face challenges with labor availability, relations, labor costs, hiring, onboarding, and training new employees, including leadership, which may impact results. The Company also may face operational challenges if government quarantine orders restrict movement of employees.
▪Supply chain disruptions of various types arising from COVID-19 may impact the Company's ability to make products, the cost for such products, and the ability to deliver products to customers. Closure or reduced operations of material suppliers could result in shortages of key raw materials, as well as impact prices for those materials. The volatility in the market for raw material and supplies could impact the Company's profitability.
▪National, state, and local government orders closing or limiting operation of borders and ports, or imposing quarantine, could impact the Company's ability to obtain raw materials and to deliver finished goods to customers.
▪Closures or reduced operations at foodservice establishments may impact results for the Company's foodservice business. Bankruptcy filings and/or delinquent payments from the foodservice industry or other customers may negatively impact cash flow.
▪A national and/or global economic downturn may impact consumer purchase behavior, such as reduced volume for foodservice products and premium brands.
▪If the Company's public relations efforts related to the pandemic are not effective or if consumers perceive them to be irresponsible, the Company's competitive position, reputation, and market share may suffer.
The extent of the impact on the Company’s business, financial condition, and results of operations is dependent on the length and severity of the pandemic. The COVID-19 pandemic may adversely impact the Company's operations in one or more ways not identified to date.
The Company’s operations are subject to the general risks associated with acquisitions and divestitures. The Company has made several acquisitions and divestitures in recent years, including the acquisition of the Planters®snack nuts business in
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June 2021, that align with the Company’s strategic initiative of delivering long-term value to shareholders. The Company regularly reviews strategic opportunities to grow through acquisitions and to divest non-strategic assets. Potential risks associated with these transactions include the inability to consummate a transaction timely or on favorable terms, diversion of management's attention from other business concerns, potential loss of key employees and customers of current or acquired companies, inability to integrate or divest operations successfully, possible assumption of unknown liabilities, potential disputes with buyers or sellers, inability to obtain favorable financing terms, potential impairment charges if purchase assumptions are not achieved, and the inherent risks in entering markets or lines of business in which the Company has limited or no prior experience. Any or all of these risks could impact the Company’s financial results and business reputation. In addition, acquisitions outside the U. S. may present unique challenges and increase the Company's exposure to the risks associated with foreign operations. The Company's level of indebtedness increased significantly to fund the purchase of the Planters® snack nuts business and may continue to increase to fund future acquisitions. Higher levels of debt may, among other things, impact the Company's liquidity and increase the Company's exposure to negative fluctuations in interest rates.
The Company is subject to disruption of operations at co-manufacturers, suppliers, logistics providers, customers, or other third-party service providers.
▪Disruption of operations at co‐manufacturers, suppliers, or logistics providers have and may continue to impact the Company’s product and input supplies as well as the ability to distribute products.
▪Disruptions related to significant customers or sales channels has and could continue to result in a reduction in sales or change in the mix of products sold.
▪Disruption in services from partners such as third-party service providers used to support various business functions such as benefit plan administration, payroll processing, information technology and cloud computing services could have an adverse effect on the Company's business.
Any of these disruptions could have an adverse effect on the Company’s financial results. Actions taken to mitigate the impact of any potential disruption, including increasing inventory in anticipation of a potential production or supply interruption, may adversely affect the Company’s financial results. Additionally, labor-related challenges have caused disruptions for many of these providers and may continue to impact the Company's ability to receive inputs or distribute products.
The Company is subject to the loss of a material contract. The Company is a party to several supply, distribution, contract packaging and other material contracts. The loss of a material contract or failure to obtain new material contracts could adversely affect the Company’s financial results.
The Company may be adversely impacted if the Company is unable to protect information technology systems against, or effectively respond to, cyber attacks or security breaches. Information technology systems are an important part of the Company’s business operations. In addition, the Company increasingly relies upon third-party service providers for a variety of business functions, including cloud-based services. Cyber incidents are occurring more frequently and are being made by groups and individuals with a wide range of motives and expertise. From time to time, the Company has experienced, and may experience in the future, breaches of its security measures due to human error, malfeasance, insider threats, system errors or vulnerabilities or other irregularities, none of which have been material to date. Remote work arrangements may bring additional information technology and data security risks.
In addition, the Company is in the midst of a multi-year transformation project (Project Orion) to achieve better analytics, customer service, and process efficiencies through the use of Oracle Cloud Solutions. This project is expected to improve the efficiency and effectiveness of certain financial and business transaction processes and the underlying systems environment. During fiscal 2020, the Company implemented the human resource, payroll, and finance phases of the project. Additional integrations are expected to take place over the next few years. Such an implementation is a major undertaking from a financial, management, and personnel perspective. The implementation of the enterprise resource planning system may prove to be more difficult, costly, or time consuming than expected, and there can be no assurance that this system will be beneficial to the extent anticipated.
In an attempt to mitigate these risks, the Company has implemented and continues to evaluate security initiatives and business continuity plans.
Deterioration of labor relations, labor availability or increases in labor costs could harm the Company’s business. As of October 30, 2022, the Company employed more than 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 four of the Company's manufacturing facilities, covering approximately 2,400 employees, will expire during fiscal 2023. Negotiations have not yet been initiated. 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.
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Industry Risks
The Company’s operations are subject to the general risks of the food industry. The food products manufacturing industry is subject to the risks posed by:
▪food spoilage;
▪food contamination caused by disease-producing organisms or pathogens, such as Listeria monocytogenes, Salmonella, and pathogenic E coli.;
▪food allergens;
▪nutritional and health-related concerns;
▪federal, state, and local food processing controls;
▪consumer product liability claims;
▪product tampering; and
▪the possible unavailability and/or expense of liability insurance.
The pathogens that may cause food contamination are found generally in livestock and in the environment and thus may be present in the Company's products. These pathogens can also be introduced to products as a result of improper handling by customers or consumers. The Company does not have control over handling procedures once products have been shipped for distribution. If one or more of these risks were to materialize, the Company’s brand and business reputation could be negatively impacted. In addition, revenues could decrease, costs of doing business could increase, and the Company’s operating results could be adversely affected.
Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins. The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including African swine fever (ASF), Bovine Spongiform Encephalopathy (BSE), pneumo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease (FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI). The outbreak of such diseases could adversely affect the Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins. Additionally, the outbreak of disease may hinder the Company’s ability to market and sell products both domestically and internationally.
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 U.S. in 2022 and was confirmed within the Company's Jennie-O Turkey Store supply chain. The impact of HPAI has reduced and will continue to reduce production volume in the Company's turkey facilities at least through the first half of fiscal 2023. The Company is continuing to monitor the situation and will take the 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.
Fluctuations in commodity prices and availability of raw materials and other inputs could harm the Company’s earnings.The Company’s results of operations and financial condition are largely dependent upon the cost and supply of pork, poultry, beef, feed grains, and nuts as well as supplies, energy and other inputs and the selling prices for many of the Company's products, which are determined by constantly changing market forces of supply and demand.
