EX-13.1 3 a16-22026_1ex13d1.htm EX-13.1

Exhibit 13.1

 

Selected Financial Data

 

(in thousands, except per share amounts)

2016

2015

2014

2013

2012

 

 

 

 

 

 

Operations

 

 

 

 

 

Net Sales

$9,523,224

$9,263,863

$9,316,256

$8,751,654

$8,230,670

Net Earnings

890,517

687,264

606,026

530,076

504,961

Net Earnings Attributable to Hormel Foods Corporation

890,052

686,088

602,677

526,211

500,050

% of net sales

9.35%

7.41%

6.47%

6.01%

6.08%

EBIT (1)

1,323,430

1,066,144

928,271

802,124

759,763

% of net sales

13.90%

11.51%

9.96%

9.17%

9.23%

EBITDA (2)

1,455,398

1,199,578

1,058,315

926,974

879,257

% of net sales

15.28%

12.95%

11.36%

10.59%

10.68%

Return on Invested Capital (3)

19.04%

15.62%

15.79%

14.92%

16.43%

 

 

 

 

 

 

Financial Position

 

 

 

 

 

Total Assets

6,370,067

6,139,831

5,455,619

4,915,880

4,563,966

Long-term Debt less Current Maturities

250,000

250,000

250,000

250,000

250,000

Hormel Foods Corporation Shareholders’ Investment

4,448,006

3,998,198

3,605,678

3,311,040

2,819,455

 

 

 

 

 

 

Selected Cash Flow Data

 

 

 

 

 

Depreciation and Amortization

131,968

133,434

130,044

124,850

119,494

Capital Expenditures

255,524

144,063

159,138

106,762

132,303

Acquisitions of Businesses

280,889

770,587

466,204

665,415

168

Share Repurchase

87,885

24,928

58,937

70,819

61,366

Dividends Paid

$   296,493

$   250,834

$   203,156

$   174,320

$   152,204

 

 

 

 

 

 

Common Stock**

 

 

 

 

 

Weighted-Average Shares Outstanding – Basic

529,290

528,143

527,624

528,635

526,932

Weighted-Average Shares Outstanding – Diluted

542,473

541,002

540,431

540,449

537,782

Earnings per Share – Basic

$         1.68

$         1.30

$         1.14

$         1.00

$         0.95

Earnings per Share – Diluted

1.64

1.27

1.12

0.97

0.93

Dividends per Share

0.58

0.50

0.40

0.34

0.30

Hormel Foods Corporation Shareholders’ Investment per Share

8.42

7.57

6.84

6.28

5.36

 

The Company provides EBIT, EBITDA, and Return on Invested Capital because these measures are useful to investors as indicators of operating strength and performance relative to prior years, and are typically used to benchmark our Company’s performance against other companies in our industry. Management uses EBIT as a component of certain executive incentive plans, but does not utilize EBITDA for any material purpose. These measures are calculated as follows:

 

(in thousands)

2016

2015

2014

2013

2012

(1) EBIT:

 

 

 

 

 

Net Earnings Attributable to Hormel Foods Corporation

$   890,052

$   686,088

$   602,677

$   526,211

$   500,050

Plus: Income Tax Expense

426,698

369,879

316,126

268,431

253,374

Plus: Interest Expense

12,871

13,111

12,704

12,453

12,859

Less: Interest and Investment Income

6,191

2,934

3,236

4,971

6,520

EBIT

$1,323,430

$1,066,144

$   928,271

$   802,124

$   759,763

(2) EBITDA:

 

 

 

 

 

EBIT per (1) above

1,323,430

1,066,144

928,271

802,124

759,763

Plus: Depreciation and Amortization

131,968

133,434

130,044

124,850

119,494

EBITDA

$1,455,398

$1,199,578

$1,058,315

$   926,974

$   879,257

(3) Return on Invested Capital:

 

 

 

 

 

EBIT per (1) above

1,323,430

1,066,144

928,271

802,124

759,763

X (1 – Effective Tax Rate*)

67.59%

64.97%

65.59%

66.22%

66.37%

After-tax EBIT

$   894,506

$   692,674

$   608,887

$   531,166

$   504,257

Divided by:

 

 

 

 

 

Total Debt

250,000

435,000

250,000

250,000

250,000

Hormel Foods Corporation Shareholders’ Investment

4,448,006

3,998,198

3,605,678

3,311,040

2,819,455

Total Debt and Shareholders’ Investment

$4,698,006

$4,433,198

$3,855,678

$3,561,040

$3,069,455

Return on Invested Capital

19.04%

15.62%

15.79%

14.92%

16.43%

 

* Excluding earnings attributable to noncontrolling interests.

 

** Shares and per share figures have been restated to reflect the two-for-one stock split distributed on February 9, 2016.

 

14



 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 


Executive Overview

 

Fiscal 2016: Hormel Foods achieved record earnings for fiscal 2016, as we celebrated the Company’s 125th anniversary. Sales for the year were $9.5 billion, a 3 percent increase from last year with three of five segments contributing to the sales growth. Fiscal 2016 included an extra week compared to the prior year. Net earnings attributable to the Company for fiscal 2016 were $890.1 million, a 30 percent increase from $686.1 million in fiscal 2015 with four segments delivering double-digit earnings growth. Diluted earnings per share for fiscal 2016 increased 29 percent to $1.64 compared to $1.27 per share last year. Fiscal 2016 net earnings increased 25 percent over 2015 non-GAAP adjusted net earnings of $714.4 million. Fiscal 2016 diluted earnings per share increased 24 percent over 2015 non-GAAP adjusted net earnings of $1.32 per share (see explanation of non-GAAP financial measures in the Consolidated Results section).

 

Significant performance improvements, including double-digit earnings increases for the Refrigerated Foods, Jennie-O Turkey Store (JOTS), Grocery Products, and Specialty Foods segments, drove financial results for the year. The International & Other segment also had improved profitability compared to the prior year. Financial performance for the Refrigerated Foods segment was led by solid gains in many value-added products including foodservice sales of Hormel® Bacon1TM fully cooked bacon and Hormel® Fire BraisedTM meats and retail sales of Hormel Gatherings® party trays and Hormel® Natural Choice® lunchmeats. The addition of Applegate and favorable market conditions also benefited the Refrigerated Foods segment. The JOTS segment delivered significant sales and earnings growth as they recovered from the effects of highly pathogenic avian influenza (HPAI) in the prior year. Strong demand for fresh, lean ground turkey products was a leading contributor to the year’s improved performance. The Grocery Products segment experienced notable sales growth for SKIPPY® peanut butter, the SPAM® family of products, and Hormel® chili. The segment was also aided by growth of Wholly Guacamole® refrigerated dips and Herdez® salsas in MegaMex Foods along with favorable input costs. Specialty Foods segment profit improved on the contributions of Muscle Milk® sports nutrition products, offsetting the impacts of the divestiture of Diamond Crystal Brands (DCB) in May. The International & Other segment results exceeded last year as improved contributions from pork exports and growth of SKIPPY® peanut butter in China covered higher

raw material costs and soft demand for retail meat products in China. General corporate expense was higher due primarily to an increase in employee-related expenses.

 

Our financial performance continued to generate strong operating cash flows. We acquired Justin’s, LLC, for $280.9 million. The Justin’s® brand is a leader in the nut butter-based snacking category. We repurchased 2.4 million shares of common stock in fiscal 2016, spending $87.9 million. The annual dividend for 2017 will be $0.68 per share and marks the 51st consecutive year of dividend increases, representing an increase of 17 percent after a 16 percent increase last year.

 

Fiscal 2017 Outlook: We are pleased with our momentum heading into fiscal 2017 and expect revenue growth to continue as we progress through the year. The inclusion of Justin’s® specialty nut butters and contributions from branded products such as SKIPPY® peanut butter and Herdez® salsas are expected to drive improved Grocery Products results. We anticipate strong demand for value-added retail and foodservice products in Refrigerated Foods, supported by contributions from Applegate and favorable input costs. Refrigerated Foods sales growth will be muted by the anticipated sale of Farmer John. The JOTS segment should benefit from increased demand for Jennie-O® branded products and stable grain prices. Specialty Foods is expected to generate sales and earnings growth net of the DCB divestiture, benefiting from continued growth of Muscle Milk® protein nutrition products. We expect the International & Other segment to achieve year-over-year improved results through the expansion of our business in China, led by the opening of our new plant in Jiaxing, China, along with increased sales of the SPAM® and SKIPPY® family of products.

 

We continue to put a top priority on product innovation, process improvement, and building our branded, value-added product lines. We strive to stay current with the dynamics of a changing marketplace and changing consumer needs, introducing new flavors, convenience, and creative menu options in order to keep our products relevant with consumers and customers. We plan to support numerous iconic brands with continued advertising in fiscal 2017. Strong cash flow, along with a solid balance sheet, will enable us to continue to return cash to shareholders while providing the foundation to expand our business through internal investment and strategic acquisitions.


 

15



 


Critical Accounting Policies

 

This discussion and analysis of financial condition and results of operations is based upon the consolidated financial statements of Hormel Foods Corporation (the Company), which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company evaluates, on an ongoing basis, its estimates for reasonableness as changes occur in its business environment. The Company bases its estimates on experience, the use of independent third-party specialists, and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

 

Critical accounting policies are defined as those that are reflective of significant judgments, estimates, and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company believes the following are its critical accounting policies:

 

Stock Split: Unless otherwise noted, all prior year share amounts and per share calculations throughout this Annual Report have been restated to reflect the impact of the two-for-one stock split distributed on February 9, 2016.

 

Revenue Recognition: The Company recognizes sales when title passes upon delivery of its products to customers, net of applicable provisions for discounts, returns, and allowances. Products are delivered upon receipt of customer purchase orders with acceptable terms, including price and reasonably assured collectability.

 

The Company offers various sales incentives to customers and consumers. Incentives that are offered off-invoice include prompt pay allowances, will call allowances, spoilage allowances, and temporary price reductions. These incentives are recognized as reductions of revenue at the time title passes. Coupons are used as an incentive for consumers to purchase various products. The coupons reduce revenues at the time they are offered, based on estimated redemption rates. Promotional contracts are performed by customers to promote the Company’s products to consumers. These incentives reduce revenues at the time of performance through direct payments and accrued promotional funds. Accrued promotional funds are unpaid liabilities for promotional contracts in process or completed at the end of a quarter or fiscal year. Promotional contractual accruals are based on agreements with customers for defined performance. The liability relating to these agreements is based on a review of the outstanding contracts on which performance has taken place but for which the promotional payments relating to such contracts remain unpaid as of the

end of the fiscal year. The level of customer performance and the historical spend rate versus contracted rates are significant estimates used to determine these liabilities.

 

Inventory Valuation: The Company values its pork inventories at the lower of cost or USDA market prices (primal values). When the carcasses are disassembled and transferred from primal processing to various manufacturing departments, the primal values, as adjusted by the Company for product specifications and further processing, become the basis for calculating inventory values. Turkey raw materials are represented by the deboned meat quantities. The Company values these raw materials using a concept referred to as the “meat cost pool.” The meat cost pool is determined by combining the cost to grow turkeys with processing costs, less any net sales revenue from by-products created from the processing and not used in producing Company products. The Company has developed a series of ratios using historical data and current market conditions (which themselves involve estimates and judgment determinations by the Company) to allocate the meat cost pool to each meat component. Substantially all inventoriable expenses, meat, packaging, and supplies are valued by the average cost method.

