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Published: 2023-03-02 15:06:22 ET
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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 classTrading SymbolName of each exchange on which registered
Common Stock
$0.01465 par value
HRL
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes                ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     ☒  Yes                ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
 Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at February 26, 2023
Common Stock$.01465par value546,532,923 
Common Stock Non-Voting$.01par value0 

Table of Contents
TABLE OF CONTENTS


2
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, 2023January 30, 2022
Net Sales$2,970,992 $3,044,358 
Cost of Products Sold2,475,043 2,505,610 
Gross Profit495,949 538,749 
Selling, General, and Administrative222,056 225,972 
Equity in Earnings of Affiliates
15,559 6,898 
Operating Income289,452 319,675 
Interest and Investment Income10,096 3,869 
Interest Expense18,347 14,640 
Earnings Before Income Taxes281,201 308,904 
Provision for Income Taxes
63,551 69,194 
Net Earnings217,651 239,710 
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
Basic546,384 542,680 
Diluted550,031 547,928 
 
See Notes to Consolidated Financial Statements


3
Table of Contents
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
Unaudited
 Quarter Ended
 January 29, 2023January 30, 2022
Net Earnings$217,651 $239,710 
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation15,046 925 
Pension and Other Benefits2,990 2,535 
Deferred Hedging(14,514)8,404 
Total Other Comprehensive Income (Loss)
3,522 11,864 
Comprehensive Income221,173 251,574 
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


4
Table of Contents
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
In thousands, except share and per share amounts
Unaudited
January 29, 2023October 30, 2022
Assets  
Cash and Cash Equivalents$599,789 $982,107 
Short-term Marketable Securities17,792 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 
Inventories1,730,086 1,716,059 
Taxes Receivable7,145 7,177 
Prepaid Expenses40,063 31,481 
Other Current Assets13,218 16,559 
Total Current Assets3,195,306 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 Affiliates701,629 271,058 
Other Assets
292,697 283,169 
Property, Plant, and Equipment
Land73,952 74,303 
Buildings1,405,861 1,398,255 
Equipment2,641,581 2,636,660 
Construction in Progress226,908 216,246 
Less: Allowance for Depreciation(2,223,900)(2,184,319)
Net Property, Plant, and Equipment2,124,402 2,141,146 
Total Assets$13,283,047 $13,306,919 
 
See Notes to Consolidated Financial Statements












5
Table of Contents
HORMEL FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
In thousands, except share and per share amounts
Unaudited
January 29, 2023October 30, 2022
Liabilities and Shareholders' Investment  
Accounts Payable and Accrued Expenses$764,525 $875,405 
Accrued Marketing Expenses133,240 113,105 
Employee Related Expenses213,540 279,072 
Interest and Dividends Payable158,376 163,963 
Taxes Payable94,775 32,925 
Current Maturities of Long-term Debt8,929 8,796 
Total Current Liabilities1,373,385 1,473,266 
Long-term Debt Less Current Maturities3,292,559 3,290,549 
Pension and Post-retirement Benefits389,423 385,832 
Deferred Income Taxes471,457 475,212 
Other Long-term Liabilities137,230 141,840 
Shareholders' Investment
Preferred Stock, Par Value $0.01 a Share–
— — 
Authorized 160,000,000 Shares: Issued–None
Common Stock, Non-voting, Par Value $0.01 a Share–
— — 
Authorized 400,000,000 Shares: Issued–None
Common Stock, Par Value $0.01465 a Share–
8,006 8,002 
Authorized 1,600,000,000 Shares:
Shares Issued as of January 29, 2023: 546,465,522
Shares Issued as of October 30, 2022: 546,237,051
Additional Paid-in Capital477,470 469,468 
Accumulated Other Comprehensive Loss(252,261)(255,561)
Retained Earnings7,380,689 7,313,374 
Hormel Foods Corporation Shareholders' Investment7,613,904 7,535,284 
Noncontrolling Interest5,089 4,936 
Total Shareholders' Investment7,618,993 7,540,219 
Total Liabilities and Shareholders' Investment$13,283,047 $13,306,919 
 