The Company takes a balanced approach to sourcing pork raw materials, including hogs purchased for the Austin, Minnesota processing facility, long-term supply agreements for pork, and spot market purchases of pork. This approach ensures a more stable supply of raw materials while minimizing extreme fluctuations in costs over the long-term. This may result, in the short-term, in higher or lower live hog costs compared to the cash spot market. Market-based pricing on certain product lines, and lead time required to implement pricing adjustments, may prevent all or part of these cost increases from being recovered, and these higher costs could adversely affect the Company's short-term financial results.
Jennie-O Turkey Store raises turkeys and contracts with turkey growers to meet its raw material requirements for whole birds and processed turkey products. Results in these operations are affected by the cost and supply of feed grains, which fluctuate due to climate conditions, production forecasts, and supply and demand conditions at local, regional, national, and worldwide markets. The Company attempts to manage some of its short-term exposure to fluctuations in feed prices by forward buying, using futures contracts, and pursuing pricing advances. However, these strategies may not be adequate to overcome sustained increases in market prices due to alternate uses for feed grains or other changes in these market conditions.
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The Company may be subject to decreased availability or less favorable pricing for nuts, tomatoes, avocados, or other produce if poor growing conditions have a negative effect on agricultural productivity. Reductions in crop size or quality due to unfavorable growing conditions may have an adverse effect on the Company’s results.
The supplies of natural and organic proteins may impact the Company’s ability to ensure a continuing supply of these products. To mitigate this risk, the Company partners with multiple long-term suppliers.
International trade barriers and other restrictions or disruptions could result in decreased foreign demand and increased domestic supply of proteins, thereby potentially lowering prices. The Company occasionally utilizes in-country production to limit this exposure.
Market demand for the Company’s products may fluctuate. The Company faces competition from producers of alternative meats and protein sources, including pork, beef, turkey, chicken, fish, nuts, nut butters, whey, and plant-based proteins. The factors on which the Company competes include:
▪price;
▪product quality and attributes;
▪brand identification;
▪breadth of product line; and
▪customer service.
Demand for the Company’s products is also affected by competitors’ promotional spending, the effectiveness of the Company’s advertising and marketing programs, and consumer perceptions. Failure to identify and react to changes in food trends such as sustainability of product sources and animal welfare could lead to, among other things, reduced demand for the Company’s brands and products. The Company may be unable to compete successfully on any or all of these factors in the future.
Damage to the Company’s reputation or brand image can adversely affect its business. Maintaining and continually enhancing the perception of the Company’s reputation and brands is critical to business success. The Company’s reputation and brands have been in the past and could in the future be adversely impacted by a number of factors, including unfavorable consumer perception related to events or rumors, adverse publicity, and negative information disseminated through social and digital media. Failure to maintain, extend, and expand the Company’s reputation or brand image could adversely impact 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 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, could cause disruptions 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. Further, 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.
Legal and Regulatory Risks
The Company’s operations are subject to the general risks of litigation. The Company is involved on an ongoing basis in litigation arising in the ordinary course of business. Trends in litigation may include class actions involving employees, consumers, competitors, suppliers, shareholders, or others, and claims relating to product liability, contract disputes, antitrust regulations, intellectual property, advertising, labeling, wage and hour laws, employment practices or environmental matters. Neither litigation trends nor the outcomes of litigation can be predicted with certainty and adverse litigation trends and outcomes could negatively affect the Company’s financial results.
Government regulation, present and future, exposes the Company to potential sanctions and compliance costs that could adversely affect the Company’s business. The Company’s operations are subject to extensive regulation by the U.S. Department of Homeland Security, the U.S. Department of Agriculture, the U.S. Food and Drug Administration, federal and state taxing authorities and other federal, state, and local authorities which oversee workforce immigration, taxation, animal welfare, food safety, and the processing, packaging, storage, distribution, advertising, and labeling of the Company’s products. The Company’s manufacturing facilities and products are subject to ongoing inspection by federal, state and local authorities. Claims or enforcement proceedings could be brought against the Company in the future. The availability of government inspectors due
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to a government furlough could also cause disruption to the Company’s manufacturing facilities. Additionally, the Company is subject to new or modified laws, regulations, and accounting standards. The Company’s failure or inability to comply with such requirements could subject the Company to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions. A recent federal district court ruling has had a negative impact on harvest capacity and labor costs. Harvest facilities the Company uses are negotiating to resolve the situation and expect to reach a solution, but harvest capacity and labor costs will continue to be negatively impacted until a solution is reached. There can be no assurance a solution will be reached, in which case the negative impacts of the ruling would continue.
The Company is subject to stringent environmental regulations and potentially subject to environmental litigation, proceedings, and investigations. The Company’s past and present business operations and ownership and operation of real property are subject to stringent federal, state, and local environmental laws and regulations pertaining to the discharge of materials into the environment and the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment. Compliance with these laws and regulations, as well as any modifications, is material to the Company’s business. Some of the Company’s facilities have been in operation for many years and, over time, the Company and other prior operators of these facilities may have generated and disposed of wastes that now may be considered hazardous. Future discovery of contamination of property underlying or in the vicinity of the Company’s present or former properties or manufacturing facilities and/or waste disposal sites could require the Company to incur additional expenses related to additional investigation, assessment or other requirements. The occurrence of any of these events, the implementation of new laws and regulations or stricter interpretation of existing laws or regulations could adversely affect the Company’s financial results.
The Company’s foreign operations pose additional risks to the Company’s business. The Company operates its business and markets its products internationally. The Company’s foreign operations are subject to the risks described above, as well as risks related to fluctuations in currency values, foreign currency exchange controls, compliance with foreign laws, compliance with applicable U.S. laws, including the Foreign Corrupt Practices Act, and other economic or political uncertainties. International sales are subject to risks related to general economic conditions, imposition of tariffs, quotas, trade barriers and other restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws, and other economic and political uncertainties. All of these risks could result in increased costs or decreased revenues, which could adversely affect the Company’s financial results.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
The Company's global headquarters are located in Austin, Minnesota. The Company has various processing plants, warehouses and operational facilities, mainly located in the U.S. The Company maintains a national sales force through strategic placement of sales offices across the U.S. Properties are also maintained internationally to support global processing and sales. The majority of Company property is owned. Leased property is used as needed for production and sales. Property leases range in duration from one to twelve years.
*Many of the Company's properties are utilized by more than one segment. These facilities are reflected in the principal segment for presentation purposes. Additionally, turkey growout facilities are excluded.
The Company believes its operating facilities are well maintained and suitable for current production volumes. The Company regularly engages in construction and other capital improvement projects with a focus on value-added capacity projects and automation.
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Item 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings related to the ongoing operation of its business, including claims both by and against the Company. At any time, such proceedings typically involve claims related to product liability, 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 matters, either individually or in the aggregate, is not expected to have a material effect on the Company’s financial condition, results of operations, or liquidity.