 

Goodwill and Other Indefinite-Lived Intangibles: Indefinite-lived intangible assets are originally recorded at their estimated fair values at date of acquisition and the residual of the purchase price is recorded to goodwill. Goodwill and other indefinite-lived intangible assets are allocated to reporting units that will receive the related sales and income. Goodwill and indefinite-lived intangible assets are tested annually for impairment, or more frequently if impairment indicators arise.

 

In conducting the annual impairment test for goodwill, the Company first performs a qualitative assessment to determine whether it is more likely than not (> 50% likelihood) that the fair value of any reporting unit is less than its carrying amount. If the Company concludes this is the case, then a two-step quantitative test for goodwill impairment is performed for the appropriate reporting units. Otherwise, the Company concludes no impairment is indicated and does not perform the two-step test.

 

In conducting the initial qualitative assessment, the Company analyzes actual and projected growth trends for net sales, gross margin, and segment profit for each reporting unit, as well as historical performance versus plan and the results of prior quantitative tests performed. Additionally, each reporting unit assesses critical areas that may impact their business, including macroeconomic conditions and the related impact, market-related exposures, any plans to market all or a portion of their business, competitive changes, new or discontinued product lines, changes in key personnel, or any other potential risks to their projected financial results.

 

If performed, the quantitative goodwill impairment test is a two-step process performed at the reporting unit level. First, the fair value of each reporting unit is compared to its corresponding carrying value, including goodwill. The fair value of each


 

16



 


reporting unit is estimated using discounted cash flow valuations (Level 3), which incorporate assumptions regarding future growth rates, terminal values, and discount rates. The estimates and assumptions used consider historical performance and are consistent with the assumptions used in determining future profit plans for each reporting unit, which are approved by the Company’s Board of Directors. If the first step results in the carrying value exceeding the fair value of any reporting unit, then a second step must be completed in order to determine the amount of goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference.

 

During fiscal 2016, 2015, and 2014, as a result of the qualitative testing performed, no impairment charges were recorded other than for the DCB assets held for sale in fiscal 2016 and 2015.

 

In conducting the annual impairment test for its indefinite-lived intangible assets, the Company first performs a qualitative assessment to determine whether it is more likely than not (> 50% likelihood) that an indefinite-lived intangible asset is impaired. If the Company concludes this is the case, then a quantitative test for impairment must be performed. Otherwise, the Company does not need to perform a quantitative test.

 

In conducting the initial qualitative assessment, the Company analyzes growth rates for historical and projected net sales and the results of prior quantitative tests performed. Additionally, the Company assesses critical areas that may impact its intangible assets or the applicable royalty rates to determine if there are factors that could indicate impairment of the asset.

 

If performed, the quantitative impairment test compares the fair value to the carrying value of the indefinite-lived intangible asset. The fair value of indefinite-lived intangible assets is primarily determined on the basis of estimated discounted value, using the relief from royalty method (Level 3). This method incorporates assumptions regarding future sales projections and discount rates. If the carrying value exceeds fair value, the indefinite-lived intangible asset is considered impaired and an impairment charge is recorded. Even if not required, the Company periodically elects to perform the quantitative test in order to confirm the qualitative assessment.

 

Based on the qualitative assessment conducted in fiscal 2016, performance of the quantitative test was not required for any of the Company’s indefinite-lived intangible assets. No impairment charges were recorded for indefinite-lived intangible assets for fiscal 2016, 2015, or 2014.

 

Employee Benefit Plans: The Company incurs expenses relating to employee benefits, such as noncontributory defined benefit pension plans and post-retirement health care benefits. In accounting for these employment costs, management must make a variety of assumptions and estimates including

mortality rates, discount rates, overall compensation increases, expected return on plan assets, and health care cost trend rates. The Company considers historical data as well as current facts and circumstances when determining these estimates. The Company uses third-party specialists to assist management in the determination of these estimates and the calculation of certain employee benefit expenses and the outstanding obligation.

 

Income Taxes: The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur.

 

The Company computes its provision for income taxes based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it operates. Significant judgment is required in evaluating the Company’s tax positions and determining its annual tax provision. While the Company considers all of its tax positions fully supportable, the Company is occasionally challenged by various tax authorities regarding the amount of taxes due. The Company recognizes a tax position in its financial statements when it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. That position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. A change in judgment related to the expected ultimate resolution of uncertain tax positions will be recognized in earnings in the quarter of such change.

 

Contingent Liabilities: At any time, the Company may be subject to investigations, legal proceedings, or claims related to the on-going operation of its business, including claims both by and against the Company. Such proceedings typically involve claims related to product liability, contract disputes, wage and hour laws, employment practices, or other actions brought by employees, consumers, competitors, or suppliers. The Company routinely assesses the likelihood of any adverse outcomes related to these matters on a case by case basis, as well as the potential ranges of losses and fees. The Company establishes accruals for its potential exposure, as appropriate, for claims against the Company when losses become probable and reasonably estimable. Where the Company is able to reasonably estimate a range of potential losses, the Company records the amount within that range which constitutes the Company’s best estimate. The Company also discloses the nature and range of loss for claims against the Company when losses are reasonably possible and material. These accruals and disclosures are determined based on the facts and circumstances related to the individual cases and require estimates and judgments regarding the interpretation of facts and laws, as well as the effectiveness of strategies or factors beyond our control.


 

17



 

Results of Operations

 

OVERVIEW

 

 

The Company is a processor of branded and unbranded food products for retail, foodservice, and fresh product customers. The Company operates in the following five reportable segments:

 

Segment

 

Business Conducted

Grocery Products

 

This segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market. This segment also includes the results from the Company’s MegaMex Foods, LLC (MegaMex) joint venture.

 

 

 

Refrigerated Foods

 

This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork, beef, chicken, and turkey products for retail, foodservice, and fresh product customers.

 

 

 

Jennie-O Turkey Store

 

This segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers.

 

 

 

Specialty Foods

 

This segment consists of the processing, marketing, and sale of nutritional and private label shelf-stable products to retail, foodservice, and industrial customers.

 

 

 

International & Other

 

This segment includes Hormel Foods International, which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Company’s international joint ventures.

 

The Company’s fiscal year consisted of 53 weeks in 2016. Fiscal years 2015 and 2014 consisted of 52 weeks.

 

FISCAL YEARS 2016 AND 2015:

 

 

Consolidated Results

 

Net Earnings and Diluted Earnings per Share

 

 

Fourth Quarter Ended

Year Ended

 

October 30,

October 25,

 

October 30,

October 25,

 

(in millions, except per share amounts)

2016

2015

% Change

2016

2015

% Change

Net earnings

$243.9

$187.2

30.3

$890.1

$686.1

29.7

Diluted earnings per share

0.45

0.35

28.6

1.64

1.27

29.1

Adjusted net earnings

243.9

199.9(1)

22.0

890.1

714.4(1)

24.6

Adjusted diluted earnings per share

0.45

0.37(1)

21.6

1.64

1.32(1)

24.2

 

(1)  The non-GAAP adjusted financial measurements are presented to provide investors additional information to facilitate the comparison of past and present operations. The non-GAAP adjusted financial measurements are used for internal purposes to evaluate the results of operations and to measure a component of certain employee incentive plans in fiscal year 2015. Non-GAAP measurements are not intended to be a substitute for U.S. GAAP measurements in analyzing financial performance. These non-GAAP measurements are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.

 

Adjusted net earnings and diluted net earnings per share exclude charges relating to the closure of the Stockton, California, manufacturing facility and the exit from international joint venture businesses in the first quarter of fiscal 2015, and charges relating to the goodwill impairment charge associated with the DCB business and an adjustment to the contingent consideration accrual for CytoSport in the fourth quarter of fiscal 2015. The tables below show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in both the fourth quarter and full year of fiscal 2015.

 

18



 

 

Fourth Quarter

 

 

2015

Diamond

CytoSport

 

 

 

Non-GAAP

Crystal

Contingent

 

 

2016

Adjusted

Brands

Consideration

2015 GAAP

(in thousands, except per share amounts)

Earnings

Earnings

Impairment

Adjustment

Earnings

Grocery Products

$   82,734

$   78,772

$          –

$       –

$   78,772

Refrigerated Foods

168,040

111,287

111,287

Jennie-O Turkey Store

92,299

73,227

73,227

Specialty Foods

20,182

35,015

(21,537)

8,870

22,348

International & Other

19,570

23,300

23,300

Total segment operating profit

$ 382,825

$ 321,601

$(21,537)

$8,870

$ 308,934

General corporate expense

(17,325)

(16,649)

(16,649)

Net interest & investment expense

(1,017)

(3,341)

(3,341)

Earnings before income taxes

$ 364,483

$ 301,611

$(21,537)

$8,870

$ 288,944

Income taxes

(120,543)

(101,713)

(101,713)

Net earnings attributable to Hormel Foods Corporation

$ 243,940

$ 199,898

$(21,537)

$8,870

$ 187,231

Diluted net earnings per share

$       0.45

$       0.37

$    (0.04)

$  0.02

$       0.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

2015

 

 

Diamond

CytoSport

 

 

 

Non-GAAP

Stockton

 

Crystal

Contingent

 

(in thousands,

2016

Adjusted

Plant

International

Brands

Consideration

2015 GAAP

except per share amounts)

Earnings

Earnings

Closure

Business Exit

Impairment

Adjustment

Earnings

Grocery Products

$   268,461

$   239,108

$(10,526)

$        –

$          –

$       –

$   228,582

Refrigerated Foods

585,652

424,968

424,968

Jennie-O Turkey Store

329,427

276,217

276,217

Specialty Foods

110,917

105,925

(21,537)

8,870

93,258

International & Other

78,409

87,864

(9,546)

78,318

Total segment operating profit

$1,372,866

$1,134,082

$(10,526)

$(9,546)

$(21,537)

$8,870

$1,101,343

General corporate expense

(49,436)

(35,199)

(35,199)

Net interest & investment expense

(6,680)

(10,177)

(10,177)

Earnings before income taxes

$1,316,750

$1,088,706

$(10,526)

$(9,546)

$(21,537)

$8,870

$1,055,967

Income taxes

(426,698)

(374,334)

3,685

770

(369,879)

Net earnings attributable to Hormel Foods Corporation

$   890,052

$   714,372

$  (6,841)

$(8,776)

$(21,537)

$8,870

$  686,088

Diluted net earnings per share

$         1.64

$         1.32

$    (0.01)

$  (0.02)

$    (0.04)

$  0.02

$        1.27

 

Net Sales

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 30,

October 25,

 

October 30,

October 25,

 

(in millions)

 

2016

2015

% Change

2016

2015

% Change

Net sales

 

$2,627.9

$2,400.9

9.5

$9,523.2

$9,263.9

2.8

Tonnage (lbs.)

 

1,421.0

1,308.3

8.6

5,192.0

5,109.5

1.6

 

Four of the Company’s five segments posted sales growth in the fourth quarter, more than offsetting lower sales for the Specialty Foods segment, which was impacted by the divestiture of DCB on May 9, 2016. Strong value-added sales for the Refrigerated Foods and JOTS segments drove higher sales for the fourth quarter.

