Hormel Foods (HRL) 10-Q 2002 Q3 Quarterly report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended July 27, 2002 Commission File
Number 1-2402

HORMEL FOODS CORPORATION

Incorporated Under the Laws
of the State of Delaware Fein #41-0319970

1 Hormel Place
Austin, Minnesota 55912-3680
Telephone — (507) 437-5546

None
(Former name, former address and former fiscal year, if changed since last report.)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

Class	Class Outstanding at July 27, 2002
Common Stock	$.0586 par value	138,666,600
Common Stock Non-Voting	$.01 par value	-0-

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

HORMEL FOODS CORPORATION

STATEMENTS OF FINANCIAL POSITION

(In Thousands of Dollars)

			July 27, 2002			October 27, 2001
			(Unaudited)
ASSETS
CURRENT ASSETS
	Cash and cash equivalents		$	267,468		$	186,276
	Short-term marketable securities—at cost which approximates market			10,000			0
	Accounts receivable			251,019			308,115
	Inventories			351,663			355,114
	Deferred income taxes			9,723			7,341
	Prepaid expenses and other current assets			21,048			26,435
		TOTAL CURRENT ASSETS		910,921			883,281
DEFERRED INCOME TAXES				15,776			0
GOODWILL				310,978			279,225
OTHER INTANGIBLES				56,498			99,453
INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES				132,446			129,805
OTHER ASSETS				99,237			91,004
PROPERTY, PLANT AND EQUIPMENT
	Land			22,041			21,967
	Buildings			384,985			377,217
	Equipment			861,541			837,496
	Construction in progress			30,339			37,416
				1,298,906			1,274,096
	Less allowance for depreciation			(645,110	)		(594,166	)
				653,796			679,930
		TOTAL ASSETS	$	2,179,652		$	2,162,698

See notes to financial statements

2

HORMEL FOODS CORPORATION

STATEMENTS OF FINANCIAL POSITION

(In Thousands of Dollars)

			July 27, 2002			October 27, 2001
			(Unaudited)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
	Accounts payable		$	149,273		$	171,177
	Accrued expenses			35,284			40,515
	Accrued marketing expenses			65,708			43,102
	Employee compensation			77,715			76,258
	Taxes, other than federal income taxes			13,695			16,655
	Dividends payable			13,611			12,910
	Federal income tax			16,521			20,552
	Current maturities of long-term debt			25,485			39,034
		TOTAL CURRENT LIABILITIES		397,292			420,203
LONG-TERM DEBT — less current maturities				420,842			462,407
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION				253,727			253,607
OTHER LONG-TERM LIABILITIES				31,232			30,140
DEFERRED INCOME TAXES				0			460
SHAREHOLDERS' INVESTMENT
	Preferred stock, par value $.01 a share—   authorized 80,000,000 shares; issued—none
	Common stock, non-voting, par value $.01 a share—   authorized 200,000,000 shares; issued—none
	Common stock, par value $.0586 a share—   authorized 400,000,000 shares;     issued 138,839,524 shares July 27, 2002     issued 138,663,289 shares October 27, 2001			8,136			8,126
	Additional paid in capital			4,220			3,143
	Accumulated other comprehensive loss			(23,280	)		(25,861	)
	Retained earnings			1,091,251			1,010,473
				1,080,327			995,881
Shares held in treasury—172,924 shares				(3,768	)		0
		TOTAL SHAREHOLDERS' INVESTMENT		1,076,559			995,881
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT			$	2,179,652		$	2,162,698

See notes to financial statements

3

HORMEL FOODS CORPORATION

STATEMENTS OF EARNINGS

(In Thousands of Dollars, Except Per Share Amounts)

(Unaudited)

			Three Months Ended						Nine Months Ended
			July 27, 2002			July 28, 2001			July 27, 2002			July 28, 2001
Net sales			$	933,778		$	976,977		$	2,871,419		$	2,830,016
Cost of products sold				706,968			766,531			2,174,300			2,199,428
		GROSS PROFIT		226,810			210,446			697,119			630,588
Expenses:
	Selling and delivery			140,800			128,791			425,002			380,065
	Administrative and general			23,529			25,172			69,569			63,597
		OPERATING INCOME		62,481			56,483			202,548			186,926
Other income and expenses:
	Interest and investment income			2,202			2,350			5,398			8,030
	Equity in earnings of affiliates			1,775			1,028			5,774			1,413
	Interest expense			(7,704	)		(8,947	)		(24,118	)		(19,282	)
		EARNINGS BEFORE INCOME TAXES		58,754			50,914			189,602			177,087
Provision for income taxes				20,493			17,702			68,250			63,449
		NET EARNINGS	$	38,261		$	33,212		$	121,352		$	113,638
NET EARNINGS PER SHARE:
		BASIC	$	0.28		$	0.24		$	0.87		$	0.82
		DILUTED	$	0.27		$	0.24		$	0.86		$	0.81
WEIGHTED AVERAGE SHARES OUTSTANDING:
		BASIC		138,804			138,790			138,785			138,675
		DILUTED		140,259			140,441			140,450			140,009

See notes to financial statements

4

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(Unaudited)

