HORMEL FOODS CORP /DE/ (HRL) FY 2022 MD&A

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Executive Overview

Fiscal 2022: The Company achieved its third consecutive year of record net sales in fiscal 2022. Net sales increased 9 percent to $12.5 billion, primarily driven by the full year inclusion of the Planters® snack nuts business and by growth from the Company's foodservice businesses. Organic net sales1 growth of 6 percent can be attributed to improvement from the foodservice businesses and pricing actions to mitigate inflationary pressures in each business segment (1See explanation of non-GAAP financial measures in the Consolidated Results section). Volume and organic volume1 declined 7 percent and 8 percent, respectively. Consistent with the Company's long-term strategy to better align resources to value-added growth, the overall decline in volume was primarily due to lower commodity sales resulting from the Company's new pork supply agreement, which was effective January 1, 2022. Net earnings increased 10 percent compared to fiscal 2021, benefiting from the inclusion of the Planters® snack nuts business, significant profit growth for the Jennie-O Turkey Store segment, and higher sales across the foodservice businesses. Net earnings were negatively impacted by broad-based inflationary pressures stemming from raw materials, packaging, freight, labor, and other inputs. Pricing actions to mitigate these pressures were announced and implemented throughout fiscal 2022. Diluted earnings per share for fiscal 2022 was $1.82, compared to $1.66 last year. Fiscal 2022 contained one less week than the prior year.

Earnings for Jennie-O Turkey Store increased significantly due to higher commodity prices and foodservice sales. Highly pathogenic avian influenza (HPAI) was confirmed in the Jennie-O Turkey Store supply chain in March 2022. In the second half of the year, the team effectively managed a limited turkey supply and maximized operational performance. Refrigerated Foods segment profit for the full year increased, primarily driven by strong results from the foodservice businesses, more than offsetting higher operational and logistics costs. Grocery Products segment profit declined, as the contribution from the Planters® snack nuts business and organic net sales growth was more than offset by inflationary pressures and lower results from MegaMex. International & Other segment profit declined due in large part to lower results from the export business, which was negatively impacted by logistics challenges and meaningfully higher freight and warehouse expenses.

The Company again reinvested into the business through capital expenditures and returned a record amount of cash to shareholders in the form of dividends. Capital expenditures in fiscal 2022 were $279 million, including investments in new production capabilities for retail and foodservice pepperoni, an expansion of bacon capacity, work on a new line for the SPAM® family of products to be opened in the first half of fiscal 2023, and other projects to support growth of branded products and increase automation. The annual dividend for 2023 will be $1.10 per share and marks the 57th consecutive year of dividend increases.

In August 2022, the Company announced a new strategic operating model and has transitioned, effective October 31, 2022, to three operating segments – Retail, Foodservice, and International. The three new segments will continue to be supported by the Company's One Supply Chain team and corporate functions. Additionally, the Company will be standing up a Brand Fuel Center of Excellence, which will house enterprise-wide brand management expertise, e-commerce capabilities, insights-led innovation and analytical support to further enable data-driven decisions. Changes to the Company's operating segments have no impact on historical consolidated results of operations, financial position, or cash flows. Earnings will be reported under this structure beginning with the release of fiscal 2023 first quarter results in early March 2023. The Company will provide recast financial information for fiscal years 2021 and 2022 in February 2023.

Fiscal 2023 Outlook: The Company expects sales and earnings growth in fiscal 2023. From a top-line perspective, the Company anticipates to benefit from higher levels of brand investment, increased production capacity, pricing actions effective in the second half of fiscal 2022, and actions related to its new strategic operating model. Earnings growth is expected from the Foodservice and International segments and improvement across the supply chain. The Company expects to again operate in a volatile, complex and high-cost environment in fiscal 2023. Risks to the outlook include incremental inflationary pressures, further supply chain disruption, and the impact of deteriorating macroeconomic conditions on the Company's customers, consumers, and operators.

The Company remains in a strong financial position due to its consistent cash flow, liquidity, and strong balance sheet. The Company plans to continue to support the business through increased marketing and advertising investments for its leading brands as well as investments into its production capabilities, including a new line for the SPAM® family of products, a large investment to expand its operations and capabilities in China, and projects to increase automation and efficiency. The Company remains committed to returning cash to shareholders in the form of dividends.