 

Positive momentum in the second half of the year led to improved net sales results for both the fourth quarter and fiscal year. Sales in the first half of the year were tempered by lower turkey volumes in the JOTS segment and soft export demand in the International & Other segment. JOTS posted strong results in both the fourth quarter and fiscal year as production volumes returned to normalized levels during the third quarter. The Refrigerated Foods and Grocery Products segments experienced strong value-added product sales. Due to challenging market conditions in China, fiscal 2016 net sales declined for the International & Other segment.

 

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Moving into fiscal 2017, the Company expects continued growth for value-added products such as SKIPPY® peanut butter and Herdez® salsas, along with the addition of Justin’s® specialty nut butters in the Grocery Products segment. JOTS should benefit from increased demand for Jennie-O® branded products and stable grain prices. Continued strong momentum of both retail and foodservice value-added sales is anticipated for the Refrigerated Foods segment. The International & Other segment should show growth through increased export sales and sales growth in the Company’s China operations. Growth of Muscle Milk® protein nutrition products is expected to drive sales for the Specialty Foods segment.

 

Cost of Products Sold

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 30,

October 25,

 

October 30,

October 25,

 

(in millions)

 

2016

2015

% Change

2016

2015

% Change

Cost of products sold

 

$2,029.4

$1,905.8

6.5

$7,365.0

$7,455.3

(1.2)

 

The increase in cost of products sold for the fourth quarter of fiscal 2016 is primarily a result of higher sales volumes of JOTS products. JOTS sales volumes declined in fiscal 2015 as HPAI significantly impacted the availability of raw materials. For the fiscal year, cost of products sold decreased due to lower pork input costs for the Refrigerated Foods and Grocery Products segments along with lower grain costs for JOTS and favorable input costs for Specialty Foods. In the first quarter of fiscal 2015, charges totaling $10.5 million were recognized for the closure of the Stockton, California, manufacturing facility.

 

Gross Profit

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 30,

October 25,

 

October 30,

October 25,

 

(in millions)

 

2016

2015

% Change

2016

2015

% Change

Gross profit

 

$598.5

$495.0

20.9

$2,158.2

$1,808.6

19.3

Percentage of net sales

 

22.8

20.6

 

22.7

19.5

 

 

Higher margins from the JOTS, Refrigerated Foods, Grocery Products, and Specialty Foods segments in the fourth quarter of fiscal 2016 offset lower results in the International & Other segment. The improved gross profit for JOTS is the result of strong value-added sales following the recovery from HPAI. Margins in the Refrigerated Foods and Grocery Products segments were driven by value-added sales growth and favorable market conditions. For fiscal 2016, strong value-added sales results across the Company’s segments boosted margins.

 

The Company expects overall favorable market conditions in fiscal 2017. Continued low input costs should benefit the value-added products within the Refrigerated Foods and Grocery Products segments, while stable grain prices will benefit JOTS. The International & Other segment is entering 2017 anticipating improved results in China. The Specialty Foods segment expects to deliver increases through growth of Muscle Milk® protein nutrition products.

 

Selling, General and Administrative (SG&A)

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 30,

October 25,

 

October 30,

October 25,

 

(in millions)

 

2016

2015

% Change

2016

2015

% Change

SG&A

 

$244.0

$189.0

29.1

$872.0

$743.6

17.3

Percentage of net sales

 

9.3

7.9

 

9.2

8.0

 

 

The Company increased advertising expense by $58.8 million and incurred $24.2 million higher employee-related expenses in fiscal 2016. Fiscal 2016 includes higher advertising for the Company’s value-added products along with the addition of Applegate’s advertising expenses. In fiscal 2017, the Company intends to continue to build brand awareness through advertising investments and anticipates advertising expense to be similar to fiscal 2016. The Company will continue to invest in key brands such as Jennie-O® products, Hormel® Natural Choice® meats, Hormel® pepperoni, SKIPPY® peanut butter, the SPAM® family of products, Wholly Guacamole® dips, and Muscle Milk® protein nutrition products.

 

Research and development expenses were $9.6 million and $34.7 million for the fiscal 2016 fourth quarter and year, respectively, compared to $8.5 million and $32.0 million in fiscal 2015.

 

Goodwill Impairment Charge: Goodwill impairment charges related to the divestiture of DCB of $1.0 million and $21.5 million were recorded in the second quarter of fiscal 2016 and fourth quarter of fiscal 2015, respectively.

 

20



 

Equity in Earnings of Affiliates

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 30,

October 25,

 

October 30,

October 25,

 

(in millions)

 

2016

2015

% Change

2016

2015

% Change

Equity in earnings of affiliates

 

$11.2

$8.0

40.0

$38.7

$23.9

61.9

 

The increase for both the fourth quarter and fiscal 2016 was largely the result of improved earnings from the Company’s 50 percent-owned MegaMex joint venture.

 

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 or cost method. These investments, along with receivables from other affiliates, are included in the Consolidated Statements of Financial Position as investments in and receivables from affiliates. The composition of this line item at October 30, 2016, was as follows:

 

(in thousands)

Investments/Receivables

Country

 

United States

$180,437

Foreign

59,153

Total

$239,590

 

Effective Tax Rate

 

 

 

 

 

Fourth Quarter Ended

Year Ended

 

 

 

 

October 30,

October 25,

October 30,

October 25,

 

 

 

 

2016

2015

2016

2015

Effective tax rate

 

 

 

33.0%

35.2%

32.4%

35.0%

 

The lower comparative tax rate for the fourth quarter was due to the impact of the fiscal 2015 DCB goodwill impairment charge. The fiscal 2016 rate was lower due to the benefit from a foreign tax credit, along with a comparison to the unfavorable impact of the exit from international joint venture businesses in fiscal 2015. The Company expects the effective tax rate in fiscal 2017 to be between 33.0 and 33.5 percent.

 

 

Segment Results

 

Net sales and operating profits 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 operating profit and other financial information shown below. (Additional segment financial information can be found in Note P “Segment Reporting.”)

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 30,

October 25,

 

October 30,

October 25,

 

(in thousands)

 

2016

2015

% Change

2016

2015

% Change

Net Sales

 

 

 

 

 

 

 

Grocery Products

 

$   491,724

$   422,570

16.4

$1,684,756

$1,617,680

4.1

Refrigerated Foods

 

1,237,276

1,149,496

7.6

4,647,173

4,372,347

6.3

Jennie-O Turkey Store

 

541,409

420,312

28.8

1,740,968

1,635,776

6.4

Specialty Foods

 

216,674

269,887

(19.7)

939,134

1,103,359

(14.9)

International & Other

 

140,858

138,593

1.6

511,193

534,701

(4.4)

Total Net Sales

 

$2,627,941

$2,400,858

9.5

$9,523,224

$9,263,863

2.8

Segment Operating Profit

 

 

 

 

 

 

 

Grocery Products

 

$     82,734

$     78,772

5.0

$   268,461

$   228,582

17.4

Refrigerated Foods

 

168,040

111,287

51.0

585,652

424,968

37.8

Jennie-O Turkey Store

 

92,299

73,227

26.0

329,427

276,217

19.3

Specialty Foods

 

20,182

22,348

(9.7)

110,917

93,258

18.9

International & Other

 

19,570

23,300

(16.0)

78,409

78,318

0.1

Total Segment Operating Profit

 

$   382,825

$   308,934

23.9

$1,372,866

$1,101,343

24.7

Net interest and investment expense (income)

1,017

3,341

(69.6)

6,680

10,177

(34.4)

General corporate expense

 

17,325

16,649

4.1

49,436

35,199

40.4

Less: Noncontrolling interest

 

250

212

17.9

465

1,176

(60.5)

Earnings Before Income Taxes

 

$   364,733

$   289,156

26.1

$1,317,215

$1,057,143

24.6

 

21



 

Grocery Products: Results for the Grocery Products segment compared to the prior year are as follows:

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 30,

October 25,

 

October 30,

October 25,

 

(in thousands)

 

2016

2015

% Change

2016

2015

% Change

Net sales

 

$491,724

$422,570

16.4

$1,684,756

$1,617,680

4.1

Tonnage (lbs.)

 

258,386

230,170

12.3

906,202

890,735

1.7

Segment profit

 

$  82,734

$  78,772

5.0

$   268,461

$   228,582

17.4

 

Results reflect the addition of Justin’s acquired on May 25, 2016. Justin’s contributed incremental sales of $24.3 million in the fourth quarter and $36.8 million for the twelve months ended October 30, 2016. Increased sales of SPAM® luncheon meat, SKIPPY® peanut butter, Wholly Guacamole® dips, and Herdez® salsas also contributed to the improved sales results in the fourth quarter and full year of fiscal 2016.

 

Fourth quarter and full year segment profit results benefited from the net sales growth noted above along with favorable beef and pork input costs. Charges totaling $10.5 million related to the closure of the Stockton, California, manufacturing facility impacted the first quarter of fiscal 2015.

 

Looking ahead to fiscal 2017, the Company anticipates positive momentum in SKIPPY® peanut butter products, Herdez® salsas, and Wholly Guacamole® dips in addition to Justin’s® for Grocery Products.

 

Refrigerated Foods: Results for the Refrigerated Foods segment compared to the prior year are as follows:

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 30,

October 25,

 

October 30,

October 25,

 

(in thousands)

 

2016

2015

% Change

2016

2015

% Change

Net sales

 

$1,237,276

$1,149,496

7.6

$4,647,173

$4,372,347

6.3

Tonnage (lbs.)

 

658,506

601,857

9.4

2,493,358

2,368,804

5.3

Segment profit

 

$   168,040

$   111,287

51.0

$   585,652

$   424,968

37.8

 

Results reflect the addition of Applegate acquired on July 13, 2015, contributing an incremental $236.8 million of net sales and 36.0 million pounds for fiscal 2016.

 

Many of the Company’s value-added products enjoyed strong sales growth during the fourth quarter. Foodservice sales of Hormel® Bacon 1TM fully cooked bacon and Hormel® Fire BraisedTM meats along with retail sales of Applegate® deli meats, Hormel® Natural Choice® meats, and Hormel Gatherings® party trays drove the sales growth for the fourth quarter.

 

Segment profit results for the fourth quarter were driven by strong results from the Company’s value-added products and favorable raw material markets. Fiscal 2016 benefitted from lower input costs, the addition of Applegate, and strong foodservice results.

 

Looking forward, the Company anticipates low input costs to provide a benefit for the Refrigerated Foods value-added products in addition to positive momentum in both retail and foodservice channels. In November 2016, subsequent to the end of the fiscal year, the Company entered into an agreement for the sale of Farmer John, which will partially offset the sales gains expected for value-added products.

 

Jennie-O Turkey Store: Results for the JOTS segment compared to the prior year are as follows:

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 30,

October 25,

 

October 30,

October 25,

 

(in thousands)

 

2016

2015

% Change

2016

2015

% Change

Net sales

 

$541,409

$420,312

28.8

$1,740,968

$1,635,776

6.4

Tonnage (lbs.)

 

291,587

221,528

31.6

902,073

849,418

6.2

Segment profit

 

$  92,299

$  73,227

26.0

$   329,427

$   276,217

19.3

 

Net sales and segment profit exceeded last year, which was negatively impacted by HPAI. The HPAI outbreak last year created large volume shortfalls and corresponding declines in sales and operational efficiencies. Value-added sales of Jennie-O® foodservice products were strong in the fourth quarter, with growth coming from items in the raw boneless breast and sliced meat categories.

