UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 1, 2022

or

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________________________ to ________________________________________

Commission File Number: 1-2402

HORMEL FOODS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware						41-0319970
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1 Hormel Place

Austin, MN  55912

(Address of Principal Executive Office, including zip code)

(507) 437-5611

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock

$0.01465

par value

HRL

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes                ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class						Outstanding at May 29, 2022
Common Stock						$.01465			par value			546,055,595
Common Stock Non-Voting						$.01			par value			0

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Table of Contents

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1.						Financial Statements
			Consolidated Statements of Operations
			Consolidated Statements of Comprehensive Income
			Consolidated Condensed Statements of Financial Position
			Consolidated Statements of Changes in Shareholders' Investment
			Consolidated Condensed Statements of Cash Flows
			Notes to Consolidated Financial Statements
Item 2.						Management’s Discussion and Analysis of Financial Condition and Results of Operations
			Results of Operations
						Overview
						Consolidated Results
						Segment Results
						Related Party Transactions
			Liquidity and Capital Resources
			Critical Accounting Estimates
			Forward-looking Statements
Item 3.						Quantitative and Qualitative Disclosures About Market Risk
Item 4.						Controls and Procedures
PART II - OTHER INFORMATION
Item 1.						Legal Proceedings
Item 1A.						Risk Factors
Item 2.						Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.						Exhibits
SIGNATURES

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

In thousands, except per share amounts

Unaudited

			Quarter Ended												Six Months Ended
			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
Net Sales			$	3,096,559					$	2,606,621					$	6,140,917					$	5,067,768
Cost of Products Sold			2,543,088						2,130,314						5,048,697						4,141,291
Gross Profit			553,471						476,307						1,092,220						926,477
Selling, General and Administrative			224,659						199,966						450,631						396,346
Equity in Earnings of Affiliates			5,916						13,074						12,814						27,302
Operating Income			334,728						289,415						654,402						557,433
Other Income and Expense:
Interest and Investment Income			1,799						10,992						5,668						28,284
Interest Expense			14,658						7,788						29,298						16,015
Earnings Before Income Taxes			321,868						292,620						630,772						569,702
Provision for Income Taxes			60,189						64,699						129,383						119,386
Net Earnings			261,679						227,921						501,389						450,316
Less: Net Earnings (Loss) Attributable to Noncontrolling Interest			62						21						201						133
Net Earnings Attributable to Hormel Foods Corporation			$	261,617					$	227,901					$	501,188					$	450,184
Net Earnings Per Share
Basic			$	0.48					$	0.42					$	0.92					$	0.83
Diluted			$	0.48					$	0.42					$	0.91					$	0.82
Weighted-average Shares Outstanding
Basic			544,702						540,195						543,691						540,054
Diluted			550,036						547,536						548,982						547,490

 

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

In thousands

Unaudited

			Quarter Ended												Six Months Ended
			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
Net Earnings			$	261,679					$	227,921					$	501,389					$	450,316
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation			14,071						(7,025)						14,996						10,863
Pension and Other Benefits			2,603						4,199						5,138						8,399
Deferred Hedging			27,701						38,029						36,105						50,628
Total Other Comprehensive Income (Loss)			44,375						35,203						56,239						69,890
Comprehensive Income			306,054						263,124						557,628						520,206
Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interest			77						(16)						335						401
Comprehensive Income Attributable to Hormel Foods Corporation			$	305,977					$	263,140					$	557,293					$	519,805

 

See Notes to Consolidated Financial Statements

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CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION

In thousands, except share and per share amounts

Unaudited

			May 1, 2022						October 31, 2021
Assets
Current Assets
Cash and Cash Equivalents			$	861,719					$	613,530
Short-term Marketable Securities			23,478						21,162
Accounts Receivable (Net of Allowance for Doubtful Accounts of    $3,500 at May 1, 2022, and $4,033 at October 31, 2021)			795,292						895,719
Inventories			1,597,001						1,369,198
Taxes Receivable			7,763						8,293
Prepaid Expenses			31,478						24,971
Other Current Assets			56,826						14,943
Total Current Assets			3,373,557						2,947,816
Goodwill			4,935,832						4,929,102
Other Intangibles			1,814,501						1,822,273
Pension Assets			303,803						289,096
Investments In and Receivables from Affiliates			275,849						299,019
Other Assets			295,127						299,907
Property, Plant and Equipment
Land			75,053						72,133
Buildings			1,349,098						1,332,881
Equipment			2,486,841						2,415,063
Construction in Progress			316,840						316,455
Less: Allowance for Depreciation			(2,104,237)						(2,027,414)
Net Property, Plant and Equipment			2,123,595						2,109,117
Total Assets			$	13,122,263					$	12,696,329

 

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION

In thousands, except share and per share amounts

Unaudited

			May 1, 2022						October 31, 2021
Liabilities and Shareholders' Investment
Current Liabilities
Accounts Payable and Accrued Expenses			$	826,729					$	844,502
Accrued Marketing Expenses			126,077						114,746
Employee Related Expenses			244,664						269,327
Interest and Dividends Payable			181,782						154,803
Taxes Payable			93,324						23,520
Current Maturities of Long-term Debt			8,084						8,756
Total Current Liabilities			1,480,659						1,415,654
Long-term Debt Less Current Maturities			3,294,101						3,315,147
Pension and Post-retirement Benefits			550,047						546,362
Other Long-term Liabilities			160,401						162,623
Deferred Income Taxes			291,841						278,183
Shareholders' Investment
Preferred Stock, Par Value $0.01 a Share–			—						—
Authorized 160,000,000 Shares: Issued–None
Common Stock, Non-voting, Par Value $0.01 a Share–			—						—
Authorized 400,000,000 Shares: Issued–None
Common Stock, Par Value $0.01465 a Share–			8,000						7,946
Authorized 1,600,000,000 Shares:
Shares Issued as of May 1, 2022: 546,052,763
Shares Issued as of October 31, 2021: 542,412,403
Additional Paid-in Capital			451,836						360,336
Accumulated Other Comprehensive Loss			(221,164)						(277,269)
Retained Earnings			7,100,730						6,881,870
Hormel Foods Corporation Shareholders' Investment			7,339,402						6,972,883
Noncontrolling Interest			5,812						5,478
Total Shareholders' Investment			7,345,214						6,978,360
Total Liabilities and Shareholders' Investment			$	13,122,263					$	12,696,329

 

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT

In thousands, except per share amounts

Unaudited

			Quarter Ended April 25, 2021
			Common Stock												Treasury Stock												Additional Paid-in Capital						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Non- controlling Interest						Total Shareholders’ Investment
			Shares						Amount						Shares						Amount
Balance at January 24, 2021			539,796						$	7,908					—						$	—					$	298,988					$	6,604,506					$	(360,869)					$	5,195					$	6,555,727
Net Earnings																																	227,901												21						227,921
Other Comprehensive Income (Loss)																																							35,240						(37)						35,203
Purchases of Common Stock															(18)						(816)																														(816)
Stock-based Compensation Expense			38						1																		8,053																								8,054
Exercise of Stock Options/Restricted Shares			595						9																		12,017																								12,026
Shares Retired			(18)						—						18						816						(10)						(806)																		—
Declared Cash Dividends – $0.2450 per Share																																	(132,265)																		(132,265)
Balance at April 25, 2021			540,411						$	7,917					—						$	—					$	319,048					$	6,699,336					$	(325,629)					$	5,178					$	6,705,851
			Quarter Ended May 1, 2022
			Common Stock												Treasury Stock												Additional Paid-in Capital						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Non- controlling Interest						Total Shareholders’ Investment
			Shares						Amount						Shares						Amount
Balance at January 30, 2022			543,012						$	7,955					—						$	—					$	377,708					$	6,980,451					$	(265,524)					$	5,736					$	7,106,325
Net Earnings																																	261,617												62						261,679
Other Comprehensive Income (Loss)																																							44,360						15						44,375
Stock-based Compensation Expense			37						1																		10,039																								10,040
Exercise of Stock Options/Restricted Shares			3,004						44																		64,089																								64,133
Declared Cash Dividends – $0.2600 per Share																																	(141,338)																		(141,338)
Balance at May 1, 2022			546,053						$	8,000					—						$	—					$	451,836					$	7,100,730					$	(221,164)					$	5,812					$	7,345,214

 

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			Six Months Ended April 25, 2021
			Common Stock												Treasury Stock												Additional Paid-in Capital						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Non- controlling Interest						Total Shareholders’ Investment
			Shares						Amount						Shares						Amount
Balance at October 25, 2020			539,887						$	7,909					—						$	—					$	289,554					$	6,523,335					$	(395,250)					$	4,778					$	6,430,326
Net Earnings																																	450,184												133						450,316
Other Comprehensive Income (Loss)																																							69,622						268						69,890
Purchases of Common Stock															(217)						(9,653)																														(9,653)
Stock-based Compensation Expense			38						1																		15,834																								15,834
Exercise of Stock Options/Restricted Shares			703						11																		13,780																								13,791
Shares Retired			(217)						(3)						217						9,653						(120)						(9,530)																		—
Declared Cash Dividends – $0.4900 per Share																																	(264,653)																		(264,653)
Balance at April 25, 2021			540,411						$	7,917					—						$	—					$	319,048					$	6,699,336					$	(325,629)					$	5,178					$	6,705,851
			Six Months Ended May 1, 2022
			Common Stock												Treasury Stock												Additional Paid-in Capital						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Non- controlling Interest						Total Shareholders’ Investment
			Shares						Amount						Shares						Amount
Balance at October 31, 2021			542,412						$	7,946					—						$	—					$	360,336					$	6,881,870					$	(277,269)					$	5,478					$	6,978,360
Net Earnings																																	501,188												201						501,389
Other Comprehensive Income (Loss)																																							56,105						134						56,239
Stock-based Compensation Expense			37						1																		16,367																								16,368
Exercise of Stock Options/Restricted Shares			3,603						53																		75,133																								75,186
Declared Cash Dividends – $0.5200 per Share																																	(282,328)																		(282,328)
Balance at May 1, 2022			546,053						$	8,000					—						$	—					$	451,836					$	7,100,730					$	(221,164)					$	5,812					$	7,345,214