See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT
In thousands, except per share amounts
Unaudited
Quarter Ended January 30, 2022
Common
Stock
Treasury
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Non-
controlling
Interest
Total
Shareholders’
Investment
SharesAmountSharesAmount
Balance at October 31, 2021542,412 $7,946 — $— $360,336 $6,881,870 $(277,269)$5,478 $6,978,360 
Net Earnings
239,571 139 239,710 
Other Comprehensive Income (Loss)
11,745 119 11,864 
Stock-based Compensation Expense
6,328 6,328 
Exercise of Stock Options/Restricted Shares
599 9 11,044 11,053 
Declared Dividends – $0.2600 per Share
(140,990)(140,990)
Balance at January 30, 2022543,012 $7,955 — $— $377,708 $6,980,451 $(265,524)$5,736 $7,106,325 
Quarter Ended January 29, 2023
Common
Stock		Treasury
Stock		Additional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Non-
controlling
Interest		Total
Shareholders’
Investment
SharesAmountSharesAmount
Balance at October 30, 2022546,237 $8,002 — $— $469,468 $7,313,374 $(255,561)$4,936 $7,540,219 
Net Earnings
217,719 (69)217,651 
Other Comprehensive Income (Loss)
3,300 222 3,522 
Stock-based Compensation Expense
5,202 5,202 
Exercise of Stock Options/Restricted Shares
228 3 2,632 2,635 
Declared Dividends – $0.2750 per Share
169(150,405)(150,236)
Balance at January 29, 2023546,466 $8,006 — $— $477,470 $7,380,689 $(252,261)$5,089 $7,618,993 

See Notes to Consolidated Financial Statements



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HORMEL FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
In thousands
Unaudited
Quarter Ended
January 29, 2023January 30, 2022
Operating Activities  
Net Earnings$217,651 $239,710 
Adjustments to Reconcile to Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization70,893 64,280 
Equity in Earnings of Affiliates(15,559)(6,898)
Distributions Received from Equity Method Investees3,652 18,039 
Provision for Deferred Income Taxes(311)366 
Loss (Gain) on Property/Equipment Sales and Plant Facilities(2,496)1,593 
Non-cash Investment Activities(7,839)5,956 
Stock-based Compensation Expense5,202 6,328 
Changes in Operating Assets and Liabilities, Net of Acquisitions:
Decrease (Increase) in Accounts Receivable79,561 85,079 
Decrease (Increase) in Inventories(11,766)(16,251)
Decrease (Increase) in Prepaid Expenses and Other Assets(34,538)10,143 
Increase (Decrease) in Pension and Post-retirement Benefits10,710 (2,533)
Increase (Decrease) in Accounts Payable and Accrued Expenses(171,368)(85,554)
Increase (Decrease) in Net Income Taxes Payable59,837 63,498 
Net Cash Provided by (Used in) Operating Activities203,629 383,756 
Investing Activities
Net (Purchase) Sale of Securities(833)(1,611)
Purchases of Property and Equipment(37,052)(49,747)
Proceeds from Sales of Property and Equipment5,016 388 
Decrease (Increase) in Investments, Equity in Affiliates, and Other Assets(418,616)1,290 
Proceeds from Company-owned Life Insurance16 — 
Net Cash Provided by (Used in) Investing Activities(451,469)(49,680)
Financing Activities
Repayments of Long-term Debt and Finance Leases(2,189)(2,163)
Dividends Paid on Common Stock(142,017)(132,909)
Proceeds from Exercise of Stock Options2,635 11,053 
Net Cash Provided by (Used in) Financing Activities(141,570)(124,019)
Effect of Exchange Rate Changes on Cash7,093 846 
Increase (Decrease) in Cash and Cash Equivalents(382,318)210,904 
Cash and Cash Equivalents at Beginning of Year982,107 613,530 
Cash and Cash Equivalents at End of Quarter$599,789 $824,434 

See Notes to Consolidated Financial Statements

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

These statements should be reviewed in conjunction with the consolidated financial statements and associated notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 30, 2022. The significant accounting policies used in preparing these interim 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 Company has determined there have been no material changes in the Company’s significant accounting policies, including estimates and assumptions, as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 30, 2022.

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

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

Reportable Segments: As of October 30, 2022, the Company had four operating and reportable segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store and International and Other. At the beginning of fiscal 2023, the Company transitioned to a new strategic operating model, which aligns its businesses to be more agile, consumer and customer focused, and market driven. Effective on October 31, 2022, the Company operates with the following three operating and reportable segments: Retail, Foodservice, and International, which are consistent with how the Company's chief operating decision maker assesses performance and allocates resources. This change had no impact on the consolidated results of operations, financial position, shareholders' investment, or cash flows. Prior period segment results have been retrospectively recast to reflect the new reportable segments.

Accounting Changes and Recent Accounting Pronouncements: Recently issued accounting standards or pronouncements not disclosed have been excluded as they are currently not relevant to the Company.