 

22



 

Retail sales of Jennie-O® lean ground turkey and Jennie-O® turkey bacon improved during the fourth quarter of fiscal 2016. For the year, lean ground tray pack, turkey bacon, and Jennie-O® Oven Ready® products drove the improved sales results.

 

Segment profit for the fourth quarter improved over last year, as the 2015 results reflected the impact of HPAI. Favorable input costs this year also provided benefits in both the quarter and year-to-date results.

 

JOTS expects to improve on its segment profit performance in fiscal 2017. The Company looks to continue the positive momentum in branded Jennie-O® products next year supported with continued media and promotional support.

 

Specialty Foods: Results for the Specialty Foods segment compared to the prior year are as follows:

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 30,

October 25,

 

October 30,

October 25,

 

(in thousands)

 

2016

2015

% Change

2016

2015

% Change

Net sales

 

$216,674

$269,887

(19.7)

$939,134

$1,103,359

(14.9)

Tonnage (lbs.)

 

127,053

177,784

(28.5)

583,267

702,110

(16.9)

Segment profit

 

$  20,182

$  22,348

(9.7)

$110,917

$     93,258

18.9

 

The results for the fourth quarter and fiscal year reflect the May 9, 2016, divestiture of DCB, resulting in lower sales and tonnage in fiscal 2016. Muscle Milk® branded items posted strong sales growth throughout the fiscal year with increases across many product lines including protein powders and ready-to-drink protein beverages.

 

Fourth quarter segment profit declined versus the prior year primarily due to increased advertising. For the fiscal year, favorable input costs and operational synergies drove segment profit gains.

 

The Company expects the Specialty Foods segment to deliver sales and profit increases through the growth of Muscle Milk® protein nutrition products in fiscal 2017.

 

International & Other: Results for the International & Other segment compared to the prior year are as follows:

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 30,

October 25,

 

October 30,

October 25,

 

(in thousands)

 

2016

2015

% Change

2016

2015

% Change

Net sales

 

$140,858

$138,593

1.6

$511,193

$534,701

(4.4)

Tonnage (lbs.)

 

85,454

76,953

11.0

307,127

298,421

2.9

Segment profit

 

$  19,570

$  23,300

(16.0)

$  78,409

$  78,318

0.1

 

Pork exports drove net sales growth during the fourth quarter, as volumes and markets improved compared to the prior year. For the fiscal year, challenging market conditions and unfavorable exchange rates resulted in an overall decline in export sales compared to fiscal 2015. In China, the Company also experienced softness in the meat business throughout fiscal 2016, while the SKIPPY® peanut butter business continued to grow in both retail and foodservice channels.

 

Segment profit results for both the fourth quarter and fiscal year primarily reflect weaker margins for the China meat business and lower exports of branded items. These losses offset improved profitability for pork exports and growth in the China SKIPPY® peanut butter business. Stronger equity in earnings results did provide a benefit for the year. Fiscal 2015 results also included charges of $9.5 million related to the exit from international joint venture businesses.

 

Entering 2017, the International & Other segment expects improved export results across all key brands, including SPAM®, SKIPPY®, and Muscle Milk®. The Company anticipates pork markets will remain favorable in fiscal 2017, benefitting pork exports. Continued expansion in China is also projected as the Company’s new plant in Jiaxing, China, will provide additional capacity and in-country SPAM® luncheon meat production beginning in the spring of 2017. Hog costs in China are projected to remain high in the near-term, but are expected to moderate in the second half, which should enhance segment margins.

 

Unallocated Income and Expense: The Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at corporate. Equity in earnings of affiliates is included in segment operating 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.

 

23



 

 

Fourth Quarter Ended

Year Ended

 

October 30,

October 25,

October 30,

October 25,

(in millions)

2016

2015

2016

2015

Net interest and investment expense (income)

$  1.0

$  3.3

$  6.7

$  10.2

Interest expense

3.3

3.8

12.9

13.1

General corporate expense

17.3

16.6

49.4

35.2

Noncontrolling interest earnings

0.3

0.2

0.5

1.2

 

Net interest and investment expense was lower than last year due to higher interest income, favorable currency exchange, and improved returns on the rabbi trust. General corporate expense was higher for the both the fourth quarter and fiscal year primarily reflecting higher employee-related expenses.

 

FISCAL YEARS 2015 AND 2014:

 

 

Consolidated Results

 

Net Earnings and Diluted Earnings per Share

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in millions, except per share amounts)

2015

2014

% Change

2015

2014

% Change

Net earnings

$187.2

$171.3

9.3

$686.1

$602.7

13.8

Diluted earnings per share

0.35

0.32

9.4

1.27

1.12

13.4

Adjusted net earnings

199.9(1)

171.3

16.7

714.4(1)

602.7

18.5

Adjusted diluted earnings per share

0.37(1)

0.32

15.6

1.32(1)

1.12

17.9

 

(1)      The non-GAAP adjusted financial measurements are presented to provide investors additional information to facilitate the comparison of past and present operations. The non-GAAP adjusted financial measurements are used for internal purposes to evaluate the results of operations and to measure a component of certain employee incentive plans in fiscal 2015. Non-GAAP measurements are not intended to be a substitute for U.S. GAAP measurements in analyzing financial performance. These non-GAAP measurements are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.

 

Adjusted net earnings and diluted net earnings per share exclude charges relating to the closure of the Stockton, California, manufacturing facility and the exit from international joint venture businesses in the first quarter of fiscal 2015, and charges relating to the goodwill impairment charge associated with the DCB business and an adjustment to the contingent consideration accrual for CytoSport in the fourth quarter of fiscal 2015. The tables below show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in both the fourth quarter and full year of fiscal 2015.

 

 

Fourth Quarter

 

2015

Diamond

CytoSport

 

 

Non-GAAP

Crystal

Contingent

 

 

Adjusted

Brands

Consideration

2015 GAAP

(in thousands, except per share amounts)

Earnings

Impairment

Adjustment

Earnings

Grocery Products

$   78,772

$           –

$       –

$  78,772

Refrigerated Foods

111,287

111,287

Jennie-O Turkey Store

73,227

73,227

Specialty Foods

35,015

(21,537)

8,870

22,348

International & Other

23,300

 

 

23,300

Total segment operating profit

$ 321,601

$(21,537)

$8,870

$ 308,934

General corporate expense

(16,649)

(16,649)

Net interest & investment expense

(3,341)

(3,341)

Earnings before income taxes

$ 301,611

$(21,537)

$8,870

$ 288,944

Income taxes

(101,713)

(101,713)

Net earnings attributable to Hormel Foods Corporation

$ 199,898

$(21,537)

$8,870

$ 187,231

Diluted net earnings per share

$       0.37

$    (0.04)

$  0.02

$       0.35

 

24



 

 

Fiscal Year 2015

 

2015

 

 

Diamond

CytoSport

 

 

Non-GAAP

Stockton

International

Crystal

Contingent

 

 

Adjusted

Plant

Business

Brands

Consideration

2015 GAAP

(in thousands, except per share amounts)

Earnings

Closure

Exit

Impairment

Adjustment

Earnings

Grocery Products

$    239,108

$(10,526)

$         –

$          –

$       –

$    228,582

Refrigerated Foods

424,968

424,968

Jennie-O Turkey Store

276,217

276,217

Specialty Foods

105,925

(21,537)

8,870

93,258

International & Other

87,864

(9,546)

78,318

Total segment operating profit

$ 1,134,082

$(10,526)

$(9,546)

$(21,537)

$8,870

$1,101,343

General corporate expense

(35,199)

(35,199)

Net interest & investment expense

(10,177)

(10,177)

Earnings before income taxes

$ 1,088,706

$(10,526)

$(9,546)

$(21,537)

$8,870

$1,055,967

Income taxes

(374,334)

3,685

770

(369,879)

Net earnings attributable to Hormel Foods Corporation

$    714,372

$  (6,841)

$(8,776)

$(21,537)

$8,870

$   686,088

Diluted net earnings per share

$          1.32

$    (0.01)

$  (0.02)

$    (0.04)

$  0.02

$         1.27

 

Net Sales

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in millions)

2015

2014

% Change

2015

2014

% Change

Net sales

$2,400.9

$2,543.8

(5.6)

$9,263.9

$9,316.3

(0.6)

Tonnage (lbs.)

1,308.3

1,336.5

(2.1)

5,109.5

5,000.9

2.2

 

Lower sales for the fourth quarter and fiscal year 2015 were primarily due to turkey supply shortages in the JOTS segment and price deflation in pork markets, impacting sales within the Refrigerated Foods and International & Other segments along with the dissolution of the Precept Foods joint venture at the end of fiscal 2014.

 

Net sales and tonnage for the fiscal 2015 fourth quarter and year were positively impacted by the following incremental sales from Applegate, CytoSport, and additional MegaMex products not included in the prior year:

 

(in thousands)

 

 

Fourth Quarter Ended

Year Ended

Segment

 

 

Net Sales

Tonnage (lbs.)

Net Sales

Tonnage (lbs.)

Specialty Foods

 

 

$ 13,209

5,463

$237,829

102,915

Grocery Products

 

 

26,478

16,415

95,942

64,404

Refrigerated Foods

 

 

80,352

12,670

92,796

14,646

 

Despite a strong start to fiscal 2015, the effects of HPAI on the turkey supply chain significantly impacted JOTS as the number of birds through the Company’s facilities was reduced in the second half of fiscal 2015. Value-added sales across the Company’s segments were strong, but price reductions taken on certain items in the Refrigerated Foods and International & Other segments due to declining pork markets tempered top-line results.

 

Cost of Products Sold

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in millions)

2015

2014

% Change

2015

2014

% Change

Cost of products sold

$1,905.8

$2,120.2

(10.1)

$7,455.3

$7,751.3

(3.8)

 

Lower pork input costs for the Refrigerated Foods, Grocery Products, and International & Other segments led to the decrease for the quarter and fiscal year of 2015, partially offset by additional product costs from the acquisition of Applegate for the fourth quarter and CytoSport for the fiscal year. Results for fiscal year 2015 also reflect charges totaling $10.5 million related to the closure of the Stockton, California, manufacturing facility.

 

25



 

Gross Profit

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in millions)

2015

2014

% Change

2015

2014

% Change

Gross profit

$495.0

$423.6

16.9

$1,808.6

$1,565.0

15.6

Percentage of net sales

20.6

16.7

 

19.5

16.8

 

 

Higher margins from the Grocery Products, Refrigerated Foods, and International & Other segments in the fourth quarter of fiscal 2015 offset lower margins in the JOTS and Specialty Foods segments. Favorable raw material and plant operating costs along with improved equity in earnings contributed to the growth for Grocery Products. The Refrigerated Foods segment posted solid margin gains in the fourth quarter of fiscal 2015 led by strong performance from Affiliated Foods. Positive results in China along with favorable costs on products such as SPAM® luncheon meat and SKIPPY® peanut butter in the International & Other segment aided margins. JOTS finished below fiscal 2014 as shortfalls due to flocks lost to HPAI lowered plant processing and sales volumes. For the year, synergies captured within the CytoSport and Century Foods operations contributed to the improved margins in fiscal 2015. Additionally, the Company’s value-added businesses within the Refrigerated Foods segment benefited from the lower input costs referenced above.

