What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-29 compared with 2023-08-31 · 175 added, 189 removed, 138 unchanged (73% of the section changed)

2 unchanged sentences

The Company is a global manufacturer and marketer of branded food products.

The Company’s three reportable segments are described in Note M - Segment Reporting in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

The Company reported diluted net earnings per share of $0.30 for the third quarter of fiscal 2023, down 25 percent compared to last year.

Adjusted diluted net earnings per share (1) of $0.40 was in line with last year.

The Company’s three reportable segments are described in Note M - Segment Reporting in the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

The Company reported diluted net earnings per share of $0.40 for the first quarter of fiscal 2024, flat compared to last year.

Adjusted diluted net earnings per share (1) was $0.41.

Significant factors impacting the quarter were:

• Net sales for the third quarter decreased 2 percent.

The benefit from higher volumes in each segment and pricing actions to mitigate inflationary pressures was more than offset by lower net pricing in certain categories, such as bacon, reflecting raw material commodity deflation and the difficult comparison from high levels of demand for Skippy ® spreads last year.

• Segment profit for the third quarter decreased 2 percent.

Improved results in the Foodservice segment were more than offset by declines in the Retail and International segments.

• Net sales and segment profit for the Retail and Foodservice segments were negatively impacted to a lesser degree from supply chain disruption caused by a third-party logistics provider shutdown.

• Earnings before income taxes for the third quarter decreased 28 percent compared to the prior year, primarily due to the impact of an adverse arbitration ruling totaling approximately $70 million.

Adjusted earnings before income taxes (1) , excluding the impact of an adverse arbitration ruling, decreased 4 percent.

• Foodservice segment profit increased due to the contribution from higher volumes and improved mix.

• Retail segment profit declined due to unfavorable mix and increased brand investments, partially offset by the benefit from pricing actions across the portfolio, improved bacon volumes, and higher equity in earnings from MegaMex Foods, LLC (MegaMex Foods).

• International segment profit declined significantly due to unfavorable pork and turkey commodity markets, continued softness in China, and lower branded export demand.

• Year-to-date cash flow from operations was $729 million, down 5 percent compared to the prior year.

• As disclosed in a Form 8-K filed with the U.S.

Securities and Exchange Commission on August 22, 2023, the Company received an unexpected, unfavorable arbitration ruling involving an isolated commercial dispute with a third party.

The estimated pre-tax impact of $70.0 million is reflected in operating expense and accrued liabilities.

The associated one-time payment is expected to be made in the fourth quarter of fiscal 2023.

• Net sales for the first quarter increased 1 percent.

The benefit from higher volumes in each segment and strong results in Foodservice more than offset lower sales in the Retail and International segments.

• Segment profit for the first quarter increased 3 percent, driven primarily by improved results in the Foodservice segment.

• Earnings before income taxes for the first quarter increased 2 percent, as the benefit from higher net sales, lower logistics expenses, and higher interest and investment income more than offset higher selling, general, and administrative expenses.

Adjusted earnings before income taxes (1) , excluding the impact of expenses related to the Company's transformation and modernization initiative, increased 5 percent compared to last year.

• Foodservice segment profit increased primarily due to higher sales and favorable logistics expenses.

• International segment profit increased due to the inclusion of our investment in Indonesia and significantly higher results from our partnership in the Philippines, which more than offset the impact from lower branded export demand and lower sales in China.

• Retail segment profit declined, as the benefit from higher sales in the snacking and entertaining vertical and lower logistics expenses was more than offset by the impact from lower commodity turkey pricing and lower equity in earnings from MegaMex Foods, LLC (MegaMex Foods).

• Year-to-date cash flow from operations was $404 million, up 98 percent compared to the prior year.

Consolidated Results

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

Quarter Ended Nine Months Ended

in thousands, except per share amounts July 30,

2023 July 31, 2022 %

Change July 30,

2023 July 31, 2022 %

Quarter Ended

In thousands, except per share amounts

January 28, 2024 January 29, 2023 %

Volume (lbs.) 1,101,554 1,062,211 3.7

6 unchanged sentences

(1) See the “Non-GAAP Financial Measures” section below for a description of the Company's use of measures not defined by United States Generally Accepted Accounting Principles (GAAP).

Net sales for the third quarter decreased.

For the first nine months of fiscal 2023, the benefit from pricing actions to mitigate inflationary pressures was more than offset by the impact of lower volumes in each segment and lower net pricing in certain categories, such as bacon, reflecting raw material commodity deflation.