The Company is a defendant in four sets of antitrust lawsuits broadly targeting the pork and turkey industries. None of these cases involve allegations of bid rigging or other criminal conduct. The Company has not established reserves as it does not believe it will have liability in any of these cases.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
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Information About Executive Officers
CURRENT OFFICE AND PREVIOUS
NAME AGE FIVE YEARS EXPERIENCE DATES
Group Vice President (Corporate Strategy) 04/05/21 to 12/31/21
Vice President and Chief Accounting Officer, LyondellBasell 04/01/18 to 04/04/21
Chief Financial Officer, GE Oil and Gas North America 02/01/16 to 03/31/18
Deanna T. Brady 57 Executive Vice President (Retail) 10/31/22 to Present
Executive Vice President (Refrigerated Foods) 10/28/19 to 10/30/22
Group Vice President/President Consumer Product Sales 10/26/15 to 10/27/19
Mark A. Coffey 60 Group Vice President (Supply Chain) 04/26/21 to Present
Senior Vice President (Supply Chain and Manufacturing) 03/28/17 to 04/25/21
Patrick J. Connor 53 Group Vice President (Retail Sales) 10/31/22 to Present
Group Vice President/President Consumer Product Sales 10/28/19 to 10/30/22
Jeffery R. Frank 46 Group Vice President (Retail Marketing) 10/31/22 to Present
Vice President (Grocery Products Marketing) 03/01/21 to 10/31/21
President and Chief Executive Officer (MegaMex) 10/28/13 to 04/29/18
Senior Vice President/President Jennie-O Turkey Store, Inc. 12/04/17 to 03/21/21
Mark J. Ourada 57 Group Vice President (Foodservice) 03/05/18 to Present
Vice President (Corporate Communications) 04/13/15 to 10/31/21
Paul R. Kuehneman 51 Vice President and Controller 02/18/22 to Present
Vice President and CFO (Jennie-O Turkey Store) 05/30/16 to 01/03/21
Florence Makope 47 Vice President and Treasurer 07/25/22 to Present
Director of Strategy Deployment, Oshkosh Corporation 06/27/21 to 07/01/22
Director of International Finance, Oshkosh Corporation 03/25/20 to 06/26/21
No family relationship exists among the executive officers.
Executive officers are designated annually by the Board of Directors at the first meeting following the Annual Meeting of Stockholders. Vacancies may be filled and additional officers elected at any time. The Company's Chief Executive Officer has the authority to appoint and remove Vice Presidents (other than Executive Vice Presidents, Group Vice Presidents, and Senior Vice Presidents).
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PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUERPURCHASES OF EQUITY SECURITIES
Market Information
Hormel Foods Corporation’s common stock is traded on the New York Stock Exchange under the symbol HRL. The CUSIP number is 440452100.
Holders
There are approximately 10,000 record stockholders and 230,000 stockholders whose shares are held in street name by brokerage firms and financial institutions.
Issuer Purchases of Equity Securities
Fourth Quarter Ended October 30, 2022
Total — —
(1) On January 29, 2013, the Company's Board of Directors authorized the repurchase of 10,000,000 shares of its common stock with no expiration date. On January 26, 2016, the Board of Directors approved a two-for-one split of the Company’s common stock to be effective January 27, 2016. As part of the stock split resolution, the number of shares remaining to be repurchased was adjusted proportionately.
Dividends
The Company has paid dividends for 377 consecutive quarters. The annual dividend rate for fiscal 2023 will increase to $1.10 per share, representing the 57th consecutive annual dividend increase. The Company is dedicated to returning excess cash flow to shareholders through dividend payments.
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Shareholder Return Performance Graph
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend-reinvested basis, for the Company, the S&P 500 Index, and the S&P 500 Packaged Foods & Meats Index for the five years ended October 30, 2022. The graph assumes $100 was invested in each, as of the market close on October 30, 2017. Note that historic stock price performance is not necessarily indicative of future stock price performance.
Item 6. RESERVED
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OFOPERATIONS
Executive Overview
Fiscal 2022: The Company achieved its third consecutive year of record net sales in fiscal 2022. Net sales increased 9 percent to $12.5 billion, primarily driven by the full year inclusion of the Planters® snack nuts business and by growth from the Company's foodservice businesses. Organic net sales1 growth of 6 percent can be attributed to improvement from the foodservice businesses and pricing actions to mitigate inflationary pressures in each business segment (1See explanation of non-GAAP financial measures in the Consolidated Results section). Volume and organic volume1 declined 7 percent and 8 percent, respectively. Consistent with the Company's long-term strategy to better align resources to value-added growth, the overall decline in volume was primarily due to lower commodity sales resulting from the Company's new pork supply agreement, which was effective January 1, 2022. Net earnings increased 10 percent compared to fiscal 2021, benefiting from the inclusion of the Planters® snack nuts business, significant profit growth for the Jennie-O Turkey Store segment, and higher sales across the foodservice businesses. Net earnings were negatively impacted by broad-based inflationary pressures stemming from raw materials, packaging, freight, labor, and other inputs. Pricing actions to mitigate these pressures were announced and implemented throughout fiscal 2022. Diluted earnings per share for fiscal 2022 was $1.82, compared to $1.66 last year. Fiscal 2022 contained one less week than the prior year.
Earnings for Jennie-O Turkey Store increased significantly due to higher commodity prices and foodservice sales. Highly pathogenic avian influenza (HPAI) was confirmed in the Jennie-O Turkey Store supply chain in March 2022. In the second half of the year, the team effectively managed a limited turkey supply and maximized operational performance. Refrigerated Foods segment profit for the full year increased, primarily driven by strong results from the foodservice businesses, more than offsetting higher operational and logistics costs. Grocery Products segment profit declined, as the contribution from the Planters® snack nuts business and organic net sales growth was more than offset by inflationary pressures and lower results from MegaMex. International & Other segment profit declined due in large part to lower results from the export business, which was negatively impacted by logistics challenges and meaningfully higher freight and warehouse expenses.
The Company again reinvested into the business through capital expenditures and returned a record amount of cash to shareholders in the form of dividends. Capital expenditures in fiscal 2022 were $279 million, including investments in new production capabilities for retail and foodservice pepperoni, an expansion of bacon capacity, work on a new line for the SPAM® family of products to be opened in the first half of fiscal 2023, and other projects to support growth of branded products and increase automation. The annual dividend for 2023 will be $1.10 per share and marks the 57th consecutive year of dividend increases.
In August 2022, the Company announced a new strategic operating model and has transitioned, effective October 31, 2022, to three operating segments – Retail, Foodservice, and International. The three new segments will continue to be supported by the Company's One Supply Chain team and corporate functions. Additionally, the Company will be standing up a Brand Fuel Center of Excellence, which will house enterprise-wide brand management expertise, e-commerce capabilities, insights-led innovation and analytical support to further enable data-driven decisions. Changes to the Company's operating segments have no impact on historical consolidated results of operations, financial position, or cash flows. Earnings will be reported under this structure beginning with the release of fiscal 2023 first quarter results in early March 2023. The Company will provide recast financial information for fiscal years 2021 and 2022 in February 2023.