 

Selling, General and Administrative (SG&A)

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in millions)

2015

2014

% Change

2015

2014

% Change

SG&A

$189.0

$165.9

13.9

$743.6

$650.9

14.2

Percentage of net sales

7.9

6.5

 

8.0

7.0

 

 

The Company incurred $40.4 million higher employee-related expenses and $31.0 million higher advertising expenses in fiscal 2015 in addition to the added expenses related to the acquisitions of Applegate during the fourth quarter and CytoSport for the fiscal year 2015.

 

Research and development expenses were $8.5 million and $32.0 million for the fiscal 2015 fourth quarter and year, respectively, compared to $7.5 million and $29.9 million in fiscal 2014.

 

Goodwill Impairment Charge: A goodwill impairment charge of $21.5 million was recorded in the fourth quarter of fiscal 2015 as the Company decided to sell a portion of DCB and classify it as held for sale.

 

Equity in Earnings of Affiliates

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in millions)

2015

2014

% Change

2015

2014

% Change

Equity in earnings of affiliates

$8.0

$5.7

40.4

$23.9

$17.6

35.8

 

The increase for both the fourth quarter and fiscal 2015 is largely the result of improved earnings from the Company’s 50 percent owned MegaMex joint venture, reflecting the impact of incentive expenses on the Fresherized Foods acquisition recognized in the prior year.

 

26



 

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 or cost method. These investments, along with receivables from other affiliates, are included in the Consolidated Statements of Financial Position as investments in and receivables from affiliates. The composition of this line item at October 25, 2015, was as follows:

 

(in thousands)

Investments/Receivables

Country

 

United States

$200,110

Foreign

58,888

Total

$258,998

 

Effective Tax Rate

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

October 25,

October 26,

 

2015

2014

2015

2014

Effective tax rate

35.2%

34.1%

35.0%

34.3%

 

The higher rate for the fourth quarter of fiscal 2015 is due to the impact of the goodwill impairment charge. Fiscal 2015 was also impacted by the unfavorable impact of the exit from international joint venture businesses.

 

Segment Results

 

Net sales and operating profits 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 operating profit and other financial information shown below. (Additional segment financial information can be found in Note P “Segment Reporting.”)

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in thousands)

2015

2014

% Change

2015

2014

% Change

Net Sales

 

 

 

 

 

 

Grocery Products

$   422,570

$   405,166

4.3

$1,617,680

$1,558,265

3.8

Refrigerated Foods

1,149,496

1,211,890

(5.1)

4,372,347

4,644,179

(5.9)

Jennie-O Turkey Store

420,312

509,980

(17.6)

1,635,776

1,672,452

(2.2)

Specialty Foods

269,887

277,559

(2.8)

1,103,359

907,120

21.6

International & Other

138,593

139,176

(0.4)

534,701

534,240

0.1

Total Net Sales

$2,400,858

$2,543,771

(5.6)

$9,263,863

$9,316,256

(0.6)

Segment Operating Profit

 

 

 

 

 

 

Grocery Products

$     78,772

$     50,051

57.4

$   228,582

$   195,064

17.2

Refrigerated Foods

111,287

87,296

27.5

424,968

338,020

25.7

Jennie-O Turkey Store

73,227

95,253

(23.1)

276,217

272,362

1.4

Specialty Foods

22,348

13,747

62.6

93,258

71,514

30.4

International & Other

23,300

22,629

3.0

78,318

84,745

(7.6)

Total Segment Operating Profit

$  308,934

$  268,976

14.9

$1,101,343

$   961,705

14.5

Net interest and investment expense (income)

3,341

2,626

27.2

10,177

9,468

7.5

General corporate expense

16,649

6,192

168.9

35,199

33,434

5.3

Less: Noncontrolling interest

212

584

(63.7)

1,176

3,349

(64.9)

Earnings Before Income Taxes

$  289,156

$  260,742

10.9

$1,057,143

$   922,152

14.6

 

27



 

Grocery Products: Results for the Grocery Products segment for fiscal 2015 compared to fiscal 2014 are as follows:

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in thousands)

2015

2014

% Change

2015

2014

% Change

Net sales

$ 422,570

$ 405,166

4.3

$ 1,617,680

$ 1,558,265

3.8

Tonnage (lbs.)

230,170

218,912

5.1

890,735

850,844

4.7

Segment profit

$   78,772

$   50,051

57.4

$    228,582

$    195,064

17.2

 

Additional MegaMex products not included in the prior year contributed an incremental $26.4 million of net sales and 16.4 million lbs. for the fourth quarter, and $95.9 million of net sales and 64.4 million lbs. for the year in fiscal 2015. Strong sales of SKIPPY® peanut butter, Dinty Moore® stew, and Hormel® chili also contributed to the improved net sales results for the fourth quarter, offsetting sales declines of Hormel® Compleats® microwave meals.

 

Lower pork and beef input costs and improved manufacturing productivity drove segment profit results in the fourth quarter, as well as improved equity in earnings results. Segment profit results for the year in fiscal 2015 were impacted by charges totaling $10.5 million related to the closure of the Stockton, California, manufacturing facility.

 

Refrigerated Foods: Results for the Refrigerated Foods segment for fiscal 2015 compared to fiscal 2014 are as follows:

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in thousands)

2015

2014

% Change

2015

2014

% Change

Net sales

$ 1,149,496

$ 1,211,890

(5.1)

$ 4,372,347

$ 4,644,179

(5.9)

Tonnage (lbs.)

601,857

587,862

2.4

2,368,804

2,351,898

0.7

Segment profit

$    111,287

$      87,296

27.5

$    424,968

$    338,020

25.7

 

The comparative results for the fourth quarter and fiscal year reflect the addition of Applegate acquired on July 13, 2015, contributing an incremental $80.4 million of net sales and 12.6 million lbs. for the fourth quarter and $92.8 million of net sales and 14.6 million lbs. for fiscal 2015.

 

Many of the Company’s value-added products enjoyed strong sales growth during the fourth quarter. On the retail side, sales gains were led by sales of Hormel® refrigerated entrees, Hormel® pepperoni, and Hormel Gatherings® party trays. Within foodservice, sales of Hormel® Fire BraisedTM meats and Hormel® pizza toppings experienced gains for the quarter. Despite robust value-added sales, overall sales declined for the fourth quarter and fiscal year due to price reductions taken on certain items in light of lower pork markets compared to the record high pork markets in the prior year and the dissolution of the Precept Foods joint venture at the end of fiscal 2014. Tonnage was higher in fiscal 2015, as the impact of the Porcine Epidemic Diarrhea Virus (PEDv) in the industry reduced volumes processed through the Company’s harvest facilities in fiscal 2014.

 

Segment profit results for the fourth quarter were driven by strong results from Affiliated Foods, higher pork operating margins, and the addition of Applegate on July 13, 2015. Fiscal 2015 benefitted from lower input costs. For the full year, $9.0 million of transaction costs offset the results from Applegate.

 

Jennie-O Turkey Store: Results for the JOTS segment for fiscal 2015 compared to fiscal 2014 are as follows:

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in thousands)

2015

2014

% Change

2015

2014

% Change

Net sales

$ 420,312

$ 509,980

(17.6)

$ 1,635,776

$ 1,672,452

(2.2)

Tonnage (lbs.)

221,528

280,810

(21.1)

849,418

892,965

(4.9)

Segment profit

$   73,227

$   95,253

(23.1)

$    276,217

$    272,362

1.4

 

Both top and bottom-line results for the fourth quarter and fiscal 2015 were negatively impacted by HPAI, which created large volume shortfalls in operations and sales. Although JOTS was able to purchase some turkey meat to partially offset flock losses, turkey breast prices remained at a record high due to overall industry shortages. The strong value-added product sales enjoyed during the first half of the year along with second half price increases and controlled spending allowed JOTS to finish above last year in segment profit with lower volume and sales.

 

28



 

Specialty Foods: Results for the Specialty Foods segment compared for fiscal 2015 compared to fiscal 2014 are as follows:

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in thousands)

2015

2014

% Change

2015

2014

% Change

Net sales

$269,887

$277,559

(2.8)

$1,103,359

$907,120

21.6

Tonnage (lbs.)

177,784

175,285

1.4

702,110

612,415

14.6

Segment profit

$  22,348

$  13,747

62.6

$     93,258

$  71,514

30.4

 

The comparative results for the fourth quarter and fiscal year reflect the addition of CytoSport acquired on August 11, 2014, which contributed an incremental $13.2 million of net sales and 5.5 million lbs. to top-line results for the fourth quarter and $237.8 million of net sales and 102.9 million lbs. for fiscal 2015. Full year sales benefited from the addition of Muscle Milk® protein nutrition products, but were unable to offset lower contract packaging sales in the fourth quarter.

 

Fiscal year 2015 fourth quarter segment profit results reflect synergies captured within the CytoSport and Century Foods supply chain and a beneficial comparison to fiscal year 2014 CytoSport acquisition-related costs of $9.3 million. The Company made the decision to explore the sale of a portion of DCB and classified it as held for sale in fiscal year 2015. The fair value of the net assets to be sold was determined utilizing a market participant bid along with internal valuations of the business. The Company recorded a goodwill impairment charge of $21.5 million for the assets held for sale, which was partially offset by an $8.9 million reduction to a contingent consideration liability related to the CytoSport acquisition.

 

International & Other: Results for the International & Other segment for fiscal 2015 compared to fiscal 2014 are as follows:

 

 

Fourth Quarter Ended

Year Ended

 

October 25,

October 26,

 

October 25,

October 26,

 

(in thousands)

2015

2014

% Change

2015

2014

% Change

Net sales

$138,593

$139,176

(0.4)

$534,701

$534,240

0.1

Tonnage (lbs.)

76,953

73,585

4.6

298,421

292,790

1.9

Segment profit

$  23,300

$  22,629

3.0

$  78,318

$  84,745

(7.6)

 

Strong export sales of the SPAM® family of products and continued growth in China were offset by softer pork export sales in the fourth quarter. For fiscal 2015, robust performance from China and sales growth for SKIPPY® peanut butter products drove top-line results.

 

Fourth quarter segment profit results for fiscal 2015 were driven by growth in our core product lines and strong results in China, as noted above, along with improved royalties. Profitability on pork exports remained significantly below the prior year. For the 2015 fiscal year, International & Other segment profits were negatively impacted by pork markets, port challenges experienced in the first half of the year, and charges of $9.5 million related to the exit from international joint venture businesses.

 

On March 16, 2015, the Company purchased the remaining 19.29% ownership interest in its Shanghai Hormel Foods Corporation joint venture from the minority partner Shanghai Shangshi Meat Products Co. Ltd., resulting in 100.0% ownership at the end of the second quarter.

 

Unallocated Income and Expense: The Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at corporate. Equity in earnings of affiliates is included in segment operating 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.

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 25,

October 26,

October 25,

October 26,

(in millions)

 

2015

2014

2015

2014

Net interest and investment expense (income)

 

$  3.3

$2.6

$10.2

$  9.5

Interest expense

 

3.8

3.4

13.1

12.7

General corporate expense

 

16.6

6.2

35.2

33.4

Noncontrolling interest earnings

 

0.2

0.6

1.2

3.3

 

The increased expense for the fourth quarter and fiscal year 2015 is primarily due to higher interest expense associated with Applegate-related debt, as the Company utilized short-term financing along with its revolving line of credit to fund the Applegate acquisition in the third quarter.