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

In thousands

Unaudited

			Six Months Ended
			May 1, 2022						April 25, 2021
Operating Activities
Net Earnings			$	501,389					$	450,316
Adjustments to Reconcile to Net Cash Provided by Operating Activities:
Depreciation and Amortization			126,436						103,307
Equity in Earnings of Affiliates			(12,814)						(27,302)
Distributions Received from Equity Method Investees			30,539						22,500
Provision for Deferred Income Taxes			(521)						2,007
Loss (Gain) on Property/Equipment Sales and Plant Facilities			2,192						1,508
Non-cash Investment Activities			14,005						(16,526)
Stock-based Compensation Expense			16,368						15,834
Changes in Operating Assets and Liabilities, Net of Acquisitions:
Decrease (Increase) in Accounts Receivable			109,297						(19,823)
Decrease (Increase) in Inventories			(226,422)						(154,647)
Decrease (Increase) in Prepaid Expenses and Other Current Assets			943						45,848
Increase (Decrease) in Pension and Post-retirement Benefits			(4,508)						2,375
Increase (Decrease) in Accounts Payable and Accrued Expenses			(46,331)						(103,438)
Increase (Decrease) in Net Income Taxes Payable			66,538						39,301
Net Cash Provided by (Used in) Operating Activities			577,111						361,259
Investing Activities
Net (Purchase) Sale of Securities			(4,367)						(722)
Purchases of Property and Equipment			(128,213)						(85,544)
Proceeds from Sales of Property and Equipment			434						1,653
Decrease (Increase) in Investments, Equity in Affiliates, and Other Assets			6,265						(3,599)
Proceeds from Company-owned Life Insurance			70						956
Net Cash Provided by (Used in) Investing Activities			(125,811)						(87,256)
Financing Activities
Repayments of Long-term Debt and Finance Leases			(5,024)						(254,360)
Dividends Paid on Common Stock			(274,063)						(257,787)
Share Repurchase			—						(9,653)
Proceeds from Exercise of Stock Options			75,086						13,340
Net Cash Provided by (Used in) Financing Activities			(204,001)						(508,459)
Effect of Exchange Rate Changes on Cash			890						4,680
Increase (Decrease) in Cash and Cash Equivalents			248,189						(229,776)
Cash and Cash Equivalents at Beginning of Year			613,530						1,714,309
Cash and Cash Equivalents at End of Quarter			$	861,719					$	1,484,533

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation: The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include certain information and footnotes required by generally accepted accounting principles (U.S. GAAP) for comprehensive financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results and cash flows for the interim period are not necessarily indicative of the results that may be expected for the full year.

These statements should be reviewed in conjunction with the consolidated financial statements and associated notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021. The significant accounting policies used in preparing these consolidated financial statements are consistent with those described in Note A - Summary of Significant Accounting Policies to the consolidated financial statements in the Form 10-K with the exception of new requirements adopted in the first quarter of fiscal 2022. The Company has considered the impact of COVID-19 and determined there have been no material changes in the Company’s significant accounting policies, including estimates and assumptions, as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

Fiscal Year: The Company’s fiscal year ends on the last Sunday in October. Fiscal 2022 consists of 52 weeks. Fiscal 2021 consisted of 53 weeks with the additional week occurring in the fourth quarter.

Rounding: Certain amounts in the Consolidated Financial Statements and associated notes may not foot due to rounding. All percentages have been calculated using unrounded amounts.

Reclassifications: Certain reclassifications of previously reported amounts have been made to conform to the current year presentation.

Accounting Changes and Recent Accounting Pronouncements:

New Accounting Pronouncements Adopted in Current Fiscal Year 

In December 2019, the Financial Accounting Standards Board (FASB) issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions in Topic 740 and clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2022 and adoption did not have a material impact on its consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The guidance provides optional expedients and exceptions to account for contracts, hedging relationships, and other transactions that reference London Interbank Referenced Rate (LIBOR) or another reference rate expected to be discontinued. The optional guidance can be applied from March 12, 2020 through December 31, 2022. The Company currently holds an interest rate swap which uses LIBOR as the benchmark interest rate. When LIBOR ceases to be published in June 2023, the benchmark interest rate of the swap will change to Secured Overnight Financing Rate (SOFR) plus a spread adjustment. The Company does not expect adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

Recently issued accounting standards or pronouncements not disclosed have been excluded as they are currently not relevant to the Company.

NOTE B - ACQUISITIONS AND DIVESTITURES

 

Acquisitions: On June 7, 2021, the Company acquired the Planters® snack nuts business from The Kraft Heinz Company. The acquisition includes the Planters®, NUT-rition®, and Corn Nuts® brands. The final purchase price, including working capital adjustments, was $3.4 billion. The transaction was funded with the Company’s cash on hand and from the issuance of long-term debt.

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Planters® is an iconic snack brand and this acquisition significantly expands the Company's presence, and should broaden the scope for future acquisitions, in the growing snacking space. Operating results for this acquisition have been included in the Company's Consolidated Statements of Operations from the date of acquisition and are reflected in the Grocery Products, Refrigerated Foods, and International & Other segments. The acquisition contributed $239.0 million and $510.8 million of net sales during the second quarter and first six months of fiscal 2022, respectively. As the acquisition has been integrated within the Company's existing operations, post-acquisition net earnings are not discernible.

The acquisition was accounted for as a business combination using the acquisition method. The Company determined the acquisition date fair values of the assets acquired using independent appraisals. The Company completed purchase accounting allocations in the fourth quarter of fiscal 2021.

NOTE C - GOODWILL AND INTANGIBLE ASSETS

 

Goodwill: The changes in the carrying amounts of goodwill for the quarter and six months ended May 1, 2022 are:

in thousands			Grocery Products						Refrigerated Foods						Jennie-O Turkey Store						International & Other						Total
Balance at January 30, 2022			$	2,398,354					$	2,094,421					$	176,628					$	258,737					$	4,928,139
Foreign Currency Translation			—						—						—						7,692						7,692
Balance at May 1, 2022			$	2,398,354					$	2,094,421					$	176,628					$	266,429					$	4,935,832
Balance at October 31, 2021			$	2,398,354					$	2,094,421					$	176,628					$	259,699					$	4,929,102
Foreign Currency Translation			—						—						—						6,730						6,730
Balance at May 1, 2022			$	2,398,354					$	2,094,421					$	176,628					$	266,429					$	4,935,832

Intangible Assets: The carrying amounts for indefinite-lived intangible assets are:

in thousands			May 1, 2022						October 31, 2021
Brands/Tradenames/Trademarks			$	1,665,190					$	1,665,190
Other Intangibles			184						184
Foreign Currency Translation			(5,276)						(6,646)
Total			$	1,660,098					$	1,658,728

The gross carrying amount and accumulated amortization for definite-lived intangible assets are:

			May 1, 2022																		October 31, 2021
in thousands			Gross Carrying Amount						Accumulated Amortization												Gross Carrying Amount						Accumulated Amortization
Customer Lists/Relationships			$	168,239					$	(63,318)											$	168,239					$	(56,882)
Other Intangibles			59,241						(9,481)												60,241						(8,356)
Tradenames/Trademarks			10,536						(6,773)												10,536						(5,700)
Foreign Currency Translation			—						(4,041)												—						(4,534)
Total			$	238,016					$	(83,613)											$	239,016					$	(75,471)

 

Amortization expense was $4.8 million and $9.6 million for the quarter and six months ended May 1, 2022, respectively, compared to $4.0 million and $7.9 million for the quarter and six months ended April 25, 2021.

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Estimated annual amortization expense for the five fiscal years after October 31, 2021, is as follows:

in thousands			Amortization Expense
2022			$	19,244
2023			18,351
2024			16,352
2025			14,627
2026			14,170

NOTE D - INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES

 

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 any related receivables from affiliates, are included in the Consolidated Condensed Statements of Financial Position as Investments In and Receivables From Affiliates.

 

Investments In and Receivables From Affiliates consist of:

in thousands			Segment			% Owned			May 1, 2022						October 31, 2021
MegaMex Foods, LLC			Grocery Products			50%			$	185,417					$	205,413
Other Joint Ventures			International & Other			Various (20-50%)			90,432						93,606
Total									$	275,849					$	299,019

Equity in Earnings of Affiliates consists of:

						Quarter Ended												Six Months Ended
in thousands			Segment			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
MegaMex Foods, LLC			Grocery Products			$	3,011					$	9,663					$	10,006					$	22,096
Other Joint Ventures			International & Other			2,905						3,411						2,807						5,206
Total						$	5,916					$	13,074					$	12,814					$	27,302

 

For the quarter and six months ended May 1, 2022, $12.5 million and $30.5 million of dividends were received from affiliates, compared to $11.2 million and $22.5 million of dividends received for the quarter and six months ended April 25, 2021.