			Nine Months Ended
			July 27, 2002			July 28, 2001
OPERATING ACTIVITIES
	Net earnings		$	121,352		$	113,638
	Adjustments to reconcile to net cash provided by operating activities:
		Depreciation		61,556			53,599
		Amortization of intangibles		724			9,843
		Equity in earnings of affiliates		(5,774	)		(1,413	)
		Provision for deferred income taxes		(6,346	)		7,720
		Loss on property/equipment sales and plant facilities		829			218
	Changes in operating assets and liabilities net of acquisitions:
		Decrease in accounts receivable		57,096			37,259
		Decrease (increase) in inventories and prepaid expenses and other current assets		8,838			(10,241	)
		(Decrease) increase in accounts payable and accrued expenses		(9,577	)		35,987
NET CASH PROVIDED BY OPERATING ACTIVITIES				228,698			246,610
INVESTING ACTIVITIES
	Sale of held-to-maturity securities			5,000			6,239
	Purchase of held-to-maturity securities			(15,000	)		(275	)
	Acquisitions of businesses			(476	)		(438,782	)
	Purchases of property/equipment			(38,041	)		(56,205	)
	Proceeds from sales of property/equipment			1,825			3,001
	(Increase) in investments, equity in affiliates, and other assets			(2,464	)		(27,349	)
	Dividends from affiliates			2,104			1,399
NET CASH USED IN INVESTING ACTIVITIES				(47,052	)		(511,972	)
FINANCING ACTIVITIES
	Proceeds from long-term debt			3,263			367,496
	Principal payments on long-term debt			(61,645	)		(17,481	)
	Dividends paid on common stock			(39,883	)		(37,778	)
	Stock repurchase			(4,114	)		(2,527	)
	Other			1,925			4,757
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES				(100,454	)		314,467
INCREASE IN CASH AND CASH EQUIVALENTS				81,192			49,105
Cash and cash equivalents at beginning of year				186,276			100,646
CASH AND CASH EQUIVALENTS AT END OF QUARTER			$	267,468		$	149,751

See notes to financial statements

5

HORMEL FOODS CORPORATION

NOTES TO FINANCIAL STATEMENTS

(In Thousands, Except Per Share and Percentage Amounts)

(Unaudited)

NOTE A            BASIS OF PRESENTATION

        The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year. The balance sheet at October 27, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended October 27, 2001.

NOTE B            NEW ACCOUNTING PRONOUNCEMENTS

        The Company adopted the provisions of Emerging Issues Task Force (EITF) Issues 00-14, "Accounting for Certain Sales Incentives" and 00-25, "Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer," effective with the beginning of fiscal year 2002. These EITF Issues provide guidance to the effect that certain sales incentives and consideration paid by the Company to a retailer, such as slotting fees and cooperative advertising, are reductions of net sales. Prior to adoption, the Company recognized these expenditures as marketing expenses. To conform to current year presentation, prior year results have been appropriately reclassified. The result of these adoptions was a reclassification between selling and delivery expenses and net sales with no impact on net income.

        In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or the normal operations of long-lived assets, except for certain obligations of lessees. The Company is currently analyzing this statement and plans to adopt its guidance beginning in fiscal year 2003. At this time, the Company anticipates its adoption will not have a material impact on the Company's financial statements.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." Though SFAS No. 144 retains the basic guidance of SFAS No. 121, regarding when and how to measure an impairment loss, it provides additional implementation guidelines. The Company will adopt this statement in the first quarter of fiscal year 2003 and does not believe its adoption will have a material impact on the Company's financial statements.

        The Company adopted SFAS Nos. 141 and 142 effective as of October 28, 2001. (See Note C)

6

NOTE C            GOODWILL AND INTANGIBLE ASSETS

        In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations," and No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." These statements change the accounting for business combinations, goodwill and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria for recognizing intangible assets separate from goodwill. SFAS 142 provides that goodwill and other indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are deemed to have a definite life will continue to be amortized over their useful lives.

        The Company has elected to adopt early the provisions of SFAS 141 and 142, and has discontinued the amortization of its goodwill and indefinite-lived intangible assets effective with the end of our fiscal year on October 27, 2001. Had the provisions of SFAS 142 been in effect during the three and nine-month periods ended July 28, 2001, net earnings would have increased $3,965 or $.03 per share (basic) and $.02 per share (diluted) and $8,069 or $.06 per share (basic and diluted), respectively.

        Carrying amounts, net of accumulated amortization, for other intangible assets as of July 27, 2002 and October 27, 2001 were $56,498 and $99,453, respectively, including indefinite-lived assets of $51,059 and $93,089, respectively. The decrease in other intangibles is due to $724 of amortization expense, purchase accounting adjustments of $5,461 resulting from final appraisals, and $36,770 of reclassifications to goodwill of certain intangible assets not meeting the criteria for separate recognition under SFAS 142.

        The carrying amount, net of accumulated amortization, for goodwill as of July 27, 2002 and October 27, 2001 was $310,978 and $279,225, respectively. The increase is due to $476 of goodwill acquired in fiscal year 2002, reclassifications of certain intangible assets of $25,852 ($36,770 net of deferred taxes) noted above, and purchase accounting adjustments of $5,425.

        During the first two quarters of fiscal 2002, the Company completed the required transitional impairment tests of indefinite-lived intangible assets and goodwill with no impairment indicated.

NOTE D            SHIPPING AND HANDLING COSTS

        Shipping and handling costs are recorded as selling and delivery expenses. Shipping and handling costs were $63,962 and $196,203 for the quarter and nine months ended July 27, 2002 compared to $58,570 and $169,376 for the quarter and nine months ended July 28, 2001.