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NOTE B - GOODWILL AND INTANGIBLE ASSETS

Goodwill: As a result of the organizational changes referenced in Note A - Summary of Significant Accounting Policies, the Company conducted an assessment of its operating segments and reporting units. Based on this analysis, goodwill was reallocated using the relative fair value approach. Subsequent to the goodwill reclassification, the Company completed quantitative impairment testing on each reporting unit. The fair value of each reporting unit exceeded its carrying amount, therefore, no impairment charges were recorded. The change in the carrying amounts of goodwill for the quarter ended January 29, 2023, are:
in thousandsRetailFoodserviceInternationalTotal
Balance at October 30, 2022
$2,916,796 $1,750,594 $258,440 $4,925,829 
Foreign Currency Translation— — 2,093 2,093 
Balance at January 29, 2023
$2,916,796 $1,750,594 $260,533 $4,927,923 

Intangible Assets: The carrying amounts for indefinite-lived intangible assets are:
in thousandsJanuary 29, 2023October 30, 2022
Brands/Tradenames/Trademarks$1,665,190 $1,665,190 
Other Intangibles184 184 
Foreign Currency Translation(6,372)(6,599)
Total$1,659,002 $1,658,775 

The gross carrying amount and accumulated amortization for definite-lived intangible assets are:
 January 29, 2023October 30, 2022
in thousands
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
Customer Lists/Relationships$168,239 $(72,995)$168,239 $(69,779)
Other Intangibles59,241 (12,669)59,241 (11,606)
Tradenames/Trademarks6,540 (4,161)10,536 (7,828)
Foreign Currency Translation— (4,465)— (4,551)
Total$234,020 $(94,290)$238,016 $(93,764)
 
Amortization expense was $4.6 million for the quarter ended January 29, 2023, compared to $4.8 million for the quarter ended January 30, 2022.

Estimated annual amortization expense for the five fiscal years after October 30, 2022, is as follows:
in thousandsAmortization Expense
2023$18,320 
202416,331 
202514,628 
202614,172 
202713,940 


NOTE C - INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES
 
The Company accounts for its majority-owned operations under the consolidation method. Investments in which the Company owns a minority interest and for which there are no other indicators of control are accounted for under the equity method. These investments, along with any related receivables from affiliates, are included in the Consolidated Condensed Statements of Financial Position as Investments In and Receivables From Affiliates. Financial results for certain foreign entities are reported on a lag. The Company reviewed the investments in affiliates as of January 29, 2023, and did not recognize any other-than-temporary impairment.

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On December 15, 2022, the Company purchased a 29% common stock interest in PT Garudafood Putra Putri Jaya Tbk (Garudafood), a food and beverage company in Indonesia. This investment expands the Company's presence in Southeast Asia and supports the global execution of the snacking and entertaining strategic priority. The Company has the ability to exercise significant influence, but not control, over Garudafood; therefore, the investment is accounted for under the equity method.

The Company obtained the Garudafood interest from various minority shareholders for a purchase price of $410.6 million, including associated transaction costs. The transaction was funded using the Company's cash on hand. Based on a preliminary valuation, as of January 29, 2023, the Company estimated the initial basis difference between the fair value of the investment and proportionate share of the carrying value of Garudafood's net assets is approximately $300 million. The basis difference related to inventory, property, plant and equipment and other intangible assets will be amortized over the associated useful lives of the assets. The Company expects to finalize the valuation, allocation, and applicable amortization of basis difference in the second quarter of fiscal 2023 and does not anticipate any material impact to the consolidated financial statements. Based on quoted market prices, the fair value of the common stock held in Garudafood as of January 27, 2023, was $338.7 million.

Equity in Earnings of Affiliates consists of:
  Quarter Ended
in thousands% Owned
 
Segment
January 29, 2023January 30, 2022
MegaMex Foods, LLC50%Retail$13,681 $6,995 
Other Joint Ventures
Various (20-50%)
International1,878 (97)
Total$15,559 $6,898 
 
For the quarter ended January 29, 2023, $3.7 million of dividends were received from affiliates, compared to $18.0 million of dividends received for the quarter ended January 30, 2022.

The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $9.9 million is remaining as of January 29, 2023. This difference is being amortized through Equity in Earnings of Affiliates.