The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $10.6 million is remaining as of May 1, 2022. This difference is being amortized through Equity in Earnings of Affiliates.

NOTE E - INVENTORIES

 

Principal components of inventories are:

in thousands			May 1, 2022						October 31, 2021
Finished Products			$	875,674					$	725,115
Raw Materials and Work-in-Process			432,806						395,403
Operating Supplies			197,796						163,416
Maintenance Materials and Parts			90,725						85,264
Total			$	1,597,001					$	1,369,198

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NOTE F - DERIVATIVES AND HEDGING

 

The Company uses hedging programs to manage price risk associated with commodity purchases and interest rates. These programs utilize futures, swaps, and options contracts to manage the Company’s exposure to market fluctuations. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Effectiveness testing is performed on a quarterly basis to ascertain a high level of effectiveness for cash flow and fair value hedging programs.

Cash Flow Commodity Hedges:  The Company designates grain and lean hog futures, swaps, and options used to offset price fluctuations in the Company’s future direct grain and hog purchases as cash flow hedges. Effective gains or losses related to these cash flow hedges are reported in Accumulated Other Comprehensive Loss (AOCL) and reclassified into earnings, through Cost of Products Sold, in the periods in which the hedged transactions affect earnings. The Company typically does not hedge its grain exposure beyond the next two upcoming fiscal years and its hog exposure beyond the next fiscal year.

Fair Value Commodity Hedges:  The Company designates the futures it uses to minimize the price risk assumed when fixed forward priced contracts are offered to the Company’s commodity suppliers as fair value hedges. The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery. Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and recorded on the Consolidated Condensed Statements of Financial Position as a Current Asset and Current Liability, respectively. Effective gains or losses related to these fair value hedges are recognized through Cost of Products Sold in the periods in which the hedged transactions affect earnings.

Cash Flow Interest Rate Hedges: In the second quarter of fiscal 2021, the Company designated two separate interest rate locks as cash flow hedges to manage interest rate risk associated with the anticipated debt transactions required to fund the acquisition of the Planters® snack nuts business. The total notional amount of the Company's locks was $1.25 billion. In the third quarter of fiscal 2021, the associated unsecured senior notes were issued with a tenor of seven and thirty years and both locks were lifted (See Note J - Long-term Debt and Other Borrowing Arrangements). Mark-to-market gains and losses on these instruments were deferred as a component of AOCL. The resulting gain in AOCL is reclassified to Interest Expense in the periods in which the hedged transactions affect earnings.

Fair Value Interest Rate Hedge: In the first quarter of fiscal 2022, the Company entered into an interest rate swap to protect against changes in the fair value of a portion of previously issued senior unsecured notes attributable to the change in the benchmark interest rate. The hedge specifically designates the last $450 million of the notes due June 2024 (the “2024 Notes”). The swap compounds quarterly and settles semi-annually with gains and losses recognized in earnings through interest expense. The swap includes SOFR plus a spread adjustment as a fallback rate to be used when LIBOR ceases to be published in June 2023. Mark-to-market changes in the fair value of the interest rate swap and hedged debt are also recognized as interest expense.

Other Derivatives:  The Company holds certain futures contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets. The Company has not applied hedge accounting to these positions. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.

Volume: The Company's outstanding contracts related to its commodity hedging programs include:

			Volume
Commodity Contracts			May 1, 2022						October 31, 2021
Corn			37.7 million bushels						33.1 million bushels
Lean Hogs			162.0 million pounds						120.0 million pounds

Fair Value of Derivatives:  The fair values of the Company’s derivative instruments designated as hedges are:

Gross Fair Value

in thousands

Location on Consolidated Condensed Statements of Financial Position

May 1, 2022

October 31, 2021

Derivatives Designated as Hedges:

Commodity Contracts(1)

Other Current Assets

$

51,269

$

21,798

Interest Rate Contracts

Interest and Dividends Payable

(18,723)

—

(1) Amounts represent the gross fair value of commodity derivative assets and liabilities. The Company nets the derivative assets and liabilities for each of its hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The amount or timing of cash collateral balances may impact the classification of the commodity derivative in the Consolidated Condensed Statements of Financial Position. The gross asset position as of May 1, 2022 is offset by the obligation to return net cash collateral of $39.4 million contained within the master netting

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arrangement. The gross asset position as of October 31, 2021 is offset by the obligation to return net cash collateral of $10.8 million. See Note I - Fair Value Measurements for a discussion of these net amounts as reported in the Consolidated Condensed Statements of Financial Position.

 

Fair Value Hedge - Assets (Liabilities): The carrying amount of the Company's fair value hedged assets (liabilities) are:

Carrying Amount of Hedged Assets/(Liabilities)

in thousands

Location on Consolidated Condensed Statements of Financial Position

May 1, 2022

October 31, 2021

Fair Value Hedges:

Commodity Contracts

Accounts Payable(1)

$

20,428

$

3,432

Interest Rate Contracts

Long-term Debt - Less Current Maturities(2)

(431,277)

—

(1)  Represents the carrying amount of fair value hedged assets and liabilities which are offset by other assets included in master netting arrangements described above.

(2) Represents the carrying amount of the hedged portion of the "2024 Notes". As of May 1, 2022, a cumulative basis adjustment of $18.7 million has been included in the carrying amount.

Accumulated Other Comprehensive Loss Impact: As of May 1, 2022, the Company included in AOCL hedging gains (before tax) of $80.1 million on commodity contracts and $14.0 million related to interest rate settled positions. The Company expects to recognize the majority of the gains on commodity contracts over the next twelve months. Gains on interest rate contracts offset the hedged interest payments over the tenor of the debt instruments.

The effect of AOCL for gains or losses (before tax) related to the Company's derivative instruments are:

			Gain/(Loss) Recognized  in AOCL (1)									Gain/(Loss) Reclassified from AOCL into Earnings (1)									Location on Consolidated Statements of Operations
			Quarter Ended									Quarter Ended
in thousands			May 1, 2022						April 25, 2021			May 1, 2022						April 25, 2021
Cash Flow Hedges:
Commodity Contracts			$	50,331					$	36,109		$	11,269					$	4,512		Cost of Products Sold
Excluded Component (2)			(2,271)						—			—						—
Interest Rate Contracts			—						18,539			247						—			Interest Expense
			Gain/(Loss) Recognized  in AOCL (1)									Gain/(Loss) Reclassified from AOCL into Earnings (1)									Location on Consolidated Statements of Operations
			Six Months Ended									Six Months Ended
in thousands			May 1, 2022						April 25, 2021			May 1, 2022						April 25, 2021
Cash Flow Hedges:
Commodity Contracts			$	70,611					$	52,661		$	19,015					$	4,462		Cost of Products Sold
Excluded Component (2)			(3,444)						—			—						—
Interest Rate Contracts			—						18,539			494						—			Interest Expense

(1) See Note H - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on Net Earnings.

(2) Represents the time value of corn options excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in AOCL.

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Consolidated Statements of Operations Impact: The effect on the Consolidated Statements of Operations for gains or losses (before tax) related to the Company's derivative instruments are:

			Consolidated Statements of Operations Impact
			Quarter Ended												Six Months Ended
in thousands			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
Net Earnings Attributable to Hormel Foods Corporation			$	261,617					$	227,901					$	501,188					$	450,184
Cash Flow Hedges - Commodity Contracts
Gain (Loss) Reclassified from AOCL			9,599						4,512						17,345						4,462
Amortization of Excluded Component from Options			(1,120)						—						(1,945)						—
Gain (Loss) Reclassified from AOCL Due to Discontinuance of Cash Flow Hedges (1)			1,620						—						1,620						—
Fair Value Hedges - Commodity Contracts
Gain (Loss) on Commodity Futures (2)			(9,757)						(11,357)						(13,407)						(14,271)
Total Gain (Loss) on Commodity Contracts (3)			$	342					$	(6,845)					$	3,613					$	(9,809)
Cash Flow Hedges - Interest Rate Locks
Amortization of Gain on Interest Rate Locks			247						—						494						—
Fair Value Hedge - Interest Rate Swap
Gain (Loss) on Interest Rate Swap			699						—						1,491						—
Total Gain (Loss) on Interest Rate Contracts (4)			$	946					$	—					$	1,985					$	—
Total Gain (Loss) Recognized in Earnings			$	1,288					$	(6,845)					$	5,598					$	(9,809)

(1) During the second quarter of fiscal 2022, the Company discontinued hedge accounting on 0.6 million bushels of corn usage that was deemed no longer probable to occur. A gain of $1.7 million related to the discontinued hedges and an immaterial loss related to the excluded component from options was reclassified directly into earnings.

(2)     Amounts represent gains or losses on commodity contracts designated as fair value hedges that were closed during the quarter and six months ended May 1, 2022, which were offset by a corresponding gain or loss on the underlying hedged purchase commitment. Additional gains or losses related to changes in the fair value of open commodity contracts, along with the offsetting gain or loss on the hedged purchase commitment, are also marked-to-market through earnings with no impact on a net basis.

