EX-13.1 3 a17-26513_1ex13d1.htm EX-13.1

Exhibit 13.1

 

Selected Financial Data

 

(in thousands, except per share amounts)

 

2017

2016*

2015

2014

2013

Operations

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$9,167,519

 

$9,523,224

 

$9,263,863

 

$9,316,256

 

$8,751,654

 

Net Earnings

 

847,103

 

890,517

 

687,264

 

606,026

 

530,076

 

Net Earnings Attributable to
Hormel Foods Corporation

 

846,735

 

890,052

 

686,088

 

602,677

 

526,211

 

% of net sales

 

9.24

%

9.35

%

7.41

%

6.47

%

6.01

%

EBIT(1)

 

1,280,101

 

1,323,430

 

1,066,144

 

928,271

 

802,124

 

% of net sales

 

13.96

%

13.90

%

11.51

%

9.96

%

9.17

%

EBITDA(2)

 

1,411,078

 

1,455,398

 

1,199,578

 

1,058,315

 

926,974

 

% of net sales

 

15.39

%

15.28

%

12.95

%

11.36

%

10.59

%

Return on Invested Capital(3)

 

16.35

%

19.04

%

15.62

%

15.79

%

14.92

%

 

 

 

 

 

 

 

 

 

 

 

 

Financial Position

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$6,975,908

 

$6,370,067

 

$6,139,831

 

$5,455,619

 

$4,915,880

 

Long-term Debt less Current Maturities

 

250,000

 

250,000

 

250,000

 

250,000

 

250,000

 

Hormel Foods Corporation
Shareholders’ Investment

 

4,935,907

 

4,448,006

 

3,998,198

 

3,605,678

 

3,311,040

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Cash Flow Data

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

$   130,977

 

$   131,968

 

$   133,434

 

$   130,044

 

$   124,850

 

Capital Expenditures

 

221,286

 

255,524

 

144,063

 

159,138

 

106,762

 

Acquisitions of Businesses

 

520,463

 

280,889

 

770,587

 

466,204

 

665,415

 

Share Repurchase

 

94,487

 

87,885

 

24,928

 

58,937

 

70,819

 

Dividends Paid

 

346,010

 

296,493

 

250,834

 

203,156

 

174,320

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock**

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average Shares
Outstanding – Basic

 

528,363

 

529,290

 

528,143

 

527,624

 

528,635

 

Weighted-Average Shares
Outstanding – Diluted

 

539,116

 

542,473

 

541,002

 

540,431

 

540,449

 

Earnings per Share – Basic

 

$         1.60

 

$        1.68

 

$        1.30

 

$        1.14

 

$         1.00

 

Earnings per Share – Diluted

 

1.57

 

1.64

 

1.27

 

1.12

 

0.97

 

Dividends per Share

 

0.68

 

0.58

 

0.50

 

0.40

 

0.34

 

Hormel Foods Corporation Shareholders’
Investment per Share

 

9.34

 

8.42

 

7.57

 

6.84

 

6.28

 

 

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)

 

2017

2016*

2015

2014

2013

(1) EBIT:

 

 

 

 

 

 

 

 

 

 

 

Net Earnings Attributable to
Hormel Foods Corporation

 

$   846,735

 

$   890,052

 

$   686,088

 

$   602,677

 

$    526,211

 

Plus: Income Tax Expense

 

431,542

 

426,698

 

369,879

 

316,126

 

268,431

 

Plus: Interest Expense

 

12,683

 

12,871

 

13,111

 

12,704

 

12,453

 

Less: Interest and Investment Income

 

10,859

 

6,191

 

2,934

 

3,236

 

4,971

 

EBIT

 

$1,280,101

 

$1,323,430

 

$1,066,144

 

$   928,271

 

$    802,124

 

(2) EBITDA:

 

 

 

 

 

 

 

 

 

 

 

EBIT per (1) above

 

1,280,101

 

1,323,430

 

1,066,144

 

928,271

 

802,124

 

Plus: Depreciation and Amortization

 

130,977

 

131,968

 

133,434

 

130,044

 

124,850

 

EBITDA

 

$1,411,078

 

$1,455,398

 

$1,199,578

 

$1,058,315

 

$    926,974

 

(3) Return on Invested Capital:

 

 

 

 

 

 

 

 

 

 

 

EBIT per (1) above

 

1,280,101

 

1,323,430

 

1,066,144

 

928,271

 

802,124

 

X (1 – Effective Tax Rate***)

 

66.25

%

67.59

%

64.97

%

65.59

%

66.22

%

After-tax EBIT

 

$   848,067

 

$   894,506

 

$   692,674

 

$   608,887

 

$    531,166

 

Divided by:

 

 

 

 

 

 

 

 

 

 

 

Total Debt

 

250,000

 

250,000

 

435,000

 

250,000

 

250,000

 

Hormel Foods Corporation
Shareholders’ Investment

 

4,935,907

 

4,448,006

 

3,998,198

 

3,605,678

 

3,311,040

 

Total Debt and Shareholders’ Investment

 

$5,185,907

 

$4,698,006

 

$4,433,198

 

$3,855,678

 

$3,561,040

 

Return on Invested Capital

 

16.35

%

19.04

%

15.62

%

15.79

%

14.92

%

 

* Fiscal 2016 included 53 weeks.

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

*** Excluding earnings attributable to noncontrolling interests.

 

14



 

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


Executive Overview

 

Fiscal 2017: While the year did not progress as anticipated, three of our five segments – Grocery Products, Refrigerated Foods, and International & Other – delivered record earnings, despite one less week, and helped us achieve the second-best year of earnings in our history. The growth in these segments partially offset declines at Jennie-O Turkey Store (JOTS) and Specialty Foods. Sales for the year were $9.2 billion, a 4 percent decline from last year. Organic net sales1 were up 3 percent with four of five segments contributing to the sales growth. Diluted earnings per share for fiscal 2017 were $1.57, a 4 percent decline compared to $1.64 per share last year. Fiscal 2017 net earnings attributable to the Company fell 5 percent to $846.7 million, compared to net earnings of $890.1 million last year. (1see explanation of non-GAAP financial measures in the Consolidated Results section).