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 impacts of highly pathogenic avian influenza (HPAI).

Net sales for the first quarter increased, led by the benefit from higher volumes in each segment and strong growth in Foodservice, more than offsetting lower sales in the Retail and International segments.

In Retail, net sales increased in the global flavors and snacking and entertaining verticals, and declined in the value-added meats, convenient meals and proteins, and bacon verticals.

Demand was strong for many products, including Skippy ® peanut

butter, Planters ® snack nuts, Wholly ® dips, Herdez ® salsas and sauces, La Victoria ® salsas, Jennie-O ® ground turkey, Hormel ® Square Table™ entrees and Hormel ® pepperoni, which each delivered volume and net sales improvement during the quarter.

Foodservice net sales growth was broad-based, led by the Heritage Premium meats business and growth from Hormel ® Bacon 1™ precooked bacon, premium prepared proteins, Jennie-O ® branded turkey items, and pepperoni.

International net sales declined due to lower branded export sales and lower sales in China.

Cost of Products Sold

Quarter Ended Nine Months Ended

in thousands July 30, 2023 July 31, 2022 %

July 30, 2023 July 31, 2022 %

Quarter Ended

January 28, 2024 January 29, 2023 %

Cost of Products Sold $ 2,488,178 $ 2,475,043 0.5

Cost of products sold for the third quarter and first nine months of fiscal 2023 decreased due to lower sales.

On a volume basis, cost of products sold increased 4 percent for the first nine months of the year driven primarily by inflationary pressures stemming from, among other inputs, packaging, logistics, and labor.

Costs are expected to remain elevated due to inflation and higher warehousing costs.

In general, raw material input costs for protein are expected to be lower for the balance of the year compared to fiscal 2022.

Feed costs are anticipated to remain above historical levels through the end of the fiscal year.

Quarter Ended Nine Months Ended

in thousands July 30, 2023 July 31, 2022 %

July 30, 2023 July 31, 2022 %

Total cost of products sold for the first quarter of fiscal 2024 increased due primarily to higher sales.

On a per pound basis, cost of products sold decreased 3 percent, consistent with the Company's assumption for cost moderation in fiscal 2024.

Costs are expected to continue to moderate relative to the high levels of inflation the business has absorbed since the beginning of fiscal 2021.

Raw material input costs for pork, beef, and feed are anticipated to remain volatile and above historical levels.

The Company expects its transformation and modernization initiative to deliver cost savings throughout fiscal 2024, targeting packaging, logistics, and production costs.

Quarter Ended

January 28, 2024 January 29, 2023 %

Gross Profit $ 508,733 $ 495,949 2.6

Percent of Net Sales 17.0 % 16.7 %

Gross profit as a percentage of net sales for the third quarter increased marginally due to improvement in the Foodservice segment.

For the first nine months of fiscal 2023, gross profit as a percentage of net sales 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 nine months of the year.

Looking ahead to the fourth quarter of fiscal 2023, the Company expects gross profit as a percentage of net sales to be comparable to last year.

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.

Gross profit as a percent of net sales for the first quarter of fiscal 2024 increased due to improvement in the Foodservice and Retail segments, more than offsetting a decline in International.

Both the Foodservice and Retail segments benefited from lower logistics expenses on a volume basis.

Lower logistics expenses are due to lower industrywide freight rates and savings realized as part of our transformation and modernization initiative.

Looking ahead to the second quarter of fiscal 2024, the Company expects gross profit as a percent of net sales to be comparable to last year.

The Company expects gross profit as a percent of net sales to increase for the International segment but decline for the Retail and Foodservice segments.

Selling, General, and Administrative (SG&A)

Quarter Ended Nine Months Ended

in thousands July 30, 2023 July 31, 2022 %

July 30, 2023 July 31, 2022 %

Quarter Ended

January 28, 2024 January 29, 2023 %

SG&A $ 240,386 $ 222,056 8.3

3 unchanged sentences

Adjusted Percent of Net Sales (1)

7.5 % 7.3 % 7.4 % 7.3 %

(1) See the “Non-GAAP Financial Measures” section below for a description of the Company's use of measures not defined by U.S.

For the third quarter and first nine months of fiscal 2023, SG&A expenses and SG&A expenses as a percent of net sales increased primarily due to the accrual for an adverse arbitration ruling of $70.0 million.