(3)    Total Gain (Loss) on Commodity Contracts is recognized in earnings through Cost of Products Sold.

(4)    Total Gain (Loss) on Interest Rate Contracts is recognized in earnings through Interest Expense.

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NOTE G - PENSION AND OTHER POST-RETIREMENT BENEFITS

 

Net periodic benefit cost for pension and other post-retirement benefit plans consists of:

			Pension Benefits
			Quarter Ended												Six Months Ended
in thousands			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
Service Cost			$	10,019					$	9,107					$	20,038					$	18,214
Interest Cost			12,640						12,362						25,279						24,724
Expected Return on Plan Assets			(27,062)						(25,189)						(54,124)						(50,378)
Amortization of Prior Service Cost			(374)						(367)						(748)						(734)
Recognized Actuarial Loss			3,132						5,578						6,264						11,156
Net Periodic Cost			$	(1,645)					$	1,491					$	(3,290)					$	2,982

			Post-retirement Benefits
			Quarter Ended												Six Months Ended
in thousands			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
Service Cost			$	117					$	131					$	234					$	261
Interest Cost			1,921						1,948						3,840						3,896
Amortization of Prior Service Cost			2						(164)						4						(328)
Recognized Actuarial Loss			610						495						1,220						991
Net Periodic Cost			$	2,650					$	2,410					$	5,298					$	4,820

Non-service cost components of net pension and postretirement benefit cost are presented within Interest and Investment Income on the Consolidated Statements of Operations.

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NOTE H - ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Components of Accumulated Other Comprehensive Loss are:

in thousands			Foreign Currency Translation						Pension & Other Benefits									Derivatives & Hedging									Accumulated Other Comprehensive Loss
Balance at January 30, 2022			$	(50,375)					$	(258,676)								$	43,527								$	(265,524)
Unrecognized Gains (Losses)
Gross			14,056						59									48,060									62,175
Tax Effect			—						—									(11,630)									(11,630)
Reclassification into Net Earnings
Gross			—						3,370			(1)						(11,516)			(2)						(8,146)
Tax Effect			—						(826)									2,787									1,961
Net of Tax Amount			14,056						2,603									27,701									44,360
Balance at May 1, 2022			$	(36,319)					$	(256,073)								$	71,228								$	(221,164)
Balance at October 31, 2021			$	(51,181)					$	(261,211)								$	35,123								$	(277,269)
Unrecognized Gains (Losses)
Gross			14,862						51									67,167									82,080
Tax Effect			—						—									(16,284)									(16,284)
Reclassification into Net Earnings
Gross			—						6,740			(1)						(19,509)			(2)						(12,769)
Tax Effect			—						(1,653)									4,731									3,078
Net of Tax Amount			14,862						5,138									36,105									56,105
Balance at May 1, 2022			$	(36,319)					$	(256,073)								$	71,228								$	(221,164)

(1)    Included in the computation of net periodic cost. See Note G - Pension and Other Post-Retirement Benefits for additional information.

(2)    Included in Cost of Products Sold and Interest Expense in the Consolidated Statements of Operations. See Note F - Derivatives and Hedging for additional information.

NOTE I - FAIR VALUE MEASUREMENTS

 

Accounting guidance establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of the three levels below based on the inputs used in the valuation.

 

Level 1:  Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2: Observable inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.

 

Level 3:  Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.

 

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The Company’s financial assets and liabilities carried at fair value on a recurring basis as of May 1, 2022, and October 31, 2021, and their level within the fair value hierarchy are presented in the table below.

			Fair Value Measurements at May 1, 2022
in thousands			Total Fair Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Assets at Fair Value
Cash and Cash Equivalents (1)			$	861,719					$	861,390					$	329					$	—
Short-term Marketable Securities (2)			23,478						11,929						11,549						—
Other Trading Securities (3)			191,066						—						191,066						—
Commodity Derivatives (4)			14,774						5,249						9,524						—
Total Assets at Fair Value			$	1,091,037					$	878,568					$	212,468					$	—
Liabilities at Fair Value
Deferred Compensation (3)			$	62,291					$	—					$	62,291					$	—
Interest Rate Derivatives (5)			18,723						—						18,723						—
Total Liabilities at Fair Value			$	81,014					$	—					$	81,014					$	—

			Fair Value Measurements at October 31, 2021
in thousands			Total Fair Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Assets at Fair Value
Cash and Cash Equivalents (1)			$	613,530					$	611,111					$	2,419					$	—
Short-term Marketable Securities (2)			21,162						8,790						12,372						—
Other Trading Securities (3)			203,020						—						203,020						—
Commodity Derivatives (4)			13,522						8,104						5,418						—
Total Assets at Fair Value			$	851,234					$	628,005					$	223,229					$	—
Liabilities at Fair Value
Deferred Compensation (3)			$	70,466					$	—					$	70,466					$	—
Total Liabilities at Fair Value			$	70,466					$	—					$	70,466					$	—

 

The following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:

(1)    The Company’s cash equivalents considered Level 1 consist primarily of bank deposits, money market funds rated AAA, or other highly liquid investment accounts, and have a maturity date of three months or less. Cash equivalents considered Level 2 are funds holding agency bonds or securities recognized at amortized cost.

(2)    The Company holds securities as part of a portfolio maintained to generate investment income and to provide cash for operations of the Company, if necessary. The portfolio is managed by a third party who is responsible for daily trading activities, and all assets within the portfolio are highly liquid. The cash, U.S. government securities, and money market funds rated AAA held by the portfolio are classified as Level 1. The current investment portfolio also includes corporate bonds and other asset backed securities for which there is an active, quoted market. Market prices are obtained from a variety of industry providers, large financial institutions, and other third-party sources to calculate a representative daily market value, and therefore, these securities are classified as Level 2.

(3)    The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred compensation plans. The majority of the funds held in the rabbi trust relate to supplemental executive retirement plans and have been invested primarily in fixed income funds managed by a third party. The declared rate on these funds is set based on a formula using the yield of the general account investment portfolio supporting the fund, adjusted for expenses and other charges. The rate is guaranteed for one year at issue and may be reset annually on the policy anniversary, subject to a guaranteed minimum rate. As the value is based on adjusted market rates and the fixed rate is only reset on an annual basis, these funds are classified as Level 2.

Under the Company's deferred compensation plans, participants can defer certain types of compensation and elect to receive a return based on the changes in fair value of various investment options which include equity securities, money market accounts, bond funds or other portfolios for which there is an active quoted market. The Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based on a specified percentage of the I.R.S. applicable federal rates. These liabilities are classified as Level 2. The Company maintains funding in the rabbi trust generally mirroring the selections within the deferred compensation plans. These funds are managed by a third-party insurance policy, the values of which represent their cash surrender value based on the fair value of the underlying investments in the account. These policies are classified as Level 2.

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The rabbi trust is included in Other Assets and deferred compensation liabilities in Other Long-term Liabilities on the Consolidated Condensed Statements of Financial Position. Securities held by the rabbi trust are classified as trading securities. Unrealized gains and losses associated with these investments are included in the Company's earnings. During the quarter and six months ended May 1, 2022, securities held by the rabbi trust generated losses of $6.6 million and $12.0 million, respectively, compared to gains of $5.2 million and $17.0 million for the quarter and six months ended April 25, 2021.

(4)    The Company’s commodity derivatives represent futures, swaps, and options contracts used in its hedging or other programs to offset price fluctuations associated with purchases of corn and hogs, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers. The Company’s futures contracts for corn are traded on the Chicago Board of Trade, while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange. These are active markets with quoted prices available, and these contracts are classified as Level 1. The Company’s corn futures option contracts are OTC instruments classified as Level 2 whose value is calculated using the Black-Scholes pricing model, corn future prices quoted from the Chicago Board of Trade, and other adjustments to inputs that are observable in active markets. All derivatives are reviewed for potential credit risk and risk of nonperformance. The net balance for each program is included in Other Current Assets or Accounts Payable, as appropriate, in the Consolidated Condensed Statements of Financial Position. As of May 1, 2022, the Company has recognized the obligation to return net cash collateral of $39.4 million from various counterparties (including cash of $39.9 million less $0.6 million of realized gain). As of October 31, 2021, the Company had recognized the obligation to return net cash collateral of $10.8 million from various counterparties (including cash of $45.6 million less $34.8 million of realized gain).

(5)    The Company holds an interest rate hedging position to minimize the risk related to future interest rate changes. The fair value of the outstanding interest rate hedge agreement is based on an observable benchmark interest rate (LIBOR) and therefore classified as Level 2. The interest rate derivatives are included in Interest and Dividends Payable in the Consolidated Condensed Statements of Financial Position.

The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value. The Company does not carry its long-term debt at fair value in its Consolidated Condensed Statements of Financial Position. The fair value of long-term debt, utilizing discounted cash flows (Level 2), was $2.9 billion as of May 1, 2022, and $3.3 billion as of October 31, 2021. See Note J - Long Term Debt and Other Borrowing Arrangements for additional information.