 

Financial performance for the Grocery Products segment was led by sales growth of Wholly Guacamole® dips, Herdez® salsas, and the SPAM® family of products. These growth areas, along with a full year of Justin’s, offset higher input costs experienced during the year. Refrigerated Foods segment results were tempered by the divestiture of Farmer John in January 2017 and record high prices for numerous beef and pork raw materials. The inclusion of the Fontanini acquisition in addition to solid gains in many foodservice value-added products including Hormel® Bacon 1TM fully cooked bacon and Hormel® pepperoni and retail sales of Hormel® Natural Choice® products benefited Refrigerated Foods. Results for the JOTS segment were impacted by industry oversupply and corresponding low commodity prices. Increased competition from both within the turkey industry and alternative proteins affected results at JOTS. Specialty Foods segment profit declined due to increased competitive activity, which drove lower sales of Muscle Milk® ready-to-drink protein beverages. The International & Other segment results exceeded last year due to the addition of the Ceratti acquisition and improved contributions from exports of fresh pork and SPAM® luncheon meat.

 

Our financial performance continued to generate record operating cash flows, which we reinvested into the business through capital expenditures and acquisitions while returning a record amount of cash back to shareholders in the form of dividends and share repurchases. We completed the acquisition of Fontanini for $427.9 million and Ceratti for $103.5 million. Fontanini is a branded foodservice business specializing in authentic Italian meats and sausages, pizza toppings, and meatballs. Fontanini complements our growing foodservice business, gives us more production capacity, and reduces the need for capital expenditures at our current facilities. Ceratti, an authentic, family-owned business in Brazil, produces premium, value-added deli products and gives us an entry into the fast-growing Brazilian market. Subsequent to the end of the year, we completed the acquisition of Columbus Craft Meats, an authentic, premium deli meat and salami company.

This strategic acquisition positions us as a total deli solutions provider and enhances our other strong deli brands such as Hormel®, Jennie-O®, Applegate®, and DiLusso®. In connection with the purchase, the Company borrowed $375.0 million under a term loan facility and $375.0 million under a revolving credit facility. We repurchased 2.7 million shares of common stock in fiscal 2017, spending $94.5 million. The annual dividend for 2018 will be $0.75 per share and marks the 52nd consecutive year of dividend increases, representing an increase of 10 percent after a 17 percent increase last year.

 

Fiscal 2018 Outlook: With the addition of three new acquisitions, numerous strategic investments in value-added capacity, an innovation pipeline full of exciting new products, and strong fundamentals throughout our business, we are confident about sales and earnings growth for fiscal 2018. To support our growth, we reorganized our supply chain and combined the Grocery Products and Specialty Foods segments effective with the start of fiscal 2018. Both reorganizations are expected to create cost and revenue synergies. The contributions from branded products such as the SPAM® family of products, Skippy® peanut butter, Wholly Guacamole® dips, Herdez® salsas, and Muscle Milk® protein nutrition products are expected to drive improved Grocery Products results. While we anticipate a reduction in the commodity profits in Refrigerated Foods, we expect growth in our value-added businesses, along with the acquisitions of Fontanini and Columbus, to more than offset the declines. We expect the JOTS segment to continue value-added sales and volume growth, led by Jennie-O® lean ground turkey, Jennie-O® Oven Ready® products, and turkey burgers. We expect a modest decrease in segment profit as the business continues to navigate difficult industry conditions. We expect the International & Other segment to grow sales and earnings through the addition of the Ceratti acquisition and the expansion of our business in China, aided by our new plant in Jiaxing, China, along with increased sales of the SPAM® and Skippy® families of products.

 

We also plan to support numerous iconic brands with continued advertising in fiscal 2018. Strong cash flow, along with a solid balance sheet, will enable us to continue to return cash to shareholders while investing capital for growth of our business through internal investment and strategic acquisitions.

 

 

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


 

15



 


occur in its business environment. The Company bases its estimates on experience, the use of independent third-party specialists, and various other assumptions 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 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 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:

 

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 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: Estimating the fair value of the Company’s goodwill reporting units and intangible assets requires significant judgement. Accordingly, the Company obtains the assistance of third-party valuation specialists who utilize available historical information along with future expectations to value the assets. Determining the useful life of an intangible asset also requires judgement. Certain acquired brands are expected to have indefinite lives based on their history and the Company’s plans to continue to support and build the brands. Other acquired assets such as customer relationships, are expected to have determinable useful lives.

 

Indefinite-lived intangible assets are originally recorded at their estimated fair values at the 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 has the option to first assess qualitative factors 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 elects to perform a qualitative assessment and determines an impairment is more likely than not, the Company is required to perform a quantitative impairment test. Otherwise, no further analysis is required. Alternatively, the Company may elect not to perform the qualitative assessment and proceed directly to the quantitative impairment test.

 

Prior to the fourth quarter of fiscal 2017, if the carrying value of a reporting unit exceeded its fair value, the Company completed the second step of the test to determine the amount of goodwill impairment loss, if any, to be recognized. In the second step, the Company estimated an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The impairment loss was equal to the excess of the carrying value of the goodwill over the implied fair value of that goodwill. In the fourth quarter of fiscal 2017, the Company adopted Accounting Standards Update (ASU) 2017-04, Simplifying the Test for Goodwill Impairment. As a result, the Company recognizes an impairment loss equal to the difference between the carrying value and estimated fair value of the reporting unit if the carrying value of a reporting unit exceeds its fair value.

 

In conducting a 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, the Company assesses critical areas that may impact its business, including macroeconomic conditions and the related impact, market-related exposures,


 

16



 


any plans to market for sale all or a portion of their business, competitive changes, new or discontinued product lines, changes in key personnel, or any potential risks to their projected financial results.

 

If performed, the quantitative goodwill impairment test is 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 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 quantitative assessment results in the carrying value exceeding the fair value of any reporting unit, then the results from the quantitative analysis will be relied upon to determine both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.

 

During the fourth quarter of fiscal 2017, the Company completed its annual impairment tests and elected to perform a quantitative assessment of goodwill. As a result of the quantitative testing during fiscal 2017 and qualitative testing during fiscal years 2016 and 2015, no impairment charges were recorded other than for the Company’s Diamond Crystal Brands (DCB) assets divested during fiscal 2016.

 

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.