Fiscal 2023 Outlook: The Company expects sales and earnings growth in fiscal 2023. From a top-line perspective, the Company anticipates to benefit from higher levels of brand investment, increased production capacity, pricing actions effective in the second half of fiscal 2022, and actions related to its new strategic operating model. Earnings growth is expected from the Foodservice and International segments and improvement across the supply chain. The Company expects to again operate in a volatile, complex and high-cost environment in fiscal 2023. Risks to the outlook include incremental inflationary pressures, further supply chain disruption, and the impact of deteriorating macroeconomic conditions on the Company's customers, consumers, and operators.
The Company remains in a strong financial position due to its consistent cash flow, liquidity, and strong balance sheet. The Company plans to continue to support the business through increased marketing and advertising investments for its leading brands as well as investments into its production capabilities, including a new line for the SPAM® family of products, a large investment to expand its operations and capabilities in China, and projects to increase automation and efficiency. The Company remains committed to returning cash to shareholders in the form of dividends.
A detailed review of the Company's fiscal 2022 performance compared to fiscal 2021 appears in the following section. A detailed review of the fiscal 2021 performance compared to fiscal 2020 is set forth in Part II, Item 7 of the Company's Form 10-K for the fiscal year ended October 31, 2021, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated herein by reference.
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Results of Operations
OVERVIEW
The Company is a processor of branded and unbranded food products for retail, foodservice, deli, and commercial customers.
The Company operates in the following four reportable segments:
The Company’s fiscal year consisted of 52 weeks in fiscal years 2022 and 2020 and 53 weeks in fiscal year 2021. Fiscal year 2023 will consist of 52 weeks.
CONSOLIDATED RESULTS
Net Earnings and Diluted Earnings Per Share
Fourth Quarter Ended Fiscal Year Ended
Volume and Net Sales
Fourth Quarter Ended Fiscal Year Ended
(1) See the "Non-GAAP Financial Measures" section below for a description of the Company's use of measures not defined by U.S. generally accepted accounting principles (GAAP)
Consistent with the Company's long-term strategy to better align resources to value-added growth, the overall decline in volume for the fourth quarter and full year of fiscal 2022 was primarily due to lower commodity sales resulting from the Company's new pork supply agreement, which was effective January 1, 2022.
Net sales decreased for the fourth quarter of fiscal 2022 due to reduced commodity sales and the impact from an additional week of sales last year. Organic net sales for the fourth quarter increased, led by growth from the Grocery Products and International & Other segments. The Grocery Products segment benefited from pricing actions effective at the beginning of the fourth quarter.
Fiscal 2022 marked the third consecutive year of record sales for the Company. Record net sales were primarily driven by the inclusion of the Planters® snack nuts business and growth from the Company's foodservice businesses. All segments implemented pricing actions during the fiscal year to combat inflationary pressures.
In fiscal 2023, the Company expects sales growth and to benefit from higher levels of brand investment, increased production capacity, pricing actions effective in the second half of fiscal 2022, and actions related to its new strategic operating model.
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Cost of Products Sold
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
Cost of products sold for the fourth quarter decreased, resulting from lower sales due to the additional week in fiscal 2021. For fiscal 2022, cost of products sold increased due to inflationary pressures stemming from raw materials, packaging, freight, labor, and other inputs. The inclusion of the Planters® snack nuts business was also a driver of higher costs for the full year.
In fiscal 2023, costs are expected to remain elevated due to the continued impacts of broad-based inflation. Raw material input costs for pork, beef, turkey, and feed are anticipated to remain volatile and above historical levels.
Gross Profit
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
Consolidated gross profit as a percentage of net sales for the fourth quarter and full year of fiscal 2022 increased primarily due to improved profitability from the Jennie-O Turkey Store segment, the inclusion of the Planters® snack nuts business, and pricing actions to help mitigate inflationary pressures across all segments. Gross profit as a percentage of net sales also benefited from the reduction of lower margin commodity sales resulting from the Company's new pork supply agreement.
Compared to the prior year, gross profit as a percentage of net sales for the fourth quarter of fiscal 2022 increased for the Jennie-O Turkey Store segment and declined for the other segments. For fiscal 2022, gross profit as a percentage of net sales increased for the Jennie-O Turkey Store and International & Other segments and decreased for the Refrigerated Foods and Grocery Products segments. All business segments were negatively impacted by broad-based inflationary pressures.
In fiscal 2023, the Company expects gross profit as a percentage of net sales to be comparable to fiscal 2022. Incremental cost inflation poses the largest risk to this assumption.
Selling, General, and Administrative (SG&A)
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
Percentage of Net Sales 6.3 % 6.7 % 7.1 % 7.5 %
SG&A expenses for the fourth quarter of fiscal 2022 declined primarily due to the additional week in fiscal 2021. SG&A expenses for fiscal 2022 increased due to the inclusion of the Planters® snack nuts business and higher marketing and advertising investments. As a percent of net sales, SG&A expenses declined for the full year, driven by record sales and disciplined cost management.
Advertising investments in fiscal year 2022 were $157 million, representing a 14 percent increase compared to fiscal 2021.
In fiscal 2023, the Company intends to continue investing in key brands including Planters®, SPAM®, SKIPPY®, Columbus®, Hormel® Black Label®, Hormel® pepperoni, and Jennie-O®.
Research and development continues to be a vital part of the Company's strategy to grow existing brands and expand into new branded items. Research and development expenses were $8.6 million and $34.7 million for the fourth quarter and full year of fiscal 2022, respectively, compared to $8.3 million and $33.6 million for the corresponding periods in fiscal 2021.
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Equity in Earnings of Affiliates
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
Equity in earnings of affiliates for the fourth quarter and full year of fiscal 2022 decreased significantly due to lower results for MegaMex. MegaMex results have been negatively impacted by inflationary pressures, including significantly higher costs for avocados.
The Company accounts for its majority-owned operations under the consolidation method. Investments in which the Company owns a minority interest, and for which there are no other indicators of control, are accounted for under the equity or cost method. These investments, along with receivables from other affiliates, are included in the Consolidated Statements of Financial Position as investments in and receivables from affiliates. The composition of this line item as of October 30, 2022, was as follows:
In thousands Investments/Receivables
Interest and Investment Income and Interest Expense
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
Interest and investment income decreased in the fourth quarter and full year of fiscal 2022 primarily due to losses on the rabbi trust. Interest expense in fiscal 2022 reflects the full year impact of debt issued in 2021.
Effective Tax Rate
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
The effective tax rate for fiscal 2021 included the benefit of one-time state tax discrete items. For additional information, refer to Note N - Income Taxes.
The Company expects the effective tax rate in fiscal 2023 to be between 21.0 and 23.0 percent.
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SEGMENT RESULTS
Net sales and segment profit for each of the Company’s reportable segments are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the segment profit and other financial information shown below. Additional segment financial information can be found in Note P - Segment Reporting.