The Company measures certain nonfinancial assets and liabilities at fair value, which are recognized or disclosed on a nonrecurring basis (e.g. goodwill, intangible assets, and property, plant and equipment). During the quarter and six months ended May 1, 2022, and April 25, 2021, there were no material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

NOTE J - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS

Long-term Debt consists of: 

in thousands			May 1, 2022						October 31, 2021
Senior Unsecured Notes, with Interest at 3.050%      Interest Due Semi-annually through June 2051 Maturity Date			$	600,000					$	600,000
Senior Unsecured Notes, with Interest at 1.800%      Interest Due Semi-annually through June 2030 Maturity Date			1,000,000						1,000,000
Senior Unsecured Notes, with Interest at 1.700%      Interest Due Semi-annually through June 2028 Maturity Date			750,000						750,000
Senior Unsecured Notes, with Interest at 0.650%      Interest Due Semi-annually through June 2024 Maturity Date			950,000						950,000
Unamortized Discount on Senior Notes			(8,117)						(8,484)
Unamortized Debt Issuance Costs			(21,645)						(23,435)
Interest Rate Swap			(18,723)						—
Finance Lease Liabilities			48,044						52,999
Other Financing Arrangements			2,628						2,823
Total			$	3,302,186					$	3,323,903
Less: Current Maturities of Long-term Debt			8,084						8,756
Long-term Debt Less Current Maturities			$	3,294,101					$	3,315,147

Senior Unsecured Notes: On June 11, 2020, the Company issued senior notes in an aggregate principal amount of $1.0 billion, due June 11, 2030. The notes bear interest at a fixed rate of 1.800% per annum, with interest paid semi-annually in arrears on June 11 and December 11 of each year, commencing December 11, 2020. The notes may be redeemed in whole or in part at any time at the applicable redemption price set forth in the prospectus supplement. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.

The Company repaid its $250.0 million senior unsecured notes upon maturity in April 2021.

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On June 3, 2021, the Company issued $950.0 million aggregate principal amount of its 0.650% notes due 2024 (the "2024 Notes"), $750.0 million aggregate principal amount of its 1.700% notes due 2028 (the "2028 Notes") and $600.0 million aggregate principal amount of its 3.050% notes due 2051 (the "2051 Notes"). Interest will accrue per annum at the stated rates with interest on the notes being paid semi-annually in arrears on June 3 and December 3 of each year, commencing December 3, 2021. Interest rate risk was hedged utilizing interest rate locks on the 2028 Notes and 2051 Notes. The Company lifted the hedges in conjunction with the issuance of these notes. The 2024 Notes may be redeemed in whole or in part one year after their issuance without penalty for early partial payments or full redemption. The 2028 Notes and 2051 Notes may be redeemed in whole or in part at any time at the applicable redemption price. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.

In the first quarter of fiscal 2022, the Company entered into an interest rate swap with a notional amount totaling $450.0 million effectively converting a portion of the 2024 Notes from a fixed to variable rate basis. The interest rate swap was designated as a fair value hedge of the underlying debt obligation. See Note F - Derivatives and Hedging for additional details.

Unsecured Revolving Credit Facility: On May 6, 2021, the Company entered into an unsecured revolving credit agreement with Wells Fargo Bank, National Association as administrative agent, swingline lender and issuing lender, U.S. Bank National Association, JPMorgan Chase Bank, N.A. and BofA Securities, Inc. as syndication agents and the lenders party thereto. In connection with entering the revolving credit agreement, the Company terminated its existing credit facility that was entered into on June 24, 2015. The revolving credit agreement provides for an unsecured revolving credit facility with an aggregate principal commitment amount at any time outstanding of up to $750.0 million with an uncommitted increase option of an additional $375.0 million upon the satisfaction of certain conditions. The unsecured revolving line of credit bears interest, at the Company’s election, at either a Base Rate plus margin of 0.0% to 0.150% or the Eurocurrency Rate plus margin of 0.575% to 1.150% and a variable fee of 0.050% to 0.100% is paid for the availability of this credit line. Extensions of credit under the facility may be made in the form of revolving loans, swingline loans and letters of credit. The lending commitments under the agreement are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding. As of May 1, 2022, and October 31, 2021, the Company had no outstanding draws from this facility.

Debt Covenants: The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of May 1, 2022, the Company was in compliance with all of these covenants.

NOTE K - INCOME TAXES

 

The Company's tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter. The effects of tax legislation are recognized in the period in which the law is enacted. The deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years the related temporary differences are anticipated to reverse.

The Company's effective tax rate for the quarter and six months ended May 1, 2022, was 18.7 percent and 20.5 percent compared to 22.1 percent and 21.0 percent for the corresponding periods a year ago. The lower effective tax rate in the current year is due primarily to tax benefits from increased stock option exercises.

The amount of unrecognized tax benefits, including interest and penalties, is recorded in Other Long-term Liabilities. If recognized as of May 1, 2022, and April 25, 2021, $21.0 million and $28.1 million, respectively, would impact the Company’s effective tax rate. The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense. Interest and penalties included in income tax expense was immaterial for the quarter ended May 1, 2022, and April 25, 2021. The amount of accrued interest and penalties at May 1, 2022, and April 25, 2021, associated with unrecognized tax benefits was $5.8 million and $7.0 million, respectively.

The Company is regularly audited by federal and state taxing authorities. The United States Internal Revenue Service (I.R.S.) concluded its examination of fiscal 2019 in the second quarter of fiscal 2021. The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years through 2023. The objective of CAP is to contemporaneously work with the I.R.S. to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return. The Company may elect to continue participating in CAP for future tax years; the Company may withdraw from the program at any time.

The Company is in various stages of audit by several state taxing authorities on a variety of fiscal years, as far back as 2015. While it is reasonably possible that one or more of these audits may be completed within the next 12 months and the related unrecognized tax benefits may change, based on the status of the examinations it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.

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NOTE L - EARNINGS PER SHARE DATA

 

The reported net earnings attributable to the Company were used when computing basic and diluted earnings per share. The following table sets forth the shares used as the denominator for those computations:

			Quarter Ended												Six Months Ended
in thousands			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
Basic Weighted-Average Shares Outstanding			544,702						540,195						543,691						540,054
Dilutive Potential Common Shares			5,334						7,341						5,291						7,436
Diluted Weighted-Average Shares Outstanding			550,036						547,536						548,982						547,490
Antidilutive Potential Common Shares			790						2,373						2,145						2,283

NOTE M - SEGMENT REPORTING

 

The Company develops, processes, and distributes a wide array of food products in a variety of markets. The Company reports its results in the following four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other.

 

The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market, along with the sale of nutritional and private label shelf-stable products to retail, foodservice, and industrial customers. This segment also includes the results from the Company’s MegaMex Foods, LLC joint venture.

 

The Refrigerated Foods segment consists primarily of the processing, marketing, and sale of branded and unbranded pork, beef, and poultry products for retail, foodservice, deli, convenience store, and commercial customers.

 

The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and commercial customers.

 

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 joint ventures and royalty arrangements.

 

Intersegment sales are eliminated in the Consolidated Statements of Operations. 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 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 below as Net Unallocated Expense and Noncontrolling Interest when reconciling to Earnings Before Income Taxes.

 

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Sales and segment profit for each of the Company’s reportable segments and reconciliation to Earnings Before Income Taxes are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the profit and other financial information shown below.

 

			Quarter Ended												Six Months Ended
in thousands			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
Sales to Unaffiliated Customers
Grocery Products			$	873,572					$	628,232					$	1,729,163					$	1,205,831
Refrigerated Foods			1,644,284						1,453,380						3,271,812						2,820,457
Jennie-O Turkey Store			407,287						351,179						791,759						684,500
International & Other			171,416						173,830						348,184						356,980
Total			$	3,096,559					$	2,606,621					$	6,140,917					$	5,067,768
Intersegment Sales
Grocery Products			$	—					$	—					$	—					$	—
Refrigerated Foods			6,491						5,933						14,179						11,891
Jennie-O Turkey Store			52,498						32,442						100,452						59,135
International & Other			—						—						—						—
Total			58,989						38,376						114,631						71,026
Intersegment Elimination			(58,989)						(38,376)						(114,631)						(71,026)
Total			$	—					$	—					$	—					$	—
Net Sales
Grocery Products			$	873,572					$	628,232					$	1,729,163					$	1,205,831
Refrigerated Foods			1,650,775						1,459,313						3,285,991						2,832,348
Jennie-O Turkey Store			459,785						383,621						892,211						743,635
International & Other			171,416						173,830						348,184						356,980
Intersegment Elimination			(58,989)						(38,376)						(114,631)						(71,026)
Total			$	3,096,559					$	2,606,621					$	6,140,917					$	5,067,768
Segment Profit
Grocery Products			$	89,299					$	97,970					$	188,785					$	190,172
Refrigerated Foods			178,492						173,352						340,884						314,524
Jennie-O Turkey Store			61,799						12,700						105,536						39,640
International & Other			23,653						24,481						49,737						56,685
Total Segment Profit			353,243						308,503						684,941						601,020
Net Unallocated Expense			31,436						15,904						54,370						31,451
Noncontrolling Interest			62						21						201						133
Earnings Before Income Taxes			$	321,868					$	292,620					$	630,772					$	569,702

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Revenue has been disaggregated into the categories below to show how sales channels affect the nature, amount, timing, and uncertainty of revenue and cash flows. Total revenue contributed by sales channel are:

			Quarter Ended												Six Months Ended
in thousands			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
U.S. Retail			$	1,946,117					$	1,685,631					$	3,904,864					$	3,355,518
U.S. Foodservice			959,467						724,248						1,845,532						1,310,584
International			190,975						196,742						390,520						401,666
Total			$	3,096,559					$	2,606,621					$	6,140,917					$	5,067,768

Beginning in the first quarter of fiscal 2022, the Company updated its presentation of revenue disaggregation by sales channel, combining U.S. Deli and U.S. Retail as market conditions have evolved providing many similarities between the channels. The prior year presentation has been updated to conform to the current period presentation.

