Item 2. Management’s Discussion and Analysis
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. The Company’s three reportable segments, Retail, Foodservice, and International, 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 $0.32 for the third quarter of fiscal 2024, up 7 percent compared to the same period last year. Adjusted diluted net earnings per share (1) was $0.37. Significant factors impacting the quarter are listed below. All comparisons are to the same period of the prior year unless otherwise noted.
• Net sales for the third quarter decreased 2 percent. The benefit from higher volume and net sales in the Foodservice segment was more than offset by lower volume and net sales in the Retail and International segments.
• Segment profit for the third quarter decreased 6 percent. Improved results in the International segment were more than offset by declines in profit for each of the Retail and Foodservice segments.
• Earnings before income taxes for the third quarter increased 9 percent, as the impact of lower net sales was more than offset by lower selling, general, and administrative (SG&A) expenses compared to the prior period, which included an unfavorable arbitration ruling. Adjusted earnings before income taxes (1) decreased 8 percent.
• Retail segment profit declined in the current quarter as the benefit from lower logistics expenses and savings from the transform and modernize initiative were more than offset by the impact of lower net sales.
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• Foodservice segment profit decreased in the current quarter, as higher sales were more than offset by higher SG&A expenses.
• International segment profit increased significantly in the current quarter, driven by improved export margins, growth from the Company’s investments in the Philippines and Indonesia, and favorable costs in China.
• The pre-tax impact of expenses related to the Company’s transform and modernize initiative and antitrust litigation settlements in the third quarter of fiscal 2024 was $30.5 million, most of which was recorded in SG&A expense. The pre-tax impact of expenses related to the Company's arbitration ruling in the third quarter of fiscal 2023 was $70.0 million, all of which was recorded in SG&A expense.
• Year-to-date cash flow from operations was $858 million, an increase of 18 percent compared to the prior year.
• Subsequent to the end of the quarter, storms in the Midwest U.S. caused roof and other damage at the Company’s Papillion, Nebraska, manufacturing facility. The Company is assessing the financial impact for the fourth quarter of fiscal year 2024.
Consolidated Results
Volume, Net Sales, Earnings, and Diluted Earnings Per Share
Quarter Ended Nine Months Ended
In thousands, except per share amounts
July 28, 2024 July 30, 2023 %
Change July 28, 2024 July 30, 2023 %
Change
Volume (lbs.) 1,018,690 1,094,518 (6.9) 3,180,087 3,256,292 (2.3)
Net Sales $ 2,898,443 $ 2,963,299 (2.2) $ 8,782,706 $ 8,911,930 (1.5)
Earnings Before Income Taxes 225,719 207,626 8.7 755,404 767,666 (1.6)
Net Earnings Attributable to Hormel Foods Corporation
176,701 162,679 8.6 584,842 597,637 (2.1)
Diluted Earnings Per Share 0.32 0.30 6.7 1.07 1.09 (1.8)
Adjusted Diluted Earnings Per Share (1)
0.37 0.40 (7.5) 1.16 1.19 (2.5)
(1) See the “Non-GAAP 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
Net sales for the third quarter of fiscal 2024 decreased as the benefit from higher volume and net sales in the Foodservice segment was more than offset by lower volume and net sales in each of the Retail and International segments. In the Retail segment, lower volume and net sales were driven by significant year-over-year volume and pricing declines for whole bird turkeys, lower sales of Planters ® snack nuts resulting from production disruptions at the Suffolk, Virginia, facility, and lower center-store and contract manufacturing volumes. In the International segment, top-line declines were driven by lower commodity export volumes and lower net sales in China.
For the first nine months of fiscal 2024, the benefit from improved volume in the Foodservice segment was more than offset by lower net sales in the Retail and International segments. The declines in net sales are related to a significant year-over-year decline in pricing within the whole bird turkey markets, which primarily impact the Retail segment, lower volumes in contract manufacturing, which primarily impact the Retail segment, and lower commodity export sales and lower net sales in China, which impact the International segment.
