## Executive Overview 

Fiscal 2014: Hormel Foods achieved record sales and earn- ings for fiscal 2014. Sales grew 6.5 percent to $9.3 billion with four of the five reporting segments recording top-line increases. Net earnings for the year were $602.7 million, an increase of 14.5 percent over 2013, with three of five segments contributing to the growth. Earnings per diluted share were $2.23, a 14.4 percent improvement compared to last year. 

Significant contributions by the Refrigerated Foods, Jennie-O Turkey Store, and International & Other segments drove top and bottom-line results, with each delivering double-digit percentage segment operating profit growth. Financial performance for the Refrigerated Foods segment improved over last year as strong pork operating margins, higher meat commodity markets, and increased sales of value-added products in the retail and foodservice businesses drove segment results. Our Jennie-O Turkey Store segment was also able to capitalize on the growth of value-added sales and higher meat commodity markets. Segment profit performance was negatively impacted by higher grain and energy costs and lower live production performance associated with colder than normal weather conditions in the first half of the year. The International & Other segment benefitted from growth in the China businesses and increased royalty income, along with momentum from export sales of SKIPPY ®  peanut butter and pork products, to drive year-over-year gains. Grocery Products results were pressured by higher protein input costs and volume softness associated with price increases on cer- tain products. Specialty Foods segment net sales and segment profit were negatively impacted due to the fourth quarter 2013 expiration of the agreement allowing Diamond Crystal Brands to sell certain sugar substitutes in foodservice trade chan- nels as well as 2014 acquisition-related expenses. General corporate expense was higher due to an increase in bad debt expense, while net interest and investment expense increased due to lower returns on the Company’s rabbi trust. 

Our financial performance continued to generate substantial operating cash flows. In fiscal 2014, we completed the acquisi- tions of the China based SKIPPY ®  peanut butter business and the CytoSport Holdings, Inc. (CytoSport) business, makers of the Muscle Milk ®  brand of products, for a total of $466.2 mil- lion. We also repurchased 1.3 million shares of common stock for $58.9 million and announced a 25.0 percent increase to our dividend rate after a 17.6 percent increase last year. The annual dividend for 2015 will be $1.00 per share and marks the 49th consecutive year of dividend increases. 

Fiscal 2015 Outlook: We expect to deliver sales and earnings in fiscal 2015 that exceed our five percent sales and ten percent earnings growth goals. While we expect continued price vola- tility in commodity meats, we expect prices to normalize as the year progresses. These lower meat protein prices will provide 

input cost relief for the Grocery Products segment. Strong growth in the foodservice and retail businesses and improved live production results within the Refrigerated Foods segment will offset challenging comparisons for our pork operations. More favorable grain markets are expected to benefit the Jennie-O Turkey Store segment, partially offset by lower com- modity turkey meat prices. We plan modest increases to turkey and pork production in fiscal 2015 to support our value-added businesses. A full year of contributions from the CytoSport business will aid in the delivery of year-over-year earnings growth for Specialty Foods. We look for continued growth of pork exports and our China businesses, complemented by the SPAM ®  family of products and SKIPPY ®  peanut butter, to deliver growth in our International & Other segment. 

Product innovation and building our branded, value-added products will remain priorities in fiscal 2015. Introducing new flavors, convenience, and creative menu options for our customers and consumers are vital to our strategy to keep our products relevant in today’s changing marketplace. We will continue to support our numerous iconic brands with increased advertising in fiscal 2015 and expect these efforts to support our business growth goals. Strong cash flow, along with a solid balance sheet, will enable us to continue to return cash to shareholders, while providing the foundation to expand our business through internal investment and strategic acquisitions. 

## Critical Accounting Policies 

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

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