 

29



 


The higher expense for the fourth quarter of fiscal 2015 reflects higher employee-related expenses and increased professional and legal fees. General corporate expense for the fiscal year 2015 was higher compared to last year, primarily the result of the fourth quarter expenses mentioned above.

 

RELATED PARTY TRANSACTIONS

 

 

During the fourth quarter of fiscal 2015, the Company purchased 0.8 million shares of common stock from The Hormel Foundation at $31.16 per share, representing the average closing price for the three days of September 15, September 16, and September 17, 2015. Settlement took place on September 18, 2015.

 

The Company was not party to any other material related party transactions during fiscal years 2016, 2015, or 2014.

 

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $415.1 million at the end of fiscal 2016 compared to $347.2 million at the end of fiscal 2015 and $334.2 million at the end of fiscal 2014.

 

During fiscal 2016, cash provided by operating activities was $992.8 million compared to $992.0 million in fiscal 2015 and $746.9 million in fiscal 2014. Continued higher earnings led to the increase in fiscal 2016, offsetting higher working capital.

 

Cash used in investing activities decreased to $409.0 million in fiscal 2016 from $900.9 million in fiscal 2015 and $616.8 million in fiscal 2014. Fiscal 2016 included $280.9 million to purchase Justin’s, which was offset by the sale of DCB for $110.1 million. Fiscal 2015 included $774.1 million used to purchase Applegate. Fiscal 2014 included $424.3 million used to purchase CytoSport Holdings, Inc. and $41.9 million used to purchase the China-based SKIPPY® peanut butter business in Weifang, China. Capital expenditures in fiscal 2016 increased to $255.5 million, from $144.1 million in 2015, and $159.1 million in 2014. The increased expenditures are primarily related to the Company’s new plant in Jiaxing, China, and a lean ground turkey expansion at JOTS. The primary reason for lower capital expenditures in fiscal 2015 compared to fiscal 2014 was the Company’s decision to delay the addition of capacity at JOTS in the face of lower turkey supply due to the impacts of HPAI. Capital expenditures for fiscal 2017 are estimated to be approximately $250.0 million as several projects in process during fiscal 2016 will be completed, including construction of the Jiaxing, China, plant.

 

Cash used in financing activities was $509.6 million in fiscal 2016 compared to $70.6 million in fiscal 2015 and $229.4 million in fiscal 2014. In the third quarter of fiscal 2016, in connection with the purchase of Justin’s, the Company borrowed $145.0 million under a revolving credit facility. At the end of fiscal 2016,

no amounts were owed on the revolving credit facility. In the third quarter of fiscal 2015, in connection with the purchase of Applegate, the Company borrowed $300.0 million under a term loan facility and $50.0 million under a revolving credit facility, of which $165.0 million was paid down in the fourth quarter. On March 16, 2015, the Company purchased the remaining 19.29% ownership interest in its Shanghai Hormel Foods Corporation joint venture from the minority partner Shanghai Shangshi Meat Products Co. Ltd., resulting in 100.0% ownership at the end of the second quarter. The interest was purchased with $11.7 million in cash, along with the transfer of land use rights and buildings held by the joint venture.

 

The Company used $87.9 million for common stock repurchases during fiscal 2016, compared to $24.9 million in fiscal 2015 and $58.9 million in fiscal 2014. During fiscal 2016, the Company repurchased 2.4 million shares of its common stock at an average price per share of $36.84. During fiscal year 2015, 0.8 million shares were repurchased from The Hormel Foundation at the average closing price for the three days of September 15, September 16, and September 17, 2015, of $31.16. On January 29, 2013, the Company’s Board of Directors authorized the repurchase of 10.0 million shares of its common stock with no expiration date, which was adjusted for the stock split during the first quarter of fiscal 2016. As of the end of fiscal 2016, there were 13.2 million shares remaining for repurchase under that authorization.

 

Cash dividends paid to the Company’s shareholders continues to be an ongoing financing activity for the Company, with $296.5 million in dividends paid in fiscal 2016, compared to $250.8 million in the fiscal 2015 and $203.2 million in fiscal 2014. The dividend rate was $0.58 per share in 2016, which reflected a 16.0 percent increase over the fiscal 2015 rate of $0.50 per share. The Company has paid dividends for 353 consecutive quarters. The annual dividend rate for fiscal 2017 was increased 17 percent to $0.68 per share, representing the 51st consecutive annual dividend increase.

 

Cash flows from operating activities continue to provide the Company with its principal source of liquidity. The Company does not anticipate a significant risk to cash flows from this source in the foreseeable future because the Company operates in a relatively stable industry and has strong brands across many categories and channels.

 

The Company intends to continue the longstanding policy of increasing the dividend returned to shareholders year-after-year. The Company remains focused on growing the business through supporting innovation to drive organic growth, along with strategic acquisitions. Reinvesting in the business is a key focus, with employee safety and food safety taking top priority. Capital spending to enhance and expand current operations will also be a significant cash outflow in fiscal 2017.


 

30



 

Contractual Obligations and Commercial Commitments

 

The following table outlines the Company’s future contractual financial obligations as of October 30, 2016, (for additional information regarding these obligations, see Note F “Long-term Debt and Other Borrowing Arrangements” and Note N “Commitments and Contingencies”):

 

 

Payments Due by Periods

 

 

Less Than

 

 

More Than

Contractual Obligations (in thousands)

Total

1 Year

1-3 Years

3-5 Years

5 Years

Purchase obligations:

 

 

 

 

 

   Hog and turkey commitments(1)

$2,348,215

$   909,430

$   998,297

$387,748

$  52,740

   Grain commitments(1)

39,578

38,596

982

   Turkey grow-out contracts(2)

57,821

9,392

15,817

9,780

22,832

   Other(3)

1,058,542

589,298

215,362

119,872

134,010

Current and long-term debt

250,000

250,000

Interest payments on long-term debt

46,010

10,313

20,625

15,072

Capital expenditures(4)

165,437

148,837

13,300

3,300

Leases

36,078

11,085

13,417

7,422

4,154

Other long-term liabilities(5)(6)

66,770

4,811

7,988

8,443

45,528

Total Contractual Cash Obligations

$4,068,451

$1,721,762

$1,285,788

$801,637

$259,264

 

(1) In the normal course of business, the Company commits to purchase fixed quantities of livestock and grain from producers to ensure a steady supply of production inputs. Certain of these contracts are based on market prices at the time of delivery, for which the Company has estimated the purchase commitment using current market prices as of October 30, 2016. The Company also utilizes various hedging programs to manage the price risk associated with these commitments. As of October 30, 2016, these hedging programs result in a net decrease of $3.1 million in future cash payments associated with the purchase commitments, which is not reflected in the table above.

 

(2) The Company also utilizes grow-out contracts with independent farmers to raise turkeys for the Company. Under these contracts, the turkeys, feed, and other supplies are owned by the Company. The farmers provide the required labor and facilities, and receive a fee per pound when the turkeys are delivered. Some of the facilities are sub-leased by the Company to the independent farmers. As of October 30, 2016, the Company had approximately 90 active contracts ranging from one to twenty-five years in duration. The grow-out activity is assumed to continue through the term of these active contracts, and amounts in the table represent the Company’s obligation based on turkeys expected to be delivered from these farmers.

 

(3) Amounts presented for other purchase obligations represent all known open purchase orders and all known contracts exceeding $1.0 million, related to the procurement of raw materials, supplies, and various services. The Company primarily purchases goods and services on an as-needed basis. Therefore, the amounts in the table represent only a portion of expected future cash expenditures.

 

(4) Amounts presented for capital expenditures represent only the Company’s current commitments to complete construction in progress at various locations. The Company estimates total capital expenditures for fiscal year 2017 to be approximately $250.0 million.

 

(5) Other long-term liabilities represent payments under the Company’s deferred compensation plans. Excluded from the table above are payments under the Company’s defined benefit pension and other post-retirement benefit plans. (See estimated benefit payments for the next ten fiscal years in Note G “Pension and Other Post-retirement Benefits.”)

 

(6) As discussed in Note K “Income Taxes,” the total liability for unrecognized tax benefits, including interest and penalties, at October 30, 2016, was $19.5 million, which is not included in the table above as the ultimate amount or timing of settlement of the Company’s reserves for income taxes cannot be reasonably estimated.

 


In addition to the commitments set forth in the above table, at October 30, 2016, the Company had $44.4 million in standby letters of credit issued on behalf of the Company. The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs.

 

The Company believes its financial resources, including a revolving credit facility for $400.0 million and anticipated funds from operations, will be adequate to meet all current commitments.

 

Off-Balance Sheet Arrangements

 

As of October 30, 2016, the Company had $44.4 million of standby letters of credit issued on its behalf. The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs. However, that amount also includes revocable standby letters of credit totaling $4.0 million for obligations of an affiliated party that may arise under workers compensation claims. Letters of credit are not reflected in the Company’s Consolidated Statements of Financial Position.

 

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 the Company’s Annual Report to Stockholders, other filings by the Company with the U.S. 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,”


 

31



 


“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 following discussion of risk factors contains 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 any changes in the national and worldwide economic environment, which could include, among other things, economic conditions, political developments, currency exchange rates, interest and inflation rates, accounting standards, taxes, and laws and regulations affecting the Company and its markets.

 

Risk Factors

 

The Company’s operations are subject to the general risks of the food industry. The food products manufacturing industry is subject to the risks posed by:

·    food spoilage;

·    food contamination caused by disease-producing organisms or pathogens, such as Listeria monocytogenes, Salmonella, and pathogenic E coli.;

·    food allergens;

·    nutritional and health-related concerns;

·    federal, state, and local food processing controls;

·    consumer product liability claims;

·    product tampering; and

·    the possible unavailability and/or expense of liability insurance.

 

The pathogens which may cause food contamination are found generally in livestock and in the environment and thus may be present in our products as a result of food processing. These pathogens also can be introduced to our products as a result of improper handling by customers or consumers. We do not have control over handling procedures once our products have been shipped for distribution. If one or more of these risks were to materialize, the Company’s brand and business reputation could be negatively impacted. In addition, revenues could decrease, costs of doing business could increase, and the Company’s operating results could be adversely affected.

 

Deterioration of economic conditions could harm the Company’s business. The Company’s business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, availability of capital, energy availability and costs (including fuel surcharges), and the effects of governmental initiatives to manage economic conditions. Decreases in consumer spending rates and shifts in consumer product preferences could also negatively impact the Company.

 

Volatility in financial markets and the deterioration of national and global economic conditions could impact the Company’s operations as follows:

·    The financial stability of our customers and suppliers may be compromised, which could result in additional bad debts for the Company or non-performance by suppliers; and

·    The value of our investments in debt and equity securities may decline, including most significantly the Company’s trading securities held as part of a rabbi trust to fund supplemental executive retirement plans and deferred income plans, and the Company’s assets held in pension plans.

 

The Company also utilizes hedging programs to manage its exposure to various commodity market risks, which qualify for hedge accounting for financial reporting purposes. Volatile fluctuations in market conditions could cause these instruments to become ineffective, which could require any gains or losses associated with these instruments to be reported in the Company’s earnings each period. These instruments may also limit the Company’s ability to benefit from market gains if commodity prices become more favorable than those that have been secured under the Company’s hedging programs. Most recently, due to market volatility the Company temporarily suspended the use of the special hedge accounting exemption for JOTS corn futures contracts in the third quarter of fiscal 2016. During the time of suspension, all gains or losses related to these contracts were recognized as ineffectiveness in earnings as incurred.