Cost of Products Sold
Quarter Ended Nine Months Ended
In thousands
July 28, 2024 July 30, 2023 %
Change July 28, 2024 July 30, 2023 %
Change
Cost of Products Sold $ 2,410,075 $ 2,465,251 (2.2) $ 7,281,798 $ 7,426,514 (1.9)
Cost of products sold for the third quarter and the first nine months of fiscal 2024 decreased due primarily to lower sales. On a per pound basis, cost of products sold for the first nine months of fiscal 2024 was comparable to the same period of the prior year.
The Company expects costs of products sold to continue to moderate relative to the high levels of inflation the business has absorbed since the beginning of fiscal 2021. The Company expects its transform and modernize initiative to deliver cost savings,
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throughout fiscal 2024. The initiative targets costs throughout the Company’s organization, with a particular focus during 2024 on packaging, logistics, and production costs.
Gross Profit
Quarter Ended Nine Months Ended
In thousands
July 28, 2024 July 30, 2023 %
Change July 28, 2024 July 30, 2023 %
Change
Gross Profit $ 488,369 $ 498,048 (1.9) $ 1,500,908 $ 1,485,417 1.0
Percent of Net Sales 16.8 % 16.8 % 17.1 % 16.7 %
For the third quarter of fiscal 2024, gross profit as a percent of net sales was flat. For the first nine months of fiscal 2024, gross profit as a percent of net sales increased in the International segment and was comparable for the Retail and Foodservice segments. All segments benefited from savings realized as part of the Company’s transform and modernize initiative.
Looking ahead to the fourth quarter of fiscal 2024, the Company expects gross profit as a percent of net sales to increase compared to last year. The Company expects gross profit as a percent of net sales to increase for the International segment and be comparable for the Retail and Foodservice segments.
Selling, General, and Administrative (SG&A)
Quarter Ended Nine Months Ended
In thousands
July 28, 2024 July 30, 2023 %
Change July 28, 2024 July 30, 2023 %
Change
SG&A $ 259,653 $ 291,073 (10.8) $ 766,707 $ 725,621 5.7
Percent of Net Sales 9.0 % 9.8 % 8.7 % 8.1 %
Adjusted SG&A (1)
$ 230,373 $ 221,073 4.2 $ 706,941 $ 655,621 7.8
Adjusted Percent of Net Sales (1)
7.9 % 7.5 % 8.0 % 7.4 %
(1) See the “Non-GAAP Measures” section below for a description of the Company’s use of measures not defined by GAAP.
For the third quarter, SG&A and SG&A as a percent of net sales decreased due to the accrual for an unfavorable arbitration ruling in the prior year, which was partially offset by current year litigation settlements. Adjusted SG&A as a percent of net sales (1) increased compared to last year. For the first nine months of fiscal 2024, SG&A and SG&A as a percent of net sales increased, primarily due to higher employee-related expenses.
Advertising investments in the third quarter were $40 million, a decrease of 6 percent compared to last year. The decline was partially due to lower support for the Planters ® brand due to production disruptions at the Suffolk, Virginia, facility. For the first nine months of fiscal 2024, advertising investments were $128 million, an increase of 4 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 28, 2024 July 30, 2023 %
Change July 28, 2024 July 30, 2023 %
Change
Equity in Earnings of Affiliates $ 7,977 $ 9,784 (18.5) $ 39,250 $ 42,213 (7.0)
Equity in earnings of affiliates for the third quarter and the first nine months of fiscal 2024 decreased due to lower results for MegaMex Foods, LLC, partially offset by improvements from the Company’s international investments.
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Interest and Investment Income and Interest Expense
Quarter Ended Nine Months Ended
In thousands July 28, 2024 July 30, 2023 %
Change July 28, 2024 July 30, 2023 % Change
Interest and Investment Income $ 10,484 $ 9,239 13.5 $ 43,416 $ 20,700 109.7
Interest Expense 21,459 18,372 16.8 61,464 55,042 11.7
Interest and investment income for the third quarter and the first nine months of fiscal 2024 increased due to a higher average cash balance, favorable market interest rates, and improved performance from the rabbi trust. Interest expense increased in the third quarter and first nine months of fiscal 2024 due to the second quarter debt issuance.