7

NOTE E            EARNINGS PER SHARE DATA

        The following table sets forth the denominator for the computation of basic and diluted earnings per share:

	Three Months Ended		Nine Months Ended
	July 27, 2002	July 28, 2001	July 27, 2002	July 28, 2001
Basic weighted-average shares outstanding	138,804	138,790	138,785	138,675
Net effect of dilutive stock options	1,455	1,651	1,665	1,334
Diluted weighted-average shares outstanding	140,259	140,441	140,450	140,009

NOTE F            COMPREHENSIVE INCOME

        Other comprehensive income (loss) consists of adjustment in minimum pension liability, net unrealized gains or losses on available-for-sale securities and foreign currency translation. Other comprehensive income (loss) was $1,010 and $2,581 for the three and nine months ended July 27, 2002 and $667 and ($3,259) for the three and nine months ended July 28, 2001. Total comprehensive income combines reported net earnings and other comprehensive income (loss). Total comprehensive income was $39,271 and $123,933 for the three and nine months ended July 27, 2002 and $33,879 and $110,379 for the three and nine months ended July 28, 2001.

NOTE G            INVENTORIES

        Principal components of inventories are:

	July 27, 2002			October 27, 2001
Finished products	$	206,105		$	217,128
Raw materials and work-in-process		108,846			102,802
Materials and supplies		71,058			68,451
LIFO reserve		(34,346	)		(33,267	)
Total	$	351,663		$	355,114

NOTE H            SEGMENT REPORTING

        The Company develops, processes, and distributes a wide array of food products in a variety of markets. Under the criteria set forth by the accounting standard SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company reports its results in the following four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store and All Other.

        The Grocery Products segment primarily includes the processing, marketing and sale of shelf-stable food products sold predominately in the retail market.

8

        The Refrigerated Foods segment consists of the processing, marketing and sale of branded and unbranded pork products for the retail, foodservice and fresh customer markets. This segment also includes the manufacture, marketing and sale of nutritionally enhanced food products sold to hospitals, nursing homes and other health facilities. This segment includes the Meat Products and Foodservice business units and the Hormel HealthLabs operating segment.

        The Jennie-O Turkey Store segment primarily consists of the processing, marketing and sale of branded and unbranded turkey products for the retail, foodservice and fresh customer markets.

        The All Other segment consists of a variety of smaller, dissimilar business units and miscellaneous corporate sales. The activities of these businesses include the production, marketing and sale of beef products, food packaging (i.e., casings for dry sausage) and the manufacture, marketing and sale of Company products internationally. This segment includes operating segments: Dan's Prize, Inc., Vista International Packaging, Inc., and Hormel Foods International. In prior periods, this segment also included AFECO, a food equipment manufacturer, which was sold during the fourth quarter of fiscal year 2001.

        The Company does not allocate investment income, interest expense or interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at corporate. These items are included below as "Net interest and investment income" and "General corporate (expense)/income" when reconciling to earnings before income taxes.

9

        Sales, reflecting the adoption of EITF 00-14 and 00-25 (for more information see Note B "New Accounting Pronouncements"), and operating profits for each of the Company's business segments and reconciliation to earnings before income taxes are set forth below:

		Three Months Ended						Nine Months Ended
		July 27, 2002			July 28, 2001			July 27, 2002			July 28, 2001
Net Sales to Unaffiliated Customers*
	Grocery Products	$	174,857		$	174,896		$	556,506		$	540,346
	Refrigerated Foods		501,600			529,069			1,543,186			1,593,536
	Jennie-O Turkey Store**		212,914			223,053			628,880			544,625
	All Other		44,407			49,959			142,847			151,509
Total		$	933,778		$	976,977		$	2,871,419		$	2,830,016
Intersegment Sales
	Grocery Products	$	27		$	27		$	58		$	57
	Refrigerated Foods		798			589			2,163			1,822
	Jennie-O Turkey Store**		15,279			19,054			45,832			47,625
	All Other		16,436			17,541			47,835			51,709
Total		$	32,540		$	37,211		$	95,888		$	101,213
	Intersegment elimination		(32,540	)		(37,211	)		(95,888	)		(101,213	)
Total		$	0		$	0		$	0		$	0
Net Sales*
	Grocery Products	$	174,884		$	174,923		$	556,564		$	540,403
	Refrigerated Foods		502,398			529,658			1,545,349			1,595,358
	Jennie-O Turkey Store**		228,193			242,107			674,712			592,250
	All Other		60,843			67,500			190,682			203,218
	Intersegment elimination		(32,540	)		(37,211	)		(95,888	)		(101,213	)
Total		$	933,778		$	976,977		$	2,871,419		$	2,830,016
Segment Profit
	Grocery Products	$	27,303		$	21,471		$	90,873		$	80,835
	Refrigerated Foods		18,584			17,809			58,445			57,732
	Jennie-O Turkey Store**		15,397			17,969			48,602			37,181
	All Other		6,166			3,608			18,287			11,645
Total segment profit		$	67,450		$	60,857		$	216,207		$	187,393
	Net interest and investment income		(5,502	)		(6,597	)		(18,720	)		(11,252	)
	General corporate (expense)/income		(3,194	)		(3,346	)		(7,885	)		946
Earnings before income taxes		$	58,754		$	50,914		$	189,602		$	177,087

*

2001 Sales are restated for EITF 00-14 and 00-25

**

The acquisition of The Turkey Store was completed in the second quarter of fiscal year 2001. Financial results for the nine months ended July 28, 2001 only include five months of The Turkey Store operations. The above three-month time periods are comparable.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
            (In Thousands of Dollars, Except Per Share Amounts)

CRITICAL ACCOUNTING POLICIES

        There has been no material change in the Company's Critical Accounting Policies, as disclosed in its Quarterly Report on Form 10-Q for the quarter ended January 26, 2002.