NOTE D - INVENTORIES
 
Principal components of inventories are:
in thousandsJanuary 29, 2023October 30, 2022
Finished Products$981,588 $974,160 
Raw Materials and Work-in-Process447,675 440,193 
Operating Supplies201,743 206,289 
Maintenance Materials and Parts99,079 95,417 
Total$1,730,086 $1,716,059 


NOTE E - DERIVATIVES AND HEDGING
 
The Company uses hedging programs to manage risk associated with commodity purchases and interest rates. These programs utilize futures, swaps, and options contracts to manage the Company’s exposure to market fluctuations. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Effectiveness testing is performed on a quarterly basis to ascertain a high level of effectiveness for cash flow and fair value hedging programs. If the requirements of hedge accounting are no longer met, hedge accounting is discontinued immediately and any future changes to fair value are recorded directly through earnings.


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

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

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

Fair Value Interest Rate Hedge: In the first quarter of fiscal 2022, the Company entered into an interest rate swap to protect against changes in the fair value of a portion of previously issued senior unsecured notes attributable to the change in the benchmark interest rate. The hedge specifically designated the last $450 million of the notes due June 2024 (the 2024 Notes). The Company terminated the swap in the fourth quarter of fiscal 2022. The loss related to the swap was recorded as a fair value hedging adjustment to the hedged debt and will be amortized into earnings over the remaining life of the debt.

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

Volume: The Company's outstanding contracts related to its commodity hedging programs include:
 Volume
in millionsJanuary 29, 2023October 30, 2022
Corn30.4 bushels34.3 bushels
Lean Hogs205.6 pounds177.5 pounds
Natural Gas0.1 MMBtu— MMBtu

Fair Value of Derivatives:  The fair values of the Company’s derivative instruments designated as hedges are:
  Gross Fair Value
in thousandsLocation on Consolidated Condensed Statements of Financial PositionJanuary 29, 2023October 30, 2022
Commodity Contracts(1)
Other Current Assets$7,407 $13,504 
(1) Amounts represent the gross fair value of commodity derivative assets and liabilities. The Company nets the derivative assets and liabilities for each of its commodity hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The amount or timing of cash collateral balances may impact the classification of the commodity derivative in the Consolidated Condensed Statements of Financial Position. The gross asset position as of January 29, 2023, includes the right to reclaim net cash collateral of $8.0 million contained within the master netting arrangement. The gross asset position as of October 30, 2022, is offset by the obligation to return net cash collateral of $1.3 million. See Note H - Fair Value Measurements for a discussion of these net amounts as reported in the Consolidated Condensed Statements of Financial Position.
 

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Fair Value Hedge - Assets (Liabilities): The carrying amount of the Company's fair value hedged assets (liabilities) are:
Carrying Amount of Hedged
Assets/(Liabilities)
in thousandsLocation on Consolidated Condensed Statements of Financial PositionJanuary 29, 2023October 30, 2022
Commodity Contracts
Accounts Payable(1)
$(513)$5,725 
Interest Rate Contracts
Long-term Debt - Less Current Maturities(2)
(433,174)(430,050)
(1)  Represents the carrying amount of fair value hedged assets and liabilities which are offset by other assets included in master netting arrangements described above.
(2) Represents the carrying amount of the hedged portion of the 2024 Notes. As of January 29, 2023, the carrying amount of the 2024 Notes included a cumulative fair value hedging adjustment of $16.8 million from discontinued hedges.

Accumulated Other Comprehensive Loss Impact: As of January 29, 2023, the Company included in AOCL hedging gains (before tax) of $7.1 million on commodity contracts and $13.2 million related to interest rate settled positions. The Company expects to recognize the majority of the gains on commodity contracts over the next twelve months. Gains on interest rate contracts offset the hedged interest payments over the tenor of the associated debt instruments.

The effect of AOCL for gains or losses (before tax) related to the Company's derivative instruments are:
 
Gain/(Loss)
Recognized
 in AOCL (1)
Gain/(Loss)
Reclassified from
AOCL into Earnings (1)
Location on
Consolidated
Statements
of Operations
 Quarter EndedQuarter Ended
in thousandsJanuary 29, 2023January 30, 2022January 29, 2023January 30, 2022
Cash Flow Hedges:
Commodity Contracts$(8,390)$20,279 $10,859 $7,746 Cost of Products Sold
Excluded Component (2)
345 (1,172)— — 
Interest Rate Contracts
— — 247 247 Interest Expense
(1) See Note G - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on Net Earnings.
(2) Represents the time value of corn options excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in AOCL.