Effective Tax Rate
Quarter Ended Nine Months Ended
July 28, 2024 July 30, 2023 July 28, 2024 July 30, 2023
Effective Tax Rate 21.7 % 21.7 % 22.6 % 22.2 %
The effective tax rate in the third quarter was flat to last year. The higher effective tax rate for the first nine months of fiscal 2024 is primarily due to higher federal deductions in the prior year partially offset by the purchase of federal transferable energy credits in the current year. The effective tax rate for fiscal 2024 is expected to be between 22.0% and 23.0%. 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, non-recurring expenses associated with the transform and modernize 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 28, 2024 July 30, 2023 % Change July 28, 2024 July 30, 2023 % Change
Net Sales
Retail $ 1,767,251 $ 1,891,746 (6.6) $ 5,467,078 $ 5,765,786 (5.2)
Foodservice 954,021 890,949 7.1 2,799,110 2,607,140 7.4
International 177,171 180,605 (1.9) 516,517 539,005 (4.2)
Total Net Sales
$ 2,898,443 $ 2,963,299 (2.2) $ 8,782,706 $ 8,911,930 (1.5)
Segment Profit
Retail $ 127,932 $ 151,128 (15.3) $ 409,836 $ 459,031 (10.7)
Foodservice 142,487 146,270 (2.6) 441,952 428,110 3.2
International 21,792 12,222 78.3 65,026 45,723 42.2
Total Segment Profit
292,211 309,619 (5.6) 916,814 932,863 (1.7)
Net Unallocated Expense
66,526 101,886 (34.7) 161,239 164,997 (2.3)
Noncontrolling Interest
34 (108) 131.5 (170) (200) 14.9
Earnings Before Income Taxes
$ 225,719 $ 207,626 8.7 $ 755,404 $ 767,666 (1.6)
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Retail
Quarter Ended Nine Months Ended
In thousands
July 28, 2024 July 30, 2023 %
Change July 28, 2024 July 30, 2023 %
Change
Volume (lbs.) 680,214 748,146 (9.1) 2,170,621 2,267,363 (4.3)
Net Sales $ 1,767,251 $ 1,891,746 (6.6) $ 5,467,078 $ 5,765,786 (5.2)
Segment Profit 127,932 151,128 (15.3) 409,836 459,031 (10.7)
In the third quarter of fiscal 2024, volume and net sales declined, primarily due to significant year-over-year volume and pricing declines for whole bird turkeys, lower sales of Planters ® snack nuts resulting from production disruptions at the Suffolk, Virginia, facility, and lower center-store and contract manufacturing volumes. Partially offsetting these declines were net sales growth for many key brands, including Hormel ® Black Label ® bacon, Applegate ® natural and organic meats, Jennie-O ® ground turkey, Skippy ® peanut butter, Wholly ® guacamole, Herdez ® salsas and sauces, and Hormel ® Square Table™ entrees. For the first nine months of fiscal 2024, net sales declined primarily due to significant year-over-year declines in whole bird turkey sales and lower contract manufacturing volumes.
For the third quarter and first nine months of fiscal 2024, segment profit declined due to lower sales and higher SG&A. These factors more than offset the benefit from lower logistics expenses and savings from the transform and modernize initiative.
For the fourth quarter of fiscal 2024, Retail segment profit is expected to be comparable to the prior year, excluding the impact of last year's non-cash impairment charge. The Company expects continued benefits from lower logistics expenses and incremental savings from the transform and modernize initiative to mitigate the negative impacts from lower volumes, unfavorable commodity whole turkey dynamics, and lingering production disruptions at the Suffolk facility.