For the first nine months of fiscal 2023, adjusted SG&A expenses as a percent of net sales (1) was marginally higher compared to the prior year.

Advertising investments in the third quarter were $43 million, up 15 percent compared to last year.

(1) See the “Non-GAAP Financial Measures” section below for a description of the Company's use of measures not defined by GAAP.

For the first quarter of fiscal 2024, SG&A and SG&A as a percent of net sales increased.

This was due to higher employee and external expenses, driven in part by the Company's transformation and modernization initiative.

Adjusted SG&A as a percent of net sales (1) increased marginally compared to last year.

Advertising investments in the first quarter were $44 million, a decrease of 5 percent compared to last year.

The Company expects full-year advertising expense to increase compared to the prior year.

Equity in Earnings of Affiliates

Quarter Ended Nine Months Ended

in thousands July 30, 2023 July 31, 2022 %

July 30, 2023 July 31, 2022 %

Quarter Ended

January 28, 2024 January 29, 2023 %

Equity in Earnings of Affiliates $ 16,091 $ 15,559 3.4

Equity in earnings of affiliates for the third quarter and first nine months of fiscal 2023 increased due to significantly higher results for MegaMex Foods.

MegaMex Foods results reflect a benefit from pricing actions and lower avocado input costs.

Equity in earnings of affiliates for the first quarter of fiscal 2024 increased due to the inclusion of our investment in Indonesia and significantly higher results from our partnership in the Philippines, offsetting lower results for MegaMex Foods.

Interest and Investment Income and Interest Expense

Quarter Ended

In thousands January 28, 2024 January 29, 2023 %

Interest and Investment Income $ 19,434 $ 10,096 92.5

Interest Expense 18,326 18,347 (0.1)

Interest and investment income for the first quarter of fiscal 2024 increased primarily due to improved performance from the rabbi trust and higher interest income.

Effective Tax Rate

Quarter Ended Nine Months Ended

July 30, 2023 July 31, 2022 July 30, 2023 July 31, 2022

Quarter Ended

January 28, 2024 January 29, 2023

Effective Tax Rate 23.4 % 22.6 %

The lower effective tax rate in the third quarter is primarily due to favorable changes of certain U.S.

income and deductions in the fiscal 2022 federal tax return filing.

The higher effective tax rate for the first nine months of fiscal 2023 is primarily due to the decrease in tax benefits from stock option exercises.

The higher effective tax rate in the first quarter of fiscal 2024 is primarily due to the impact of certain discrete items and higher federal deductions last year.

The effective tax rate for fiscal 2024 is expected to be between 21.0% and 23.0%.

For further information, refer to Note K - Income Taxes.

For further information, refer to Note K - Income Taxes of the Notes to the Consolidated Financial Statements.

Segment Results

Net sales and segment profit for each of the Company’s reportable segments are set forth below.

The Company does not allocate deferred compensation, expenses associated with the transformation and modernization initiative, investment income, interest expense, or interest income to its segments when measuring performance.

The Company also retains various other income and expenses at the corporate level.

Equity in Earnings of Affiliates is included in segment profit;

however, earnings attributable to the Company’s corporate venturing investments and noncontrolling interests are excluded.

These items are included below as Net Unallocated Expense and Noncontrolling Interest when reconciling to Earnings Before Income Taxes.

The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets.

Therefore, the Company does not represent that these segments, if operated independently, would report the profit and other financial information shown below.

Quarter Ended Nine Months Ended

in thousands July 30, 2023 July 31, 2022 % Change July 30, 2023 July 31, 2022 % Change

Quarter Ended

January 28, 2024 January 29, 2023 % Change

Retail $ 1,911,272 $ 1,957,797 (2.4)

14 unchanged sentences

$ 285,547 $ 281,201 1.5

Volume declined for each segment for the first nine months of fiscal 2023 primarily due to lower fresh pork availability resulting from the Company's new pork supply agreement and lower turkey volumes due to the impacts of HPAI in the Company's vertically integrated turkey supply chain.

Quarter Ended Nine Months Ended

in thousands July 30, 2023 July 31, 2022 %

Change July 30, 2023 July 31, 2022 %

Quarter Ended

January 28, 2024 January 29, 2023 %

Volume (lbs.) 765,412 752,887 1.7

1 unchanged sentence

Segment Profit 149,505 154,677 (3.3)

For the third quarter, volume growth was driven by the value-added meats, bacon, snacking and entertaining, and emerging brands verticals.