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Consolidated Statements of Operations Impact: The effect on the Consolidated Statements of Operations for gains or losses (before tax) related to the Company's derivative instruments are:
Consolidated Statements of Operations Impact
Quarter Ended
in thousandsJanuary 29, 2023January 30, 2022
Net Earnings Attributable to Hormel Foods Corporation$217,719 $239,571 
Cash Flow Hedges - Commodity Contracts
Gain (Loss) Reclassified from AOCL10,859 7,746 
Amortization of Excluded Component from Options(1,412)(825)
Fair Value Hedges - Commodity Contracts
   Gain (Loss) on Commodity Futures (1)
(3,022)(3,650)
Total Gain (Loss) on Commodity Contracts (2)
$6,425 $3,271 
Cash Flow Hedges - Interest Rate Locks
Gain (Loss) Reclassified from AOCL247 247 
Fair Value Hedge - Interest Rate Swap
   Gain (Loss) on Interest Rate Swap— 792 
Amortization of Loss Due to Discontinuance of Fair Value Hedge (3)
(3,125)— 
Total Gain (Loss) on Interest Rate Contracts (4)
$(2,878)$1,039 
Total Gain (Loss) Recognized in Earnings$3,547 $4,310 

(1) Represents gains or losses on commodity contracts designated as fair value hedges that were closed during the quarter ended January 29, 2023, which were offset by a corresponding gain or loss on the underlying hedged purchase commitment. Additional gains or losses related to changes in the fair value of open commodity contracts, along with the offsetting gain or loss on the hedged purchase commitment, are also marked-to-market through earnings with no impact on a net basis.
(2)     Total Gain (Loss) on Commodity Contracts is recognized in earnings through Cost of Products Sold.
(3)    Represents the fair value hedging adjustment amortized into earnings.
(4)    Total (Loss) on Interest Rate Contracts is recognized in earnings through Interest Expense.


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NOTE F - PENSION AND OTHER POST-RETIREMENT BENEFITS
 
Net periodic benefit cost for pension and other post-retirement benefit plans consists of:
 Pension Benefits
 Quarter Ended
in thousandsJanuary 29, 2023January 30, 2022
Service Cost$8,902 $10,019 
Interest Cost17,157 12,640 
Expected Return on Plan Assets(19,571)(27,062)
Amortization of Prior Service Cost(460)(374)
Recognized Actuarial (Gain) Loss3,325 3,132 
Net Periodic Cost$9,353 $(1,645)

 Post-retirement Benefits
 Quarter Ended
in thousandsJanuary 29, 2023January 30, 2022
Service Cost$62 $117 
Interest Cost3,014 1,919 
Amortization of Prior Service Cost2 2 
Recognized Actuarial (Gain) Loss(7)610 
Net Periodic Cost$3,070 $2,648 

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


NOTE G - ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Components of Accumulated Other Comprehensive Loss are as follows:
in thousandsForeign
Currency
Translation		Pension &
Other
Benefits		Derivatives &
 Hedging		Accumulated
Other
Comprehensive
Loss
Balance at October 30, 2022$(89,793)$(195,624)$29,856 $(255,561)
Unrecognized Gains (Losses)
Gross14,824 1,100 (8,044)7,879 
Tax Effect(266)1,953 1,687 
Reclassification into Net Earnings0
Gross2,860 
(1)
(11,106)
(2)
(8,247)
Tax Effect(703)2,684 1,980 
Net of Tax Amount14,824 2,990 (14,514)3,300 
Balance at January 29, 2023
$(74,969)$(192,635)$15,343 $(252,261)

(1)    Included in the computation of net periodic cost. See Note F - Pension and Other Post-Retirement Benefits for additional information.
(2)    Included in Cost of Products Sold and Interest Expense in the Consolidated Statements of Operations. See Note E - Derivatives and Hedging for additional information.



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NOTE H - FAIR VALUE MEASUREMENTS
 
Accounting guidance establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of the three levels below based on the inputs used in the valuation.
 
Level 1:  Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
 
Level 2: Observable inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.
 
Level 3:  Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.
 
The Company’s financial assets and liabilities carried at fair value on a recurring basis as of January 29, 2023, and October 30, 2022, and their level within the fair value hierarchy are presented in the table below.
 Fair Value Measurements at January 29, 2023
in thousands
Total Fair
Value
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets at Fair Value    
Cash and Cash Equivalents (1)
$599,789 $599,204 $586 $— 
Short-term Marketable Securities (2)
17,792 9,419 8,373 — 
Other Trading Securities (3)
193,273 — 193,273 — 
Commodity Derivatives (4)
11,607 11,619 (12)— 
Total Assets at Fair Value$822,461 $620,242 $202,220 $— 
Liabilities at Fair Value
Deferred Compensation (3)
$60,205 $— $60,205 $— 
Total Liabilities at Fair Value$60,205 $— $60,205 $— 

 Fair Value Measurements at October 30, 2022
in thousands
Total Fair
Value
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets at Fair Value    
Cash and Cash Equivalents (1)
$982,107 $980,730 $1,377 $— 
Short-term Marketable Securities (2)
16,149 8,763 7,386 — 
Other Trading Securities (3)
186,243 — 186,243 — 
Commodity Derivatives (4)
12,448 12,228 220 — 
Total Assets at Fair Value$1,196,947 $1,001,721 $195,226 $— 
Liabilities at Fair Value
Deferred Compensation (3)
$57,790 $— $57,790 $— 
Total Liabilities at Fair Value$57,790 $— $57,790 $— 
 
The following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:

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

(2)    The Company holds securities as part of a portfolio maintained to generate investment income and to provide cash for operations of the Company, if necessary. The portfolio is managed by a third party who is responsible for daily trading activities, and all assets within the portfolio are highly liquid. The cash, U.S. government securities, and money market funds rated AAA held by the portfolio are classified as Level 1. The current investment portfolio also includes corporate

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bonds and other asset backed securities for which there is an active, quoted market. Market prices are obtained from a variety of industry providers, large financial institutions, and other third-party sources to calculate a representative daily market value, and therefore, these securities are classified as Level 2.

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

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

The rabbi trust is included in Other Assets and deferred compensation liabilities in Other Long-term Liabilities on the Consolidated Condensed Statements of Financial Position. Securities held by the rabbi trust are classified as trading securities. Unrealized gains and losses associated with these investments are included in the Company's earnings. During the quarter ended January 29, 2023, securities held by the rabbi trust generated gains of $7.0 million, compared to losses of $5.4 million for the quarter ended January 30, 2022.

(4)    The Company’s commodity derivatives represent futures, swaps, and options contracts used in its hedging or other programs to offset price fluctuations associated with purchases of corn, natural gas, and hogs, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers. The Company’s futures contracts for corn are traded on the Chicago Board of Trade, while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange. These are active markets with quoted prices available, and these contracts are classified as Level 1. The Company’s natural gas swap contracts are over-the-counter instruments classified as Level 2 whose value is calculated using natural gas future prices quoted from the New York Mercantile Exchange. All derivatives are reviewed for potential credit risk and risk of nonperformance. The net balance for commodity derivatives is included in Other Current Assets or Accounts Payable, as appropriate, in the Consolidated Condensed Statements of Financial Position. As of January 29, 2023, the Company has recognized the right to reclaim net cash collateral of $8.0 million from various counterparties (including cash of $7.4 million plus $0.6 million of realized gain). As of October 30, 2022, the Company had recognized the obligation to return net cash collateral of $1.3 million from various counterparties (including cash of $27.5 million less $26.2 million of realized gain).

The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value. The Company does not carry its long-term debt at fair value in its Consolidated Condensed Statements of Financial Position. The fair value of long-term debt, utilizing discounted cash flows (Level 2), was $2.8 billion as of January 29, 2023, and $2.7 billion as of October 30, 2022. See Note I - Long-Term Debt and Other Borrowing Arrangements for additional information.

The Company measures certain nonfinancial assets and liabilities at fair value, which are recognized or disclosed on a nonrecurring basis (e.g. goodwill, intangible assets, and property, plant, and equipment). During the quarter ended January 29, 2023, and January 30, 2022, there were no material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.


NOTE I - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term Debt consists of: 
in thousandsJanuary 29, 2023October 30, 2022
Senior Unsecured Notes, with Interest at 3.050%
     Interest Due Semi-annually through June 2051 Maturity Date
$600,000 $600,000 
Senior Unsecured Notes, with Interest at 1.800%
     Interest Due Semi-annually through June 2030 Maturity Date
1,000,000 1,000,000 
Senior Unsecured Notes, with Interest at 1.700%
     Interest Due Semi-annually through June 2028 Maturity Date
750,000 750,000 
Senior Unsecured Notes, with Interest at 0.650%
     Interest Due Semi-annually through June 2024 Maturity Date
950,000 950,000 
Unamortized Discount on Senior Notes(7,566)(7,750)
Unamortized Debt Issuance Costs(18,962)(19,856)
Interest Rate Swap Liabilities(1)
(16,826)(19,950)
Finance Lease Liabilities42,513 44,473 
Other Financing Arrangements2,329 2,429 
Total$3,301,488 $3,299,345 
Less: Current Maturities of Long-term Debt8,929 8,796 
Long-term Debt Less Current Maturities$3,292,559 $3,290,549 
(1)        See Note E - Derivatives and Hedging for additional information.


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

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

Unsecured Revolving Credit Facility: On May 6, 2021, the Company entered into an unsecured revolving credit agreement with Wells Fargo Bank, National Association as administrative agent, swingline lender and issuing lender, U.S. Bank National Association, JPMorgan Chase Bank, N.A. and BofA Securities, Inc. as syndication agents and the lenders party thereto. The revolving credit agreement provides for an unsecured revolving credit facility with an aggregate principal commitment amount at any time outstanding of up to $750.0 million with an uncommitted increase option of an additional $375.0 million upon the satisfaction of certain conditions. The unsecured revolving line of credit bears interest, at the Company’s election, at either a Base Rate plus margin of 0.0% to 0.150% or the Eurocurrency Rate plus margin of 0.575% to 1.150% and a variable fee of 0.050% to 0.100% is paid for the availability of this credit line. Extensions of credit under the facility may be made in the form of revolving loans, swingline loans and letters of credit. The lending commitments under the agreement are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding. As of January 29, 2023, and October 30, 2022, the Company had no outstanding draws from this facility.

Debt Covenants: The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of January 29, 2023, the Company was in compliance with all of these covenants.


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

The Company's effective tax rate for the quarter ended January 29, 2023, was 22.6 percent compared to 22.4 percent for the corresponding period a year ago. The higher effective tax rate in the current quarter is due primarily to the decrease in tax benefits from stock option exercises.

The amount of unrecognized tax benefits, including interest and penalties, is recorded in Other Long-term Liabilities. If recognized as of January 29, 2023, and January 30, 2022, $18.2 million and $20.2 million, respectively, would impact the Company’s effective tax rate. The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense. Interest and penalties included in income tax expense was immaterial for the quarter ended January 29, 2023, and January 30, 2022. The amount of accrued interest and penalties at January 29, 2023, and January 30, 2022, associated with unrecognized tax benefits was $2.6 million and $5.2 million, respectively.

The Company is regularly audited by federal and state taxing authorities. The U.S. Internal Revenue Service ( I.R.S.) has placed the Company in the Bridge phase of the Compliance Assurance Process (CAP) for fiscal 2020. In this phase, the I.R.S. will not accept any disclosures, conduct any reviews, or provide any assurances. The Company has elected to participate in CAP for fiscal years through 2023. The objective of CAP is to contemporaneously work with the I.R.S. to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return. The Company may elect to continue participating in CAP for future tax years; the Company may withdraw from the program at any time.

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

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The Inflation Reduction Act of 2022 was signed into law on August 16, 2022. The 15% corporate minimum tax will not apply to the Company until fiscal year 2024.


NOTE K - EARNINGS PER SHARE DATA
 
The reported net earnings attributable to the Company were used when computing basic and diluted earnings per share. The following table sets forth the shares used as the denominator for those computations:
 Quarter Ended
in thousandsJanuary 29, 2023January 30, 2022
Basic Weighted-Average Shares Outstanding546,384 542,680 
Dilutive Potential Common Shares3,647 5,247 
Diluted Weighted-Average Shares Outstanding550,031 547,928 
Antidilutive Potential Common Shares3,239 3,501 


NOTE L - SEGMENT REPORTING
 
The Company develops, processes, and distributes a wide array of food products in a variety of markets. As discussed in Note A - Summary of Significant Accounting Policies, the Company transitioned to a new operating model in the first quarter of fiscal 2023 and now reports its results in the following three segments: Retail, Foodservice, and International, which are consistent with how the Company's chief operating decision maker (CODM) assesses performance and allocates resources. Prior period segment results have been retrospectively recast to reflect the new reportable segments.
 
The Retail segment consists primarily of the processing, marketing, and sale of food products sold predominantly in the retail market. This segment also includes the results from the Company’s MegaMex Foods, LLC joint venture.
 
The Foodservice segment consists primarily of the processing, marketing, and sale of food and nutritional products for foodservice, convenience store, and commercial customers.
 
The International segment processes, markets, and sells Company products internationally. This segment also includes the results from the Company’s international joint ventures and royalty arrangements.
 
Intersegment sales are eliminated in consolidation and are not reviewed when evaluating segment performance. Company does not allocate deferred compensation, investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and expenses at the corporate level. Equity in Earnings of Affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included below as Net Unallocated Expense and Noncontrolling Interest when reconciling to Earnings Before Income Taxes.
 
Financial measures for each of the Company’s reportable segments and reconciliation to consolidated Earnings Before Income Taxes are set forth below. The Company's CODM reviews assets at a consolidated level and does not use assets by segment to evaluate performance or allocate resources. Therefore, the Company does not disclose assets by segment. 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.

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 Quarter Ended
in thousandsJanuary 29, 2023January 30, 2022
Net Sales  
Retail$1,957,797 $1,995,896 
Foodservice834,750 854,194 
International178,445 194,268 
Total Net Sales$2,970,992 $3,044,358 
Segment Profit
Retail$154,677 $169,702 
Foodservice136,442 134,758 
International19,905 27,239 
Total Segment Profit311,025 331,699 
Net Unallocated Expense29,755 22,933 
Noncontrolling Interest(69)139 
Earnings Before Income Taxes$281,201 $308,904 


The Company’s products consist primarily of meat and other food products. Total revenue contributed by classes of similar products are: 
 Quarter Ended
in thousandsJanuary 29, 2023January 30, 2022
Perishable$2,080,461 $2,128,248 
Shelf-stable890,531 916,111 
Total Net Sales$2,970,992 $3,044,358 

Perishable includes fresh meats, frozen items, refrigerated meal solutions, bacon, sausages, hams, and guacamole and other items that require refrigeration. Shelf-stable includes canned luncheon meats, nut butters, snack nuts, chili, shelf-stable microwaveable meals, hash, stews, tortillas, salsas, tortilla chips, nutritional food supplements, and other items that do not require refrigeration.



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.

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•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 amountsJanuary 29, 2023January 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 Taxes281,201 308,904 (9.0)
Net Earnings Attributable to Hormel Foods Corporation217,719 239,571 (9.1)
Diluted Earnings per Share0.40 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 TableTM 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 BraisedTM, Hormel® Bacon 1TM, and Austin Blues®.

Cost of Products Sold
 Quarter Ended
in thousandsJanuary 29, 2023January 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.

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Gross Profit
 Quarter Ended
in thousandsJanuary 29, 2023January 30, 2022
%
Change
Gross Profit$495,949 $538,749 (7.9)
Percentage of Net Sales16.7 %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 thousandsJanuary 29, 2023January 30, 2022
%
Change
SG&A$222,056 $225,972 (1.7)
Percentage of Net Sales7.5 %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 thousandsJanuary 29, 2023January 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, 2023January 30, 2022
Effective Tax Rate22.6 %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.


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Segment Results
 
Net sales and segment profit for each of the Company’s reportable segments are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the profit and other financial information shown below.
 Quarter Ended
in thousandsJanuary 29, 2023January 30, 2022% Change
Net Sales   
Retail$1,957,797 $1,995,896 (1.9)
Foodservice834,750 854,194 (2.3)
International178,445 194,268 (8.1)
Total$2,970,992 $3,044,358 (2.4)
Segment Profit   
Retail$154,677 $169,702 (8.9)
Foodservice136,442 134,758 1.2 
International19,905 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 thousandsJanuary 29, 2023January 30, 2022%
Change
Volume (lbs.)752,887 868,939 (13.4)
Net Sales$1,957,797 $1,995,896 (1.9)
Segment Profit154,677 169,702 (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 TableTM 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.


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Foodservice
 Quarter Ended
in thousandsJanuary 29, 2023January 30, 2022%
Change
Volume (lbs.)237,087 252,249 (6.0)
Net Sales$834,750 $854,194 (2.3)
Segment Profit136,442 134,758 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 thousandsJanuary 29, 2023January 30, 2022
%
Change
Volume (lbs.)72,237 83,684 (13.7)
Net Sales$178,445 $194,268 (8.1)
Segment Profit19,905 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 thousandsJanuary 29, 2023January 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.



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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 thousandsJanuary 29, 2023January 30, 2022
Cash and Cash Equivalents$599,789 $824,434 
Cash Provided by (Used in) Operating Activities203,629 383,756 
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.


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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.


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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

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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.



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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
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).


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SIGNATURES
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  HORMEL FOODS CORPORATION
  (Registrant)
Date: March 2, 2023By/s/ JACINTH C. SMILEY
  JACINTH C. SMILEY
  Executive Vice President and Chief Financial Officer
  (Principal Financial Officer)
Date: March 2, 2023By/s/ PAUL R. KUEHNEMAN
  PAUL R. KUEHNEMAN
  Vice President and Controller
  (Principal Accounting Officer)


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