Foodservice
Quarter Ended Nine Months Ended
In thousands
July 28, 2024 July 30, 2023 %
Change July 28, 2024 July 30, 2023 %
Change
Volume (lbs.) 259,947 255,822 1.6 777,785 747,484 4.1
Net Sales $ 954,021 $ 890,949 7.1 $ 2,799,110 $ 2,607,140 7.4
Segment Profit 142,487 146,270 (2.6) 441,952 428,110 3.2
Volume and net sales growth in the third quarter of fiscal 2024 were driven primarily by strong performance across the turkey, premium prepared proteins, bacon, and pepperoni categories. Notable products such as Hormel ® Fire Braised™ meats, Hormel ® Bacon 1™ cooked bacon , Café H ® globally inspired proteins, and Rosa Grande ® premium pepperoni delivered strong volume and net sales growth. Growth from branded Jennie-O ® turkey items continued to benefit top-line results. For the first nine months of fiscal 2024, volume and net sales growth was broad-based and across numerous categories.
Segment profit decreased for the third quarter of fiscal 2024 as higher sales were more than offset by higher SG&A expenses. Segment profit increased for the first nine months of fiscal 2024 primarily due to higher sales.
For the fourth quarter, the Company expects Foodservice segment profit to be in line with prior year, with the impact from volume growth expected to be offset by higher SG&A compared to last year.
International
Quarter Ended Nine Months Ended
In thousands
July 28, 2024 July 30, 2023 %
Change July 28, 2024 July 30, 2023 %
Change
Volume (lbs.) 78,529 90,550 (13.3) 231,681 241,445 (4.0)
Net Sales $ 177,171 $ 180,605 (1.9) $ 516,517 $ 539,005 (4.2)
Segment Profit 21,792 12,222 78.3 65,026 45,723 42.2
During the third quarter of fiscal 2024, robust volume and net sales growth for SPAM ® luncheon meat, refrigerated foodservice exports, and Skippy ® peanut butter exports were more than offset by the difficult comparison in the prior year to significantly
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higher export volumes of low-margin commodity fresh pork and turkey. For the first nine months of fiscal 2024, net sales declined due to lower commodity export sales and lower net sales in China.
Segment profit in the third quarter of fiscal 2024 increased significantly, due to improved export margins, growth from the Company's investments in the Philippines and Indonesia, and favorable costs in China. For the first nine months of fiscal 2024, segment profit increased due to improvement from the Company's international investments, favorable costs in China, and growth in Brazil.
In the fourth quarter of fiscal 2024, the Company expects International segment profit to increase significantly compared to last year. This recovery is expected to be driven by improvement across the business, including increased branded exports, growth in China and Brazil, and contributions from investments in the Philippines and Indonesia.
Unallocated Income and Expense
Quarter Ended Nine Months Ended
In thousands
July 28, 2024 July 30, 2023 July 28, 2024 July 30, 2023
Net Unallocated Expense $ 66,526 $ 101,886 $ 161,239 $ 164,997
Noncontrolling Interest 34 (108) (170) (200)
Net unallocated expense decreased for the third quarter of fiscal 2024 due to the accrual for an unfavorable arbitration ruling in the prior year. For the first nine months of fiscal 2024, net unallocated expense decreased as the benefit from lapping the arbitration ruling, higher interest income, and favorable rabbi trust performance was partially offset by transform and modernize initiative costs, litigation settlements, and higher employee-related expenses.
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 29, 2023.
(1) Non-GAAP Measures
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 measures provide useful information to investors because they aid analysis and understanding of the Company’s results and business trends relative to past performance and the Company’s competitors. Non-GAAP measures are not intended to be a substitute for GAAP measures in analyzing financial performance. These non-GAAP measures are not calculated in accordance with GAAP and may be different from non-GAAP measures used by other companies.