RESULTS OF OPERATIONS

Overview

        The Company is a processor of branded and unbranded food products for the retail, foodservice and fresh customer markets. We operate in the following four segments:

Segment	Business Conducted
Grocery Products	Primarily processing, marketing and sale of shelf-stable food products sold predominately in the retail market.
Refrigerated Foods	Primarily processing, marketing and sale of branded and unbranded pork products for the retail, foodservice and fresh customer markets. This segment also includes processing, marketing and sale of nutritionally enhanced food products sold to hospitals, nursing homes and other health facilities. This segment includes the Meat Products and Foodservice business units and the Hormel HealthLabs operating segment.
Jennie-O Turkey Store	Primarily processing, marketing and sale of branded and unbranded turkey products for the retail, foodservice and fresh customer markets.
All Other	This segment consists of a variety of smaller, dissimilar business units and miscellaneous corporate sales. These businesses produce, market and sell beef products, food packaging (i.e., casings for dry sausage) and manufacture, market and sell Company products internationally. This segment includes the operating segments: Dan's Prize, Inc., Vista International Packaging, Inc., and Hormel Foods International. In fiscal 2001, this segment included AFECO, a food equipment manufacturer, which was sold in the fourth quarter of fiscal year 2001.

Consolidated Results

        Net earnings for the third quarter of fiscal 2002 were $38,261 compared to $33,212 during the same quarter of 2001. Diluted earnings per share for the quarter increased to $0.27 from $0.24 last year. The impact of SFAS No. 142, adopted by Hormel effective with the beginning of fiscal 2002, which eliminated the amortization of goodwill and other indefinite-lived assets, would have increased

11

fiscal 2001 third quarter net earnings $3,965 or $.02 per diluted share (for more information see Note C "Goodwill and Intangible Assets"). Net sales for the third quarter decreased 4.4 percent to $933,778 in 2002 from $976,977 in 2001. These 2001 net sales figures reflect the reclassification of certain expenses, which were a result of Hormel's adoption of the EITF 00-14 and 00-25 in the first quarter of 2002 (for more information see Note B "New Accounting Pronouncements"). Tonnage volume remained flat for the third quarter compared to the same quarter of last year. Current year third quarter sales dollars declined while tonnage volume remained flat due to lower commodity product pricing compared to the previous year third quarter.

        Net earnings for the first nine months of 2002 increased 6.8 percent to $121,352 from $113,638 in 2001. Diluted earnings per share for the same period increased to $.86 from $.81 in the prior year. If the Company would have applied the guidance of SFAS 142 in the first nine months of fiscal year 2001, net earnings for that period would have increased $8,069 or $.06 per diluted share. Net sales for the nine months (adjusted for EITF 00-14 and 00-25) of 2002 increased 1.5 percent to $2,871,419 from $2,830,016 in the first nine months of fiscal year 2001. Tonnage volume for the first nine months of 2002 increased 1.5 percent over the comparable period in 2001.

        The Company believes that it, along with the rest of the meat protein industry, and particularly the poultry portion of the industry, will continue to wrestle in the fourth fiscal quarter with an oversupply of protein inventory and the resulting pricing issues. The oversupply was created by a Russian ban on poultry imports and overall increased U.S. protein slaughter levels. This oversupply has restrained commodity values since March 2002. Compounding the inventory challenges to the Company's turkey operations was the August 12, 2002 USDA Crop Production Report which provided indications that higher grain prices are likely in the near future. Higher grain prices influence the cost of producing live turkeys, which negatively impacts the Company's profit margin on its turkey products.

        Given the uncertainty caused by these inventory concerns and crop conditions, the Company has widened its earnings per share guidance to a range of $.44 to $.55 for the fourth quarter and $1.30 to $1.41 for the year.

        The Company's continued emphasis on branded product sales contributed to stronger gross profits for the third quarter and nine months. Gross profit as a percent of sales for the third quarter was 24.3 percent compared to 21.5 percent for the comparable quarter of last year. Contributing to stronger gross profits was a cash hog market that was 31.3 percent lower than the previous year's third quarter. However, these lower cash hog prices were not fully realized by the Company due to the offsetting performance of the Company's hog procurement contracts. Also offsetting the benefit of the lower hog costs was the continued oversupply of proteins in the marketplace. This oversupply adversely affected gross profit margins primarily in the Jennie-O Turkey Store and Refrigerated Foods segments.

        Selling and delivery expenses for the third quarter and nine months were $140,800 and $425,002, respectively, compared to $128,791 and $380,065 last year. As a percent of net sales, selling and delivery expenses increased to 15.1 and 14.8 percent for the quarter and nine months, respectively, compared to 13.2 and 13.4 percent in 2001. Media and advertising spending contributed significantly to the increase in selling and delivery expenses which continued at levels that substantially exceeded the spending of the prior year's third quarter and nine-month periods. The nine-month dollar increase in selling and delivery expenses is also a result of the second quarter, 2001 consolidation of The Turkey Store and Diamond Crystal businesses into Hormel Foods Corporation. The Company expects these expenses, as a percent of net sales, to decline to approximately 14.8 percent from the 15.1 percent experienced in the current quarter.

        Administrative and general expenses were $23,529 and $69,569 for the quarter and nine months, respectively, compared to $25,172 and $63,597 ($20,499 and $54,316—adjusted for FAS 142) last year. As a percentage of net sales, administrative and general expenses were 2.5 and 2.4 percent for the quarter and nine months, respectively, compared to 2.6 and 2.2 percent (2.1 and 1.9 percent—adjusted

12

for FAS 142) for the quarter and nine months of last year. Contributing to the nine-month increased expenses were higher levels of bad debts and increased spending on research and development. The Company expects administrative and general expenses, as a percent of net sales, to continue at approximately 2.4 percent in future periods.