 

Additionally, if a highly pathogenic disease outbreak developed in the United States, it may negatively impact the national economy, demand for Company products, and/or the Company’s workforce availability, and the Company’s financial results could suffer. The Company has developed contingency plans to address infectious disease scenarios and the potential impact on its operations, and will continue to update these plans as


 

32



 


necessary. There can be no assurance given, however, that these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.

 

Fluctuations in commodity prices and availability of pork, poultry, beef, feed grains, avocados, peanuts, energy, and whey could harm the Company’s earnings. The Company’s results of operations and financial condition are largely dependent upon the cost and supply of pork, poultry, beef, feed grains, avocados, peanuts, and whey as well as energy costs and the selling prices for many of our products, which are determined by constantly changing market forces of supply and demand.

 

The live hog industry has evolved to large, vertically-integrated operations using long-term supply agreements. This has resulted in fewer hogs being available on the cash spot market. Consequently, the Company uses long-term supply contracts based on market-based formulas or the cost of production to ensure a stable supply of raw materials while minimizing extreme fluctuations in costs over the long-term. This may result, in the short-term, in costs for live hogs that are higher than the cash spot market depending on the relationship of the cash spot market to contract prices. Market-based pricing on certain product lines, and lead time required to implement pricing adjustments, may prevent all or part of these cost increases from being recovered, and these higher costs could adversely affect our short-term financial results.

 

JOTS raises turkeys and also contracts with turkey growers to meet its raw material requirements for whole birds and processed turkey products. Additionally, the Company owns various hog raising facilities that supplement its supply of raw materials. Results in these operations are affected by the cost and supply of feed grains, which fluctuate due to climate conditions, production forecasts, and supply and demand conditions at local, regional, national, and worldwide levels. The Company attempts to manage some of its short-term exposure to fluctuations in feed prices by forward buying, using futures contracts, and pursuing pricing advances. However, these strategies may not be adequate to overcome sustained increases in market prices due to alternate uses for feed grains or other changes in these market conditions.

 

The supply of natural and organic proteins may impact the Company’s ability to ensure a continuing supply of these products. To manage this risk, the Company partners with multiple long-term suppliers.

 

International trade barriers and other restrictions could result in less foreign demand and increased domestic supply of proteins which could lower prices. The Company occasionally utilizes in-country production to limit this exposure.

 

Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins. The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including Bovine Spongiform Encephalopathy (BSE), pneu-mo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease

(FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI). The outbreak of disease could adversely affect the Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins. Additionally, the outbreak of disease may hinder the Company’s ability to market and sell products both domestically and internationally. Most recently, HPAI impacted the Company’s operations and several of the Company’s independent turkey suppliers. The impact of HPAI in the industry reduced volume through the Company’s turkey facilities through the first part of fiscal 2016. The Company has developed business continuity plans for various disease scenarios and will continue to update these plans as necessary. There can be no assurance given, however, that these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.

 

Market demand for the Company’s products may fluctuate. The Company faces competition from producers of alternative meats and protein sources, including pork, beef, turkey, chicken, fish, peanut butter, and whey. The bases on which the Company competes include:

·    price;

·    product quality and attributes;

·    brand identification;

·    breadth of product line; and

·    customer service.

 

Demand for the Company’s products is also affected by competitors’ promotional spending and the effectiveness of the Company’s advertising and marketing programs, and consumer perceptions. Failure to identify and react to changes in food trends such as sustainability of product sources and animal welfare could lead to, among other things, reduced demand for the Company’s brands and products. The Company may be unable to compete successfully on any or all of these bases in the future.

 

The Company’s operations are subject to the general risks associated with acquisitions. The Company has made several acquisitions in recent years, most recently the acquisitions of Justin’s and Applegate, and regularly reviews opportunities for strategic growth through acquisitions. Potential risks associated with acquisitions include the inability to integrate new operations successfully, the diversion of management’s attention from other business concerns, the potential loss of key employees and customers of the acquired companies, the possible assumption of unknown liabilities, potential disputes with the sellers, potential impairment charges if purchase assumptions are not achieved or market conditions decline, and the inherent risks in entering markets or lines of business in which the Company has limited or no prior experience. Any or all of these risks could impact the Company’s financial results and business reputation. In addition, acquisitions outside the United States may present unique challenges and increase the Company’s exposure to the risks associated with foreign operations.


 

33



 


The Company’s operations are subject to the general risks of litigation. The Company is involved on an ongoing basis in litigation arising in the ordinary course of business. Trends in litigation may include class actions involving employees, consumers, competitors, suppliers, shareholders, or injured persons, and claims relating to product liability, contract disputes, intellectual property, advertising, labeling, wage and hour laws, employment practices, or environmental matters. Litigation trends and the outcome of litigation cannot be predicted with certainty and adverse litigation trends and outcomes could adversely affect the Company’s financial results.

 

The Company is subject to the loss of a material contract. The Company is a party to several supply, distribution, contract packaging, and other material contracts. The loss of a material contract could adversely affect the Company’s financial results.

 

Government regulation, present and future, exposes the Company to potential sanctions and compliance costs that could adversely affect the Company’s business. The Company’s operations are subject to extensive regulation by the U.S. Department of Homeland Security, the U.S. Department of Agriculture, the U.S. Food and Drug Administration, federal and state taxing authorities, and other state and local authorities that oversee workforce immigration laws, tax regulations, animal welfare, food safety standards, and the processing, packaging, storage, distribution, advertising, and labeling of the Company’s products. The Company’s manufacturing facilities and products are subject to continuous inspection by federal, state, and local authorities. Claims or enforcement proceedings could be brought against the Company in the future. The availability of government inspectors due to a government furlough could also cause disruption to the Company’s manufacturing facilities. Additionally, the Company is subject to new or modified laws, regulations, and accounting standards. The Company’s failure or inability to comply with such requirements could subject the Company to civil remedies, including fines, injunctions, recalls, or seizures, as well as potential criminal sanctions.

 

The Company is subject to stringent environmental regulation and potentially subject to environmental litigation, proceedings, and investigations. The Company’s past and present business operations and ownership and operation of real property are subject to stringent federal, state, and local environmental laws and regulations pertaining to the discharge of materials into the environment and the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment. Compliance with these laws and regulations, and the ability to comply with any modifications to these laws and regulations, is material to the

 

Company’s business. New matters or sites may be identified in the future that will require additional investigation, assessment, or expenditures. In addition, some of the Company’s facilities have been in operation for many years and, over time, the Company and other prior operators of these facilities may have generated and disposed of wastes that now may be considered hazardous. Future discovery of contamination of property underlying or in the vicinity of the Company’s present or former properties or manufacturing facilities and/or waste disposal sites could require the Company to incur additional expenses. The occurrence of any of these events, the implementation of new laws and regulations, or stricter interpretation of existing laws or regulations could adversely affect the Company’s financial results.

 

The Company’s foreign operations pose additional risks to the Company’s business. The Company operates its business and markets its products internationally. The Company’s foreign operations are subject to the risks described above, as well as risks related to fluctuations in currency values, foreign currency exchange controls, compliance with foreign laws, compliance with applicable U.S. laws, including the Foreign Corrupt Practices Act, and other economic or political uncertainties. International sales are subject to risks related to general economic conditions, imposition of tariffs, quotas, trade barriers and other restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws, and other economic and political uncertainties. All of these risks could result in increased costs or decreased revenues, which could adversely affect the Company’s financial results.

 

The Company may be adversely impacted if the Company is unable to protect information technology systems against, or effectively respond to, cyber-attacks or security breaches. Information technology systems are an important part of the Company’s business operations. Attempted cyber-attacks and other cyber incidents are occurring more frequently and are being made by groups and individuals with a wide range of motives and expertise. In an attempt to mitigate this risk, the Company has implemented and continues to evaluate security initiatives and disaster recovery plans.

 

Deterioration of labor relations or increases in labor costs could harm the Company’s business. As of October 30, 2016, the Company had approximately 21,100 employees worldwide, of which approximately 5,500 were represented by labor unions, principally the United Food and Commercial Workers Union. A significant increase in labor costs or a deterioration of labor relations at any of the Company’s facilities or contracted hog processing facilities resulting in work slowdowns or stoppages could harm the Company’s financial results.


 

34



 


Quantitative and Qualitative Disclosure About Market Risks

 

Hog Markets: The Company’s earnings are affected by fluctuations in the live hog market. To minimize the impact on earnings, and to ensure a steady supply of quality hogs, the Company has entered into contracts with producers for the purchase of hogs at formula-based prices over periods of up to 10 years. Purchased hogs under contract accounted for 94 percent of the total hogs purchased by the Company in both fiscal 2016 and 2015. The majority of these contracts use market-based formulas based on hog futures, hog primal values, or industry reported hog markets. Other contracts use a formula based on the cost of production, which can fluctuate independently from hog markets. The Company’s value-added branded portfolio helps mitigate changes in hog and pork market prices. Therefore, a hypothetical 10 percent change in the cash hog market would have had an immaterial effect on the Company’s results of operations.

 

Certain procurement contracts allow for future hog deliveries (firm commitments) to be forward priced. The Company generally hedges these firm commitments by using hog futures contracts. These futures contracts are designated and accounted for as fair value hedges. The change in the market value of such futures contracts is highly effective at offsetting changes in price movements of the hedged item, and the Company evaluates the effectiveness of the contracts at least quarterly. Changes in the fair value of the futures contracts, along with the gain or loss on the firm commitment, are marked-to-market through earnings and are recorded on the Consolidated Statements of Financial Position as a current asset and liability, respectively. The fair value of the Company’s open futures contracts as of October 30, 2016, was $1.4 million compared to $1.2 million as of October 25, 2015.

 

The Company measures its market risk exposure on its hog futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in market prices. A 10 percent increase in market prices would have negatively impacted the fair value of the Company’s October 30, 2016, open contracts by $1.2 million, which in turn would lower the Company’s future cost of purchased hogs by a similar amount.

 

Turkey and Hog Production Costs: The Company raises or contracts for live turkeys and hogs to meet some of its raw material supply requirements. Production costs in raising turkeys and hogs are subject primarily to fluctuations in feed prices and, to a lesser extent, fuel costs. Under normal, long-term market conditions, changes in the cost to produce turkeys and hogs are offset by proportional changes in their respective markets.

 

To reduce the Company’s exposure to changes in grain prices, the Company utilizes a hedge program to offset the fluctuation in the Company’s future direct grain purchases. This program currently utilizes corn futures for JOTS, and these contracts are accounted for under cash flow hedge accounting. The fair value

 

of the Company’s open futures contracts as of October 30, 2016, was $(3.2) million compared to $(2.9) million, before tax, as of October 25, 2015.

 

The Company measures its market risk exposure on its grain futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for grain. A 10 percent decrease in the market price for grain would have negatively impacted the fair value of the Company’s October 30, 2016, open grain contracts by $8.6 million, which in turn would lower the Company’s future cost on purchased grain by a similar amount.

 

Long-Term Debt: A principal market risk affecting the Company is the exposure to changes in interest rates on the Company’s fixed-rate, long-term debt. Market risk for fixed-rate, long-term debt is estimated as the potential increase in fair value, resulting from a hypothetical 10 percent decrease in interest rates, and amounts to approximately $2.1 million. The fair value of the Company’s long-term debt was estimated using discounted future cash flows based on the Company’s incremental borrowing rates for similar types of borrowing arrangements.