Transform and Modernize Initiative
In the fourth quarter of fiscal 2023, the Company announced a multi-year transform and modernize initiative. In presenting non-GAAP measures, the Company adjusts for (i.e., excludes) expenses for this initiative that are non-recurring, comprised primarily of project-based external consulting fees and asset write-offs related to portfolio optimization (i.e., reducing the complexity and optimizing the assortment of the product portfolio). The Company believes that non-recurring costs associated with the transform and modernize initiative are not reflective of the Company’s ongoing operating cost structure; therefore, the Company is excluding these discrete costs. The Company does not adjust for (i.e., does not exclude) certain costs related to the transform and modernize initiative that are expected to continue after the project ends, such as software license fees and internal employee expenses, because those costs are considered ongoing in nature as a component of normal operating costs.
Legal Matters
From time to time, the Company incurs expenses related to discrete legal matters that the Company believes are not indicative of the Company’s core operating performance, do not reflect expected future operating costs, and may not be meaningful when comparing the Company’s operating performance against that of prior periods. The Company adjusts for (i.e., excludes) these expenses.
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Litigation Settlements
In the second and third quarters of fiscal 2024, the Company entered into settlement agreements with certain plaintiffs in its pending antitrust litigation. See Note I - Commitments and Contingencies of the Notes to the Consolidated Financial Statements for additional information.
Arbitration Ruling
In the third quarter of fiscal 2023, the Company received an unexpected, unfavorable arbitration ruling involving an isolated commercial dispute with a third party.
The table below shows the calculations to reconcile from the GAAP measures to the non-GAAP measures presented in this Quarterly Report on Form 10-Q. The tax impacts were calculated using the effective tax rate for the quarter in which the expenses were incurred.
Quarter Ended Nine Months Ended
In thousands, except per share amounts July 28, 2024 July 30, 2023 July 28, 2024 July 30, 2023
Cost of Products Sold (GAAP) $ 2,410,075 $ 2,465,251 $ 7,281,798 $ 7,426,514
Transform and Modernize Initiative (1)
(1,226) — (4,646) —
Adjusted Cost of Products Sold (Non-GAAP) $ 2,408,848 $ 2,465,251 $ 7,277,152 $ 7,426,514
Gross Profit (GAAP) $ 488,369 $ 498,048 $ 1,500,908 $ 1,485,417
Transform and Modernize Initiative (1)
1,226 — 4,646 —
Adjusted Gross Profit (Non-GAAP) $ 489,595 $ 498,048 $ 1,505,554 $ 1,485,417
SG&A (GAAP) $ 259,653 $ 291,073 $ 766,707 $ 725,621
Transform and Modernize Initiative (2)
(12,280) — (31,016) —
Pork Antitrust Litigation Settlements — — (11,750) —
Red Meat Wages Antitrust Litigation Settlement (13,500) — (13,500) —
Poultry Wages Antitrust Litigation Settlement
(3,500) — (3,500) —
Arbitration Ruling
— (70,000) — (70,000)
Adjusted SG&A (Non-GAAP) $ 230,373 $ 221,073 $ 706,941 $ 655,621
Operating Income (GAAP) $ 236,693 $ 216,759 $ 773,452 $ 802,009
Transform and Modernize Initiative (1)(2)
13,506 — 35,663 —
Pork Antitrust Litigation Settlements — — 11,750 —
Red Meat Wages Antitrust Litigation Settlement 13,500 — 13,500 —
Poultry Wages Antitrust Litigation Settlement
3,500 — 3,500 —
Arbitration Ruling
— 70,000 — 70,000
Adjusted Operating Income (Non-GAAP) $ 267,200 $ 286,759 $ 837,864 $ 872,009
Earnings Before Income Taxes (GAAP) $ 225,719 $ 207,626 $ 755,404 $ 767,666
Transform and Modernize Initiative (1)(2)
13,506 — 35,663 —
Pork Antitrust Litigation Settlements — — 11,750 —
Red Meat Wages Antitrust Litigation Settlement 13,500 — 13,500 —
Poultry Wages Antitrust Litigation Settlement
3,500 — 3,500 —
Arbitration Ruling
— 70,000 — 70,000
Adjusted Earnings Before Income Taxes (Non-GAAP) $ 256,225 $ 277,626 $ 819,816 $ 837,666
Provision for Income Taxes (GAAP) $ 48,984 $ 45,055 $ 170,733 $ 170,230
Transform and Modernize Initiative (1)(2)
2,931 — 8,009 —
Pork Antitrust Litigation Settlements — — 2,644 —
Red Meat Wages Antitrust Litigation Settlement 2,930 — 2,930 —
Poultry Wages Antitrust Litigation Settlement
760 — 760 —
Arbitration Ruling
— 15,190 — 15,190
Adjusted Provision for Income Taxes (Non-GAAP) $ 55,603 $ 60,245 $ 185,074 $ 185,420
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Quarter Ended Nine Months Ended
In thousands, except per share amounts July 28, 2024 July 30, 2023 July 28, 2024 July 30, 2023
Net Earnings Attributable to Hormel Foods Corporation (GAAP) $ 176,701 $ 162,679 $ 584,842 $ 597,637
Transform and Modernize Initiative (1)(2)
10,575 — 27,654 —
Pork Antitrust Litigation Settlements — — 9,106 —
Red Meat Wages Antitrust Litigation Settlement 10,571 — 10,571 —
Poultry Wages Antitrust Litigation Settlement
2,741 — 2,741 —
Arbitration Ruling
— 54,810 — 54,810
Adjusted Net Earnings Attributable to Hormel Foods Corporation (Non-GAAP) $ 200,588 $ 217,489 $ 634,913 $ 652,447
Diluted Net Earnings Per Share (GAAP) $ 0.32 $ 0.30 $ 1.07 $ 1.09
Transform and Modernize Initiative (1)(2)
0.02 — 0.05 —
Pork Antitrust Litigation Settlements — — 0.02 —
Red Meat Wages Antitrust Litigation Settlement 0.02 — 0.02 —
Poultry Wages Antitrust Litigation Settlement
— — — —
Arbitration Ruling
— 0.10 — 0.10
Adjusted Diluted Net Earnings Per Share (Non-GAAP) $ 0.37 $ 0.40 $ 1.16 $ 1.19
SG&A as a Percent of Net Sales (GAAP) 9.0 % 9.8 % 8.7 % 8.1 %
Transform and Modernize Initiative (2)
(0.4) — (0.4) —
Pork Antitrust Litigation Settlements — — (0.1) —
Red Meat Wages Antitrust Litigation Settlement (0.5) — (0.2) —
Poultry Wages Antitrust Litigation Settlement
(0.1) — — —
Arbitration Ruling
— (2.4) — (0.8)
Adjusted SG&A as a Percent of Net Sales (Non-GAAP) 7.9 % 7.5 % 8.0 % 7.4 %
Operating Margin (GAAP) 8.2 % 7.3 % 8.8 % 9.0 %
Transform and Modernize Initiative (1)(2)
0.5 — 0.4 —
Pork Antitrust Litigation Settlements — — 0.1 —
Red Meat Wages Antitrust Litigation Settlement 0.5 — 0.2 —
Poultry Wages Antitrust Litigation Settlement
0.1 — — —
Arbitration Ruling
— 2.4 — 0.8
Adjusted Operating Margin (Non-GAAP) 9.2 % 9.7 % 9.5 % 9.8 %
(1) Comprised primarily of asset write-offs related to portfolio optimization.
(2) Comprised primarily of project-based external consulting fees.
LIQUIDITY AND CAPITAL RESOURCES
When assessing its 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
Nine Months Ended
In thousands
July 28, 2024 July 30, 2023
Cash and Cash Equivalents at End of Period
$ 537,476 $ 669,124
Cash Provided by (Used in) Operating Activities 858,117 728,756
Cash Provided by (Used in) Investing Activities (176,899) (588,489)
Cash Provided by (Used in) Financing Activities (879,823) (450,977)
Increase (Decrease) in Cash and Cash Equivalents (199,057) (312,983)
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Cash and cash equivalents decreased $199 million during the first nine months of fiscal 2024, primarily as a result of the Company repaying a portion of long-term debt by using existing cash on hand and the proceeds from new debt issued in fiscal 2024. Cash provided by operating activities has been sufficient to cover dividend payments and capital expenditures during the first nine months of fiscal 2024. 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.