In addition to a recovery across the turkey portfolio, volume and net sales grew for many leading items, including our SPAM ® family of products, Hormel ® Gatherings ® party trays, Hormel ® pepperoni, and Applegate ® natural and organic meats.

Net sales declined due to the difficult comparison from high levels of demand for Skippy ® spreads last year and lower market-driven pricing on raw bacon items.

Net sales declined for the first nine months of fiscal 2023 primarily due to lower fresh pork and turkey volumes, and lower market-driven pricing on raw bacon items.

Segment profit declined for the third quarter due to the impact of unfavorable mix and increased brand investments, partially offset by the benefit from pricing actions across the portfolio, improved bacon volumes, and higher equity in earnings from MegaMex Foods.

For the first nine months of fiscal 2023, segment profit declined due to unfavorable mix and higher operating expenses, partially offset by the benefit from pricing actions across the portfolio, higher equity in earnings from MegaMex Foods, and improved bacon volumes.

Looking to the fourth quarter, the Retail segment expects lower segment profit compared to last year.

The impact of higher volumes from the snacking and entertaining vertical is expected to be more than offset by lower volume in the convenient meals and proteins vertical, which benefited from strong Skippy ® spreads demand in the prior year.

Unfavorable mix, partially due to lower turkey markets, is also anticipated to negatively impact results.

Further risks to the outlook include higher-than-expected elasticities and lower sales volumes as a result of softer consumer demand.

Quarter Ended Nine Months Ended

in thousands July 30, 2023 July 31, 2022 %

Change July 30, 2023 July 31, 2022 %

For the first quarter of fiscal 2024, volume growth was driven by the value-added meats, global flavors, emerging brands and bacon verticals.

Net sales declined primarily due to lower contract manufacturing volume and lower commodity turkey pricing.

Demand was strong for many products, including Skippy ® peanut butter, Planters ® snack nuts, Wholly ® dips, Herdez ® salsas and sauces, La Victoria ® salsas, Jennie-O ® ground turkey, Hormel ® Square Table™ entrees and Hormel ® pepperoni, which each delivered volume and net sales improvement during the quarter.

Segment profit declined, as the benefit from higher sales in the snacking and entertaining vertical and lower logistics expenses was more than offset by the impact from lower commodity turkey pricing and lower equity in earnings from MegaMex Foods.

Looking to the second quarter of fiscal 2024, the Retail segment expects lower segment profit compared to last year.

Segment profit is expected to be pressured by lower pricing in whole bird turkey markets and higher SG&A.

Risks to this outlook include a further slowing in consumer demand, a higher-than-expected impact from elasticities as a result of pricing actions, and greater-than-expected pricing headwinds in the whole bird turkey business.

Quarter Ended

January 28, 2024 January 29, 2023 %

Volume (lbs.) 256,007 237,087 8.0

1 unchanged sentence

Segment Profit 150,164 136,442 10.1

Volume for the third quarter increased, driven by growth in our affiliated businesses and strong demand in many branded categories, including pizza toppings, premium bacon and breakfast sausage, and premium prepared proteins.

Brands such as Cafe H ® , Hormel ® Fire Braised TM , Fontanini ® , Old Smokehouse ® and Hormel ® Bacon 1 TM delivered volume gains compared to the prior year.

Net sales declined, primarily due to lower net pricing in certain categories, such as bacon, reflecting raw material commodity deflation.

Net sales declined for the first nine months of fiscal 2023 primarily due to lower net pricing in certain categories reflecting raw material commodity deflation, and lower fresh pork and turkey volumes.

Segment profit increased during the third quarter due to the contribution from higher volumes and improved mix.

Segment profit increased during the first nine months of fiscal 2023 due to improved mix across the portfolio.

For the fourth quarter, the Foodservice segment expects higher segment profit compared to the prior year.

Growth is expected to be driven by higher volumes and lower freight expenses.

Risks to the outlook include a softening of foodservice industry demand and higher-than-expected operating costs.

Volume and net sales growth for the first quarter of fiscal 2024 was broad-based and across numerous categories, led by Jennie-O ® turkey and double-digit gains for products such as Hormel ® Bacon 1™ cooked bacon, pepperoni, Austin Blues ® smoked meats and Café H ® globally inspired proteins.

Additionally, the Company's Heritage Premium Meats group drove strong volume and double-digit net sales improvement for the quarter.

Segment profit increased primarily due to higher sales and favorable logistics expenses.