The Company’s products consist primarily of meat and other food products. Total revenue contributed by classes of similar products are: 

			Quarter Ended												Six Months Ended
in thousands			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
Perishable			$	1,783,172					$	1,453,149					$	3,556,375					$	2,829,969
Shelf-stable			629,406						567,501						1,264,643						1,091,437
Poultry			565,531						494,186						1,102,135						968,837
Miscellaneous			118,449						91,786						217,764						177,525
Total			$	3,096,559					$	2,606,621					$	6,140,917					$	5,067,768

Perishable includes fresh meats, frozen items, refrigerated meal solutions, bacon, sausages, hams, and guacamole (excludes Jennie-O Turkey Store products). Shelf-stable includes canned luncheon meats, nut butters, snack nuts, chili, shelf-stable microwaveable meals, hash, stews, tortillas, salsas, tortilla chips, and other items that do not require refrigeration. The Poultry category is composed primarily of Jennie-O Turkey Store products. The Miscellaneous category primarily consists of nutritional food products and supplements, dessert and drink mixes, and industrial gelatin products.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

 

Overview

 

The Company is a global manufacturer and marketer of branded food products. It operates in four reportable segments as described in Note M - Segment Reporting in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

 

The Company reported net earnings per diluted share of $0.48 for the second quarter of fiscal 2022, up 14 percent compared to last year. Significant factors impacting the quarter were:

 

•Net sales for the second quarter were a record, driven by growth from the Company's foodservice businesses and the inclusion of the Planters® snack nuts business.

•Segment profit for the quarter increased 15 percent. Strong results from the Jennie-O Turkey Store segment, growth from the foodservice businesses in Refrigerated Foods, and the inclusion of the Planters® snack nuts business were the key contributors to growth.

•The Company grew earnings before income taxes, net earnings, and diluted earnings per share, marking the third consecutive quarter of earnings growth. Diluted earnings per share is expected to increase marginally in the third quarter after adjusting for the one-time costs associated with the acquisition of the Planters® snack nuts business in the prior year.

•Refrigerated Foods sales and segment profit increased as a result of strong results from the foodservice businesses, more than offsetting higher operational and logistics costs.

•Jennie-O Turkey Store segment profit increased due to higher commodity prices and strong foodservice sales.

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•Grocery Products segment profit declined, as organic sales growth and the contribution from the Planters® snack nuts business was unable to overcome significant inflationary pressures and lower results from MegaMex.

•International & Other segment profit declined, as profit growth in China was offset by lower results from the export business, which was negatively impacted by logistics challenges and higher freight expenses.

•Year-to-date cash flow from operations was $577.1 million, up 60 percent compared to the prior year.

•A wide-spread outbreak of highly pathogenic avian influenza (HPAI) began in February and was confirmed in the Jennie-O Turkey Store supply chain in late March. It has since been detected at multiple turkey farms across Minnesota and Wisconsin that supply the Company. This has resulted in the loss of flocks, the temporary quarantine of farms, and the establishment of control zones in the impacted areas. HPAI had an immaterial impact on the Jennie-O Turkey Store's segment results for the quarter.

Consolidated Results

 

Volume, Net Sales, Earnings, and Diluted Earnings per Share

			Quarter Ended																		Six Months Ended
in thousands, except per share amounts			May 1, 2022						April 25, 2021						% Change						May 1, 2022						April 25, 2021						% Change
Volume (lbs.)			1,164,198						1,192,948						(2.4)						2,369,070						2,372,654						(0.2)
Organic Volume (1)			1,099,220						1,192,948						(7.9)						2,230,585						2,372,654						(6.0)
Net Sales			$	3,096,559					$	2,606,621					18.8						$	6,140,917					$	5,067,768					21.2
Organic Net Sales (1)			2,857,545						2,606,621						9.6						5,630,079						5,067,768						11.1
Earnings Before Income Taxes			321,868						292,620						10.0						630,772						569,702						10.7
Net Earnings Attributable to Hormel Foods Corporation			261,617						227,901						14.8						501,188						450,184						11.3
Diluted Earnings per Share			0.48						0.42						14.3						0.91						0.82						11.0

(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).

Net Sales

Record net sales for the second quarter and first six months of the year were driven by the inclusion of the Planters® snack nuts business and growth from the Company's foodservice businesses. Additionally, all segments benefited from pricing actions taken during the quarter and first half of the year to offset inflationary pressures. The second quarter marked the sixth consecutive quarter of record sales.

Cost of Products Sold

			Quarter Ended																		Six Months Ended
in thousands			May 1, 2022						April 25, 2021						% Change						May 1, 2022						April 25, 2021						% Change
Cost of Products Sold			$	2,543,088					$	2,130,314					19.4						$	5,048,697					$	4,141,291					21.9

Cost of products sold for the second quarter and first six months of fiscal 2022 increased due to inflationary pressures stemming from raw materials, packaging, freight, labor and many other inputs. The inclusion of the Planters® snack nuts business was also a driver of higher costs.

Costs are expected to remain elevated due to the continued impacts of broad-based inflation. Raw material input costs for pork, beef, turkey, chicken, avocados, and feed are anticipated to remain above historical levels.

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Gross Profit

			Quarter Ended																					Six Months Ended
in thousands			May 1, 2022						April 25, 2021						% Change									May 1, 2022						April 25, 2021						% Change
Gross Profit			$	553,471					$	476,307					16.2									$	1,092,220					$	926,477					17.9
Percentage of Net Sales			17.9		%				18.3		%													17.8		%				18.3		%

 

Gross profit as a percentage of net sales for the second quarter and first six months of 2022 declined, driven primarily by higher freight and operational expenses. Compared to the prior year, gross profit as a percentage of net sales for the second quarter increased for Jennie-O Turkey Store and declined for Grocery Products and Refrigerated Foods. Gross profit as a percentage of net sales was flat for the International & Other segment. For the first six months of 2022, gross profit as a percentage of net sales increased for the Jennie-O Turkey Store and International & Other segments and was lower for Grocery Products and Refrigerated Foods.

Looking ahead to the third quarter of fiscal 2022, the Company expects gross profit as a percentage of net sales to improve compared to the prior year but decline from the second quarter. The Company expects a year over year benefit from the actions it has taken to offset inflationary pressures. These actions include pricing, improving promotional effectiveness, and shifting to a more profitable mix. Compared to the prior quarter, lower margins at Jennie-O Turkey Store due to impacts from HPAI and significant inflationary pressure above current pricing levels in the Grocery Products segment are expected to drive the overall decline. The net impact of input cost inflation poses the largest risk to these assumptions.

Selling, General and Administrative (SG&A)

			Quarter Ended																		Six Months Ended
in thousands			May 1, 2022						April 25, 2021						% Change						May 1, 2022						April 25, 2021						% Change
SG&A			$	224,659					$	199,966					12.3						$	450,631					$	396,346					13.7
Percentage of Net Sales			7.3		%				7.7		%										7.3		%				7.8		%

 

For the second quarter and first six months of fiscal 2022, SG&A expenses increased due to the addition of the Planters® snack nuts business and higher marketing and advertising investments. As a percent of net sales, SG&A expenses declined, driven by strong sales and disciplined cost management.

Advertising investments in the second quarter were $39.2 million compared to $30.9 million last year. For the first half of 2022, advertising investments increased 32.7% compared to the prior year. The Company plans to continue to invest in its leading brands.

Equity in Earnings of Affiliates

			Quarter Ended																		Six Months Ended
in thousands			May 1, 2022						April 25, 2021						% Change						May 1, 2022						April 25, 2021						% Change
Equity in Earnings of Affiliates			$	5,916					$	13,074					(54.8)						$	12,814					$	27,302					(53.1)

 

Equity in earnings of affiliates for the second quarter and first half of 2022 decreased significantly due to lower results for MegaMex. MegaMex results were negatively impacted by significantly higher costs for avocados and additional inflationary pressures.

Effective Tax Rate

			Quarter Ended												Six Months Ended
			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
Effective Tax Rate			18.7		%				22.1		%				20.5		%				21.0		%

The effective tax rate for the second quarter decreased as this year's tax rate reflects stock option exercise benefits. The effective tax rate for fiscal 2022 is expected to be between 20.5% and 22.5%. For further information, refer to Note K - Income Taxes.

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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 profit and other financial information shown below.