Cash Provided by (Used in) Operating Activities
• Cash flows from operating activities during the first nine months of fiscal 2024 were largely impacted by changes in operating assets and liabilities.
– Accounts receivable decreased $89 million and $81 million during the nine months ended July 28, 2024 and July 30, 2023, respectively, primarily due to lower sales.
– Inventory decreased $31 million during the first nine months of fiscal 2024 compared to an increase of $21 million in the comparable period of the prior year. The decrease in inventory during fiscal 2024 was due to benefits in supply chain processes associated with the Company's transform and modernize initiative as well as the impact of production disruptions at the Suffolk, Virginia manufacturing facility. These reduced levels of inventory were partially offset by higher levels of turkey on hand in fiscal 2024. The increase in inventory during fiscal 2023 was due to production outpacing sales.
– Accounts payable and accrued expenses decreased $95 million during the first nine months of fiscal 2024 due to the general timing of payments, feed and livestock deferral payments, and annual incentive payments. These decreases were partially offset by higher accruals for marketing and legal expenses. Accounts payable and accrued expenses decreased $131 million during the first nine months of fiscal 2023 due to the general timing of payments and annual incentive payments, partially offset by higher accruals for legal expenses.
– Prepaid expenses and other assets increased $8 million during the nine months ended July 28, 2024, compared to an increase of $52 million during the nine months ended July 30, 2023. This activity was primarily related to settlements associated with the Company’s hedging activities.
Cash Provided by (Used in) Investing Activities
• Capital expenditures were $173 million and $169 million during the first nine months of fiscal 2024 and fiscal 2023, respectively. The largest spend during fiscal 2024 was for the transition from harvest to value-added capacity at the facility in Barron, Wisconsin and wastewater infrastructure to support operations in Austin, Minnesota. The largest spend during fiscal 2023 was related to capacity expansion for pepperoni and the SPAM ® family of products.
• During the first nine months of fiscal 2023, the Company purchased a minority interest in Garudafood for $426 million.
Cash Provided by (Used in) Financing Activities
• The Company paid $950 million of its senior unsecured notes upon maturity on June 3, 2024.
• Proceeds from the issuance of long-term debt were $498 million during the first nine months of fiscal 2024. The Company issued senior unsecured notes with aggregate principal amount of $500 million.
• Cash dividends paid to the Company’s shareholders were $460 million during the first nine months of fiscal 2024, compared to $443 million in the comparable period of fiscal 2023.
• Proceeds from the exercise of stock options were $34 million in the first nine months of fiscal 2024, compared to $8 million in the first nine months of fiscal 2023. The increase in proceeds was due to more options exercised during fiscal 2024 compared to fiscal 2023.
• There were no share repurchases during the first nine months of fiscal 2024. Share repurchases of $12 million were made during the first nine months of fiscal 2023.
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 maintains a disciplined capital allocation strategy and uses a waterfall approach, which focuses first on core uses of cash, such as capital expenditures to maintain facilities, dividend returns to investors, mandatory debt repayments, and fulfillment of 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, borrowing capacity under the current unsecured revolving credit facility, and access to capital markets 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 has multiple sources of liquidity to complete such investments and acquisitions. For example, the Company’s historic ability to leverage its balance sheet through the issuance of debt has provided the flexibility to pursue strategic opportunities.
Dividend Payments
The Company remains committed to providing returns to investors through cash dividends. The Company has paid 384 consecutive quarterly dividends since becoming a public company in 1928. The Board of Directors approved an increased
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annual dividend rate for fiscal 2024 raising it to $1.13 per share from $1.10 per share, representing the 58th consecutive annual dividend increase.
Capital Expenditures
Capital expenditures are allocated to required maintenance and growth opportunities based on the needs of the business. 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.