 

The Company elected to perform a quantitative assessment in the fourth quarter of fiscal 2017. No material impairment charges were recorded for indefinite-lived intangible assets

for fiscal years 2017, 2016, or 2015. Four tradenames were determined to have fair values exceeding their carrying values by less than a 10 percent cushion. Sales related to these tradenames were impacted by supply chain challenges and an increased competitive market environment. Management has implemented strategies to address these events, however, adverse events in the future could result in a decline in fair value that could trigger a future impairment charge for a portion of these indefinite-lived intangible assets. A 10 percent decline in sales or a 10 percent increase in the discount rate would result in an impairment of approximately $20 – $30 million.

 

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 the position will be sustained upon examination, based on the technical merits of the position. This 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


 

17



 

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.

 

 

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 52 weeks in fiscal years 2017 and 2015. Fiscal 2016 consisted of 53 weeks.

 

FISCAL YEARS 2017 AND 2016:

 

Consolidated Results

 

Net Earnings and Diluted Earnings per Share

 

 

 

Fourth Quarter Ended

Year Ended

(in thousands, except per share amounts)

 

October 29,
2017

October 30,
2016

% Change

October 29,
2017

October 30,
2016

% Change

Net earnings

 

$218,154

 

$243,940

 

(10.6

)

$846,735

 

$890,052

 

(4.9

)

Diluted earnings per share

 

0.41

 

0.45

 

(8.9

)

1.57

 

1.64

 

(4.3

)

 

Volume and Net Sales

 

 

 

Fourth Quarter Ended

Year Ended

(in thousands)

 

October 29,
2017

October 30,
2016

% Change

October 29,
2017

October 30,
2016

% Change

Volume (lbs.)

 

1,275,270

 

1,420,986

 

(10.3

)

4,770,485

 

5,192,027

 

(8.1

)

Organic volume(1)

 

1,250,659

 

1,231,044

 

1.6

 

4,658,990

 

4,588,581

 

1.5

 

Net sales

 

$2,492,608

 

$2,627,941

 

(5.1

)

$9,167,519

 

$9,523,224

 

(3.7

)

Organic net sales(1)

 

2,439,006

 

2,325,779

 

4.9

 

8,970,540

 

8,710,616

 

3.0

 

 

(1) COMPARISON OF U.S. GAAP TO NON-GAAP FINANCIAL MEASUREMENTS

 

The non-GAAP adjusted financial measurements of organic volume and organic net sales are presented to provide investors additional information to facilitate the comparison of past and present operations. The Company believes these non-GAAP financial measurements provide useful information to investors because they are the measurements used to evaluate performance on a comparable year-over-year basis. 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.

 

Organic net sales and organic volume are defined as net sales and volume excluding the impact of acquisitions, divestitures and the impact of the 53rd reporting week in 2016. Organic net sales and organic volume exclude the impacts of the acquisition of Justin’s (May 2016) in Grocery Products, the acquisition of Fontanini Italian Meats and Sausages (August 2017) and the divestiture of Farmer John (January 2017) in Refrigerated Foods, the divestiture of Diamond Crystal Brands (May 2016) from Specialty Foods, and the acquisition of Ceratti (August 2017) in International. The tables below show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in the fourth quarter and the full year of fiscal 2016 and fiscal 2017.

 

18



 

4th Quarter
Volume (lbs.)

 

 

 

FY 2017

 

FY 2016

 

(in thousands)

 

Reported
(GAAP)

 

Acquisitions

 

Divestitures

 

Organic
(Non-GAAP)

 

Reported
(GAAP)

 

Divestitures

 

53rd
Week

 

Organic
(Non-GAAP)

 

Organic
% change

Grocery Products

 

249,141

 

 

 

249,141

 

258,386

 

 

(18,456

)

239,930

 

3.8

 

Refrigerated Foods

 

547,196

 

(16,727

)

 

530,469

 

658,506

 

(95,246)

 

(40,233

)

523,027

 

1.4

 

Jennie-O Turkey Store

 

270,175

 

 

 

270,175

 

291,587

 

 

(20,828

)

270,759

 

(0.2

)

Specialty Foods

 

117,344

 

 

 

117,344

 

127,053

 

 

(9,075

)

117,978

 

(0.5

)

International & Other

 

91,414

 

(7,884

)

 

83,530

 

85,454

 

 

(6,104

)

79,350

 

5.3

 

Total Volume

 

1,275,270

 

(24,611

)

 

1,250,659

 

1,420,986

 

(95,246)

 

(94,696

)

1,231,044

 

1.6

 

 

Net Sales

 

 

 

FY 2017

 

FY 2016

 

(in thousands)

 

Reported
(GAAP)

 

Acquisitions

 

Divestitures

 

Organic
(Non-GAAP)

 

Reported
(GAAP)

 

Divestitures

 

53rd
Week

 

Organic
(Non-GAAP)

 

Organic
% change

Grocery Products

 

$   489,169

 

$          –

 

$             –

 

$   489,169

 

$   491,724

 

$            –

 

$  (35,123

)

$   456,601

 

7.1

 

Refrigerated Foods

 

1,166,661

 

(44,450

)

 

1,122,211

 

1,237,276

 

(123,256)

 

(79,573

)

1,034,447

 

8.48

 

Jennie-O Turkey Store

 

484,856

 

 

 

484,856

 

541,409

 

 

(38,672

)

502,737

 

(3.6

)

Specialty Foods

 

196,792

 

 

 

196,792

 

216,674

 

 

(15,477

)

201,197

 

(2.2

)

International & Other

 

155,130

 

(9,152

)

 

145,978

 

140,858

 

 

(10,061

)

130,797

 

11.6

 

Total Net Sales

 

$2,492,608

 

$(53,602

)

$             –

 

$2,439,006

 

$2,627,941

 

$(123,256)

 

$(178,906

)

$2,325,779

 

4.9

 

 

Full Year
Volume (lbs.)