For the second quarter, the Foodservice segment expects higher segment profit compared to the prior year.

Continued volume growth is expected to be offset by lower margins and higher SG&A compared to last year.

Risks to this outlook include a softening of foodservice industry demand and higher-than-expected operating costs.

International

Quarter Ended Nine Months Ended

in thousands July 30, 2023 July 31, 2022 %

July 30, 2023 July 31, 2022 %

Quarter Ended

January 28, 2024 January 29, 2023 %

Volume (lbs.) 80,135 72,237 10.9

1 unchanged sentence

Segment Profit 20,031 19,905 0.6

During the third quarter, net sales declined as a result of lower branded export sales and lower results in China.

Foodservice sales in China improved sequentially throughout the third quarter, partially offsetting the difficult net sales comparison from sales to food-security programs last year.

In addition to growth from the Skippy ® and Planters ® brands, strong volume growth was driven by low-margin commodity fresh pork and turkey exports.

Net sales declined for the first nine months of fiscal 2023 primarily due to lower turkey volumes and lower sales in China.

Segment profit declined significantly in the third quarter due to unfavorable pork and turkey commodity markets, continued softness in China, and lower branded export demand.

Segment profit for the first nine months of fiscal 2023 declined significantly due to lower sales in China and lower turkey export volumes.

In the fourth quarter, the International segment anticipates segment profit to decline significantly compared to last year.

Similar to the drivers in the third quarter, continued softness in China, lower branded export demand, and unfavorable pork and turkey commodity markets are expected to persist.

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 Nine Months Ended

in thousands July 30, 2023 July 31, 2022 July 30, 2023 July 31, 2022

During the first quarter of fiscal 2024, higher commodity exports led to volume gains compared to last year.

Net sales declined due to lower branded export sales and lower sales in China.

Also in China, foodservice results improved as we lapped COVID-related disruption last year.

This benefit was more than offset by continued weakness in the retail channel.

Segment profit increased for the quarter due to the inclusion of our investment in Indonesia and significantly higher results from our partnership in the Philippines, which offset the impact from lower branded export demand and lower sales in China.

In the second quarter of fiscal 2024, the International segment anticipates segment profit to increase significantly compared to last year.

This recovery is expected to be driven by improvement across the business, including from its branded exports, partnership in the Philippines, and multinational business in Brazil.

The Company also expects a benefit from the inclusion of its investment in Indonesia.

Risks to this outlook include continued softness in China and commodity headwinds impacting the export business.

Unallocated Income and Expense

Quarter Ended

January 28, 2024 January 29, 2023

Net Unallocated Expense $ 34,020 $ 29,755

Noncontrolling Interest (134) (69)

For the third quarter and first nine months of fiscal 2023, net unallocated expense increased resulting from the accrual for an adverse arbitration ruling of $70.0 million and higher pension costs, which were partially offset by improved interest and investment income.

For the first quarter of fiscal 2024, net unallocated expense increased driven by transformation and modernization initiative costs and higher employee-related expenses, partially offset by favorable rabbi trust performance and higher interest income.

Related Party Transactions

1 unchanged sentence

(1) Non-GAAP Financial Measures

The non-GAAP adjusted financial measures of adjusted SG&A expense, adjusted SG&A as a percent of net sales, adjusted earnings before income taxes, and adjusted diluted net earnings per share are presented to provide investors with additional information to facilitate the comparison of past and present operations.

Adjusted SG&A, adjusted SG&A as a percent of net sales, adjusted earnings before income taxes and adjusted diluted net earnings per share exclude the impact of an adverse arbitration ruling.

The tax impact was calculated using the effective tax rate for the quarter in which the expense was incurred.

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.

This filing includes measures of financial performance that are not defined by GAAP.

The Company utilizes these non-GAAP measures to understand and evaluate operating performance on a consistent basis.

These measures may also be used when making decisions regarding resource allocation and in determining incentive compensation.

The Company believes these non-GAAP financial measures provide useful information to investors because they facilitate year-over-year comparison and comparison with peer companies as well as provide additional information about trends in the Company’s operations.

Non-GAAP measures are not intended to be a substitute for 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.

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.

In the fourth quarter of fiscal 2023, the Company announced a multi-year transformation and modernization initiative.

The strategic investments in this initiative are expected to cease at the end of the investment period, are not expected to recur in the foreseeable future and are not considered representative of the Company's underlying operating performance.