Debt
As of July 28, 2024, the Company’s outstanding debt included $2.9 billion of fixed rate unsecured senior notes due in fiscal 2027, 2028, 2030, and 2051 with interest payable semi-annually. During the first nine months of fiscal 2024, the Company made $55 million of interest payments and the Company expects to make an additional $13 million of interest payments during fiscal 2024 on these notes. On March 8, 2024, the Company issued senior unsecured notes with an aggregate principal amount of $500 million. These proceeds were used, along with cash on hand, to repay $950 million in senior unsecured notes which matured on June 3, 2024. See Note J - Long-Term Debt and Other Borrowing Arrangements of the Notes to the Consolidated Financial Statements 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 for general corporate purposes, which may include repaying existing debt, funding acquisitions, and for working capital or other general purposes. 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 28, 2024, the Company had no outstanding draws from this facility.
Debt Covenants
The Company’s debt 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, or engage in certain sale and leaseback transactions, and the covenants require the Company to maintain certain consolidated leverage ratios. As of July 28, 2024, the Company was in compliance with all covenants in its debt agreements and expects to maintain compliance in the future.
Cash Held by International Subsidiaries
As of July 28, 2024, the Company's international subsidiaries held $197 million of cash and cash equivalents. 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 3,677,494 shares of common stock as part of an existing plan approved by the Company’s Board of Directors. Under the share repurchase authorization, the Company may repurchase shares periodically, depending on market conditions and other factors, and may do so in open market purchases or privately negotiated transactions. The share repurchase authorization has no expiration date. The Company did not repurchase any shares of stock during the first nine months of fiscal 2024. The Company continues to evaluate share repurchases as part of its capital allocation strategy.
Commitments
As previously described, on March 8, 2024, the Company issued senior unsecured notes with an aggregate principal amount of $500 million with a three-year tenor due March 2027. The notes bear interest at a fixed rate of 4.800% per annum and pay semi-annually. See Note J - Long-Term Debt and Other Borrowing Arrangements of the Notes to the Consolidated Financial Statements for additional information.
The Company used cash on hand to pay approximately $7 million during the third quarter of fiscal 2024 in respect of legal settlements. Subsequent to quarter-end but prior to the filing of this Quarterly Report on Form 10-Q, the Company used an additional $4 million of cash on hand to complete payment of these legal settlements. Also subsequent to quarter-end, the Company entered into additional legal settlements totaling $17 million, which remain subject to Court approval. Following such approval, the Company expects to pay the associated amounts using cash on hand. See Note I - Commitments and Contingencies of the Notes to the Consolidated Financial Statements for additional information.
Outside of the items mentioned above, 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 29, 2023.
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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
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 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. 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 29, 2023.
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 Company’s business as well as the national and worldwide economic environment. The risks and uncertainties that could cause actual results to differ from those anticipated or projected include, among other things, risks related to the deterioration of economic conditions; risks associated with acquisitions, joint ventures, equity investments, and divestitures; the risk of disruption of operations, including at owned facilities, co-manufacturers, suppliers, logistics providers, customers, or other third-party service providers; risk related to the remediation of production disruptions at the Suffolk, Virginia, facility; the risk that the Company will fail to realize anticipated cost savings or operating efficiencies associated with strategic initiatives, including the transform and modernize initiative; risk of loss of a material contract; risk of the Company’s inability to protect information technology systems against, or effectively respond to, cyber attacks against it or others with whom it does business, security breaches or other IT interruptions; deterioration of labor
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relations or labor availability or increases to labor costs; general risks of the food industry, including food contamination or 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 related to the Company's ability to respond to changing consumer preferences and the success of innovation and marketing investments; damage to the Company’s reputation or brand image; risks associated with 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; risks and uncertainties associated with intangible assets, including any future goodwill or intangible assets impairment charges; and risks arising from the Company’s foreign operations, including geopolitical risk, exchange rate risk, and risks associated with tariffs.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.