			Quarter Ended																		Six Months Ended
in thousands			May 1, 2022						April 25, 2021						% Change						May 1, 2022						April 25, 2021						% Change
Net Sales
Grocery Products			$	873,572					$	628,232					39.1						$	1,729,163					$	1,205,831					43.4
Refrigerated Foods			1,644,284						1,453,380						13.1						3,271,812						2,820,457						16.0
Jennie-O Turkey Store			407,287						351,179						16.0						791,759						684,500						15.7
International & Other			171,416						173,830						(1.4)						348,184						356,980						(2.5)
Total			$	3,096,559					$	2,606,621					18.8						$	6,140,917					$	5,067,768					21.2
Segment Profit
Grocery Products			$	89,299					$	97,970					(8.9)						$	188,785					$	190,172					(0.7)
Refrigerated Foods			178,492						173,352						3.0						340,884						314,524						8.4
Jennie-O Turkey Store			61,799						12,700						386.6						105,536						39,640						166.2
International & Other			23,653						24,481						(3.4)						49,737						56,685						(12.3)
Total Segment Profit			353,243						308,503						14.5						684,941						601,020						14.0
Net Unallocated Expense			31,436						15,904						97.7						54,370						31,451						72.9
Noncontrolling Interest			62						21						197.7						201						133						51.2
Earnings Before Income Taxes			$	321,868					$	292,620					10.0						$	630,772					$	569,702					10.7

 

Grocery Products

			Quarter Ended																		Six Months Ended
in thousands			May 1, 2022						April 25, 2021						% Change						May 1, 2022						April 25, 2021						% Change
Volume (lbs.)			373,163						313,795						18.9						744,678						618,129						20.5
Net Sales			$	873,572					$	628,232					39.1						$	1,729,163					$	1,205,831					43.4
Segment Profit			89,299						97,970						(8.9)						188,785						190,172						(0.7)

Volume and sales for the second quarter and first six months of fiscal 2022 increased due to the inclusion of the Planters® snack nuts business and strength across the portfolio. Organic sales growth for the second quarter was led by the Wholly®, SKIPPY®, SPAM®, and Dinty Moore® brands, in addition to strategic pricing actions.

Segment profit for the second quarter and first half of the year declined, as the contribution from the Planters® snack nuts business and organic sales growth was unable to overcome significant inflationary pressures and lower results from MegaMex.

Volume, sales and segment profit during the first half of fiscal 2022 were negatively impacted by production constraints due to labor shortages.

Looking forward, the Grocery Products segment will continue to be challenged by inflationary pressures until the recently announced pricing actions become effective in the fourth quarter. Additional risks to profitability include higher than anticipated elasticities impacting sales volumes and labor shortages impacting production on key product lines.

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Refrigerated Foods

			Quarter Ended																		Six Months Ended
in thousands			May 1, 2022						April 25, 2021						% Change						May 1, 2022						April 25, 2021						% Change
Volume (lbs.)			517,477						593,271						(12.8)						1,090,229						1,188,586						(8.3)
Net Sales			$	1,644,284					$	1,453,380					13.1						$	3,271,812					$	2,820,457					16.0
Segment Profit			178,492						173,352						3.0						340,884						314,524						8.4

For the second quarter and first half of 2022, sales increased due to strong results from the foodservice businesses, strategic pricing actions across the portfolio, and from the inclusion of the Planters® snack nuts business. Consistent with the Company's long-term strategy to better align resources to value-added growth, the overall decline in volume for the first half of fiscal 2022 was due primarily to lower commodity sales resulting from the Company's new pork supply agreement.

Segment profit growth during the second quarter and first six months of 2022 was driven by strong results from the foodservice businesses, more than offsetting higher operational and logistics costs.

Volume, sales and segment profit during the first half of fiscal 2022 were negatively impacted by production constraints due to labor shortages.

Refrigerated Foods expects a strong finish to the year, led by continued strength in the foodservice businesses and strong demand for its retail products. Risks to profitability include additional inflationary pressures and labor shortages impacting production on key product lines.

Jennie-O Turkey Store

			Quarter Ended																		Six Months Ended
in thousands			May 1, 2022						April 25, 2021						% Change						May 1, 2022						April 25, 2021						% Change
Volume (lbs.)			201,608						202,624						(0.5)						390,108						396,193						(1.5)
Net Sales			$	407,287					$	351,179					16.0						$	791,759					$	684,500					15.7
Segment Profit			61,799						12,700						386.6						105,536						39,640						166.2

Sales for the second quarter and first half of fiscal 2022 increased for all areas of the business, led by higher foodservice, whole bird and retail sales. Increased volume in the foodservice business was not enough to offset large commodity volume declines.

For the second quarter and first six months of the year, higher commodity prices and improved foodservice sales drove the substantial improvement in segment profit.

Given the uncertainty regarding HPAI and based on our current expectations, Jennie-O Turkey Store sales volumes are projected to decline approximately 30 percent in the back half of the year due to supply gaps in its vertically integrated supply chain. With the third quarter representing the seasonal earnings low for this business, we expect third quarter earnings to be in line with last year.

International & Other

			Quarter Ended																		Six Months Ended
in thousands			May 1, 2022						April 25, 2021						% Change						May 1, 2022						April 25, 2021						% Change
Volume (lbs.)			71,949						83,257						(13.6)						144,056						169,746						(15.1)
Net Sales			$	171,416					$	173,830					(1.4)						$	348,184					$	356,980					(2.5)
Segment Profit			23,653						24,481						(3.4)						49,737						56,685						(12.3)

 

Volume and sales declined during the second quarter and first half of the year as a result of current export logistics challenges and lower commodity sales due to the Company's new pork supply agreement. Second quarter retail sales in China improved as pantry loading and sales to food security programs in response to COVID-related lockdowns helped offset declines in foodservice sales.

Segment profit for the second quarter and first six months of 2022 declined due in most part to lower results from the export business, which was negatively impacted by logistics challenges and meaningfully higher freight expenses.

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The International & Other segment continues to see strong demand both in its export business and in China. However, due to the impact of two partial plant shutdowns in China as a result of COVID-related restrictions and persistent export logistics challenges, there remains a risk to earnings growth in the back half of the year.

Unallocated Income and Expenses

 

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.

			Quarter Ended												Six Months Ended
in thousands			May 1, 2022						April 25, 2021						May 1, 2022						April 25, 2021
Net Unallocated Expense			$	31,436					$	15,904					$	54,370					$	31,451
Noncontrolling Interest			62						21						201						133

 

For the second quarter and first six months of 2022, net unallocated expense increased due to lower investment income from the Company's Rabbi Trust and higher interest expense.

Non-GAAP Financial Measures

The non-GAAP adjusted financial measures of organic net sales and organic volume are presented to provide investors with additional information to facilitate the comparison of past and present operations. Organic net sales and organic volume are defined as net sales and volume, excluding the impact of acquisitions and divestitures. Organic net sales and organic volume exclude the impact of the acquisition of the Planters® snack nuts business (June 2021) in the Grocery Products, Refrigerated Foods and International & Other segments.

The Company believes these non-GAAP financial measures provide useful information to investors, because they are the measures used to evaluate performance on a comparable year-over-year basis. Non-GAAP measures are not intended to be a substitute for U.S. GAAP measures in analyzing financial performance. These non-GAAP measures are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.

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The tables below show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures.

RECONCILIATION OF NON-GAAP MEASURES
ORGANIC VOLUME AND NET SALES (NON-GAAP)
			Quarter Ended
			May 1, 2022												April 25, 2021
in thousands			Reported GAAP			Acquisitions			Organic (Non-GAAP)						Reported GAAP												Organic % Change
Volume (lbs.)
Grocery Products			373,163			(54,150)			319,013						313,795												1.7
Refrigerated Foods			517,477			(9,608)			507,869						593,271												(14.4)
Jennie-O Turkey Store			201,608			—			201,608						202,624												(0.5)
International & Other			71,949			(1,220)			70,730						83,257												(15.0)
Total Volume			1,164,198			(64,978)			1,099,220						1,192,948												(7.9)
Net Sales
Grocery Products			$	873,572		$	(200,775)		$	672,797					$	628,232											7.1
Refrigerated Foods			1,644,284			(34,759)			1,609,525						1,453,380												10.7
Jennie-O Turkey Store			407,287			—			407,287						351,179												16.0
International & Other			171,416			(3,480)			167,935						173,830												(3.4)
Total Net Sales			$	3,096,559		$	(239,014)		$	2,857,545					$	2,606,621											9.6
			Six Months Ended
			May 1, 2022												April 25, 2021
in thousands			Reported GAAP			Acquisitions			Organic (Non-GAAP)						Reported GAAP												Organic % Change
Volume (lbs.)
Grocery Products			744,678			(117,362)			627,316						618,129												1.5
Refrigerated Foods			1,090,229			(18,182)			1,072,047						1,188,586												(9.8)
Jennie-O Turkey Store			390,108			—			390,108						396,193												(1.5)
International & Other			144,056			(2,942)			141,114						169,746												(16.9)
Total Volume			2,369,070			(138,485)			2,230,585						2,372,654												(6.0)
Net Sales
Grocery Products			$	1,729,163		$	(436,507)		$	1,292,656					$	1,205,831											7.2
Refrigerated Foods			3,271,812			(66,012)			3,205,800						2,820,457												13.7
Jennie-O Turkey Store			791,759			—			791,759						684,500												15.7
International & Other			348,184			(8,320)			339,864						356,980												(4.8)
Total Net Sales			$	6,140,917		$	(510,838)		$	5,630,079					$	5,067,768											11.1

Related Party Transactions

 

There has been no material change in the information regarding Related Party Transactions as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

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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

			Six Months Ended
in millions			May 1, 2022			April 25, 2021
Cash and Cash Equivalents			$	862		$	1,485
Cash Provided by (Used in) Operating Activities			577			361
Cash Provided by (Used in) Investing Activities			(126)			(87)
Cash Provided by (Used in) Financing Activities			(204)			(508)

Cash and cash equivalents increased $248 million in the six months ended May 1, 2022 as cash from operating activities was sufficient to cover dividend payments and capital expenditures. Cash and cash equivalents decreased compared to the prior year due to funding the purchase of the Planters® snack nuts business. Additional details related to significant drivers of cash flows are provided below.