        Equity in earnings of affiliates was $1,775 and $5,774 for the quarter and nine months, respectively, compared to $1,028 and $1,413 last year. The increase in the nine-month results is primarily due to the improved performance of the Company's 49.0 percent owned joint venture, Carapelli USA, LLC. At the end of the current fiscal quarter, the Company began accounting for its investment in Campofrio Alimentacion, S.A. (Campofrio), a publicly traded company in Spain, using the cost method. Hormel changed its accounting method and now classifies its holding in Campofrio as "available-for-sale" because its ownership level was reduced from 21.1 percent to 15.2 percent due to the Company's election to not participate in a Campofrio equity offering. This change in accounting results in the investment being adjusted to market value with a corresponding adjustment to the Company's other comprehensive income. This change will also substantially reduce the Company's equity in earnings of affiliates in future periods on a comparative basis.

        The effective tax rate was 34.88 and 36.00 percent for the quarter and nine months, respectively, compared to 34.77 and 35.83 percent for the comparable quarter and nine months of 2001. We expect the rate to be in a range of 35.75 to 36.25 percent for the remainder of fiscal year 2002.

Segment Results

        Segmented net sales and profits for each of the Company's segments are set forth below. Additional segment financial information can be found in Note H of the Notes to Consolidated Financial Statements.

		Three Months Ended								Nine Months Ended
		July 27, 2002			July 28, 2001			% Change		July 27, 2002			July 28, 2001			% Change
Net Sales to Unaffiliated Customers*
	Grocery Products	$	174,857		$	174,896		(0.0	)	$	556,506		$	540,346		3.0
	Refrigerated Foods		501,600			529,069		(5.2	)		1,543,186			1,593,536		(3.2	)
	Jennie-O Turkey Store**		212,914			223,053		(4.5	)		628,880			544,625		15.5
	All Other		44,407			49,959		(11.1	)		142,847			151,509		(5.7	)
Total		$	933,778		$	976,977		(4.4	)	$	2,871,419		$	2,830,016		1.5
Segment Profit
	Grocery Products	$	27,303		$	21,471		27.2		$	90,873		$	80,835		12.4
	Refrigerated Foods		18,584			17,809		4.4			58,445			57,732		1.2
	Jennie-O Turkey Store**		15,397			17,969		(14.3	)		48,602			37,181		30.7
	All Other		6,166			3,608		70.9			18,287			11,645		57.0
Total segment profit		$	67,450		$	60,857		10.8		$	216,207		$	187,393		15.4
	Net interest and investment income		(5,502	)		(6,597	)	16.6			(18,720	)		(11,252	)	(66.4	)
	General corporate (expense)/income		(3,194	)		(3,346	)	4.5			(7,885	)		946		(933.5	)
Earnings before income taxes		$	58,754		$	50,914		15.4		$	189,602		$	177,087		7.1

*

2001 net sales are restated for EITF 00-14 and 00-25

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**

The acquisition of The Turkey Store was completed in the second quarter of fiscal year 2001. Financial results for the nine months ended July 28, 2001 only include five months of The Turkey Store operations. The above three-month time periods are comparable.

Grocery Products

        The Grocery Products segment consists primarily of processing, marketing and sale of shelf-stable food products sold predominately in the retail market.

        Grocery Products sales were even for the quarter and increased 3.0 percent for the nine months compared to the comparable fiscal 2001 periods. Sales tonnage volume was up 0.8 percent for the quarter and 3.4 percent for nine months compared to the comparable fiscal year 2001 periods. Segment profit for the Grocery Products segment increased 27.2 percent for the quarter and 12.4 percent for the nine months compared to fiscal 2001. Lower raw material cost contributed to stronger third quarter results. Certain key raw materials experienced prices that were 40.8 percent lower than the prior year quarter while the Company held firm on product pricing. The Company anticipates raw material prices to be lower than the previous year throughout the remainder of fiscal 2002.

        The Grocery Products' ethnic category continued to post solid volume gains of 9.0 percent over the prior fiscal year third quarter results. The segment's ethnic category is represented by products such asChi-Chi's andHerdez (Mexican),House of Tsang (Asian),Marrakesh Express andPeloponnese (Mediterranean), andCarapelli olive oil (Italian). The strongest performance was realized byChi-Chi's sauces, which experienced a sales volume increase of 19.4 percent compared to the third quarter of last year. The Company expects the ethnic category to continue to grow for the foreseeable future based on continued marketing efforts and domestic population trends.

Refrigerated Foods

        The Refrigerated Foods segment consists primarily of processing, marketing and sale of branded and unbranded pork products for the retail, foodservice and fresh customer markets. This segment also includes processing, marketing and sale of nutritionally enhanced food products sold to hospitals, nursing homes and other health facilities. This segment includes the Meat Products and Foodservice business units and the Hormel HealthLabs operating segment.

        The Refrigerated Foods segment net sales were down 5.2 percent for the quarter and 3.2 percent for the nine months compared to the comparable fiscal 2001 periods. Segment profit increased 4.4 and 1.2 percent for the quarter and nine months, respectively, compared to the prior year. Sales tonnage increased 1.9 percent for the quarter and decreased 3.0 percent for the nine months compared to fiscal 2001 periods. Slaughter levels increased 2.3 percent for the third quarter and are flat for the nine months compared to the comparable fiscal 2001 periods. Hormel's success in enhancing its value-added product lines has significantly reduced the impact of the oversupply of proteins in the marketplace. The Company's supplier hog contracts lowered the profits generated by this segment by about $13,000 for the quarter because contract prices paid for hogs exceeded the spot cash market. The Company expects cash hog prices to remain low for the remainder of the year resulting in higher costs under these contracts.