A detailed review of the Company's fiscal 2022 performance compared to fiscal 2021 appears in the following section. A detailed review of the fiscal 2021 performance compared to fiscal 2020 is set forth in Part II, Item 7 of the Company's Form 10-K for the fiscal year ended October 31, 2021, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated herein by reference.

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Results of Operations

OVERVIEW

The Company is a processor of branded and unbranded food products for retail, foodservice, deli, and commercial customers.

The Company operates in the following four reportable segments:

The Company’s fiscal year consisted of 52 weeks in fiscal years 2022 and 2020 and 53 weeks in fiscal year 2021. Fiscal year 2023 will consist of 52 weeks.

CONSOLIDATED RESULTS

Net Earnings and Diluted Earnings Per Share

Volume and Net Sales

(1)  See the "Non-GAAP Financial Measures" section below for a description of the Company's use of measures not defined by U.S. generally accepted accounting principles (GAAP)

Consistent with the Company's long-term strategy to better align resources to value-added growth, the overall decline in volume for the fourth quarter and full year of fiscal 2022 was primarily due to lower commodity sales resulting from the Company's new pork supply agreement, which was effective January 1, 2022.

Net sales decreased for the fourth quarter of fiscal 2022 due to reduced commodity sales and the impact from an additional week of sales last year. Organic net sales for the fourth quarter increased, led by growth from the Grocery Products and International & Other segments. The Grocery Products segment benefited from pricing actions effective at the beginning of the fourth quarter.

Fiscal 2022 marked the third consecutive year of record sales for the Company. Record net sales were primarily driven by the inclusion of the Planters® snack nuts business and growth from the Company's foodservice businesses. All segments implemented pricing actions during the fiscal year to combat inflationary pressures.

In fiscal 2023, the Company expects sales growth and to benefit from higher levels of brand investment, increased production capacity, pricing actions effective in the second half of fiscal 2022, and actions related to its new strategic operating model.

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Cost of Products Sold

Cost of products sold for the fourth quarter decreased, resulting from lower sales due to the additional week in fiscal 2021. For fiscal 2022, cost of products sold increased due to inflationary pressures stemming from raw materials, packaging, freight, labor, and other inputs. The inclusion of the Planters® snack nuts business was also a driver of higher costs for the full year.

In fiscal 2023, costs are expected to remain elevated due to the continued impacts of broad-based inflation. Raw material input costs for pork, beef, turkey, and feed are anticipated to remain volatile and above historical levels.

Gross Profit

Consolidated gross profit as a percentage of net sales for the fourth quarter and full year of fiscal 2022 increased primarily due to improved profitability from the Jennie-O Turkey Store segment, the inclusion of the Planters® snack nuts business, and pricing actions to help mitigate inflationary pressures across all segments. Gross profit as a percentage of net sales also benefited from the reduction of lower margin commodity sales resulting from the Company's new pork supply agreement.

Compared to the prior year, gross profit as a percentage of net sales for the fourth quarter of fiscal 2022 increased for the Jennie-O Turkey Store segment and declined for the other segments. For fiscal 2022, gross profit as a percentage of net sales increased for the Jennie-O Turkey Store and International & Other segments and decreased for the Refrigerated Foods and Grocery Products segments. All business segments were negatively impacted by broad-based inflationary pressures.

In fiscal 2023, the Company expects gross profit as a percentage of net sales to be comparable to fiscal 2022. Incremental cost inflation poses the largest risk to this assumption.

Selling, General, and Administrative (SG&A)

SG&A expenses for the fourth quarter of fiscal 2022 declined primarily due to the additional week in fiscal 2021. SG&A expenses for fiscal 2022 increased due to the inclusion of the Planters® snack nuts business and higher marketing and advertising investments. As a percent of net sales, SG&A expenses declined for the full year, driven by record sales and disciplined cost management.

Advertising investments in fiscal year 2022 were $157 million, representing a 14 percent increase compared to fiscal 2021.

In fiscal 2023, the Company intends to continue investing in key brands including Planters®, SPAM®, SKIPPY®, Columbus®, Hormel® Black Label®, Hormel® pepperoni, and Jennie-O®.

