filings.toolsHormel Foods 10-Q 2023-01-29
Filed 2023-03-02. 7 sections, 131K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
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 January 29, 2023
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 Minnesota | 55912-3680 | |||||||
| (Address of principal executive offices) | (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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at February 26, 2023 | ||||||||||||||||
| Common Stock | $.01465 | par value | 546,532,923 | ||||||||||||||
| Common Stock Non-Voting | $.01 | par value | 0 |
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 | |||||||||||||||||||||||
| January 29, 2023 | January 30, 2022 | ||||||||||||||||||||||
| Net Sales | $ | 2,970,992 | $ | 3,044,358 | |||||||||||||||||||
| Cost of Products Sold | 2,475,043 | 2,505,610 | |||||||||||||||||||||
| Gross Profit | 495,949 | 538,749 | |||||||||||||||||||||
| Selling, General, and Administrative | 222,056 | 225,972 | |||||||||||||||||||||
| Equity in Earnings of Affiliates | 15,559 | 6,898 | |||||||||||||||||||||
| Operating Income | 289,452 | 319,675 | |||||||||||||||||||||
| Interest and Investment Income | 10,096 | 3,869 | |||||||||||||||||||||
| Interest Expense | 18,347 | 14,640 | |||||||||||||||||||||
| Earnings Before Income Taxes | 281,201 | 308,904 | |||||||||||||||||||||
| Provision for Income Taxes | 63,551 | 69,194 | |||||||||||||||||||||
| Net Earnings | 217,651 | 239,710 | |||||||||||||||||||||
| Less: Net Earnings (Loss) Attributable to Noncontrolling Interest | (69) | 139 | |||||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | $ | 217,719 | $ | 239,571 | |||||||||||||||||||
| Net Earnings Per Share | |||||||||||||||||||||||
| Basic | $ | 0.40 | $ | 0.44 | |||||||||||||||||||
| Diluted | $ | 0.40 | $ | 0.44 | |||||||||||||||||||
| Weighted-average Shares Outstanding | |||||||||||||||||||||||
| Basic | 546,384 | 542,680 | |||||||||||||||||||||
| Diluted | 550,031 | 547,928 |
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
Unaudited
| Quarter Ended | |||||||||||||||||||||||
| January 29, 2023 | January 30, 2022 | ||||||||||||||||||||||
| Net Earnings | $ | 217,651 | $ | 239,710 | |||||||||||||||||||
| Other Comprehensive Income (Loss), Net of Tax: | |||||||||||||||||||||||
| Foreign Currency Translation | 15,046 | 925 | |||||||||||||||||||||
| Pension and Other Benefits | 2,990 | 2,535 | |||||||||||||||||||||
| Deferred Hedging | (14,514) | 8,404 | |||||||||||||||||||||
| Total Other Comprehensive Income (Loss) | 3,522 | 11,864 | |||||||||||||||||||||
| Comprehensive Income | 221,173 | 251,574 | |||||||||||||||||||||
| Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interest | 154 | 258 | |||||||||||||||||||||
| Comprehensive Income Attributable to Hormel Foods Corporation | $ | 221,019 | $ | 251,316 |
See Notes to Consolidated Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
In thousands, except share and per share amounts
Unaudited
| January 29, 2023 | October 30, 2022 | ||||||||||
| Assets | |||||||||||
| Cash and Cash Equivalents | $ | 599,789 | $ | 982,107 | |||||||
| Short-term Marketable Securities | 17,792 | 16,149 | |||||||||
| Accounts Receivable (Net of Allowance for Doubtful Accounts of $3,481 at January 29, 2023, and $3,507 at October 30, 2022) | 787,213 | 867,593 | |||||||||
| Inventories | 1,730,086 | 1,716,059 | |||||||||
| Taxes Receivable | 7,145 | 7,177 | |||||||||
| Prepaid Expenses | 40,063 | 31,481 | |||||||||
| Other Current Assets | 13,218 | 16,559 | |||||||||
| Total Current Assets | 3,195,306 | 3,637,125 | |||||||||
| Goodwill | 4,927,923 | 4,925,829 | |||||||||
| Other Intangibles | 1,798,732 | 1,803,027 | |||||||||
| Pension Assets | 242,358 | 245,566 | |||||||||
| Investments In and Receivables from Affiliates | 701,629 | 271,058 | |||||||||
| Other Assets | 292,697 | 283,169 | |||||||||
| Property, Plant, and Equipment | |||||||||||
| Land | 73,952 | 74,303 | |||||||||
| Buildings | 1,405,861 | 1,398,255 | |||||||||
| Equipment | 2,641,581 | 2,636,660 | |||||||||
| Construction in Progress | 226,908 | 216,246 | |||||||||
| Less: Allowance for Depreciation | (2,223,900) | (2,184,319) | |||||||||
| Net Property, Plant, and Equipment | 2,124,402 | 2,141,146 | |||||||||
| Total Assets | $ | 13,283,047 | $ | 13,306,919 |
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
In thousands, except share and per share amounts
Unaudited
| January 29, 2023 | October 30, 2022 | ||||||||||
| Liabilities and Shareholders' Investment | |||||||||||
| Accounts Payable and Accrued Expenses | $ | 764,525 | $ | 875,405 | |||||||
| Accrued Marketing Expenses | 133,240 | 113,105 | |||||||||
| Employee Related Expenses | 213,540 | 279,072 | |||||||||
| Interest and Dividends Payable | 158,376 | 163,963 | |||||||||
| Taxes Payable | 94,775 | 32,925 | |||||||||
| Current Maturities of Long-term Debt | 8,929 | 8,796 | |||||||||
| Total Current Liabilities | 1,373,385 | 1,473,266 | |||||||||
| Long-term Debt Less Current Maturities | 3,292,559 |
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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. Effective October 31, 2022, the Company transitioned to three operating segments – Retail, Foodservice, and International. The Company provided certain recast financial information for fiscal years 2021 and 2022 in a Form 8-K filed with the U.S. Securities and Exchange Commission on February 28, 2023. The Company's three reportable segments are described in Note L - 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 $0.40 for the first quarter of fiscal 2023, down 9 percent compared to last year. Significant factors impacting the quarter were:
-
Net sales for the first quarter decreased, as the benefit from pricing actions to mitigate inflationary pressures was unable to overcome the impact of lower volumes in each business segment.
-
Consistent with the Company's long-term strategy to better align resources to value-added growth, the overall decline in volume was primarily due to lower commodity sales resulting from the Company's new pork supply agreement and lower turkey volumes due to the ongoing impacts of highly pathogenic avian influenza (HPAI).
-
Segment profit for the quarter decreased 6 percent. Improved results in the Foodservice segment were more than offset by declines in the Retail and International segments.
-
Earnings before income taxes for the quarter decreased 9 percent compared to the prior year. The impact of lower sales, unfavorable mix, and higher operating costs were partially offset by higher equity in earnings, higher investment income, and lower selling, general, and administrative expenses.
-
Foodservice segment profit increased due to improved mix across the portfolio.
-
International segment profit declined, as strong results from the Company's joint venture in the Philippines did not overcome significantly lower turkey and fresh pork export sales, lower sales in China, and elevated logistics expenses.
-
Retail segment profit declined due to the impact from lower net sales, unfavorable mix and higher operating costs, partially offset by the benefit from pricing actions across the portfolio, higher equity in earnings from MegaMex and improved results for the bacon business.
-
Year-to-date cash flow from operations was $204 million, down 47 percent compared to the prior year.
-
On December 15, 2022, the Company purchased approximately 29% of the common stock interest in PT Garudafood Putra Putri Jaya Tbk (Garudafood), one of the largest food and beverage companies in Indonesia. This investment expands the Company's presence in Southeast Asia and further supports the global execution of the snacking and entertaining strategic priority.
Consolidated Results
Volume, Net Sales, Earnings, and Diluted Earnings per Share
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands, except per share amounts | January 29, 2023 | January 30, 2022 | % Change | ||||||||||||||||||||||||||||||||
| Volume (lbs.) | 1,062,211 | 1,204,872 | (11.8) | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 2,970,992 | $ | 3,044,358 | (2.4) | ||||||||||||||||||||||||||||||
| Earnings Before Income Taxes | 281,201 | 308,904 | (9.0) | ||||||||||||||||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | 217,719 | 239,571 | (9.1) | ||||||||||||||||||||||||||||||||
| Diluted Earnings per Share | 0.40 | 0.44 | (9.1) | ||||||||||||||||||||||||||||||||
Net Sales
Net sales for the first quarter decreased, as the benefit from pricing actions to mitigate inflationary pressures was more than offset by the impact of lower volumes in each segment. The primary drivers of lower volume were declines in commodity pork availability as a result of the Company's new pork supply agreement and lower turkey supply from the ongoing impacts of HPAI.
Strong demand continued across many of the Company's center-store, refrigerated, and premium items at retail, including Hormel**®** Black Label**®** bacon, Columbus**®** charcuterie, Hormel**®** chili, Hormel**®** pepperoni, Applegate**®** breaded chicken, Herdez**®** products, Hormel**®** Square Table****TM entrees, and Mary Kitchen**®** hash. Solutions-based items in the Foodservice segment also had another strong quarter, with volume growth in sliced meats and from brands such as Cafe H**®, Hormel®** Fire Braised****TM, Hormel**®** Bacon 1****TM, and Austin Blues**®**.
Cost of Products Sold
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 29, 2023 | January 30, 2022 | % Change | ||||||||||||||||||||||||||||||||
| Cost of Products Sold | $ | 2,475,043 | $ | 2,505,610 | (1.2) |
Cost of products sold for the first quarter of fiscal 2023 decreased due to lower sales. On a volume basis, cost of products sold increased 12 percent. This increase was driven primarily by continued inflationary pressures stemming from, among other inputs, raw materials, packaging, logistics, and labor.
Costs are expected to remain elevated due to the continued impacts of broad-based inflation and higher warehousing costs. In general, raw material input costs for protein and feed are anticipated to remain above historical levels.
Gross Profit
| Quarter Ended | ||||||||||||||||||||||||||||||||||||||
| in thousands | January 29, 2023 | January 30, 2022 | % Change | |||||||||||||||||||||||||||||||||||
| Gross Profit | $ | 495,949 | $ | 538,749 | (7.9) | |||||||||||||||||||||||||||||||||
| Percentage of Net Sales | 16.7 | % | 17.7 | % |
Gross profit as a percentage of net sales for the first quarter of fiscal 2023 declined, driven primarily by unfavorable mix and the persistent impact of inflationary pressures. Pricing actions helped mitigate some of the impact from inflationary pressures. Gross profit as a percentage of net sales increased for the Foodservice segment but declined for the Retail and International segments during the first quarter.
Looking ahead to the second quarter of fiscal 2023, the Company expects gross profit as a percentage of net sales to decline compared to last year. Actions to combat higher inventory levels and warehousing costs are expected to result in short-term margin compression. Similar to the first quarter of fiscal 2023, the Company expects gross profit as a percentage of net sales to increase for the Foodservice segment but decline for the Retail and International segments.
Selling, General, and Administrative (SG&A)
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 29, 2023 | January 30, 2022 | % Change | ||||||||||||||||||||||||||||||||
| SG&A | $ | 222,056 | $ | 225,972 | (1.7) | ||||||||||||||||||||||||||||||
| Percentage of Net Sales | 7.5 | % | 7.4 | % |
For the first quarter, SG&A expenses as a percent of net sales increased marginally.
Advertising investments in the first quarter were $47 million, comparable to last year. The Company plans to continue to invest in its leading brands.
Equity in Earnings of Affiliates
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 29, 2023 | January 30, 2022 | % Change | ||||||||||||||||||||||||||||||||
| Equity in Earnings of Affiliates | $ | 15,559 | $ | 6,898 | 125.6 |
Equity in earnings of affiliates for the first quarter of fiscal 2023 increased significantly due to higher results for MegaMex and improved results from the Company's joint venture in the Philippines. MegaMex results reflect a benefit from pricing actions and lower avocado input costs.
Effective Tax Rate
| Quarter Ended | |||||||||||||||||||||||
| January 29, 2023 | January 30, 2022 | ||||||||||||||||||||||
| Effective Tax Rate | 22.6 | % | 22.4 | % |
The effective tax rate for the first quarter increased as last year's tax rate reflected higher stock option exercise benefits. The effective tax rate for fiscal 2023 is expected to be between 21.0% and 23.0%. For further information, refer to Note J - 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 Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 29, 2023 | January 30, 2022 | % Change | ||||||||||||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||||||||||||||
| Retail | $ | 1,957,797 | $ | 1,995,896 | (1.9) | ||||||||||||||||||||||||||||||
| Foodservice | 834,750 | 854,194 | (2.3) | ||||||||||||||||||||||||||||||||
| International | 178,445 | 194,268 | (8.1) | ||||||||||||||||||||||||||||||||
| Total | $ | 2,970,992 | $ | 3,044,358 | (2.4) | ||||||||||||||||||||||||||||||
| Segment Profit | |||||||||||||||||||||||||||||||||||
| Retail | $ | 154,677 | $ | 169,702 | (8.9) | ||||||||||||||||||||||||||||||
| Foodservice | 136,442 | 134,758 | 1.2 | ||||||||||||||||||||||||||||||||
| International | 19,905 | 27,239 | (26.9) | ||||||||||||||||||||||||||||||||
| Total Segment Profit | 311,025 | 331,699 | (6.2) | ||||||||||||||||||||||||||||||||
| Net Unallocated Expense | 29,755 | 22,933 | 29.7 | ||||||||||||||||||||||||||||||||
| Noncontrolling Interest | (69) | 139 | (149.4) | ||||||||||||||||||||||||||||||||
| Earnings Before Income Taxes | $ | 281,201 | $ | 308,904 | (9.0) | ||||||||||||||||||||||||||||||
Volume and net sales declined for each segment for the first quarter of fiscal 2023 due to lower fresh pork availability resulting from the Company's new pork supply agreement and lower turkey volumes due to the ongoing impacts of HPAI in the Company's vertically integrated turkey supply chain.
Retail
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 29, 2023 | January 30, 2022 | % Change | ||||||||||||||||||||||||||||||||
| Volume (lbs.) | 752,887 | 868,939 | (13.4) | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 1,957,797 | $ | 1,995,896 | (1.9) | ||||||||||||||||||||||||||||||
| Segment Profit | 154,677 | 169,702 | (8.9) |
For the first quarter, net sales growth from the bacon, global flavors, convenient meals and proteins, and emerging brands verticals was offset by lower sales in the value-added meats, and snacking and entertaining verticals. Net sales increased for products such as Hormel**®** Black Label**®** bacon, Columbus**®** charcuterie, Hormel**®** chili, Herdez**®** salsa and sauces, Hormel**®** Square Table****TM entrees, and Mary Kitchen**®** hash. Lower sales of snack nuts and peanut butter offset a majority of these gains.
Segment profit declined for the first quarter due to the impact from lower net sales, unfavorable mix, and higher operating costs, partially offset by the benefit from pricing actions across the portfolio, higher equity in earnings from MegaMex, and improved results for the bacon business.
Looking to the second quarter, the Retail segment expects lower sales and significantly lower segment profit. The impact of strong demand for the Company's center store items is expected to be offset by, among other factors, lower pricing across the bacon portfolio. Declines in segment profit are expected as a result of unfavorable mix and higher operating expenses, partially offset by pricing actions across the portfolio.
Foodservice
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 29, 2023 | January 30, 2022 | % Change | ||||||||||||||||||||||||||||||||
| Volume (lbs.) | 237,087 | 252,249 | (6.0) | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 834,750 | $ | 854,194 | (2.3) | ||||||||||||||||||||||||||||||
| Segment Profit | 136,442 | 134,758 | 1.2 |
Products in the sliced meats, pepperoni, premium prepared proteins, and premium bacon and breakfast sausage categories grew volume and net sales for the first quarter. Net sales declines can be partially attributed to lower net pricing reflecting commodity relief in certain categories.
Segment profit increased during the first quarter due to improved mix across the portfolio.
For the second quarter, the Foodservice segment expects higher volumes and favorable mix to drive increases in net sales and segment profit compared to last year. Risks to the outlook include lower demand across the foodservice industry and higher-than-expected operating costs.
International
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| in thousands | January 29, 2023 | January 30, 2022 | % Change | ||||||||||||||||||||||||||||||||
| Volume (lbs.) | 72,237 | 83,684 | (13.7) | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 178,445 | $ | 194,268 | (8.1) | ||||||||||||||||||||||||||||||
| Segment Profit | 19,905 | 27,239 | (26.9) |
Volume and net sales declined during the first quarter, as growth from branded exports, including the SPAM**®** and SKIPPY**®** brands, and improved results in Brazil, were partially offset by lower sales in China due to ongoing COVID-related disruption.
Segment profit for the first quarter declined, as strong results from the Company's joint venture in the Philippines did not overcome significantly lower turkey and fresh pork export sales, lower sales in China, and elevated logistics expenses.
The International segment anticipates higher sales and lower segment profit in the second quarter. Net sales gains are expected to be driven by strong demand for branded exports and growth in Brazil. Segment profit is expected to be impacted by lower turkey and fresh pork export sales and ongoing COVID-related disruption in China.
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 | |||||||||||||||||||||||
| in thousands | January 29, 2023 | January 30, 2022 | |||||||||||||||||||||
| Net Unallocated Expense | $ | 29,755 | $ | 22,933 | |||||||||||||||||||
| Noncontrolling Interest | (69) | 139 |
For the first quarter, net unallocated expense increased due to higher non-service pension cost, employee-related expenses and outside consulting fees, which were partially offset by improved rabbi trust results and interest income.
Related Party Transactions
There has been no material change in the information regarding Related Party Transactions as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 30, 2022.
LIQUIDITY AND CAPITAL RESOURCES
When assessing liquidity and capital resources, the Company evaluates cash and cash equivalents, short-term and long-term investments, income from operations, and borrowing capacity.
Cash Flow Highlights
| Quarter Ended | ||||||||
| in thousands | January 29, 2023 | January 30, 2022 | ||||||
| Cash and Cash Equivalents | $ | 599,789 | $ | 824,434 | ||||
| Cash Provided by (Used in) Operating Activities | 203,629 | 383,756 | ||||||
| Cash Provided by (Used in) Investing Activities | (451,469) | (49,680) | ||||||
| Cash Provided by (Used in) Financing Activities | (141,570) | (124,019) |
Cash and cash equivalents decreased $382 million in the first quarter of fiscal 2023 primarily due to the purchase of a minority interest in Garudafood for $411 million. Additional details related to significant drivers of cash flows are provided below.
Cash Provided by (Used in) Operating Activities
- Cash flows from operating activities were largely impacted by changes in operating assets and liabilities.
–Accounts receivable decreased $80 million during the first quarter of fiscal 2023 and $85 million during the first quarter of fiscal 2022 primarily due to lower sales.
–Accounts payable and accrued expenses decreased $171 million in the first quarter of fiscal 2023 and decreased $86 million in the first quarter of fiscal 2022 due to annual incentive payments, feed and livestock deferral payments, and general timing of payments.
Cash Provided by (Used in) Investing Activities
-
In the first quarter of fiscal 2023, the Company purchased a minority interest in Garudafood for $411 million.
-
Capital expenditures were $37 million and $50 million in the three months ended January 29, 2023, and January 30, 2022, respectively. The largest spend in both years was related to capacity expansion for pepperoni products in Omaha, Nebraska, and the SPAM*®* family of products in Dubuque, Iowa.
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 $142 million in the first quarter of fiscal 2023 compared to $133 million in the comparable period of fiscal 2022.
Sources and Uses of Cash
The Company's balanced business model, with diversification across raw material inputs, channels, and categories, provides stability in ever changing economic environments. The Company maintains a disciplined capital allocation strategy by applying a waterfall approach, which focuses first on required uses of cash such as capital expenditures to maintain facilities, dividend returns to investors, mandatory debt repayments, and pension obligations. Next, the Company looks to strategic items in support of growth initiatives such as capital projects, acquisitions, additional dividend increases, and working capital investments. Finally, the Company evaluates opportunistic uses including incremental debt repayment and share repurchases.
The Company believes its anticipated income from operations, cash on hand, and borrowing capacity under the current credit facility will be adequate to meet all short-term and long-term commitments. The Company continues to look for opportunities to make investments and acquisitions that align with its strategic priorities. The Company's ability to leverage its balance sheet through the issuance of debt provides the flexibility to pursue strategic opportunities which may require additional funding.
Dividend Payments
The Company remains committed to providing returns to investors through cash dividends. The Company has paid 378 consecutive quarterly dividends since becoming a public company in 1928. The annual dividend rate for fiscal 2023 increased to $1.10 per share, representing the 57th consecutive annual dividend increase.
Capital Expenditures
Capital expenditures are first allocated to required maintenance and then growth opportunities based on the needs of the business. Capital expenditures supporting growth opportunities in fiscal 2023 will focus on projects for capacity, innovation, automation, and new technology. Capital expenditures for fiscal 2023 are estimated to be $350 million.
Debt
As of January 29, 2023, the Company’s outstanding debt included $3.3 billion of fixed rate unsecured senior notes due in fiscal 2024, 2028, 2030, and 2051 with interest payable semi-annually. During the first quarter of fiscal 2023, the Company made $28 million of interest payments and expects to make an additional $28 million of interest payments during fiscal 2023 on these notes. See Note I - Long-Term Debt and Other Borrowing Arrangements for additional information.
Borrowing Capacity
As a source of short-term financing, the Company maintains a $750 million unsecured revolving credit facility. The maximum commitment under this credit facility may be further increased by $375 million, generally by mutual agreement of the lenders and the Company, subject to certain customary conditions. Funds drawn from this facility may be used by the Company to refinance existing debt, for working capital or other general corporate purposes, and for funding acquisitions. The lending commitments under the facility are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding. As of January 29, 2023, the Company had no outstanding draws from this facility.
Debt Covenants
The Company’s debt and credit agreements contain customary terms and conditions including representations, warranties, and covenants. These debt covenants limit the ability of the Company to, among other things, incur debt for borrowed money secured by certain liens and engage in certain sale and leaseback transactions, and require maintenance of certain consolidated leverage ratios. As of January 29, 2023, the Company was in compliance with all covenants and expects to maintain compliance in the future.
Cash Held by International Subsidiaries
As of January 29, 2023, the Company had $180 million of cash and cash equivalents held by international subsidiaries. The Company maintains all undistributed earnings as permanently reinvested. The Company evaluates the balance and uses of cash held internationally based on the needs of the business.
Share Repurchases
The Company is authorized to repurchase 3,987,494 shares of stock as part of an existing plan approved by the Company’s Board of Directors. During the first quarter of fiscal 2023, the Company did not repurchase any shares of stock. The Company continues to evaluate share repurchases as part of its capital allocation strategy.
Commitments
There have been no material changes to the information regarding the Company’s future contractual financial obligations previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 30, 2022.
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 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.
Critical accounting estimates are defined as those reflective of significant judgments, estimates, and uncertainties, which may result in materially different results under different assumptions and conditions. There have been no material changes in the Company’s Critical Accounting Estimates as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 30, 2022.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking” information within the meaning of the federal securities laws. The “forward-looking” information may include statements concerning the Company’s outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts.
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. The Company is filing this cautionary statement in connection with the Reform Act. When used in this Quarterly Report on Form 10-Q, the Company’s Annual Report to Stockholders, other filings by the Company with the Securities and Exchange Commission, the Company’s press releases, and oral statements made by the Company’s representatives, the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify forward-looking statements within the meaning of the Reform Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected.
In connection with the “safe harbor” provisions of the Reform Act, the Company is identifying risk factors that could affect financial performance and cause the Company’s actual results to differ materially from opinions or statements expressed with respect to future periods. The discussions of risk factors in the Company's most recent Annual Report on Form 10-K and in Part II, Item 1A of this Quarterly Report on Form 10-Q contain certain cautionary statements regarding the Company’s business, which should be considered by investors and others. Such risk factors should be considered in conjunction with any discussions of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the Company.
In making these statements, the Company is not undertaking, and specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the Company’s business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the Company has attempted to list comprehensively these important cautionary risk factors, the Company wishes to caution investors and others that other factors may in the future prove to be important in affecting the Company’s business or results of operations.
The Company cautions readers not to place undue reliance on forward-looking statements, which represent current views as of the date made. Forward-looking statements are inherently at risk to changes in the national and worldwide economic environment, which could include, among other things, risks related to the deterioration of economic conditions; the COVID-19 pandemic; risks associated with acquisitions and divestitures; potential disruption of operations including at co-manufacturers, suppliers, logistics providers, customers, or other third-party service providers; risk of loss of a material contract; the Company’s inability to protect information technology systems against, or effectively respond to, cyber attacks or security breaches; deterioration of labor relations, labor availability or increases to labor costs; general risks of the food industry, including food contamination; outbreaks of disease among livestock and poultry flocks; fluctuations in commodity prices and availability of raw materials and other inputs; fluctuations in market demand for the Company’s products; damage to the Company's reputation or brand image; climate change, or legal, regulatory, or market measures to address climate change; risks of litigation; potential sanctions and compliance costs arising from government regulation; compliance with stringent environmental regulations and potential environmental litigation; and risks arising from the Company’s foreign operations.
Item 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 the grain, live hog, and natural gas 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 January 29, 2023, was $7.6 million compared to $21.6 million as of October 30, 2022. 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 January 29, 2023, by $31.6 million, which in turn would lower the Company's future cost on purchased commodities by a similar amount.
Interest Rate Risk: The Company is subject to interest rate risk primarily from changes in fair value of long-term fixed rate debt. As of January 29, 2023, the Company’s long-term debt had a fair value of $2.8 billion compared to $2.7 billion as of October 30, 2022. The Company measures its market risk exposure of long-term fixed rate debt using a sensitivity analysis, which considers a 10 percent change in interest rates. A 10 percent decrease in interest rates would have positively impacted the fair value of the
Company’s long-term debt as of January 29, 2023, by $83.6 million. A 10 percent increase would have negatively impacted the long-term debt by $78.4 million.
Foreign Currency Exchange Rate Risk: The fair values of certain Company assets are subject to fluctuations in foreign currency exchange rates. The Company's net asset position in foreign currencies as of January 29, 2023, was $1,068.8 million, compared to $652.4 million as of October 30, 2022, with most of the exposure existing in Chinese yuan, Indonesian rupiah, and Brazilian real. The Company currently does not use market risk sensitive instruments to manage this risk.
Investment Risk: The Company has corporate-owned life insurance policies classified as trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. As of January 29, 2023, the balance of these securities totaled $193.3 million compared to $186.2 million as of October 30, 2022. The rabbi trust is invested primarily in fixed income funds. The Company is subject to market risk due to fluctuations in the value of the remaining investments as unrealized gains and losses associated with these securities are included in the Company’s net earnings on a mark-to-market basis. A 10 percent decline in the value of the investments not held in fixed income funds would have negatively impacted the Company’s pretax earnings by approximately $8.2 million, while a 10 percent increase in value would have a positive impact of the same amount.
Item 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
As of the end of the period covered by this report (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information the Company is required to disclose in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Internal Controls.
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the first quarter of fiscal 2023 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 four sets of antitrust lawsuits broadly targeting the pork and turkey industries. None of these cases involve allegations of bid rigging or other criminal conduct. The Company has not established reserves as it does not believe it will have liability in any of these cases.
Item 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 30, 2022.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no issuer purchases of equity securities in the quarter ended January 29, 2023. The maximum number of shares that may yet be purchased under the plans or programs as of January 29, 2023, 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 January 29, 2023, 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 January 29, 2023, formatted in Inline XBRL (included as Exhibit 101). |
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: March 2, 2023 | By | /s/ JACINTH C. SMILEY | ||||||
| JACINTH C. SMILEY | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| Date: March 2, 2023 | By | /s/ PAUL R. KUEHNEMAN | ||||||
| PAUL R. KUEHNEMAN | ||||||||
| Vice President and Controller | ||||||||
| (Principal Accounting Officer) |