 

 

 

FY 2017

 

FY 2016

 

(in thousands)

 

Reported
(GAAP)

 

Acquisitions

 

Divestitures

 

Organic
(Non-GAAP)

 

Reported
(GAAP)

 

Divestitures

 

53rd
Week

 

Organic
(Non-GAAP)

 

Organic
% change

Grocery Products

 

916,643

 

(6,430

)

 

910,213

 

906,202

 

 

(18,456

)

887,746

 

2.5

 

Refrigerated Foods

 

2,180,407

 

(16,727

)

(80,454)

 

2,083,226

 

2,493,358

 

(375,017)

 

(40,233

)

2,078,108

 

0.2

 

Jennie-O Turkey Store

 

890,518

 

 

 

890,518

 

902,073

 

 

(20,828

)

881,245

 

1.1

 

Specialty Foods

 

458,022

 

 

 

458,022

 

583,267

 

(133,733)

 

(9,075

)

440,459

 

4.0

 

International & Other

 

324,895

 

(7,884

)

 

317,011

 

307,127

 

 

(6,104

)

301,023

 

5.3

 

Total Volume

 

4,770,485

 

(31,041

)

(80,454)

 

4,658,990

 

5,192,027

 

(508,750)

 

(94,696

)

4,588,581

 

1.5

 

 

Net Sales

 

 

 

FY 2017

 

FY 2016

 

(in thousands)

 

Reported
(GAAP)

 

Acquisitions

 

Divestitures

 

Organic
(Non-GAAP)

 

Reported
(GAAP)

 

Divestitures

 

53rd
Week

 

Organic
(Non-GAAP)

 

Organic
% change

Grocery Products

 

$1,761,105

 

$(43,146

)

$            –

 

$1,717,959

 

$1,684,756

 

$            –

 

$  (35,123

)

$1,649,633

 

4.1

 

Refrigerated Foods

 

4,403,732

 

(44,450

)

(100,231)

 

4,259,051

 

4,647,173

 

(493,618)

 

(79,573

)

4,073,982

 

4.5

 

Jennie-O Turkey Store

 

1,663,160

 

 

 

1,663,160

 

1,740,968

 

 

(38,672

)

1,702,296

 

(2.3

)

Specialty Foods

 

794,508

 

 

 

794,508

 

939,134

 

(140,084)

 

(15,477

)

783,573

 

1.4

 

International & Other

 

545,014

 

(9,152

)

 

535,862

 

511,193

 

 

(10,061

)

501,132

 

6.9

 

Total Net Sales

 

$9,167,519

 

$(96,748

)

$(100,231)

 

$8,970,540

 

$9,523,224

 

$(633,702)

 

$(178,906

)

$8,710,616

 

3.0

 

 

19



 

The impact of one less week in fiscal 2017 was the primary driver for lower sales in the fourth quarter. International & Other posted sales growth in the fourth quarter while the other four segments showed declines. For the full year, sales declined in Refrigerated Foods and Specialty Foods due to the divestitures of Farmer John and DCB, respectively. JOTS sales were lower for the fourth quarter and full year due to the impact of record low commodity prices. Grocery Products sales increased for the full year related to the acquisition of Justin’s® specialty nut butters.

 

Moving into fiscal 2018, the Company expects continued growth through its recent acquisitions, growth of innovative products, and continued growth of value-added products. The Company also expects sales growth from products such as Wholly Guacamole® dips, Herdez® salsas, and Muscle Milk® protein beverages in the Grocery Products segment, which will include products from our Specialty Foods segment in fiscal 2018. The acquisitions of the Fontanini® and Columbus® brands in addition to increased foodser-vice sales of Hormel® Bacon 1TM fully cooked bacon and retail sales of Hormel® Natural Choice® products are anticipated to drive growth in Refrigerated Foods. JOTS should benefit from an expected increase in turkey commodity markets and increased demand for Jennie-O® branded products. The International & Other segment is expected to show growth through the acquisition of Ceratti® branded products in Brazil, increased export sales, and sales growth in the Company’s China operations.

 

Cost of Products Sold

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 29,

October 30,

 

October 29,

October 30,

 

(in thousands)

 

2017

2016

% Change

2017

2016

% Change

Cost of products sold

 

$1,981,054

$2,029,421

(2.4)

$7,164,356

$7,365,049

(2.7)

 

The decrease in cost of products sold for the fourth quarter of fiscal 2017 is primarily a result of the divestiture of Farmer John, which was partially offset by the acquisitions of Fontanini and Ceratti. For the full year, cost of products sold decreased due to the divestiture of Farmer John.

 

Gross Profit

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 29,

October 30,

 

October 29,

October 30,

 

(in thousands)

 

2017

2016

% Change

2017

2016

% Change

Gross profit

 

$511,554

$598,520

(14.5)

$2,003,163

$2,158,175

(7.2)

Percentage of net sales

 

20.5

22.8

 

21.8

22.7

 

 

Lower margins from the JOTS, Refrigerated Foods, Grocery Products, and Specialty Foods segments in the fourth quarter of fiscal 2017 more than offset improved results in the International & Other segment. The lower gross profit for JOTS was due to industry oversupply, resulting in lower commodity meat prices. Refrigerated Foods and Grocery Products segment margins were impacted by higher input costs. Gross margins in the Specialty Foods segment were lower due to increased competitive activity for Muscle Milk® ready-to-drink protein beverages in the convenience store channel. The International & Other segment delivered higher gross margins for the fourth quarter due to improved multinational business results and stronger branded exports. Full year margins also benefited from strong pork exports.

 

The Company expects favorable market conditions to continue for the Grocery Products and International & Other segments in fiscal 2018. JOTS will continue to navigate difficult industry conditions resulting in lower margins compared to fiscal 2017. Refrigerated Foods margins will benefit from continued value-added business growth tempered by expected volatility in pork markets during the year. International & Other segment margins are expected to increase due to improved results in China, the addition of Ceratti, and growth of branded exports.

 

20



 

Selling, General and Administrative (SG&A)

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 29,

October 30,

 

October 29,

October 30,

 

(in thousands)

 

2017

2016

% Change

2017

2016

% Change

SG&A

 

$194,218

$244,006

(20.4)

$762,104

$871,974

(12.6)

Percentage of net sales

 

7.8

9.3

 

8.3

9.2

 

 

Selling, general and administrative expenses decreased as the Company reduced advertising expenses by $68.6 million and incurred lower employee-related expenses.

 

In fiscal 2018, the Company intends to continue building brand awareness through advertising investments and anticipates increasing advertising expense by approximately 20 percent over 2017 levels. The Company will continue to invest in key brands such as Jennie-O® products, Hormel® Natural Choice® meats, Skippy® peanut butter, the SPAM® family of products, Wholly Guacamole® dips, Herdez® salsas, and Muscle Milk® protein nutrition products.

 

Research and development expenses were $8.2 million and $34.2 million for the fiscal 2017 fourth quarter and year, respectively, compared to $9.6 million and $34.7 million for the corresponding periods in fiscal 2016.

