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

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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.

  • 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 EndedSix Months Ended
in thousands, except per share amountsMay 1, 2022April 25, 2021% ChangeMay 1, 2022April 25, 2021% Change
Volume (lbs.)1,164,1981,192,948(2.4)2,369,0702,372,654(0.2)
Organic Volume (1)1,099,2201,192,948(7.9)2,230,5852,372,654(6.0)
Net Sales$3,096,559$2,606,62118.8$6,140,917$5,067,76821.2
Organic Net Sales (1)2,857,5452,606,6219.65,630,0795,067,76811.1
Earnings Before Income Taxes321,868292,62010.0630,772569,70210.7
Net Earnings Attributable to Hormel Foods Corporation261,617227,90114.8501,188450,18411.3
Diluted Earnings per Share0.480.4214.30.910.8211.0

(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 EndedSix Months Ended
in thousandsMay 1, 2022April 25, 2021% ChangeMay 1, 2022April 25, 2021% Change
Cost of Products Sold$2,543,088$2,130,31419.4$5,048,697$4,141,29121.9

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.

Gross Profit

Quarter EndedSix Months Ended
in thousandsMay 1, 2022April 25, 2021% ChangeMay 1, 2022April 25, 2021% Change
Gross Profit$553,471$476,30716.2$1,092,220$926,47717.9
Percentage of Net Sales17.9%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 EndedSix Months Ended
in thousandsMay 1, 2022April 25, 2021% ChangeMay 1, 2022April 25, 2021% Change
SG&A$224,659$199,96612.3$450,631$396,34613.7
Percentage of Net Sales7.3%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 EndedSix Months Ended
in thousandsMay 1, 2022April 25, 2021% ChangeMay 1, 2022April 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 EndedSix Months Ended
May 1, 2022April 25, 2021May 1, 2022April 25, 2021
Effective Tax Rate18.7%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.

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 EndedSix Months Ended
in thousandsMay 1, 2022April 25, 2021% ChangeMay 1, 2022April 25, 2021% Change
Net Sales
Grocery Products$873,572$628,23239.1$1,729,163$1,205,83143.4
Refrigerated Foods1,644,2841,453,38013.13,271,8122,820,45716.0
Jennie-O Turkey Store407,287351,17916.0791,759684,50015.7
International & Other171,416173,830(1.4)348,184356,980(2.5)
Total$3,096,559$2,606,62118.8$6,140,917$5,067,76821.2
Segment Profit
Grocery Products$89,299$97,970(8.9)$188,785$190,172(0.7)
Refrigerated Foods178,492173,3523.0340,884314,5248.4
Jennie-O Turkey Store61,79912,700386.6105,53639,640166.2
International & Other23,65324,481(3.4)49,73756,685(12.3)
Total Segment Profit353,243308,50314.5684,941601,02014.0
Net Unallocated Expense31,43615,90497.754,37031,45172.9
Noncontrolling Interest6221197.720113351.2
Earnings Before Income Taxes$321,868$292,62010.0$630,772$569,70210.7

Grocery Products

Quarter EndedSix Months Ended
in thousandsMay 1, 2022April 25, 2021% ChangeMay 1, 2022April 25, 2021% Change
Volume (lbs.)373,163313,79518.9744,678618,12920.5
Net Sales$873,572$628,23239.1$1,729,163$1,205,83143.4
Segment Profit89,29997,970(8.9)188,785190,172(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.

Refrigerated Foods

Quarter EndedSix Months Ended
in thousandsMay 1, 2022April 25, 2021% ChangeMay 1, 2022April 25, 2021% Change
Volume (lbs.)517,477593,271(12.8)1,090,2291,188,586(8.3)
Net Sales$1,644,284$1,453,38013.1$3,271,812$2,820,45716.0
Segment Profit178,492173,3523.0340,884314,5248.4

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 EndedSix Months Ended
in thousandsMay 1, 2022April 25, 2021% ChangeMay 1, 2022April 25, 2021% Change
Volume (lbs.)201,608202,624(0.5)390,108396,193(1.5)
Net Sales$407,287$351,17916.0$791,759$684,50015.7
Segment Profit61,79912,700386.6105,53639,640166.2

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 EndedSix Months Ended
in thousandsMay 1, 2022April 25, 2021% ChangeMay 1, 2022April 25, 2021% Change
Volume (lbs.)71,94983,257(13.6)144,056169,746(15.1)
Net Sales$171,416$173,830(1.4)$348,184$356,980(2.5)
Segment Profit23,65324,481(3.4)49,73756,685(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.

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 EndedSix Months Ended
in thousandsMay 1, 2022April 25, 2021May 1, 2022April 25, 2021
Net Unallocated Expense$31,436$15,904$54,370$31,451
Noncontrolling Interest6221201133

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.

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, 2022April 25, 2021
in thousandsReported GAAPAcquisitionsOrganic (Non-GAAP)Reported GAAPOrganic % Change
Volume (lbs.)
Grocery Products373,163(54,150)319,013313,7951.7
Refrigerated Foods517,477(9,608)507,869593,271(14.4)
Jennie-O Turkey Store201,608—201,608202,624(0.5)
International & Other71,949(1,220)70,73083,257(15.0)
Total Volume1,164,198(64,978)1,099,2201,192,948(7.9)
Net Sales
Grocery Products$873,572$(200,775)$672,797$628,2327.1
Refrigerated Foods1,644,284(34,759)1,609,5251,453,38010.7
Jennie-O Turkey Store407,287—407,287351,17916.0
International & Other171,416(3,480)167,935173,830(3.4)
Total Net Sales$3,096,559$(239,014)$2,857,545$2,606,6219.6
Six Months Ended
May 1, 2022April 25, 2021
in thousandsReported GAAPAcquisitionsOrganic (Non-GAAP)Reported GAAPOrganic % Change
Volume (lbs.)
Grocery Products744,678(117,362)627,316618,1291.5
Refrigerated Foods1,090,229(18,182)1,072,0471,188,586(9.8)
Jennie-O Turkey Store390,108—390,108396,193(1.5)
International & Other144,056(2,942)141,114169,746(16.9)
Total Volume2,369,070(138,485)2,230,5852,372,654(6.0)
Net Sales
Grocery Products$1,729,163$(436,507)$1,292,656$1,205,8317.2
Refrigerated Foods3,271,812(66,012)3,205,8002,820,45713.7
Jennie-O Turkey Store791,759—791,759684,50015.7
International & Other348,184(8,320)339,864356,980(4.8)
Total Net Sales$6,140,917$(510,838)$5,630,079$5,067,76811.1

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.

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 millionsMay 1, 2022April 25, 2021
Cash and Cash Equivalents$862$1,485
Cash Provided by (Used in) Operating Activities577361
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

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.

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.

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