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
Net Sales
Segment Profit
Grocery Products
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
Net sales for the fourth quarter of fiscal 2022 increased due to strong demand for SKIPPY® peanut butter and the impact of pricing actions across the Mexican and simple-meals portfolios. For the full year, net sales increased primarily due to the inclusion of the Planters® snack nuts business and the impact from strategic pricing actions.
For the fourth quarter of fiscal 2022, segment profit declined, as pricing actions did not offset the impact from continued inflationary pressures. Full year segment profit decreased, as the contribution from the Planters® snack nuts business and organic net sales growth was more than offset by inflationary pressures and lower results from MegaMex.
In fiscal 2023, the Grocery Products segment will be reported within the Company's new Retail and Foodservice segments. Refer to the "Fiscal 2023 Outlook" in the "Executive Summary" for additional forward-looking commentary.
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Refrigerated Foods
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
Volume and net sales declined in the fourth quarter of fiscal 2022 due to the impact from an additional week in the fourth quarter of last year and lower commodity sales. Products such as Hormel® Natural Choice® meats, Hormel® Bacon 1TM fully cooked bacon, Hormel® Fire BraisedTM flame-seared meats, Hormel Gatherings® party trays and Applegate®breaded chicken grew volume and sales for the quarter. For fiscal 2022, net sales increased due to strong results from the foodservice businesses, strategic pricing actions across the portfolio, and the inclusion of the Planters® snack nuts business in the convenience channel. Consistent with the Company's long-term strategy to better align resources to value-added growth, the overall decline in volume for the fourth quarter and full year was due primarily to lower commodity sales resulting from the Company's new pork supply agreement.
The decline in segment profit for the fourth quarter of fiscal 2022 was driven by lower commodity profitability and higher operational, logistics and raw material costs. Segment profit growth for full year of fiscal 2022 was primarily due to strong results from the foodservice businesses, more than offsetting higher operational and logistics costs.
In fiscal 2023, the Refrigerated Foods segment will be reported within the Company's new Retail and Foodservice segments. Refer to the "Fiscal 2023 Outlook" in the "Executive Summary" for additional forward-looking commentary.
Jennie-O Turkey Store
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
As anticipated, volume and sales declined in the fourth quarter of fiscal 2022 as a result of the supply impacts on the Company's vertically integrated supply chain from HPAI. For fiscal 2022, higher foodservice and whole-bird sales due to favorable pricing drove the marginal sales increase.
For the fourth quarter of fiscal 2022, segment profit growth was primarily due to higher commodity prices and improved value-added mix. For the full year fiscal 2022, higher commodity prices and foodservice sales drove the substantial improvement in segment profit.
In fiscal 2023, the Jennie-O Turkey Store segment will be reported within the Company's new Retail, Foodservice, and International segments. The Company expects the impacts from HPAI to reduce production volume in its turkey facilities through at least the first half of fiscal 2023. Refer to the "Fiscal 2023 Outlook" in the "Executive Summary" for additional forward-looking commentary.
International & Other
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
In the fourth quarter of fiscal 2022, volume and net sales growth from the SPAM® and SKIPPY® brands and the multinational businesses were offset by lower fresh pork and refrigerated export sales. For fiscal 2022, volume and sales declined as a result of lower commodity sales due to the Company's new pork supply agreement and ongoing export logistics challenges.
Segment profit declined in the fourth quarter of fiscal 2022, as growth in China did not overcome the impact of lower margins and higher logistics expenses for the export business. Segment profit for the full year declined due in large part to lower results from the export business, which was negatively impacted by logistics challenges and meaningfully higher freight expenses.
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In fiscal 2023, the International & Other segment will be reported within the Company's new International segment. Refer to the "Fiscal 2023 Outlook" in the "Executive Summary" for additional forward-looking commentary.
Unallocated Income and Expense
The Company does not allocate deferred compensation, investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at the corporate level. Equity in Earnings of Affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included in the segment table for the purpose of reconciling segment results to Earnings Before Income Taxes.
Fourth Quarter Ended Fiscal Year Ended
October 30, October 31, October 30, October 31,
For the fourth quarter of fiscal 2022, Net Unallocated Expense increased slightly as unfavorable investment performance was mostly offset with lower corporate expense.
For fiscal 2022, Net Unallocated Expense decreased due to one-time acquisition costs and accounting adjustments of $43 million related to the acquisition of the Planters® snack nuts business in fiscal 2021. The overall decline was partially offset by higher interest expense and lower investment income net of deferred compensation.
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Non-GAAP Financial Measures
The non-GAAP adjusted financial measurement of adjusted diluted earnings per share is presented to provide investors with additional information to facilitate the comparison of past and present operations. This measurement excludes the impact of the acquisition-related expenses and accounting adjustments related to the acquisition of the Planters® snack nuts business. The tax impact was calculated using the effective tax rate for the quarter in which the expenses and accounting adjustments were incurred.
The non-GAAP adjusted financial measurements of organic volume and organic net sales are presented to provide investors with additional information to facilitate the comparison of past and present operations. Organic volume and organic net sales exclude the impacts of the acquisition of the Planters® snack nuts business (June 2021) in the Grocery Products, Refrigerated Foods, and International & Other segments. Organic volume and organic net sales also exclude the impact of the 53rd week in fiscal 2021 as approximated based on average weekly sales for the fourth quarter (fourteen weeks) ended October 31, 2021.
The Company provides earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA) because these measures are useful to management and investors as indicators of operating strength relative to prior years and are commonly used to benchmark the Company’s performance.
The Company believes these non-GAAP financial measurements provide useful information to investors because they are the measurements used to evaluate performance on a comparable year-over-year basis. Non-GAAP measurements are not intended to be a substitute for U.S. GAAP measurements in analyzing financial performance. These non-GAAP measurements are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.
The following tables show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures.
ADJUSTED DILUTED EARNINGS PER SHARE (NON-GAAP)
Fiscal Year Ended
Less: Net Earnings Attributable to Noncontrolling Interest 239 301 — 301 (20.5)
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ORGANIC VOLUME (NON-GAAP)
Fourth Quarter Ended
Fiscal Year Ended
ORGANIC NET SALES (NON-GAAP)
Fourth Quarter Ended
Fiscal Year Ended
EBIT and EBITDA
Fiscal Year Ended
EBIT:
Net Earnings Attributable to Hormel Foods Corporation $ 999,987 $ 908,839
EBITDA:
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LIQUIDITY AND CAPITAL RESOURCES
When assessing liquidity and capital resources, the Company evaluates cash and cash equivalents, short-term and long-term investments, income from operations, and borrowing capacity.
Cash Flow Highlights
Fiscal Year Ended
Cash and Cash Equivalents $ 982 $ 614
Cash Provided By (Used in) Operating Activities 1,135 1,002
Cash Provided by (Used in) Investing Activities (258) (3,626)
Cash Provided by (Used in) Financing Activities (487) 1,521
Cash and cash equivalents increased in fiscal 2022. The Company’s income from operations was sufficient to cover dividend payments and capital expenditures. Additional details related to significant drivers of cash flows are provided below.