 

Investments: The Company holds trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. As of October 30, 2016, the balance of these securities totaled $122.3 million compared to $119.7 million as of October 25, 2015. A majority of these securities represent 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 a direct negative impact to the Company’s pre-tax earnings of approximately $4.0 million, while a 10 percent increase in value would have a positive impact of the same amount.

 

International Assets: The fair values of certain Company assets are subject to fluctuations in foreign currencies. The Company’s net asset position in foreign currencies as of October 30, 2016, was $443.1 million, compared to $277.5 million as of October 25, 2015, with most of the exposure existing in Chinese yuan and Philippine pesos. Changes in currency exchange rates impact the fair values of Company assets either currently through the Consolidated Statements of Operations as currency gains/losses, or by affecting other comprehensive loss.

 

The Company measures its foreign currency exchange risk by using a 10 percent sensitivity analysis on the Company’s primary foreign net asset position, the Chinese yuan, as of October 30, 2016. A 10 percent strengthening in the value of the yuan relative to the U.S. dollar would result in other comprehensive income of approximately $38.3 million pre-tax. A 10 percent weakening in the value of the yuan relative to the U.S. dollar would result in other comprehensive loss of approximately $31.3 million pre-tax.


 

35



 

Report of Management

 

 


Management’s Responsibility for Financial Statements

 

The accompanying financial statements were prepared by the management of Hormel Foods Corporation which is responsible for their integrity and objectivity. These statements have been prepared in accordance with U.S. generally accepted accounting principles appropriate in the circumstances and, as such, include amounts that are based on our best estimates and judgments.

 

Hormel Foods Corporation has developed a system of internal controls designed to assure that the records reflect the transactions of the Company and that the established policies and procedures are adhered to. This system is augmented by well-communicated written policies and procedures, a strong program of internal audit, and well-qualified personnel.

 

These financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm, and their report is included herein. The audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and includes a review of the Company’s accounting and financial controls and tests of transactions.

 

The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the independent auditors, management, and the internal auditors to assure that each is carrying out its responsibilities. Both Ernst & Young LLP and our internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the results of their audit work and their opinions on the adequacy of internal controls and the quality of financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management of Hormel Foods Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting standards. Under the supervision, and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).

 

Based on our evaluation under the framework in Internal Control - Integrated Framework, we concluded that our internal control over financial reporting was effective as of October 30, 2016. Our internal control over financial reporting as of October 30, 2016, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

 

 

James P. Snee

James N. Sheehan

President, Chief Executive

Senior Vice President

Officer, and Director

and Chief Financial Officer


 

36



 

Report of Independent Registered Public Accounting Firm

 

 


The Board of Directors and Shareholders Hormel Foods Corporation

 

We have audited Hormel Foods Corporation’s internal control over financial reporting as of October 30, 2016, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). Hormel Foods Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management entitled Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Hormel Foods Corporation maintained, in all material respects, effective internal control over financial reporting as of October 30, 2016, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Hormel Foods Corporation at October 30, 2016 and October 25, 2015 and the related statements of operations, comprehensive income, changes in stockholders’ investment and cash flows for each of the three years in the period ended October 30, 2016 and our report dated December 21, 2016 expressed an unqualified opinion thereon.

 

 

 

Minneapolis, Minnesota

December 21, 2016


 

37



 

Report of Independent Registered Public Accounting Firm

 

 


The Board of Directors and Shareholders Hormel Foods Corporation

 

We have audited the accompanying consolidated statements of financial position of Hormel Foods Corporation as of October 30, 2016 and October 25, 2015, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ investment, and cash flows for each of the three years in the period ended October 30, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hormel Foods Corporation at October 30, 2016 and October 25, 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 30, 2016, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hormel Food Corporation’s internal control over financial reporting as of October 30, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated December 21, 2016 expressed an unqualified opinion thereon.

 

 

 

Minneapolis, Minnesota

December 21, 2016


 

38



 

Consolidated Statements of Financial Position

 

 

 

 

 

October 30,

October 25,

(in thousands, except share and per share amounts)

2016

2015

Assets

 

 

Current Assets

 

 

Cash and cash equivalents

$    415,143

$    347,239

Accounts receivable (net of allowance for doubtful accounts of $4,045 at October 30, 2016, and $4,086 at October 25, 2015)

591,310

605,689

Inventories

985,683

993,265

Income taxes receivable

18,282

6,132

Deferred income taxes

86,902

Prepaid expenses

13,775

14,383

Other current assets

5,719

9,422

Total Current Assets

2,029,912

2,063,032

 

 

 

Deferred Income Taxes

6,223

Goodwill

1,834,497

1,699,484

Other Intangibles

903,258

827,219

Pension Assets

68,901

132,861

Investments in and Receivables from Affiliates

239,590

258,998

Other Assets

182,237

146,498

Property, Plant and Equipment

 

 

Land

67,557

71,192

Buildings

805,858

815,643

Equipment

1,675,549

1,679,100

Construction in progress

218,351

79,964

 

2,767,315

2,645,899

Less allowance for depreciation

(1,661,866)

(1,634,160)

 

1,105,449

1,011,739

Total Assets

$ 6,370,067

$ 6,139,831

 

 

 

Liabilities and Shareholders’ Investment

 

 

Current Liabilities

 

 

Accounts payable

$    481,826

$    495,317

Short-term debt

185,000

Accrued expenses

82,145

71,777

Accrued workers compensation

36,612

37,009

Accrued marketing expenses

119,583

119,153

Employee related expenses

251,433

232,309

Taxes payable

4,331

6,764

Interest and dividends payable

77,266

66,696

Total Current Liabilities

1,053,196

1,214,025

 

 

 

Long-Term Debt – less current maturities

250,000

250,000

Pension and Post-Retirement Benefits

522,356

509,261

Other Long-Term Liabilities

93,109

101,056

Deferred Income Taxes

64,096

 

 

 

Shareholders’ Investment*

 

 

Preferred stock, par value $0.01 a share – authorized 160,000,000 shares; issued – none

 

 

Common stock, nonvoting, par value $0.01 a share – authorized 400,000,000 shares; issued – none

 

 

Common stock, par value $0.01465 a share – authorized 1,600,000,000 shares;
issued 528,483,868 shares October 30, 2016
issued 528,411,628 shares October 25, 2015

7,742

7,741

Additional paid-in capital

Accumulated other comprehensive loss

(296,303)

(225,668)

Retained earnings

4,736,567

4,216,125

Hormel Foods Corporation Shareholders’ Investment

4,448,006

3,998,198

Noncontrolling Interest

3,400

3,195

Total Shareholders’ Investment

4,451,406

4,001,393

Total Liabilities and Shareholders’ Investment

$ 6,370,067

$ 6,139,831

 

* Shares and par values have been restated, as appropriate, to reflect the two-for-one stock split distributed on February 9, 2016.

See Notes to Consolidated Financial Statements.

 

39



 

Consolidated Statements of Operations

 

 

 

 

Fiscal Year Ended

 

 

 

 

 

October 30,

October 25,

October 26,

(in thousands, except per share amounts)

2016

2015*

2014*

 

 

 

 

Net sales

$9,523,224

$9,263,863

$9,316,256

Cost of products sold

7,365,049

7,455,282

7,751,273

Gross Profit

2,158,175

1,808,581

1,564,983

Selling, general and administrative

871,974

743,611

650,948

Goodwill impairment charge

991

21,537

Equity in earnings of affiliates

38,685

23,887

17,585

Operating Income

1,323,895

1,067,320

931,620

Other income and expense:

 

 

 

Interest and investment income

6,191

2,934

3,236

Interest expense

(12,871)

(13,111)

(12,704)

Earnings Before Income Taxes

1,317,215

1,057,143

922,152

Provision for income taxes

426,698

369,879

316,126

Net Earnings

890,517

687,264

606,026

Less: Net earnings attributable to noncontrolling interest

465

1,176

3,349

Net Earnings Attributable to

 

 

 

Hormel Foods Corporation

$   890,052

$   686,088

$   602,677

 

 

 

 

Net Earnings Per Share:

 

 

 

Basic

$        1.68

$        1.30

$        1.14

Diluted

$        1.64

$        1.27

$        1.12

Weighted-Average Shares Outstanding:

 

 

 

Basic

529,290

528,143

527,624

Diluted

542,473

541,002

540,431

 

* Shares and par values have been restated, as appropriate, to reflect the two-for-one stock split distributed on February 9, 2016.

See Notes to Consolidated Financial Statements.

 

 

 

Consolidated Statements of Comprehensive Income

 

 

Fiscal Year Ended

 

October 30,

October 25,

October 26,

(in thousands)

2016

2015

2014

Net earnings

$890,517

$687,264

$606,026

Other comprehensive income (loss), net of tax:

 

 

 

Foreign currency translation

(6,718)

(7,135)

(1,921)

Pension and other benefits

(69,286)

(21,280)

(52,985)

Deferred hedging

5,109

9,823

(3,590)

Total Other Comprehensive Loss

(70,895)

(18,592)

(58,496)

Comprehensive income

819,622

668,672

547,530

Less: Comprehensive income attributable to noncontrolling interest

205

947

3,339

Comprehensive Income Attributable to Hormel Foods Corporation

$819,417

$667,725

$544,191

 

See Notes to Consolidated Financial Statements.

 

40



 

Consolidated Statements of Changes in Shareholders’ Investment

 

 

 

 

 

 

Hormel Foods Corporation Shareholders

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

Other

Non-

Total

(in thousands,

Common Stock

 

Treasury Stock

 

Paid-In

Retained

Comprehensive

controlling

Shareholders’

except per share amounts)

Shares*

Amount

 

Shares*

Amount

 

Capital

Earnings

Income (Loss)

Interest

Investment

Balance at October 27, 2013

527,316

$7,725

 

$          –

 

$          –

$3,452,529

$(149,214)

$5,539

$3,316,579

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

602,677

 

3,349

606,026

Other comprehensive loss

 

 

 

 

 

 

 

 

(58,486)

(10)

(58,496)

Purchases of common stock

 

 

 

(2,514)

(58,937)

 

 

 

 

 

(58,937)

Stock-based compensation expense

 

1

 

 

 

 

14,392

 

 

 

14,393

Exercise of stock options/ nonvested shares

2,424

35

 

 

 

 

6,068

 

 

 

6,103

Shares retired

(2,514)

(37)

 

2,514

58,937

 

(20,460)

(38,440)

 

 

Distribution to noncontrolling interest

 

 

 

 

 

 

 

 

 

(2,500)

(2,500)

Declared cash dividends – $0.40 per share*

 

 

 

 

 

 

 

(211,112)

 

 

(211,112)

Balance at October 26, 2014

527,226

$7,724

 

$          –

 

$          –

$3,805,654

$(207,700)

$6,378

$3,612,056

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

686,088

 

1,176

687,264

Other comprehensive loss

 

 

 

 

 

 

 

 

(18,363)

(229)

(18,592)

Purchases of common stock

 

 

 

(800)

(24,928)

 

 

 

 

 

(24,928)

Stock-based compensation expense

 

1

 

 

 

 

15,716

 

 

 

15,716

Exercise of stock options/ nonvested shares

1,986

28