 

Goodwill/Intangible Impairment: Impairment charges related to an indefinite-lived intangible asset of $0.2 million were recorded in the fourth quarter of fiscal 2017. Goodwill impairment charges related to the divestiture of DCB of $1.0 million were recorded in the second quarter of fiscal 2016.

 

Equity in Earnings of Affiliates

 

 

 

Fourth Quarter Ended

Year Ended

 

 

October 29,

October 30,

 

October 29,

October 30,

 

(in thousands)

 

2017

2016

% Change

2017

2016

% Change

Equity in earnings of affiliates

 

$12,214

$11,236

8.7

$39,590

$38,685

2.3

 

The increase for both the fourth quarter and fiscal 2017 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 29, 2017, was as follows:

 

(in thousands)

Investments/Receivables

Country

 

United States

$177,657

Foreign

64,712

Total

$242,369

 

Effective Tax Rate

 

 

 

 

 

Fourth Quarter Ended

Year Ended

 

 

 

 

October 29,

October 30,

October 29,

October 30,

 

 

 

 

2017

2016

2017

2016

Effective tax rate %

 

 

 

33.8

33.0

33.7

32.4

 

The fiscal 2017 rate was higher as the fiscal 2016 rate benefited from a foreign tax credit. The Company expects the effective tax rate in fiscal 2018 to be between 32.3 and 33.3 percent.

 

21



 

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 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 29,

October 30,

 

October 29,

October 30,

 

(in thousands)

2017

2016

% Change

2017

2016

% Change

Net Sales

 

 

 

 

 

 

Grocery Products

$   489,169

$   491,724

(0.5)

$1,761,105

$1,684,756

4.5

Refrigerated Foods

1,166,661

1,237,276

(5.7)

4,403,732

4,647,173

(5.2)

Jennie-O Turkey Store

484,856

541,409

(10.4)

1,663,160

1,740,968

(4.5)

Specialty Foods

196,792

216,674

(9.2)

794,508

939,134

(15.4)

International & Other

155,130

140,858

10.1

545,014

511,193

6.6

Total Net Sales

$2,492,608

$2,627,941

(5.1)

$9,167,519

$9,523,224

(3.7)

Segment Operating Profit

 

 

 

 

 

 

Grocery Products

$     88,915

$     82,734

7.5

$   290,809

$   268,461

8.3

Refrigerated Foods

145,613

168,040

(13.3)

587,929

585,652

0.4

Jennie-O Turkey Store

70,370

92,299

(23.8)

247,322

329,427

(24.9)

Specialty Foods

15,933

20,182

(21.1)

96,828

110,917

(12.7)

International & Other

23,113

19,570

18.1

85,304

78,409

8.8

Total Segment Operating Profit

343,944

382,825

(10.2)

1,308,192

1,372,866

(4.7)

Net interest and investment
(income) expense

(639)

1,017

(162.8)

1,824

6,680

(72.7)

General corporate expense

14,783

17,325

(14.7)

28,091

49,436

(43.2)

Less: Noncontrolling interest

209

250

(16.4)

368

465

(20.9)

Earnings Before Income Taxes

$    330,009

$   364,733

(9.5)

$1,278,645

$1,317,215

(2.9)

 

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

 

 

Fourth Quarter Ended

Year Ended

 

October 29,

October 30,

 

October 29,

October 30,

 

(in thousands)

2017

2016

% Change

2017

2016

% Change

Volume (lbs.)

249,141

258,386

(3.6)

916,643

906,202

1.2

Net sales

$489,169

$491,724

(0.5)

$1,761,105

$1,684,756

4.5

Segment profit

88,915

82,734

7.5

290,809

268,461

8.3

 

Full-year results reflect the addition of Justin’s, acquired on May 25, 2016, in addition to increased sales of Wholly Guacamole® dips, Herdez® salsas, and the SPAM® family of products. Results were offset by the impact of one less week compared to fiscal 2016.

 

Fourth quarter and full year segment profit results benefited from the net sales growth noted above partially offset by higher beef and pork input costs. Looking ahead to fiscal 2018, the Company anticipates positive momentum in Herdez® salsas, Wholly Guacamole® dips, and Skippy® peanut butter. Effective for fiscal 2018, the Specialty Foods segment results will be reported as part of the Grocery Products segment.

 

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

 

 

Fourth Quarter Ended

Year Ended

 

October 29,

October 30,

 

October 29,

October 30,

 

(in thousands)

2017

2016

% Change

2017

2016

% Change

Volume (lbs.)

547,196

658,506

(16.9)

2,180,407

2,493,358

(12.6)

Net sales

$1,166,661

$1,237,276

(5.7)

$4,403,732

$4,647,173

(5.2)

Segment profit

145,613

168,040

(13.3)

587,929

585,652

0.4

 

22



 

The results for the fourth quarter and fiscal year reflect the January 2017 divestiture of Farmer John, resulting in lower sales and volume in fiscal 2017. The results of Fontanini have been included as of the date of acquisition on August 24, 2017. Product lines showing exceptional sales growth for the quarter include foodservice sales of Hormel® Bacon 1TM fully cooked bacon and Hormel® Fire BraisedTM meats along with retail sales of Hormel® Natural Choice® meats. Segment profit was impacted by the divestiture of Farmer John, which was partially offset by the addition of Fontanini and strong value-added product growth.

 

Looking forward, the Company anticipates higher input costs will be more than offset by the addition of the Fontanini acquisition and strong value-added growth in the foodservice and retail channels.

 

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

 

 

Fourth Quarter Ended

Year Ended

 

October 29,

October 30,

 

October 29,

October 30,

 

(in thousands)

2017

2016

% Change

2017

2016

% Change

Volume (lbs.)

270,175

291,587

(7.3)

890,518

902,073

(1.3)

Net sales

$484,856

$541,409

(10.4)

$1,663,160

$1,740,968

(4.5)

Segment profit

70,370

92,299

(23.8)

247,322

329,427

(24.9)

 

Net sales, volume, and segment profit were lower than last year as the segment continued to be impacted by higher industry supply and corresponding lower commodity meat prices. Pricing pressure from competing proteins and higher expenses also contributed to the lower results for the full year.

 

Segment profit for the fourth quarter was lower than last year as continued softness in the commodity and whole turkey markets and a more competitive industry environment pressured value-added margins.