Research and development continues to be a vital part of the Company's strategy to grow existing brands and expand into new branded items. Research and development expenses were $8.6 million and $34.7 million for the fourth quarter and full year of fiscal 2022, respectively, compared to $8.3 million and $33.6 million for the corresponding periods in fiscal 2021.

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Equity in Earnings of Affiliates

Equity in earnings of affiliates for the fourth quarter and full year of fiscal 2022 decreased significantly due to lower results for MegaMex. MegaMex results have been negatively impacted by inflationary pressures, including significantly higher costs for avocados.

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 as of October 30, 2022, was as follows:

Interest and Investment Income and Interest Expense

Interest and investment income decreased in the fourth quarter and full year of fiscal 2022 primarily due to losses on the rabbi trust. Interest expense in fiscal 2022 reflects the full year impact of debt issued in 2021.

Effective Tax Rate

The effective tax rate for fiscal 2021 included the benefit of one-time state tax discrete items. For additional information, refer to Note N - Income Taxes.

The Company expects the effective tax rate in fiscal 2023 to be between 21.0 and 23.0 percent.

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SEGMENT RESULTS

Net sales and segment profit for each of the Company’s reportable segments are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the segment profit and other financial information shown below. Additional segment financial information can be found in Note P - Segment Reporting.

Grocery Products

Net sales for the fourth quarter of fiscal 2022 increased due to strong demand for SKIPPY® peanut butter and the impact of pricing actions across the Mexican and simple-meals portfolios. For the full year, net sales increased primarily due to the inclusion of the Planters® snack nuts business and the impact from strategic pricing actions.

For the fourth quarter of fiscal 2022, segment profit declined, as pricing actions did not offset the impact from continued inflationary pressures. Full year segment profit decreased, as the contribution from the Planters® snack nuts business and organic net sales growth was more than offset by inflationary pressures and lower results from MegaMex.

In fiscal 2023, the Grocery Products segment will be reported within the Company's new Retail and Foodservice segments. Refer to the "Fiscal 2023 Outlook" in the "Executive Summary" for additional forward-looking commentary.

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Refrigerated Foods

Volume and net sales declined in the fourth quarter of fiscal 2022 due to the impact from an additional week in the fourth quarter of last year and lower commodity sales. Products such as Hormel® Natural Choice® meats, Hormel® Bacon 1TM fully cooked bacon, Hormel® Fire BraisedTM flame-seared meats, Hormel Gatherings® party trays and Applegate® breaded chicken grew volume and sales for the quarter. For fiscal 2022, net sales increased due to strong results from the foodservice businesses, strategic pricing actions across the portfolio, and the inclusion of the Planters® snack nuts business in the convenience channel. Consistent with the Company's long-term strategy to better align resources to value-added growth, the overall decline in volume for the fourth quarter and full year was due primarily to lower commodity sales resulting from the Company's new pork supply agreement.

The decline in segment profit for the fourth quarter of fiscal 2022 was driven by lower commodity profitability and higher operational, logistics and raw material costs. Segment profit growth for full year of fiscal 2022 was primarily due to strong results from the foodservice businesses, more than offsetting higher operational and logistics costs.

In fiscal 2023, the Refrigerated Foods segment will be reported within the Company's new Retail and Foodservice segments. Refer to the "Fiscal 2023 Outlook" in the "Executive Summary" for additional forward-looking commentary.

Jennie-O Turkey Store

As anticipated, volume and sales declined in the fourth quarter of fiscal 2022 as a result of the supply impacts on the Company's vertically integrated supply chain from HPAI. For fiscal 2022, higher foodservice and whole-bird sales due to favorable pricing drove the marginal sales increase.

For the fourth quarter of fiscal 2022, segment profit growth was primarily due to higher commodity prices and improved value-added mix. For the full year fiscal 2022, higher commodity prices and foodservice sales drove the substantial improvement in segment profit.

In fiscal 2023, the Jennie-O Turkey Store segment will be reported within the Company's new Retail, Foodservice, and International segments. The Company expects the impacts from HPAI to reduce production volume in its turkey facilities through at least the first half of fiscal 2023. Refer to the "Fiscal 2023 Outlook" in the "Executive Summary" for additional forward-looking commentary.

International & Other

In the fourth quarter of fiscal 2022, volume and net sales growth from the SPAM® and SKIPPY® brands and the multinational businesses were offset by lower fresh pork and refrigerated export sales. For fiscal 2022, volume and sales declined as a result of lower commodity sales due to the Company's new pork supply agreement and ongoing export logistics challenges.

Segment profit declined in the fourth quarter of fiscal 2022, as growth in China did not overcome the impact of lower margins and higher logistics expenses for the export business. Segment profit for the full year declined due in large part to lower results from the export business, which was negatively impacted by logistics challenges and meaningfully higher freight expenses.

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In fiscal 2023, the International & Other segment will be reported within the Company's new International segment. Refer to the "Fiscal 2023 Outlook" in the "Executive Summary" for additional forward-looking commentary.

Unallocated Income and Expense

The Company does not allocate deferred compensation, investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at the corporate level. Equity in Earnings of Affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included in the segment table for the purpose of reconciling segment results to Earnings Before Income Taxes.

For the fourth quarter of fiscal 2022, Net Unallocated Expense increased slightly as unfavorable investment performance was mostly offset with lower corporate expense.

For fiscal 2022, Net Unallocated Expense decreased due to one-time acquisition costs and accounting adjustments of $43 million related to the acquisition of the Planters® snack nuts business in fiscal 2021. The overall decline was partially offset by higher interest expense and lower investment income net of deferred compensation.

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Non-GAAP Financial Measures

The non-GAAP adjusted financial measurement of adjusted diluted earnings per share is presented to provide investors with additional information to facilitate the comparison of past and present operations. This measurement excludes the impact of the acquisition-related expenses and accounting adjustments related to the acquisition of the Planters® snack nuts business. The tax impact was calculated using the effective tax rate for the quarter in which the expenses and accounting adjustments were incurred.

The non-GAAP adjusted financial measurements of organic volume and organic net sales are presented to provide investors with additional information to facilitate the comparison of past and present operations. Organic volume and organic net sales exclude the impacts of the acquisition of the Planters® snack nuts business (June 2021) in the Grocery Products, Refrigerated Foods, and International & Other segments. Organic volume and organic net sales also exclude the impact of the 53rd week in fiscal 2021 as approximated based on average weekly sales for the fourth quarter (fourteen weeks) ended October 31, 2021.

The Company provides earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA) because these measures are useful to management and investors as indicators of operating strength relative to prior years and are commonly used to benchmark the Company’s performance.

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.

The following tables show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures.

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ORGANIC VOLUME (NON-GAAP)

ORGANIC NET SALES (NON-GAAP)

EBIT and EBITDA

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LIQUIDITY AND CAPITAL RESOURCES

When assessing liquidity and capital resources, the Company evaluates cash and cash equivalents, short-term and long-term investments, income from operations, and borrowing capacity.

Cash Flow Highlights

Cash and cash equivalents increased in fiscal 2022. The Company’s income from operations was sufficient to cover dividend payments and capital expenditures. Additional details related to significant drivers of cash flows are provided below.

Cash Provided by (Used in) Operating Activities

▪Cash flows from operating activities were largely impacted by changes in operating assets and liabilities.

–Accounts receivable decreased $28 million in fiscal 2022 primarily due to timing of collections. The $192 million increase in fiscal 2021 is largely due to increased sales and the incremental impact of the Planters® snack nuts business.

–In fiscal 2022, inventory increased $352 million due to inflation in raw material and other input costs and maintaining higher inventory levels. The $145 million increase in fiscal 2021 is due to higher raw material and supply costs and the acquisition of the Planters® snack nuts business.

–Accounts payable and accrued expenses decreased $15 million in fiscal 2022 related to the timing of payments. In fiscal 2021, accounts payable and accrued expenses increased $115 million related to the incremental impact of the Planters® snack nuts business.

Cash Provided by (Used in) Investing Activities

▪Capital expenditures were $279 million and $232 million in fiscal 2022 and 2021, respectively. The largest spend in both years was related to capacity expansion in Omaha, Nebraska. Additional projects included an expansion of bacon capacity at the Austin, Minnesota facility and a new production line for the SPAM® family of products in Dubuque, Iowa in fiscal 2022 and Project Orion in fiscal 2021.

▪In fiscal 2021, the Company acquired the Planters® snack nuts business for $3.4 billion.

Cash Provided by (Used in) Financing Activities

▪Cash dividends paid to the Company’s shareholders continue to be an ongoing financing activity for the Company with payments totaling $558 million in fiscal 2022 and $523 million in fiscal 2021. The dividend rate was $1.04 per share in fiscal 2022, which reflected a 6 percent increase over the fiscal 2021 rate of $0.98 per share.

▪The Company issued $2.3 billion of long-term debt in fiscal 2021. Proceeds from the issuance, along with cash on hand, were used to fund the acquisition of the Planters® snack nuts business.

▪The Company repaid $250 million of its senior unsecured notes upon maturity in fiscal 2021.

Sources and Uses of Cash

The Company's balanced business model, with diversification across raw material inputs, channels, and categories, provides stability in ever changing economic environments. The Company maintains a disciplined capital allocation strategy by applying a waterfall approach, which focuses first on required uses of cash such as capital expenditures to maintain facilities, dividend returns to investors, mandatory debt repayments, and pension obligations. Next, the Company looks to strategic items in support of growth initiatives such as capital projects, acquisitions, additional dividend increases, and working capital investments. Finally, the Company evaluates opportunistic uses including incremental debt repayment and share repurchases.

The Company believes its anticipated income from operations, cash on hand, and borrowing capacity under the current credit facility will be adequate to meet all short-term and long-term commitments. The Company continues to look for opportunities to make investments and acquisitions that align with its strategic priorities. The Company's ability to leverage its balance sheet through the issuance of debt provides the flexibility to pursue strategic opportunities which may require additional funding.

Dividend Payments

The Company remains committed to providing returns to investors through cash dividends. The Company has paid 377 consecutive quarterly dividends since becoming a public company in 1928. The annual dividend rate for fiscal 2023 will increase to $1.10 per share, representing the 57th consecutive annual dividend increase.

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Capital Expenditures

Capital expenditures are first allocated to required maintenance and then growth opportunities based on the needs of the business. Capital expenditures supporting growth opportunities in fiscal 2023 will focus on projects for capacity, innovation, automation, and new technology. Capital expenditures for fiscal 2023 are estimated to be $350 million.

Debt

As of October 30, 2022, the Company’s outstanding debt included $3.3 billion of fixed rate unsecured senior notes due in fiscal 2024, 2028, 2030, and 2051. During fiscal 2022, the Company made $55 million of interest payments and expects to make $55 million of interest payments in fiscal 2023 on these notes. See Note L - Long-term Debt and Other Borrowing Arrangements for additional information.

Borrowing Capacity

As a source of short-term financing, the Company maintains a $750 million unsecured revolving credit facility. The maximum commitment under this credit facility may be further increased by $375 million, generally by mutual agreement of the lenders and us, subject to certain customary conditions. Funds drawn from this facility may be used by the Company to refinance existing debt, for working capital or other general corporate purposes, and for funding acquisitions. The lending commitments under the facility are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding. As of October 30, 2022, the Company had no outstanding draws from this facility.

Debt Covenants

The Company’s debt and credit agreements contain customary terms and conditions including representations, warranties, and covenants. These debt covenants limit the ability of the Company to, among other things, incur debt for borrowed money secured by certain liens, engage in certain sale and leaseback transactions, and require maintenance of certain consolidated leverage ratios. As of October 30, 2022, the Company was in compliance with all covenants and expects to maintain compliance in the future.

Cash Held by International Subsidiaries

As of October 30, 2022, the Company had $170 million of cash and cash equivalents held by international subsidiaries. The Company maintains all undistributed earnings as permanently reinvested. The Company evaluates the balance and uses of cash held internationally based on the needs of the business.

Share Repurchases

The Company is authorized to repurchase 3,987,494 shares of stock as part of an existing plan approved by the Company’s Board of Directors. During fiscal year 2022, the Company did not repurchase any shares of stock. The Company continues to evaluate share repurchases as part of its capital allocation strategy.

Commitments

The following table shows a schedule of the Company's material cash commitments as of October 30, 2022:

(1) The Company commits to purchase quantities of livestock, grain, and other raw materials to ensure a steady supply of production inputs. The Company uses hedging programs to manage price risk associated with a portion of the future grain and hog commitments. The purchase commitments listed above do not reflect the impact of the hedging instruments that manage the risk of fluctuating commodity markets. See Note F - Derivatives and Hedging and Note J - Commitments and Contingencies for additional information.

(2) As of October 30, 2022, the Company’s outstanding debt included unsecured senior notes due in fiscal 2024, 2028, 2030, and 2051. The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. See Note L - Long-term Debt and Other Borrowing Arrangements for additional information.

(3) Represents pension and other post-retirement benefit payments related to the Company's unfunded defined benefit plans. Benefit payments reflect expectations for the next ten years as estimates are not readily available beyond that point. See Note G - Pension and Other Post-retirement Benefits for additional information.

(4) See Note K - Leases for additional detail.

(5) Includes obligations related to infrastructure improvements supporting various manufacturing facilities.

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Off Balance Sheet Arrangements

As of October 30, 2022, the Company had $49.4 million of standby letters of credit issued on its behalf. The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs. This amount includes revocable standby letters of credit totaling $3.1 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.

CRITICAL ACCOUNTING ESTIMATES

Management's discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. See Note A - Summary of Significant Accounting Policies for additional information.

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

Revenue Recognition

Description: The Company recognizes sales at the point in time when the performance obligation has been satisfied and control of the product has transferred to the customer. Obligations for the Company are usually fulfilled once shipped product is received or picked up by the customer. Revenue is recorded net of applicable provisions for discounts, returns, and allowances.

Judgments and Uncertainties: 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 control is transferred. Coupons are used as an incentive for consumers to purchase various products. The coupons reduce revenue 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 revenue 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. Accruals with customers are based on defined performance.

Sensitivity of Estimate to Change: The liability relating to these agreements is based on a review of the outstanding contracts on which performance has taken place but 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 estimates used to determine these liabilities.

Income Taxes

Description: 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.

Judgments and Uncertainties: 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. Judgment is required in evaluating the Company’s tax positions and determining its annual tax provision.

Sensitivity of Estimate to Change: 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 its technical merits. The 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. As of October 30, 2022, the Company had $21.8 million of unrecognized tax benefits, including estimated interest and penalties, recorded in Other Long-term Liabilities.

Business Combinations

Description: The Company accounts for business combinations using the acquisition method of accounting. The Company allocates the purchase price of an acquired business to the assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date with the excess recorded as Goodwill.

Judgments and Uncertainties: The acquisition method of accounting requires the Company to make significant estimates and assumptions regarding the fair value of the acquired assets. Fair value of the assets and liabilities acquired is determined through established valuation techniques, such as the income, cost or market approach. The Company may utilize third-party

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valuation experts to assist in the fair value determination. The fair value measurements of identifiable intangibles are based on available historical information and expectations and assumptions about the future. Significant assumptions used to value identifiable intangible assets may include projected revenue growth, estimated cash flows, discount rates, royalty rates, and other factors.

Determining the useful life of an intangible asset also requires judgment. Certain acquired brands are expected to have indefinite lives based on their history and the Company’s intent to continue to support and build the brands. Other acquired assets, such as customer relationships, are expected to have determinable useful lives.

Sensitivity of Estimate to Change: The Company did not have any business combinations in fiscal 2022. On June 7, 2021, the Company acquired the Planters® snack nuts business for $3.4 billion and used a third-party valuation specialist to perform the valuation of the assets acquired. Refer to Note B - Acquisitions and Divestitures for additional information. The Company acquired tradenames which were determined to have a fair value of $712.0 million. Key assumptions used to calculate the fair value of the tradenames using a relief from royalty model included revenue projections, royalty rates, and discount rates. The Company also identified customer relationships which were assigned a fair value of $51.0 million using the distributor method under the income approach. Assumptions in valuing this asset included future earnings projections, customer attrition rate, and discount rate, among others. The Company believes the estimates applied are based on reasonable assumptions, but which are inherently uncertain. As a result, actual results may differ from the assumptions and judgments used to determine fair value of the assets acquired, which could result in material impairment losses in the future.

Goodwill and Other Indefinite-Lived Intangibles

Description: Other indefinite-lived intangible assets primarily include tradenames obtained through business acquisitions which are originally recorded at their estimated fair values at the date of acquisition. Goodwill is the residual after allocating the purchase price to net assets acquired and is allocated across the Company’s reporting units: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International. Goodwill and indefinite-lived intangible assets are not amortized but tested annually for impairment, or more frequently if impairment indicators arise. If the carrying value of these assets exceeds the estimated fair value, the asset is considered impaired which requires a reduction to earnings. See Note A - Summary of Significant Accounting Policies for additional details regarding the Company’s procedures.

Judgments and Uncertainties: Determining whether impairment indicators exist and estimating the fair value of the Company’s goodwill reporting units and intangible assets for impairment testing requires significant judgment. Indefinite-lived tradenames are evaluated for impairment using an income approach utilizing the relief from royalty method. Significant assumptions include royalty rate, annual projected revenue, discount rate, and estimated long term growth rate. Estimating the fair value of goodwill reporting units using the discounted cash flow model requires management to make assumptions and projections of future cash flows, revenues, earnings, discount rates, long term growth rates, and other factors.

Sensitivity of Estimate to Change: The assumptions used to assess impairment consider historical trends, macroeconomic conditions, and projections consistent with the Company’s operating strategy. Changes in these estimates can have a significant impact on the assessment of fair value which could result in material impairment losses.

During the fourth quarter of fiscal 2022, the Company performed a qualitative assessment of goodwill. No goodwill impairment charges were recorded as a result of the testing. The Company last completed quantitative testing in fiscal 2021 and the estimated fair value of each goodwill reporting unit exceeded the calculated carrying value by more than 50 percent. Based on the 2021 testing, a 10 percent decline in projected cash flows or 10 percent increase in the discount rate would not result in an impairment.

The Company also performed qualitative impairment testing for indefinite-lived intangible assets in the fourth quarter of fiscal 2022. No impairment charges were recorded as a result of the testing. The Company last completed quantitative testing in fiscal 2021 and the estimated fair value of each indefinite-lived intangible asset exceeded the carrying value by more than 10 percent. Based on the fiscal 2021 testing, a 10 percent decline in forecasted revenue or 10 percent increase in the discount rate would not result in a material impairment.

Pension and Other Post-Retirement Benefits

Description: The Company sponsors several defined benefit pension and post-retirement health care benefit plans and recognizes the associated expenses, assets, and liabilities.

Judgments and Uncertainties: In accounting for these employment costs and the associated benefit obligations, management must make a variety of assumptions and estimates including mortality rates, discount rates, compensation increases, expected return on plan assets, health care cost trend rates, and interest crediting rates. The Company considers historical data as well as current facts and circumstances when determining these estimates. Expected long-term rate of return on plan assets is based on fair value, composition of the asset portfolio, historical long-term rates of return, and estimates of future performance. Mortality and discount rates used are based on actuarial tables elected at each fiscal year-end. The Company uses third-party specialists

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to assist in the determination of these estimates and the calculation of certain employee benefit expenses and the outstanding obligation.

Benefit plan assets are stated at fair value. Due to the lack of readily available market prices, private equity investments are valued by models using a combination of available market data and unobservable inputs that consider earnings multiples, discounted cash flows, and other qualitative and quantitative factors. Other benefit plan investments are measured at Net Asset Value (NAV) per share of the fund's underlying investments as a practical expedient.

Sensitivity of Estimate to Change: The assumed discount rate, expected long-term rate of return on plan assets, rate of future compensation increase, interest crediting rate, and the health care cost trend rate have a significant impact on the amounts reported for the benefit plans. For the year ended October 30, 2022, the Company had $1,200.0 million and $212.0 million in pension benefit obligation and post-retirement benefit obligation, respectively. For fiscal 2023, the Company expects pension benefit costs of $37.4 million and post-retirement benefit costs of $12.2 million. A one-percentage-point change in these rates would have the following effects:

As of October 30, 2022, the Company had $88.2 million and $666.1 million of private equity and NAV investments, respectively. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements. The Company also holds quarterly meetings with the investment adviser to review fund performance, which include comparisons to the relevant indices. On an annual basis, the Company performs pricing tests on certain underlying investments to gain additional assurance of the reliability of values received from the fund manager.

See Note G - Pension and Other Post-retirement Benefits for additional information.