        The Meat Products business unit continues to replace commodity products with branded value-added product lines. Product lines with strong volume increases over the prior year's third quarter were theCure 81 boneless and spiral sliced hams, increasing 38.0 and 37.0 percent, respectively, and the Company's bacon products, which increased 15.0 percent.

        The Foodservice business unit continues to realize improvement over the previous year as third quarter tonnage volume increased 10.0 percent over the comparable quarter of fiscal year 2001. This increase was partially achieved because of lower third quarter results experienced last year due to a

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weaker restaurant and away-from-home dining industry at that time. The restaurant and away-from-home dining industry began weakening mid fiscal year 2001 as a result of the softening economy, causing a reduction in away-from-home meal spending, and then came under further pressure due to consumers' reactions to the September 11 terrorist attacks. New product launches, such as the third quarter launch ofCafé H which incorporates ethnic sauces with proteins, and continued growth of established Foodservice products such asAlways Tender pork andFast 'N Easy precooked bacon also contributed to the strong growth results. The Company expects the away-from-home meal category to continue to improve over prior year results through the remainder of the fiscal year.

        The Hormel HealthLabs operating segment net sales were even for the third quarter and increased 99.6 percent for the nine months compared to the prior year periods. The quarter results are comparable but the nine month results for fiscal year 2002 were positively impacted by the acquisition and integration of Diamond Crystal Brands Nutritional Products (Diamond Crystal), which was acquired late in the second quarter of fiscal year 2001. Sales growth in the majority of this operating segment's product lines was offset by the elimination of certain products that did not meet the Company's profit objectives.

Jennie-O Turkey Store

        The Jennie-O Turkey Store (JOTS) segment consists primarily of processing, marketing and sale of branded and unbranded turkey products for the retail, foodservice and fresh customer markets.

        JOTS net sales decreased 4.5 percent for the quarter and increased 15.5 percent for nine months compared to the comparable fiscal 2001 periods. Tonnage volume decreased 4.7 percent for the quarter and increased 13.5 percent for the nine months compared to the comparable prior year period results. Segment profit decreased 14.3 percent for the quarter and increased 30.7 percent for the nine months compared to 2001. Adjusted for SFAS No. 142 (see Note C), segment profit decreased 26.3 percent for the quarter and increased 14.3 percent for the nine months compared to the prior year. The acquisition, during the second quarter of fiscal year 2001, and subsequent merger of The Turkey Store into this segment has provided a substantial increase to all nine-month segment measures. JOTS's second and third quarter fiscal 2002 results were significantly weakened due to the protein oversupply in the market caused initially by the Russian ban on poultry products earlier this year. This market condition drove commodity values for whole birds, breasts and dark meat well below normal market levels.

        In addition to the difficult market conditions, the decline in sales volume also resulted from the planned discontinuation of commodity sales that did not meet the Company's profit objectives. The Company's focus on branded, value-added product lines has resulted in a volume tonnage gain of 4.0 percent in this area compared to the prior year's nine-month period. Branded products enhancing overall segment margins and continuing to show strong growth wereJennie-O Turkey Store marinated tenders and corn dogs, "So Easy" oven roasted turkey breast, andJennie-O Turkey Store Cajun-style turkey and flavored chicken deli breasts.

All Other

        The All Other segment consists of a variety of smaller, dissimilar business units and miscellaneous corporate sales. These businesses produce, market and sell beef products, food packaging (i.e. casings for dry sausage) and manufacture, market and sell Company products internationally. The All Other segment includes the operating segments: Dan's Prize, Inc., Vista International Packaging, Inc. (Vista), and Hormel Foods International (HFI). During the fourth quarter of fiscal 2001, the Company sold AFECO, its food equipment manufacturer, which was included in this segment in prior periods.

        All Other net sales decreased 11.1 percent for the quarter and 5.7 percent for the nine months compared to the same fiscal 2001 periods. Segment profit increased 70.9 and 57.0 percent for the

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quarter and nine months, respectively, compared to prior year results. Adjusted for SFAS No. 142 (see Note C), segment profit increased 54.0 percent for the quarter and 42.4 percent for the nine months compared to the prior year. HFI export sales were below expectations due primarily to lower protein commodity sales, which are continuing to be negatively effected by pricing pressure caused by the global oversupply of proteins influenced by the Russian ban on U.S. poultry. The Company expects this condition to continue through the fourth fiscal quarter of 2002. However, HFI's profits continued to remain stronger than last year because of the strength of branded products likeSPAM luncheon meat, which experienced solid gains in Canada, United Kingdom, and South Korea. The Company's joint venture investment in Mexico, Hormel Alimentos, also helped to boost profits compared to the prior year. The reduced ownership level in Campofrio and the subsequent accounting change for this investment will adversely affect this segment's profit results in future quarters.

        Vista, the Company's food packaging subsidiary, continued to attain strong profit gains compared to the prior year's quarter and nine months. This increased profitability was a result of improved market conditions, production efficiencies and the reduction of overhead in all areas of the business.

        Dan's Prize, Inc., the Company's marketer and seller of beef products, benefited from the continued recovery in the away-from-home meal spending and as a result experienced increased third quarter profit results over the same quarter of fiscal year 2001.

Unallocated Income and Expenses

        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. These items are included in the segment table for the purpose of reconciling segment results to earnings before income taxes.

        Net interest and investment income for the third quarter and nine months was a net expense of $5,502 and $18,720, respectively, compared to $6,597 and $11,252 for the comparable periods of 2001. The decrease in the current year's third quarter expense is attributable to the May 2002 retirement of the Company's $54,600 euro denominated debt. The nine-month increase in net interest expense is due to higher debt levels in the first half of the current year compared to the first half of fiscal year 2001 and reduced interest income, due to lower yields on short-term investment securities.

        General corporate expense/income for the third quarter and nine months was a net expense of $3,194 and $7,885, respectively, compared to a net expense of $3,346 for the third quarter and net income of $946 for the nine months of the previous year. The nine-month increase over the prior year is due to higher levels of bad debts as well as changes in expense allocation methods from the previous year. A larger portion of corporate overhead expenses, which are not directly attributable to a segment, now remain at corporate rather than being allocated to the segments.

Related Party Transactions

        There has been no material change in the information regarding Related Party Transactions that was disclosed in the Company's Quarterly Report on Form 10-Q for the quarter ended January 26, 2002.

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LIQUIDITY AND CAPITAL RESOURCES

        Selected financial ratios at the end of the second quarter of fiscal years 2002 and 2001 are as follows:

		End of Quarter
		3rd Quarter 2002		3rd Quarter 2001
Liquidity Ratios
	Current ratio	2.3		2.0
	Receivables turnover	13.7		13.1
	Days sales in receivables	23.9		27.8
	Inventory turnover	8.2		9.6
	Days sales in inventory	44.2		41.2
Leverage Ratio
	Long-term debt to equity	41.5	%	55.5	%
Operating Ratios
	Pre-tax profit to net worth	24.4	%	25.9	%
	Pre-tax profit to total assets	11.6	%	12.6	%

        Cash, cash equivalents and short-term marketable securities were $277,468 at the end of the third quarter of fiscal year 2002 compared to $149,751 at the end of the comparable fiscal 2001 period.

        Cash provided by operations was $228,698, in the nine months of fiscal year 2002, compared to $246,610 in the same period of fiscal 2001. Earnings before income taxes, depreciation and amortization increased to $251,882 in fiscal year 2002 compared to $240,529 from the comparable nine-month period of last year.

        Cash flow from operating activities provides the Company with its principal source of liquidity. The Company does not anticipate a significant risk to cash flow from this source in the foreseeable future because we operate in a stable industry and have strong products across several product lines.

        Cash used in investing activities is down to $47,052 from $511,972 used in the nine months of fiscal 2001, which included the second quarter 2001 acquisitions of The Turkey Store and Diamond Crystal for a total of $434,887. Also contributing to the lower investment spending are reduced expenditures in fixed assets and other investments compared to the prior year. The Company expects total fiscal year 2002 fixed asset spending to reach $65,000.

        Cash used in financing activities was $100,454 in the first nine months of 2002 compared to cash provided by financing activities of $314,467 in the same period of fiscal 2001. Loan proceeds received in fiscal year 2001, for the purchase of The Turkey Store and Diamond Crystal businesses, accounted for the large difference from year to year. The Company's debt to equity ratio decreased to 41.5 percent at the end of the third quarter of fiscal 2002 compared to 55.5 percent from the comparable period of fiscal 2001. This was primarily due to the Company's decision to retire its euro denominated debt in the third quarter. The principal payment on this debt amounted to $54,600 with minor prepayment penalties involved. The Company purchased 187,237 shares of stock in the first nine months of fiscal 2002 under its repurchase plan approved in September 1998. Total shares purchased under the currently approved 10,000,000 share repurchase plan are 9,645,928 shares.

        The Company opened a new $14,500 distribution center under a synthetic lease agreement at the end of its third quarter, fiscal 2001 in Dayton, Ohio. This six-year lease, with a one-year renewal option, requires annual rent payments of about $350. The Company has the option to discontinue this lease arrangement at any time after October 17, 2002, at which time the Company would purchase the facility at the original cost of $14,500. Hormel intends to exercise this option in the fourth quarter of fiscal year 2002.

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FORWARD-LOOKING STATEMENTS

        The Company and its representatives may from time to time make written or oral forward-looking statements, including forward-looking statements made in any part of this report, with respect to their current views and estimates of future economic circumstances, industry conditions, Company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties, which could cause the Company's actual results and experiences to differ materially from the anticipated results and expectations expressed in such forward-looking statements. The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. Among the factors that may affect the operating results of the Company are the following: (i) fluctuations in the cost and availability of raw materials, such as feed grain costs; (ii) changes in the availability and relative costs of labor; (iii) market conditions for finished products, including the supply and pricing of alternative proteins; (iv) effectiveness of advertising and marketing programs; (v) the ability of the Company to successfully integrate newly acquired businesses into existing operations; (vi) risks associated with leverage, including cost increases due to rising interest rates; (vii) changes in regulations and laws, including changes in accounting standards, environmental laws and occupational, health and safety laws; (viii) issues related to food safety, including costs resulting from product recalls, regulatory compliance and any related claims or litigation; (ix) adverse results from ongoing litigation; (x) access to foreign markets together with foreign economic conditions, including currency fluctuations; and (xi) the effect of, or changes in, general economic conditions.

        Exhibit 99.1 to the Annual Report on Form 10-K for year ended October 27, 2001 provides the full text of the Company's cautionary statement relevant to forward-looking statements and information for the purpose of "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995, and is incorporated by reference into this report.

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Item 3. Quantitative and Qualitative Disclosure about Market Risks
            (In Thousands of Dollars)

        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 $17,095. The fair values of the Company's long-term debt were estimated using discounted future cash flows based on the Company's incremental borrowing rates for similar types of borrowing arrangements.

        International.    While the Company does have international operations and operates in international markets, it considers its market risk in such activities to be immaterial.

        Hog Markets.    The Company's earnings are affected by fluctuations in the live hog market. To minimize the impact on earnings, the Company has entered into contracts with producers for the purchase of hogs at formula-based prices over periods of up to 15 years. The contract formula is based on hog production costs. Purchased hogs under contract account for 75 percent and 72 percent of the total hogs purchased by the Company through nine months of 2002 and 2001, respectively. The contracts reduce volatility in hog prices and ensure a steady supply of quality hogs.

        A hypothetical 10 percent change in the cash market would have impacted approximately 25 percent and 28 percent of the hogs purchased to-date in 2002 and 2001, respectively. Under normal market conditions, a 10 percent cash market fluctuation would have a similar variation in commodity values resulting in an immaterial effect on the Company's results.

        Unusual market conditions created by the Russian ban on poultry and the excess supply of protein have restrained commodity values since March 2002. During this period, the Company has paid a premium above the cash market price for hogs purchased under its procurement contracts, creating a procurement loss. Because of the excess supply of proteins, the Company was not able to establish margins sufficient to offset the losses on these procurement contracts.

        During this period, the usual correlation of movement between the cash market price for hogs and the commodity value of pork was disrupted. Under these unusual conditions, a 10 percent decrease in the cash market price for hogs would have allowed greater margins and positively affected third quarter, 2002 earnings after taxes by $2,200. Conversely, an increase in the cash market would have increased the cost of the hogs without a corresponding increase in commodity values and negatively affected third quarter, 2002 earnings after taxes by $2,200.

        The Company expects the current market conditions will exist throughout the fourth quarter.

        Turkey Markets.    The Company raises or contracts on a yearly basis for live turkeys. Production costs in raising turkeys and the Company's turkey procurement contracts are both subject to fluctuations in grain prices, particularly corn and soybeans. Over the long-term, fluctuations in grain prices would cause similar shifts in turkey commodity values. In the short-term, however, a direct correlation between grain prices and turkey commodity values does not exist. A 10 percent increase or decrease in corn and soybean prices would have impacted third quarter earnings after taxes by approximately $2,000.

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PART II—OTHER INFORMATION

HORMEL FOODS CORPORATION

Item 1.	Legal Proceedings
	The Company knows of no pending material legal proceedings.
Item 4.	Results of Votes of Security Holders
	None
Item 6.	Exhibits and Reports on Form 8-K
(a)	Exhibits
	99.1	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	99.2	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b)	Reports on Form 8-K
	Form 8-K was filed on April 30, 2002, reporting that Hormel Foods Corporation was lowering its earnings guidance for the second quarter of fiscal 2002 from 30-34 cents to 20-24 cents per share.
	Form 8-K was filed on May 1, 2002 announcing that Hormel Foods Corporation and Excel Corporation, a wholly-owned subsidiary of Cargill, Incorporated, have signed a letter of intent to form a joint venture that will market branded fresh case-ready beef and pork in the United States.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	HORMEL FOODS CORPORATION                 (Registrant)
Date:September 10, 2002	By	/s/ M. J. McCOYM. J. McCOY Executive Vice President and Chief Financial Officer
Date:September 10, 2002	By	/s/  J. N. SHEEHAN      J. N. SHEEHAN Vice President and Controller

21

Certification Required Under Section 302 of the Sarbanes-Oxley Act of 2002

I, Joel W. Johnson, Chairman, President and Chief Executive Officer of Hormel Foods Corporation, certify that:

(1)

I have reviewed this quarterly report on Form 10-Q of Hormel Foods Corporation;

(2)

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

(3)

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date:September 10, 2002
Signed:
/s/  JOEL W. JOHNSON      JOEL W. JOHNSON
Chairman, President and
Chief Executive Officer

22

Certification Required Under Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael J. McCoy, Executive Vice President and Chief Financial Officer of Hormel Foods Corporation, certify that:

(1)

I have reviewed this quarterly report on Form 10-Q of Hormel Foods Corporation;

(2)

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

(3)

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date:September 10, 2002
Signed:
/s/ MICHAEL J. McCOYMICHAEL J. McCOY
Executive Vice President
and Chief Financial Officer

23

QuickLinks

PART I—FINANCIAL INFORMATION
HORMEL FOODS CORPORATION STATEMENTS OF FINANCIAL POSITION (In Thousands of Dollars)
HORMEL FOODS CORPORATION STATEMENTS OF FINANCIAL POSITION (In Thousands of Dollars)
HORMEL FOODS CORPORATION STATEMENTS OF EARNINGS (In Thousands of Dollars, Except Per Share Amounts) (Unaudited)
HORMEL FOODS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars) (Unaudited)
HORMEL FOODS CORPORATION NOTES TO FINANCIAL STATEMENTS (In Thousands, Except Per Share and Percentage Amounts) (Unaudited)
CRITICAL ACCOUNTING POLICIES
RESULTS OF OPERATIONS
Overview
Consolidated Results
Segment Results
Related Party Transactions
LIQUIDITY AND CAPITAL RESOURCES
FORWARD-LOOKING STATEMENTS
PART II—OTHER INFORMATION HORMEL FOODS CORPORATION
SIGNATURES
Certification Required Under Section 302 of the Sarbanes-Oxley Act of 2002
Certification Required Under Section 302 of the Sarbanes-Oxley Act of 2002