Cash Provided by (Used in) Operating Activities

•Cash flows from operating activities benefited from earnings, while changes in operating assets and liabilities during the six months ended May 1, 2022 were overall unfavorable.

–Inventory increased $226 million compared to $155 million in the prior year. The higher inventory value in fiscal 2022 was primarily due to increased raw material costs while the increase in inventory levels during fiscal 2021 was the result of strategic inventory management.

–Accounts receivable declined $109 million in the six months ended May 1, 2022 as a result of the timing of sales and collections. In comparison, accounts receivable increased $20 million in the six months ended April 25, 2021.

–Accounts payable and accrued expenses decreased $46 million and $103 million in the six months ended May 1, 2022 and April 25, 2021, respectively, primarily due to the timing of invoice payments and annual incentive compensation payments.

Cash Provided by (Used in) Investing Activities

•Capital expenditures were $128 million and $86 million in the six months ended May 1, 2022 and April 25, 2021, respectively. The Company's target for capital expenditures for fiscal 2022 is $310 million. The largest spend in both years was related to capacity expansion in Omaha, Nebraska. Additional projects include a new production line for the SPAM® family of products in Dubuque, Iowa in fiscal 2022 and Project Orion in fiscal 2021. Looking to the remainder of the year, the Company will prioritize projects which increase value added production capacity, drive cost savings and leverage automation.

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 $274 million in the six months ended May 1, 2022 compared to $258 million in the comparable period of fiscal 2021. For fiscal 2022, the annual dividend rate was increased 6 percent to $1.04 per share, representing the 56th consecutive annual dividend increase. The Company has paid dividends for 375 consecutive quarters.

•Proceeds from exercise of stock options was $75 million in the six months ended May 1, 2022 compared to $13 million in the comparable period of fiscal 2021. The increase in proceeds was caused by the number of options exercised with 3.6 million shares issued during fiscal 2022 compared to 0.7 million shares during fiscal 2021.

•The Company repaid $250.0 million of its senior unsecured notes upon maturity in April 2021.

Sources and Uses of Cash

The Company believes its balanced business model, with diversification across raw material inputs, channels, and categories, provides stability in ever changing economic environments. The Company applies a waterfall approach to capital resource allocation, which focuses first on required uses of cash such as capital expenditures to maintain facilities, dividend returns to investors, and mandatory debt repayments. Next, the Company looks to strategic items in support of growth initiatives such as acquisitions and innovation investments, which is followed by 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's ability to leverage its

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balance sheet through the issuance of debt provides the flexibility to take advantage of strategic opportunities which may require additional funding.

There have been no material changes to the information regarding the Company’s future contractual financial obligations previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of May 1, 2022, the Company was in compliance with all of these debt covenants and expects to maintain this compliance.

Trademarks

 

References to the Company’s brands or products in italics within this report represent valuable trademarks owned or licensed by Hormel Foods, LLC or other subsidiaries of Hormel Foods Corporation.

 

CRITICAL ACCOUNTING ESTIMATES

 

This discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. The significant accounting policies used in preparing these Consolidated Financial Statements are consistent with those described in Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements in the Form 10-K with the exception of new requirements adopted in the first quarter of fiscal 2022.

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 has considered the impact of COVID-19 and determined there have been no material changes in the Company’s Critical Accounting Estimates as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 31, 2021. As conditions resulting from the COVID-19 pandemic evolve, the Company expects these judgments and estimates may be subject to change, which could materially impact future periods.

FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking” information within the meaning of the federal securities laws. The “forward-looking” information may include statements concerning the Company’s outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts.

 

The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. The Company is filing this cautionary statement in connection with the Reform Act. When used in this Quarterly Report on Form 10-Q, the Company’s Annual Report to Stockholders, other filings by the Company with the Securities and Exchange Commission, the Company’s press releases, and oral statements made by the Company’s representatives, the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify forward-looking statements within the meaning of the Reform Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected.

In connection with the “safe harbor” provisions of the Reform Act, the Company is identifying risk factors that could affect financial performance and cause the Company’s actual results to differ materially from opinions or statements expressed with respect to future periods. The discussion of risk factors in the Company's most recent Annual Report on form 10-K and in Part II, Item 1A of this Quarterly Report on Form 10-Q contain certain cautionary statements regarding the Company’s business, which should be considered by investors and others. Such risk factors should be considered in conjunction with any discussions of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the Company.

 

In making these statements, the Company is not undertaking, and specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the Company’s business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the Company has attempted to list comprehensively these important cautionary risk factors, the Company wishes to caution investors and others that other factors may in the future prove to be important in affecting the Company’s business or results of operations.

 

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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; risks of litigation; potential sanctions and compliance costs arising from government regulation; compliance with stringent environmental regulation and potential environmental litigation; and risks arising from the Company’s foreign operations.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is exposed to various forms of market risk as a part of its ongoing business practices. The Company utilizes derivative instruments to mitigate earnings fluctuations due to market volatility.

Commodity Price Risk: The Company is subject to commodity price risk primarily through grain 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 May 1, 2022, was $70.8 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 May 1, 2022, by $37.3 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 May 1, 2022, the Company’s long-term debt had a carrying amount of $2.9 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 May 1, 2022, by $85.2 million. A 10 percent increase would have negatively impacted the long-term debt by $80.2 million.

To reduce the risk of changes in fair value of long-term debt, the Company has entered into an interest rate swap on a portion of the debt that receives a fixed rate and pays a floating rate. The notional amount of the Company's interest rate swap is $450.0 million. The Company measures its market risk exposure on interest rate contracts using sensitivity analysis, which considers a hypothetical change of 25 basis points in the underlying benchmark interest rate. An increase of 25 basis points would have negatively impacted the fair value of the Company's interest rate swap by $2.1 million, while a decrease of 25 basis points would increase the value by a similar amount.

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 May 1, 2022 was $658.2 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.

 

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 May 1, 2022, the balance of these securities totaled $191.1 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 a negative impact to the Company’s pretax earnings of approximately $8.1 million, while a 10 percent increase in value would have a positive impact of the same amount.

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Item 4. CONTROLS AND PROCEDURES

 

(a)    Disclosure Controls and Procedures.

As of the end of the period covered by this report (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information the Company is required to disclose in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b)    Internal Controls.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the second quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

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 three 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 1A. RISK FACTORS

The Company's business, operations, and financial condition are subject to various risks and uncertainties. There have been no material changes to the risk factors previously disclosed in Part I, Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021, except as follows:

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 our customers and suppliers may be compromised, which could result in additional bad debts for the Company or non-performance by suppliers.

▪The value of our investments in debt and equity securities may decline, including most significantly the Company’s trading securities held as part of a rabbi trust to fund supplemental executive retirement plans and deferred income plans, and the Company’s assets held in pension plans.

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▪Future volatility or disruption in the capital and credit markets could impair the Company's liquidity or increase costs of borrowing.

▪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.

Although the Company has no operations in Russia or Ukraine, inflated fuel costs and supply chain shortages and delays have been experienced due to the impact of the conflict on the global economy. Further escalation related to the military 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 Company's other risk factors described in Part I, Item 1A, "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

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 judgement 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 in the United States, it may negatively impact the national economy, demand for Company products, and/or the Company’s workforce availability, and the Company’s financial results could suffer. The Company has developed contingency plans to address infectious disease scenarios and the potential impact on its operations, and will continue to update these plans as necessary. There can be no assurance given, however, these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.

Deterioration of labor relations, labor availability or increases in labor costs could harm the Company’s business. As of May 1, 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. 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. All union contracts are currently effective with none set to expire during the remainder of fiscal 2022.

INDUSTRY RISKS

Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins.

The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including African swine fever (ASF), Bovine Spongiform Encephalopathy (BSE), pneumo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease (FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI). The outbreak of such diseases could adversely affect the Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins. 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 United States, the Company's supply of hogs and pork could be materially impacted.

HPAI was detected within the United States in 2022 and was confirmed within the Company's Jennie-O Turkey Store supply chain. The impact of HPAI will reduce production volume in the Company's turkey facilities through the end of the fiscal year. 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.

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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no issuer purchases of equity securities in the quarter ended May 1, 2022. The maximum number of shares that may yet be purchased under the plans or programs as of May 1, 2022 is 3,987,494. 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.

Item 6. EXHIBITS

31.1			Certification Required Under Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification Required Under Section 302 of the Sarbanes-Oxley Act of 2002
32.1			Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101			The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 2022, formatted in Inline XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Condensed Statements of Financial Position, (iv) Consolidated Statements of Changes in Shareholders' Investment, (v) Consolidated Condensed Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
104			The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 2022, formatted in Inline XBRL (included as Exhibit 101).

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SIGNATURES

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

						HORMEL FOODS CORPORATION
						(Registrant)
Date: June 2, 2022			By			/s/ JACINTH C. SMILEY
						JACINTH C. SMILEY
						Executive Vice President and Chief Financial Officer
						(Principal Financial Officer)
Date: June 2, 2022			By			/s/ PAUL R. KUEHNEMAN
						PAUL R. KUEHNEMAN
						Vice President and Controller
						(Principal Accounting Officer)

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