Cash Provided by (Used in) Operating Activities
▪Cash flows from operating activities were largely impacted by changes in operating assets and liabilities.
–Accounts receivable decreased $28 million in fiscal 2022 primarily due to timing of collections. The $192 million increase in fiscal 2021 is largely due to increased sales and the incremental impact of the Planters® snack nuts business.
–In fiscal 2022, inventory increased $352 million due to inflation in raw material and other input costs and maintaining higher inventory levels. The $145 million increase in fiscal 2021 is due to higher raw material and supply costs and the acquisition of the Planters® snack nuts business.
–Accounts payable and accrued expenses decreased $15 million in fiscal 2022 related to the timing of payments. In fiscal 2021, accounts payable and accrued expenses increased $115 million related to the incremental impact of the Planters® snack nuts business.
Cash Provided by (Used in) Investing Activities
▪Capital expenditures were $279 million and $232 million in fiscal 2022 and 2021, respectively. The largest spend in both years was related to capacity expansion in Omaha, Nebraska. Additional projects included an expansion of bacon capacity at the Austin, Minnesota facility and a new production line for the SPAM® family of products in Dubuque, Iowa in fiscal 2022 and Project Orion in fiscal 2021.
▪In fiscal 2021, the Company acquired the Planters® snack nuts business for $3.4 billion.
Cash Provided by (Used in) Financing Activities
▪Cash dividends paid to the Company’s shareholders continue to be an ongoing financing activity for the Company with payments totaling $558 million in fiscal 2022 and $523 million in fiscal 2021. The dividend rate was $1.04 per share in fiscal 2022, which reflected a 6 percent increase over the fiscal 2021 rate of $0.98 per share.
▪The Company issued $2.3 billion of long-term debt in fiscal 2021. Proceeds from the issuance, along with cash on hand, were used to fund the acquisition of the Planters® snack nuts business.
▪The Company repaid $250 million of its senior unsecured notes upon maturity in fiscal 2021.
Sources and Uses of Cash
The Company's balanced business model, with diversification across raw material inputs, channels, and categories, provides stability in ever changing economic environments. The Company maintains a disciplined capital allocation strategy by applying a waterfall approach, which focuses first on required uses of cash such as capital expenditures to maintain facilities, dividend returns to investors, mandatory debt repayments, and pension obligations. Next, the Company looks to strategic items in support of growth initiatives such as capital projects, acquisitions, additional dividend increases, and working capital investments. Finally, the Company evaluates opportunistic uses including incremental debt repayment and share repurchases.
The Company believes its anticipated income from operations, cash on hand, and borrowing capacity under the current credit facility will be adequate to meet all short-term and long-term commitments. The Company continues to look for opportunities to make investments and acquisitions that align with its strategic priorities. The Company's ability to leverage its balance sheet through the issuance of debt provides the flexibility to pursue strategic opportunities which may require additional funding.
Dividend Payments
The Company remains committed to providing returns to investors through cash dividends. The Company has paid 377 consecutive quarterly dividends since becoming a public company in 1928. The annual dividend rate for fiscal 2023 will increase to $1.10 per share, representing the 57th consecutive annual dividend increase.
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Capital Expenditures
Capital expenditures are first allocated to required maintenance and then growth opportunities based on the needs of the business. Capital expenditures supporting growth opportunities in fiscal 2023 will focus on projects for capacity, innovation, automation, and new technology. Capital expenditures for fiscal 2023 are estimated to be $350 million.
Debt
As of October 30, 2022, the Company’s outstanding debt included $3.3 billion of fixed rate unsecured senior notes due in fiscal 2024, 2028, 2030, and 2051. During fiscal 2022, the Company made $55 million of interest payments and expects to make $55 million of interest payments in fiscal 2023 on these notes. See Note L - Long-term Debt and Other Borrowing Arrangements 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 us, subject to certain customary conditions. Funds drawn from this facility may be used by the Company to refinance existing debt, for working capital or other general corporate purposes, and for funding acquisitions. The lending commitments under the facility are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding. As of October 30, 2022, the Company had no outstanding draws from this facility.
Debt Covenants
The Company’s debt and credit agreements contain customary terms and conditions including representations, warranties, and covenants. These debt covenants limit the ability of the Company to, among other things, incur debt for borrowed money secured by certain liens, engage in certain sale and leaseback transactions, and require maintenance of certain consolidated leverage ratios. As of October 30, 2022, the Company was in compliance with all covenants and expects to maintain compliance in the future.
Cash Held by International Subsidiaries
As of October 30, 2022, the Company had $170 million of cash and cash equivalents held by international subsidiaries. The Company maintains all undistributed earnings as permanently reinvested. The Company evaluates the balance and uses of cash held internationally based on the needs of the business.
Share Repurchases
The Company is authorized to repurchase 3,987,494 shares of stock as part of an existing plan approved by the Company’s Board of Directors. During fiscal year 2022, the Company did not repurchase any shares of stock. The Company continues to evaluate share repurchases as part of its capital allocation strategy.
Commitments
The following table shows a schedule of the Company's material cash commitments as of October 30, 2022:
In millions Payments Due by Periods
Total Less than 1 year 1-3 years 3-5 years More than 5 years
(1)The Company commits to purchase quantities of livestock, grain, and other raw materials to ensure a steady supply of production inputs. The Company uses hedging programs to manage price risk associated with a portion of the future grain and hog commitments. The purchase commitments listed above do not reflect the impact of the hedging instruments that manage the risk of fluctuating commodity markets. See Note F - Derivatives and Hedging and Note J - Commitments and Contingencies for additional information.
(2) As of October 30, 2022, the Company’s outstanding debt included unsecured senior notes due in fiscal 2024, 2028, 2030, and 2051. The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. See Note L - Long-term Debt and Other Borrowing Arrangements for additional information.
(3) Represents pension and other post-retirement benefit payments related to the Company's unfunded defined benefit plans. Benefit payments reflect expectations for the next ten years as estimates are not readily available beyond that point. See Note G - Pension and Other Post-retirement Benefits for additional information.
(4) See Note K - Leases for additional detail.
(5) Includes obligations related to infrastructure improvements supporting various manufacturing facilities.
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Off Balance Sheet Arrangements
As of October 30, 2022, the Company had $49.4 million of standby letters of credit issued on its behalf. The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs. This amount includes revocable standby letters of credit totaling $3.1 million for obligations of an affiliated party that may arise under workers compensation claims. Letters of credit are not reflected in the Company’s Consolidated Statements of Financial Position.
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 U.S. generally accepted accounting principles. 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. See Note A - Summary of Significant Accounting Policies for additional information.
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. The Company believes the following are its critical accounting estimates:
Revenue Recognition
Description: The Company recognizes sales at the point in time when the performance obligation has been satisfied and control of the product has transferred to the customer. Obligations for the Company are usually fulfilled once shipped product is received or picked up by the customer. Revenue is recorded net of applicable provisions for discounts, returns, and allowances.
Judgments and Uncertainties: The Company offers various sales incentives to customers and consumers. Incentives offered off-invoice include prompt pay allowances, will call allowances, spoilage allowances, and temporary price reductions. These incentives are recognized as reductions of revenue at the time control is transferred. Coupons are used as an incentive for consumers to purchase various products. The coupons reduce revenue at the time they are offered, based on estimated redemption rates. Promotional contracts are performed by customers to promote the Company’s products to consumers. These incentives reduce revenue at the time of performance through direct payments and accrued promotional funds. Accrued promotional funds are unpaid liabilities for promotional contracts in process or completed at the end of a quarter or fiscal year. Accruals with customers are based on defined performance.
Sensitivity of Estimate to Change: The liability relating to these agreements is based on a review of the outstanding contracts on which performance has taken place but which the promotional payments relating to such contracts remain unpaid as of the end of the fiscal year. The level of customer performance and the historical spend rate versus contracted rates are estimates used to determine these liabilities.
Income Taxes
Description: The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur.
Judgments and Uncertainties: The Company computes its provision for income taxes based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it operates. Judgment is required in evaluating the Company’s tax positions and determining its annual tax provision.
Sensitivity of Estimate to Change: While the Company considers all of its tax positions fully supportable, the Company is occasionally challenged by various tax authorities regarding the amount of taxes due. The Company recognizes a tax position in its financial statements when it is more likely than not the position will be sustained upon examination, based on its technical merits. The position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. A change in judgment related to the expected ultimate resolution of uncertain tax positions will be recognized in earnings in the quarter of such change. As of October 30, 2022, the Company had $21.8 million of unrecognized tax benefits, including estimated interest and penalties, recorded in Other Long-term Liabilities.
Business Combinations
Description: The Company accounts for business combinations using the acquisition method of accounting. The Company allocates the purchase price of an acquired business to the assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date with the excess recorded as Goodwill.
Judgments and Uncertainties: The acquisition method of accounting requires the Company to make significant estimates and assumptions regarding the fair value of the acquired assets. Fair value of the assets and liabilities acquired is determined through established valuation techniques, such as the income, cost or market approach. The Company may utilize third-party
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valuation experts to assist in the fair value determination. The fair value measurements of identifiable intangibles are based on available historical information and expectations and assumptions about the future. Significant assumptions used to value identifiable intangible assets may include projected revenue growth, estimated cash flows, discount rates, royalty rates, and other factors.
Determining the useful life of an intangible asset also requires judgment. Certain acquired brands are expected to have indefinite lives based on their history and the Company’s intent to continue to support and build the brands. Other acquired assets, such as customer relationships, are expected to have determinable useful lives.
Sensitivity of Estimate to Change: The Company did not have any business combinations in fiscal 2022. On June 7, 2021, the Company acquired the Planters® snack nuts business for $3.4 billion and used a third-party valuation specialist to perform the valuation of the assets acquired. Refer to Note B - Acquisitions and Divestitures for additional information. The Company acquired tradenames which were determined to have a fair value of $712.0 million. Key assumptions used to calculate the fair value of the tradenames using a relief from royalty model included revenue projections, royalty rates, and discount rates. The Company also identified customer relationships which were assigned a fair value of $51.0 million using the distributor method under the income approach. Assumptions in valuing this asset included future earnings projections, customer attrition rate, and discount rate, among others. The Company believes the estimates applied are based on reasonable assumptions, but which are inherently uncertain. As a result, actual results may differ from the assumptions and judgments used to determine fair value of the assets acquired, which could result in material impairment losses in the future.
Goodwill and Other Indefinite-Lived Intangibles
Description: Other indefinite-lived intangible assets primarily include tradenames obtained through business acquisitions which are originally recorded at their estimated fair values at the date of acquisition. Goodwill is the residual after allocating the purchase price to net assets acquired and is allocated across the Company’s reporting units: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International. Goodwill and indefinite-lived intangible assets are not amortized but tested annually for impairment, or more frequently if impairment indicators arise. If the carrying value of these assets exceeds the estimated fair value, the asset is considered impaired which requires a reduction to earnings. See Note A - Summary of Significant Accounting Policies for additional details regarding the Company’s procedures.
Judgments and Uncertainties: Determining whether impairment indicators exist and estimating the fair value of the Company’s goodwill reporting units and intangible assets for impairment testing requires significant judgment. Indefinite-lived tradenames are evaluated for impairment using an income approach utilizing the relief from royalty method. Significant assumptions include royalty rate, annual projected revenue, discount rate, and estimated long term growth rate. Estimating the fair value of goodwill reporting units using the discounted cash flow model requires management to make assumptions and projections of future cash flows, revenues, earnings, discount rates, long term growth rates, and other factors.
Sensitivity of Estimate to Change: The assumptions used to assess impairment consider historical trends, macroeconomic conditions, and projections consistent with the Company’s operating strategy. Changes in these estimates can have a significant impact on the assessment of fair value which could result in material impairment losses.
During the fourth quarter of fiscal 2022, the Company performed a qualitative assessment of goodwill. No goodwill impairment charges were recorded as a result of the testing. The Company last completed quantitative testing in fiscal 2021 and the estimated fair value of each goodwill reporting unit exceeded the calculated carrying value by more than 50 percent. Based on the 2021 testing, a 10 percent decline in projected cash flows or 10 percent increase in the discount rate would not result in an impairment.
The Company also performed qualitative impairment testing for indefinite-lived intangible assets in the fourth quarter of fiscal 2022. No impairment charges were recorded as a result of the testing. The Company last completed quantitative testing in fiscal 2021 and the estimated fair value of each indefinite-lived intangible asset exceeded the carrying value by more than 10 percent. Based on the fiscal 2021 testing, a 10 percent decline in forecasted revenue or 10 percent increase in the discount rate would not result in a material impairment.
Pension and Other Post-Retirement Benefits
Description: The Company sponsors several defined benefit pension and post-retirement health care benefit plans and recognizes the associated expenses, assets, and liabilities.
Judgments and Uncertainties: In accounting for these employment costs and the associated benefit obligations, management must make a variety of assumptions and estimates including mortality rates, discount rates, compensation increases, expected return on plan assets, health care cost trend rates, and interest crediting rates. The Company considers historical data as well as current facts and circumstances when determining these estimates. Expected long-term rate of return on plan assets is based on fair value, composition of the asset portfolio, historical long-term rates of return, and estimates of future performance. Mortality and discount rates used are based on actuarial tables elected at each fiscal year-end. The Company uses third-party specialists
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to assist in the determination of these estimates and the calculation of certain employee benefit expenses and the outstanding obligation.
Benefit plan assets are stated at fair value. Due to the lack of readily available market prices, private equity investments are valued by models using a combination of available market data and unobservable inputs that consider earnings multiples, discounted cash flows, and other qualitative and quantitative factors. Other benefit plan investments are measured at Net Asset Value (NAV) per share of the fund's underlying investments as a practical expedient.