The Company does not believe such costs to be reflective of the ongoing operating cost structure;

therefore, the Company is excluding certain discrete costs related to the transformation and modernization initiative from the non-GAAP financial measures.

Expenses for this initiative are comprised primarily of non-recurring charges for consulting fees, which are reflected in SG&A, and charges related to portfolio optimization, which are reflected in Cost of Products Sold.

This presentation is consistent with the information the Company’s management is using to evaluate performance and allocate resources and facilitates comparison of operating performance across multiple periods.

Adjusted cost of products sold, adjusted SG&A, adjusted operating income, adjusted earnings before income taxes, adjusted net earnings attributable to Hormel Foods Corporation, adjusted diluted net earnings per share, adjusted SG&A as a percent of net sales, and adjusted operating margin exclude certain costs associated with the transformation and modernization initiative.

The tax impact was calculated using the effective tax rate for the quarter in which the expense was incurred.

The table below shows the calculations to reconcile from the GAAP measures to the non-GAAP financial measures.

Quarter Ended

July 30, 2023 July 31, 2022

in thousands, except per share amounts Reported

GAAP Arbitration Ruling Non-GAAP Reported

GAAP Non-GAAP

Net Sales $ 2,963,299 $ — $ 2,963,299 $ 3,034,414 (2.3)

Cost of Products Sold 2,465,251 — 2,465,251 2,528,364 (2.5)

Gross Profit 498,048 — 498,048 506,049 (1.6)

Selling, General, and Administrative 291,073 (70,000) 221,073 222,147 (0.5)

Equity in Earnings of Affiliates 9,784 — 9,784 7,138 37.1

Operating Income 216,759 70,000 286,759 291,040 (1.5)

Interest and Investment Income 9,239 — 9,239 14,411 (35.9)

Interest Expense 18,372 — 18,372 15,615 17.7

Earnings Before Income Taxes 207,626 70,000 277,626 289,836 (4.2)

Provision for Income Taxes 45,055 15,190 60,245 71,010 (15.2)

Net Earnings 162,571 54,810 217,381 218,826 (0.7)

Net Earnings (Loss) Attributable to Noncontrolling Interest (108) — (108) (89) (21.4)

Net Earnings Attributable to Hormel Foods Corporation $ 162,679 $ 54,810 $ 217,489 $ 218,915 (0.7)

Diluted Net Earnings Per Share $ 0.30 $ 0.10 $ 0.40 $ 0.40 —

SG&A Percent of Net Sales 9.8 7.5 7.3

Nine Months Ended

July 30, 2023 July 31, 2022

in thousands, except per share amounts Reported

GAAP Arbitration Ruling Non-GAAP Reported

GAAP Non-GAAP

Net Sales $ 8,911,930 $ — $ 8,911,930 $ 9,175,331 (2.9)

Cost of Products Sold 7,426,514 — 7,426,514 7,577,062 (2.0)

Gross Profit 1,485,417 — 1,485,417 1,598,269 (7.1)

Selling, General, and Administrative 725,621 (70,000) 655,621 672,777 (2.6)

Equity in Earnings of Affiliates 42,213 — 42,213 19,951 111.6

Operating Income 802,009 70,000 872,009 945,443 (7.8)

Interest and Investment Income 20,700 — 20,700 20,078 3.1

Interest Expense 55,042 — 55,042 44,913 22.6

Earnings Before Income Taxes 767,666 70,000 837,666 920,608 (9.0)

Provision for Income Taxes 170,230 15,190 185,420 200,393 (7.5)

Net Earnings 597,437 54,810 652,247 720,215 (9.4)

Net Earnings (Loss) Attributable to Noncontrolling Interest (200) — (200) 112 (279.1)

Net Earnings Attributable to Hormel Foods Corporation $ 597,637 $ 54,810 $ 652,447 $ 720,103 (9.4)

Diluted Net Earnings Per Share $ 1.09 $ 0.10 $ 1.19 $ 1.31 (9.2)

SG&A Percent of Net Sales 8.1 7.4 7.3

In thousands, except per share amounts

January 28, 2024 January 29, 2023

Cost of Products Sold (GAAP) $ 2,488,178 $ 2,475,043

Transformation and Modernization Initiative (1,598) —

Adjusted Cost of Products Sold (Non-GAAP) $ 2,486,580 $ 2,475,043

$ 240,386 $ 222,056

Transformation and Modernization Initiative (8,715) —

Adjusted SG&A (Non-GAAP)