 

JOTS expects value-added volume and sales growth in fiscal 2018, led by Jennie-O® lean ground turkey and Jennie-O® Oven Ready® products. Segment profit, however, is expected to be modestly lower than fiscal 2017 as continued softness in the first half of the year offsets an expected slow recovery in the turkey markets in the back half.

 

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

 

 

Fourth Quarter Ended

Year Ended

 

October 29,

October 30,

 

October 29,

October 30,

 

(in thousands)

2017

2016

% Change

2017

2016

% Change

Volume (lbs.)

117,344

127,053

(7.6)

458,022

583,267

(21.5)

Net sales

$196,792

$216,674

(9.2)

$794,508

$939,134

(15.4)

Segment profit

15,933

20,182

(21.1)

96,828

110,917

(12.7)

 

The volume, sales, and segment profit for the fourth quarter and fiscal year reflect the increased competitive activity for Muscle Milk® ready-to-drink protein beverages in the convenience store channel stemming from the impact of the recall in fiscal 2016.

 

A return to growth for Muscle Milk® products is expected to contribute to improved results in fiscal 2018. Effective with the start of fiscal 2018, Specialty Foods will be reported in the Grocery Products segment.

 

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

 

 

Fourth Quarter Ended

Year Ended

 

October 29,

October 30,

 

October 29,

October 30,

 

(in thousands)

2017

2016

% Change

2017

2016

% Change

Volume (lbs.)

91,414

85,454

7.0

324,895

307,127

5.8

Net sales

$155,130

$140,858

10.1

$545,014

$511,193

6.6

Segment profit

23,113

19,570

18.1

85,304

78,409

8.8

 

Volume and sales for the fourth quarter were driven by improved export sales of Skippy® peanut butter products and SPAM® luncheon meat and also reflect the September 2017 acquisition of the Ceratti® brand. For the fiscal year, improved market conditions resulted in an overall increase in export sales. In China, the Skippy® peanut butter business continued to grow in both retail and foodservice channels and the Company’s meat business experienced more favorable markets throughout fiscal 2017.

 

23



 

Segment profit results for both the fourth quarter and fiscal year primarily reflect better margins for the China business and improved exports of branded items.

 

Entering 2018, 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 2018, though lower than fiscal 2017. 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.

 

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 29,

October 30,

October 29,

October 30,

(in thousands)

2017

2016

2017

2016

Net interest and investment expense (income)

$    (639)

$   1,017

$   1,824

$   6,680

Interest expense

3,577

3,288

12,683

12,871

General corporate expense

14,783

17,325

28,091

49,436

Noncontrolling interest earnings

209

250

368

465

 

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 lower for both the fourth quarter and fiscal year primarily reflecting lower employee-related expenses.

 

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 thousands, except per share amounts)

2016

2015

% Change

2016

2015

% Change

Net earnings

$243,940

$187,231

30.3

$890,052

$686,088

29.7

Diluted earnings per share

0.45

0.35

28.6

1.64

1.27

29.1

Adjusted net earnings

243,940

199,898(1)

22.0

890,052

714,372(1)

24.6

Adjusted diluted earnings per share

0.45

0.37(1)

21.6

1.64

1.32(1)

24.2

 

(1) COMPARISON OF U.S. GAAP TO NON-GAAP FINANCIAL MEASUREMENTS

 

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.

 

24



 

 

Fourth Quarter

(in thousands, except per share amounts)

2016
Earnings

2015
Non-GAAP
Adjusted
Earnings

Diamond
Crystal
Brands
Impairment

CytoSport
Contingent
Consideration
Adjustment

2015 GAAP
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

(in thousands, except per share amounts)

2016
Earnings

2015
Non-GAAP
Adjusted
Earnings

Stockton
Plant
Closure

International
Business
Exit

Diamond
Crystal
Brands
Impairment

CytoSport
Contingent
Consideration
Adjustment

2015 GAAP
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 and Volume

 

 

Fourth Quarter Ended

Year Ended

 

October 30,

October 25,

 

October 30,

October 25,

 

(in thousands)

2016

2015

% Change

2016

2015

% Change

Net sales

$2,627,941

$2,400,858

9.5

$9,523,224

$9,263,863

2.8

Volume (lbs.)

1,420,986

1,308,292

8.6

5,192,027

5,109,488

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.

 

25



 

Cost of Products Sold

 

 

Fourth Quarter Ended

Year Ended

 

October 30,

October 25,

 

October 30,

October 25,

 

(in thousands)

2016

2015

% Change

2016

2015

% Change

Cost of products sold

$2,029,421

$1,905,828

6.5

$7,365,049

$7,455,282

(1.2)

 

The increase in cost of products sold for the fourth quarter of fiscal 2016 was 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 thousands)

2016

2015

% Change

2016

2015

% Change

Gross profit

$598,520

$495,030

20.9

$2,158,175

$1,808,581

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.

 

Selling, General and Administrative (SG&A)

 

 

Fourth Quarter Ended

Year Ended

 

October 30,

October 25,

 

October 30,

October 25,

 

(in thousands)

2016

2015

% Change

2016

2015

% Change

SG&A

$244,006

$188,952

29.1

$871,974

$743,611

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 included higher advertising for the Company’s value-added products along with the addition of Applegate’s advertising expenses.

 

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/Intangible Impairment: 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.

 

Equity in Earnings of Affiliates

 

 

Fourth Quarter Ended

Year Ended

 

October 30,

October 25,

 

October 30,

October 25,

 

(in thousands)

2016

2015

% Change

2016

2015

% Change

Equity in earnings of affiliates

$ 11,236

$ 7,957

40.0

$ 38,685

$ 23,987

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.

 

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 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,
2016

October 25,
2015

October 30,
2016

October 25,
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.

 

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

 

27



 

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

Volume (lbs.)

258,386

230,170

12.3

906,202

890,735

1.7

Net sales

$491,724

$422,570

16.4

$1,684,756

$1,617,680

4.1

Segment profit

82,734

78,772

5.0

268,461

228,582

17.4

 

Results reflected 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.

 

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

Volume (lbs.)

658,506

601,857

9.4

2,493,358

2,368,804

5.3

Net sales

$1,237,276

$1,149,496

7.6

$4,647,173

$4,372,347

6.3

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 benefited from lower input costs, the addition of Applegate, and strong foodservice results.

 

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

Volume (lbs.)

291,587

221,528

31.6

902,073

849,418

6.2

Net sales

$541,409

$420,312

28.8

$1,740,968

$1,635,776

6.4

Segment profit

92,299

73,227

26.0

329,427

276,217

19.3

 

Net sales and segment profit exceeded fiscal 2015, which was negatively impacted by HPAI. The HPAI outbreak in fiscal 2015 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.

 

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 fiscal 2015 results reflected the impact of HPAI. Favorable input costs this year also provided benefits in both the quarter and full year results.

 

28



 

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

Volume (lbs.)

127,053

177,784

(28.5)

583,267

702,110

(16.9)

Net sales

$216,674

$269,887

(19.7)

$939,134

$1,103,359

(14.9)

Segment profit

20,182

22,348

(9.7)

110,917

93,258

18.9

 

The results for the fourth quarter and fiscal year reflected the May 9, 2016, divestiture of DCB, resulting in lower sales and volume 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.

 

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

Volume (lbs.)

85,454

76,953

11.0

307,127

298,421

2.9

Net sales

$140,858

$138,593

1.6

$511,193

$534,701

(4.4)

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 reflected 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.

 

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 non controlling 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

(in thousands)

October 30,
2016

October 25,
2015

October 30,
2016

October 25,
2015

Net interest and investment expense (income)

$   1,017

$   3,341

$   6,680

$ 10,177

Interest expense

3,288

3,821

12,871

13,111

General corporate expense

17,325

16,649

49,436

35,199

Noncontrolling interest earnings

250

212

465

1,176

 

Net interest and investment expense was lower in fiscal 2016 compared to fiscal 2015 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.

 

29



 


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 2017, 2016, or 2015.

 

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $444.1 million at the end of fiscal 2017 compared to $415.1 million at the end of fiscal 2016 and $347.2 million at the end of fiscal 2015.

 

During fiscal 2017, cash provided by operating activities was $1,010.2 million compared to $992.8 million in fiscal 2016 and $992.0 million in fiscal 2015. The increase in fiscal 2017 was primarily related to decreases in working capital.

 

Cash used in investing activities increased to $593.0 million in fiscal 2017 from $409.0 million in fiscal 2016 and $900.9 million in fiscal 2015. Fiscal 2017 included $520.5 million to purchase Fontanini and Ceratti, partially offset by the sale of Farmer John for $135.9 million. Fiscal 2016 included $280.9 million to purchase Justin’s, partially offset by the sale of DCB for $110.1 million. Fiscal 2015 included $774.1 million used to purchase Applegate. Capital expenditures in fiscal 2017 decreased to $221.3 million, from $255.5 million in 2016, and $144.1 million in 2015. Projects in fiscal 2017 included completion of the Company’s plant in Jiaxing, China, replacement of the JOTS whole bird production facility in Melrose, Minnesota, bacon expansion in Wichita, Kansas, and ongoing investments for food and employee safety. The primary reason for lower capital expenditures in fiscal 2015 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 2018 are estimated to be approximately $425.0 million. The higher level of capital is driven by the investments into additional capacity for high margin products and projects to improve manufacturing efficiencies. They include the expansion of baking capacity, modernization of the Austin, Minnesota, plant, and replacement of the Melrose, Minnesota, plant.

 

Cash used in financing activities was $389.3 million in fiscal 2017 compared to $509.6 million in fiscal 2016 and $70.6 million in fiscal 2015. 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 $94.5 million for common stock repurchases during fiscal 2017 compared to $87.9 million in fiscal 2016 and $24.9 million in fiscal 2015. During fiscal 2017, the Company repurchased 2.7 million shares of its common stock at an average price per share of $34.51. 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 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 2017, there were 10.5 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 $346.0 million in dividends paid in fiscal 2017 compared to $296.5 million in the fiscal 2016 and $250.8 million in fiscal 2015. The dividend rate was $0.68 per share in fiscal 2017, which reflected a 17.0 percent increase over the fiscal 2016 rate of $0.58 per share. The Company has paid dividends for 357 consecutive quarters. The annual dividend rate for fiscal 2018 was increased 10.3 percent to $0.75 per share, representing the 52nd 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 is dedicated to returning excess cash flow to shareholders through dividend payments. Growing the business through innovation and evaluating opportunities for strategic acquisitions remains a focus for the Company. Reinvestments in the business to ensure employee and food safety are a top priority for the Company. Capital spending to enhance and expand current operations will also be a significant cash outflow in fiscal 2018.


 

30



 

Contractual Obligations and Commercial Commitments

 

The following table outlines the Company’s future contractual financial obligations as of October 29, 2017, (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

Contractual Obligations (in thousands)

Total

Less Than
1 Year

1-3 Years

3-5 Years

More Than
5 Years

Purchase obligations:

 

 

 

 

 

Hog and turkey commitments(1)

$2,347,304

$1,030,401

$1,033,231

$274,978

$   8,694

Grain commitments(1)

76,909

75,832

1,077

Turkey grow-out contracts(2)

97,807

14,698

24,358

17,990

40,761

Other(3)

1,009,737

674,792

148,941

125,899

60,105

Current and long-term debt

250,000

250,000

Interest payments on long-term debt(4)

35,697

10,313

20,625

4,759

Capital expenditures(5)

278,774

262,108

13,333

3,333

Leases

22,721

7,662

8,320

5,072

1,667

Other long-term liabilities(6)(7)

67,467

5,998

10,884

10,212

40,373

Total Contractual Cash Obligations

$4,186,416

$2,081,804

$1,260,769

$692,243

$151,600

 

(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 29, 2017. The Company also utilizes various hedging programs to manage the price risk associated with these commitments. As of October 29, 2017, these hedging programs result in a net decrease of $2.5 million in future cash payments associated with the purchase commitments, which is not reflected in the table above.

 

(2)    The Company 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 29, 2017, the Company had approximately 100 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)    See Note F, “Long-term Debt and Other Borrowing Arrangements”.

 

(5)    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 2018 to be approximately $425.0 million.

 

(6)    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.”)

 

(7)    As discussed in Note K “Income Taxes,” the total liability for unrecognized tax benefits, including interest and penalties, at October 29, 2017, was $20.2 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 29, 2017, the Company had $48.0 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 29, 2017, the Company had $48.0 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, this amount 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 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 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 limit the Company’s ability to benefit from market gains if commodity prices become more favorable than those 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 its JOTS corn futures contracts in the third quarter of fiscal 2016 due to ineffectiveness. During the time of suspension, all gains or losses related to these contracts were recorded 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, 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 contracts with turkey growers to meet its raw material requirements for whole birds and processed turkey products. 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 mitigate 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, 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 Columbus, Fontanini, and Ceratti, 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.

 

The Company is subject to disruption of operations at co-packers or other suppliers. Disruption of operations at co packers or other suppliers may impact the Company’s product or raw material supply, which could have an adverse effect on


 

33



 


the Company’s financial results. Additionally, actions taken to mitigate the impact of any potential disruption, including increasing inventory in anticipation of a potential production or supply interruption, may adversely affect the Company’s financial results.

 

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 federal, state, and local authorities who 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 requiring 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 business continuity plans.

 

Deterioration of labor relations or increases in labor costs could harm the Company’s business. As of October 29, 2017, the Company had approximately 20,200 employees worldwide, of which approximately 4,500 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. A union contract at the Company’s facility in Rochelle, Illinois will expire during fiscal 2018, covering approximately 626 employees. Negotiations have not yet been initiated.

 

 

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


 

34



 


the purchase of hogs at formula-based prices over periods of up to 10 years. Purchased hogs under contract accounted for 96 percent and 94 percent of the total hogs purchased by the Company during fiscal years 2017 and 2016, respectively. 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.

 

In the second quarter of 2017, the Company initiated a hedge program to offset the fluctuation in the Company’s future direct hog purchases. This program currently utilizes lean hog futures, and these contracts are accounted for under cash flow hedge accounting. The fair value of the Company’s open futures contracts in this hedging program as of October 29, 2017, was $1.7 million, before tax. The Company measures its market risk exposure on its lean hog futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for lean hogs. A 10 percent decrease in the market price for lean hogs would have negatively impacted the fair value of the Company’s October 29, 2017, open lean hog contracts by $2.0 million, which in turn would lower the Company’s future cost on purchased hogs by a similar amount.

 

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 29, 2017, was $(0.9) million compared to $1.4 million as of October 30, 2016. 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 29, 2017, open contracts by $2.8 million, which in turn would lower the Company’s future cost of purchased hogs by a similar amount.

 

Turkey Production Costs: The Company raises or contracts for live turkeys to meet some of its raw material supply requirements. Production costs in raising turkeys 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 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 29, 2017, was $(2.2) million compared to $(3.2) million, before tax, as of October 30, 2016. 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 29, 2017, open grain contracts by $4.4 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 $1.9 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 29, 2017, the balance of these securities totaled $128.5 million compared to $122.3 million as of October 30, 2016. 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 $4.4 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 29, 2017, was $781.3 million, compared to $443.1 million as of October 30, 2016, with most of the exposure existing in Chinese yuan and Brazilian real. 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 29, 2017. A 10 percent strengthening in the value of the yuan relative to the U.S. dollar would result in other comprehensive income of approximately $46.6 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 $38.1 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 29, 2017. Our internal control over financial reporting as of October 29, 2017, 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

Chairman of the Board,

Senior Vice President

President, Chief Executive

and Chief Financial Officer

Officer, and Director

 


 

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 29, 2017, 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 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 29, 2017, 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 29, 2017 and October 30, 2016 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 29, 2017 and our report dated December 20, 2017 expressed an unqualified opinion thereon.

 

 

Minneapolis, Minnesota
December 20, 2017


 

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 29, 2017 and October 30, 2016, 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 29, 2017. 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 29, 2017 and October 30, 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 29, 2017, 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 29, 2017, 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 20, 2017 expressed an unqualified opinion thereon.

 

 

Minneapolis, Minnesota
December 20, 2017


 

38



 

Consolidated Statements of Financial Position

 

 

 

 

 

October 29,

October 30,

(in thousands, except share and per share amounts)

2017

2016

Assets

 

 

Current Assets

 

 

Cash and cash equivalents

$    444,122

$    415,143

Accounts receivable (net of allowance for doubtful accounts of
$4,246 at October 29, 2017, and $4,045 at October 30, 2016)

618,351

591,310

Inventories

921,022

985,683

Income taxes receivable

22,346

18,282

Prepaid expenses

16,144

13,775

Other current assets

4,538

5,719

Total Current Assets

2,026,523

2,029,912

 

 

 

Deferred Income Taxes

6,223

Goodwill

2,119,813

1,834,497

Other Intangibles

1,027,014

903,258

Pension Assets

171,990

68,901

Investments In and Receivables From Affiliates

242,369

239,590

Other Assets

184,948

182,237

Property, Plant and Equipment

 

 

Land

51,249

67,557

Buildings

866,855

805,858

Equipment

1,710,537

1,675,549

Construction in progress

148,064

218,351

Less: Allowance for depreciation

(1,573,454)

(1,661,866)

Net Property, Plant and Equipment

1,203,251

1,105,449

Total Assets

6,975,908

6,370,067

Liabilities and Shareholders’ Investment

 

 

Current Liabilities

 

 

Accounts payable

$    552,714

$    481,826

Accrued expenses

76,966

82,145

Accrued workers compensation

26,585

36,612

Accrued marketing expenses

101,573

119,583

Employee related expenses

209,562

251,433

Taxes payable

525

4,331

Interest and dividends payable

90,287

77,266

Total Current Liabilities

1,058,212

1,053,196

Long-Term Debt – less current maturities

250,000

250,000

Pension and Post-Retirement Benefits

530,249

522,356

Other Long-Term Liabilities

99,340

93,109

Deferred Income Taxes

98,410

 

 

 

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 528,423,605 shares October 29, 2017
issued 528,483,868 shares October 30, 2016

7,741

7,742

Additional paid-in capital

13,670

Accumulated other comprehensive loss

(248,075)

(296,303)

Retained earnings

5,162,571

4,736,567

Hormel Foods Corporation Shareholders’ Investment

4,935,907

4,448,006

Noncontrolling Interest

3,790

3,400

Total Shareholders’ Investment

4,939,697

4,451,406

Total Liabilities and Shareholders’ Investment

6,975,908

6,370,067

 

See Notes to Consolidated Financial Statements.

 

39



 

Consolidated Statements of Operations

 

 

 

 

Fiscal Year Ended