Sensitivity of Estimate to Change: The assumed discount rate, expected long-term rate of return on plan assets, rate of future compensation increase, interest crediting rate, and the health care cost trend rate have a significant impact on the amounts reported for the benefit plans. For the year ended October 30, 2022, the Company had $1,200.0 million and $212.0 million in pension benefit obligation and post-retirement benefit obligation, respectively. For fiscal 2023, the Company expects pension benefit costs of $37.4 million and post-retirement benefit costs of $12.2 million. A one-percentage-point change in these rates would have the following effects:
1-Percentage-Point
Benefit Cost Benefit Obligation
In millions Increase Decrease Increase Decrease
Pension Benefits
Expected Long-term Rate of Return on Plan Assets (12.0) 12.0 — —
Rate of Future Compensation Increase 1.3 (1.2) 0.2 (0.2)
Interest Crediting Rate 3.3 (2.8) 8.7 (7.5)
Post-retirement Benefits
Discount Rate $ — $ (1.1) $ (14.9) $ 17.3
As of October 30, 2022, the Company had $88.2 million and $666.1 million of private equity and NAV investments, respectively. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements. The Company also holds quarterly meetings with the investment adviser to review fund performance, which include comparisons to the relevant indices. On an annual basis, the Company performs pricing tests on certain underlying investments to gain additional assurance of the reliability of values received from the fund manager.
See Note G - Pension and Other Post-retirement Benefits for additional information.
Item 7A. 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 and live hog 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 and are accounted for as cash flow hedges. The fair value of the Company’s cash flow commodity contracts as of October 30, 2022, was $21.6 million compared to $25.2 million as of October 31, 2021. 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 October 30, 2022, by $31.7 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 October 30, 2022, the Company’s long-term debt had a fair value of $2.7 billion compared to $3.3 billion as of October 31, 2021. 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 October 30, 2022, by $90.2 million. A 10 percent increase would have negatively impacted the long-term debt by $84.1 million.
Foreign Currency Exchange Rate Risk: The fair values of certain Company assets are subject to fluctuations in foreign currency exchange rates. The Company's net asset position in foreign currencies as of October 30, 2022, was $652.4 million, compared to $657.2 million as of October 31, 2021, with most of the exposure existing in Chinese yuan and Brazilian real. The Company currently does not use market risk sensitive instruments to manage this risk.
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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 October 30, 2022, the balance of these securities totaled $186.2 million compared to $203.0 million as of October 31, 2021. The rabbi trust is invested primarily in fixed income funds. The Company is subject to market risk due to fluctuations in the value of the remaining investments as unrealized gains and losses associated with these securities are included in the Company’s net earnings on a mark-to-market basis. A 10 percent decline in the value of the investments not held in fixed income funds would have negatively impacted the Company’s pretax earnings by approximately $7.6 million, while a 10 percent increase in value would have a positive impact of the same amount.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management
Management’s Responsibility for Financial Statements
The accompanying financial statements were prepared by the management of Hormel Foods Corporation which is responsible for their integrity and objectivity. These statements have been prepared in accordance with U.S. generally accepted accounting principles appropriate in the circumstances and, as such, include amounts that are based on our best estimates and judgments.
Hormel Foods Corporation has developed a system of internal controls designed to assure that the records reflect the transactions of the Company and that the established policies and procedures are adhered to. This system is augmented by well-communicated written policies and procedures, a strong program of internal audit and well-qualified personnel.
These financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm, and their report is included herein. The audit was conducted in accordance with the standards of the U.S. Public Company Accounting Oversight Board and includes a review of the Company’s accounting and financial controls and tests of transactions.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the independent auditors, management, and the internal auditors to assure that each is carrying out its responsibilities. Both Ernst & Young LLP and our internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the results of their audit work and their opinions on the adequacy of internal controls and the quality of financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of Hormel Foods Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rule 13a–15(f). The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting standards. Under the supervision, and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
Based on our evaluation under the framework in Internal Control - Integrated Framework, we concluded that our internal control over financial reporting was effective as of October 30, 2022. Our internal control over financial reporting as of October 30, 2022, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
/s/ James P. Snee /s/ Jacinth C. Smiley
Chairman of the Board, Executive Vice President
President and Chief Executive Officer and Chief Financial Officer
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hormel Foods Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Hormel Foods Corporation’s internal control over financial reporting as of October 30, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hormel Foods Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of October 30, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated statements of financial position of the Company as of October 30, 2022 and October 31, 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders’ investment, and cash flows for each of the three years in the period ended October 30, 2022 and the related notes and financial statement schedule listed in the index at Item 15 and our report dated December 6, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
December 6, 2022
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hormel Foods Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Hormel Foods Corporation (the Company) as of October 30, 2022 and October 31, 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders’ investment, and cash flows for each of the three years in the period ended October 30, 2022 and the related notes and the financial statement schedule listed in the index at Item 15 (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 30, 2022 and October 31, 2021, and the results of its operations and its cash flows for each of the three years in the period ended October 30, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 30, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated December 6, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Valuation of Alternative Investments - Pension Assets
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Valuation of Alternative Investments - Pension Assets
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1931.
Minneapolis, Minnesota
December 6, 2022
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Consolidated Statements of Operations
Fiscal Year Ended
October 30, October 31, October 25,
Less: Net Earnings Attributable to Noncontrolling Interest 239 301 272
Net Earnings Per Share:
Weighted-average Shares Outstanding:
See Notes to Consolidated Financial Statements
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Consolidated Statements of Comprehensive Income
Fiscal Year Ended
October 30, October 31, October 25,
Other Comprehensive Income (Loss), Net of Tax:
See Notes to Consolidated Financial Statements
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Consolidated Statements of Financial Position
October 30, October 31,
In thousands, except share and per share amounts 2022 2021
Assets
Prepaid Expenses and Other Current Assets 48,041 39,914
Investments In and Receivables from Affiliates 271,058 299,019
Property, Plant, and Equipment
Liabilities and Shareholders’ Investment
Current Maturities of Long-term Debt 8,796 8,756
Shareholders’ Investment
See Notes to Consolidated Financial Statements
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Consolidated Statements of Changes in Shareholders’ Investment
Hormel Foods Corporation Shareholders
share amounts Shares Amount Shares Amount
Contribution from Non-controlling Interest 77 77
See Notes to Consolidated Financial Statements
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Consolidated Statements of Cash Flows
Fiscal Year Ended
October 30, October 31, October 25,
Operating Activities
Adjustments to Reconcile to Net Cash Provided by (Used in) Operating Activities:
Loss (Gain) on Property/Equipment Sales and Plant Facilities 6,695 3,731 1,793
Changes in Operating Assets and Liabilities, Net of Acquisitions:
Investing Activities
Net (Purchase) Sale of Securities $ 2,493 $ (4,364) $ (2,589)