$ 231,671 $ 222,056

Operating Income (GAAP) $ 284,438 $ 289,452

Transformation and Modernization Initiative 10,313 —

Adjusted Operating Income (Non-GAAP) $ 294,751 $ 289,452

Earnings Before Income Taxes (GAAP) $ 285,547 $ 281,201

Transformation and Modernization Initiative 10,313 —

Adjusted Earnings Before Income Taxes (Non-GAAP)

$ 295,859 $ 281,201

Net Earnings Attributable to Hormel Foods Corporation (GAAP)

$ 218,863 $ 217,719

Transformation and Modernization Initiative 7,900 —

Adjusted Net Earnings Attributable to Hormel Foods Corporation (Non-GAAP)

$ 226,763 $ 217,719

Diluted Net Earnings Per Share (GAAP)

$ 0.40 $ 0.40

Transformation and Modernization Initiative 0.01 —

Adjusted Diluted Net Earnings Per Share (Non-GAAP)

$ 0.41 $ 0.40

SG&A as a Percent of Net Sales (GAAP)

Transformation and Modernization Initiative (0.3) —

Adjusted SG&A as a Percent of Net Sales (Non-GAAP)

Operating Margin (GAAP)

Transformation and Modernization Initiative 0.3 —

Adjusted Operating Margin (Non-GAAP)

LIQUIDITY AND CAPITAL RESOURCES

1 unchanged sentence

Cash Flow Highlights

Nine Months Ended

in thousands July 30, 2023 July 31, 2022

Quarter Ended

January 28, 2024 January 29, 2023

Cash and Cash Equivalents $ 963,212 $ 599,789

2 unchanged sentences

Cash Provided by (Used in) Financing Activities (133,365) (141,570)

Cash and cash equivalents decreased $313 million for the nine months ended July 30, 2023, primarily due to the purchase of a minority interest in Garudafood for $426 million.

Increase (Decrease) in Cash and Cash Equivalents 226,680 (382,318)

Cash and cash equivalents increased $227 million for the first quarter of fiscal 2024, as cash from operating activities was sufficient to cover dividend payments and capital expenditures.

The purchase of a minority interest in PT Garudafood Putra Putri Jaya Tbk (Garudafood) was the primary driver of the decline in cash and cash equivalents in the prior year.

Additional details related to significant drivers of cash flows are provided below.

1 unchanged sentence

• Cash flows from operating activities were largely impacted by changes in operating assets and liabilities.

– Accounts receivable decreased $81 million during the nine months ended July 30, 2023, and decreased $97 million during the nine months ended July 31, 2022, as a result of the timing of sales and collections.

– Accounts payable and accrued expenses decreased $131 million and $84 million in the nine months ended July 30, 2023, and July 31, 2022, respectively, due to general timing of invoice payments and annual incentive payments.

– Inventory increased $21 million for the first nine months of fiscal 2023 compared to $311 million in the prior year.

The increase in inventory during fiscal 2023 was due to production outpacing sales and the higher inventory value in fiscal 2022 was primarily due to a recovery of inventory volumes and sustained higher raw material costs.

– Inventory decreased $104 million for the first quarter of fiscal 2024 compared to an increase of $12 million in the prior year.

The decrease in inventory during fiscal 2024 was due to improvement in the Company's supply chain and the negative impact of Highly Pathogenic Avian Influenza on turkey operations.

The increase in inventory during fiscal 2023 was due to production outpacing sales.

– Accounts receivable decreased $68 million and $80 million during the first quarter of fiscal 2024 and fiscal 2023, respectively primarily due to lower sales.

– Accounts payable and accrued expenses decreased $132 million and $171 million in the first quarter of fiscal 2024 and fiscal 2023, respectively, due to annual incentive payments, feed and livestock deferral payments, and general timing of payments.

Cash Provided by (Used in) Investing Activities

• During the nine months ended July 30, 2023, the Company purchased a minority interest in Garudafood for $426 million.

• Capital expenditures were $169 million and $189 million in the nine months ended July 30, 2023, and July 31, 2022, respectively.

The largest spend in both years was related to capacity expansion for pepperoni and the SPAM ® family of products.

• Capital expenditures were $47 million and $37 million in the first quarter of fiscal 2024, and fiscal 2023, respectively.

The largest spend in the first quarter of fiscal 2024 was for the transition from harvest to value-added capacity at our facility in Barron, Wisconsin and wastewater infrastructure to support our operations in Austin, Minnesota.

The largest spend in the first quarter of fiscal 2023 was related to capacity expansion for pepperoni and the SPAM ® family of products.

• During the first quarter of fiscal 2023, the Company purchased a minority interest in Garudafood for $411 million.

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 $443 million during the nine months ended July 30, 2023, compared to $416 million in the comparable period of fiscal 2022.

• Share repurchases were $12 million during the nine months ended July 30, 2023, compared with no share repurchases during the comparable period of fiscal 2022.

• Proceeds from exercise of stock options was $8 million in the nine months ended July 30, 2023, compared to $78 million in the comparable period of fiscal 2022.

The decrease in proceeds was due to fewer options exercised during fiscal 2023 compared to fiscal 2022.

• Cash dividends paid to the Company’s shareholders are an ongoing financing activity for the Company with payments totaling $150 million during the first quarter of fiscal 2024, compared to $142 million in the first quarter of fiscal 2023.

• Proceeds from the exercise of stock options were $19 million in the first quarter of fiscal 2024, compared to $3 million in the first quarter of fiscal 2023.

The increase in proceeds was due to more options exercised during fiscal 2024 compared to fiscal 2023.

Sources and Uses of Cash

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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 supporting growth opportunities in fiscal 2024 are expected to focus on projects related to value-added capacity, infrastructure, and new technology.

Capital expenditures for fiscal 2024 are estimated to be $280 million.

As of July 30, 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 fiscal 2023, the Company made $55 million of interest payments on these notes.

In the third quarter of fiscal 2023, $950 million of the notes was reclassified as Current Maturities of Long-term Debt on the Consolidated Condensed Statements of Financial Position as it is payable within one year.

See Note J - Long-Term Debt and Other Borrowing Arrangements for additional information.

As of January 28, 2024, 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 2024, the Company made $28 million of interest payments and expects to make an additional $28 million of interest payments during fiscal 2024 on these notes.

On January 30, 2024, the Company's Board of Directors approved up to $500 million of new long-term financing which is intended, along with cash on hand, to pay the $950 million notes due June 2024 upon maturity.

See Note J - Long-Term Debt and Other Borrowing Arrangements of the Notes to the Consolidated Financial Statements for additional information.

Borrowing Capacity

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The lending commitments under the facility are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding.

As of July 30, 2023, the Company had no outstanding draws from this facility.

As of January 28, 2024, 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 July 30, 2023, the Company was in compliance with all covenants and expects to maintain compliance in the future.

These debt covenants limit the ability of the Company to, among other things, incur debt for borrowed money secured by certain liens, engage in certain sale and leaseback transactions, and require maintenance of certain consolidated leverage ratios.

As of January 28, 2024, the Company was in compliance with all covenants and expects to maintain compliance in the future.

Cash Held by International Subsidiaries

As of July 30, 2023, the Company had $208 million of cash and cash equivalents held by international subsidiaries.

As of January 28, 2024, the Company had $190 million of cash and cash equivalents held by international subsidiaries.

The Company maintains all undistributed earnings as permanently reinvested.

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The Company is authorized to repurchase 3,677,494 shares of common stock as part of an existing plan approved by the Company’s Board of Directors.

During fiscal 2023, the Company repurchased 310,000 shares for $12 million.

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, other than the matter described below.

In the fourth quarter of fiscal 2023, the Company expects to utilize cash on hand to pay an estimated $70 million due to an adverse arbitration ruling.

Refer to Note I - Commitments and Contingencies for additional information.

During the first quarter of fiscal 2024, the Company did not repurchase any shares of stock.

The Company continues to evaluate share repurchases as part of its capital allocation strategy.

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.

Management's discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with GAAP.

The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements.

The significant accounting policies used in preparing these Consolidated Financial Statements are consistent with those described in Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements in the Form 10-K.

The significant accounting policies used in preparing these Consolidated Financial Statements are consistent with those described in Note A - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Form 10-K.

Critical accounting estimates are defined as those reflective of significant judgments, estimates, and uncertainties, which may result in materially different results under different assumptions and conditions.

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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.

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;

risks associated with acquisitions, joint ventures, equity investments, and divestitures;

potential disruption of operations, including at co-manufacturers, suppliers, logistics providers, customers, or other third-party service providers;

failure to realize anticipated cost savings or operating efficiencies associated with strategic initiatives;

risk of loss of a material contract;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis