UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] | | | | | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 28, 201831, 2021
or
[ ] | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________________________________________________ to _________________________________________________________________
Commission File Number: 1-2402
HORMEL FOODS CORPORATION
(Exact name of registrant as specified in its charter)
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| Delaware | | 41-0319970 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1 Hormel Place, Austin Minnesota | | 55912-3680 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code (507) 437-5611
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol | | Name of each exchange on which registered |
| Common Stock $0.01465 par value | | HRL | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X ☒ No☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X☐
No ☒
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, and (2) has been subject to such filing requirements for the past 90 days. Yes X ☒ No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X☒ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
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Large accelerated filer X
| Accelerated filer
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Non-accelerated filer
| Smaller reporting company
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| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes☐ No X☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of April 29, 2018,25, 2021, was $9,908,981,177$13,101,074,449 based on the closing price of $36.47$46.39 on the last business day of the registrant’s most recently completed second fiscal quarter.
As of November 30, 2018,December 5, 2021, the number of shares outstanding of each of the registrant’s classes of common stock was as follows:
Common Stock, $0.01465 – Par Value 534,595,685542,569,949 shares
Common Stock Non-Voting, $0.01 Par Value – 0 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held January 29, 2019,25, 2022, are incorporated by reference into Part III, Items 10-14. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
HORMEL FOODS CORPORATION
TABLE OF CONTENTS
PART I
Item 1. BUSINESS
(a) General Development of Business
Hormel Foods Corporation, a Delaware corporation (the Company)(collectively, the "Company", "we," "us,", "our"), was founded by George A. Hormel in 1891 in Austin, Minnesota, as Geo. A. Hormel & Company. The Company started as a processor of meat and food products and continues in this line of business. The Company’s name was changed to Hormel Foods Corporationbusiness with emphasis on January 31, 1995. The Company is primarily engaged in the production of a variety of meat and food products and the marketing of those products throughout the United States and internationally. Although pork and turkey remain the major raw materials for its products, the Company has emphasized for several years the manufacturing and distribution of branded, value-added consumer items rather than the commodity fresh meat business. products. The Company builds on its founder's legacy of innovation, quality, and integrity with focus on its purpose statement - Inspired People. Inspired Food.™ Today, the Company is a global branded food company bringing some of the most trusted and iconic brands to tables across the globe with over $11 billion in annual revenue in more than 80 countries.
The Company has continually expanded its product portfolio through organic growth new product development, and acquisitions.
Internationally, the Company markets its products through Hormel Foods International Corporation (HFIC), a wholly owned subsidiary. HFIC has a global presence in the international marketplace through joint ventures and placement of personnel in strategic foreign locations such as Australia, Brazil, Canada, China, Japan, and the Philippines. HFIC has a minority position in a food company in the Philippines (The Purefoods-Hormel Company, Inc., 40% holding).
On August 16, 2018, the Company entered into a definitive agreement to sell its Fremont, Nebraska, processing facility to WholeStone Farms, LLC. The transaction is subject to customary closing conditions and is expected to be completed in December 2018.
On November 27, 2017, During fiscal 2021, the Company acquired Columbus Manufacturing, Inc. (Columbus), an authentic premium deli meat and salami company,the Planters® snack nuts business from Chicago-based Arbor Investments, for $857.4 million. The transaction was funded with cash on hand along with borrowing $375.0 million under a term loan facility and $375.0 million under a revolving credit facility. Columbus specializes in authentic premium deli meat and salami and allows the Company to enhance its scale in the deli by broadening its portfolio of products, customers, and consumers.
On August 22, 2017, the Company acquired Cidade do Sol (Ceratti) for a purchase price of $103.3 million. The transaction was funded by the Company with cash on hand.Kraft Heinz Company. The acquisition of the CerattiPlanters® brand allows snack nuts business has expanded the Company's product portfolio, adding the Planters®, NUT-rition®, Planters®Cheez Balls, and Corn Nuts®brands. Refer to Note B - Acquisitions and Divestitures for information.
Description of Business
Segments
The Company to establish a full in-country presencereports results in the fast-growing Brazilian market with a premium brand.
On August 16, 2017, the Company acquired Fontanini Italian Meats and Sausages (Fontanini), a branded foodservice business, from Capitol Wholesale Meats, Inc. for a purchase price of $425.7 million. The transaction was funded by the Company with cash on hand and by utilizing short-term financing. Fontanini specializes in authentic Italian meats and sausages, as well as a variety of other premium meat products including pizza toppings and meatballs and allows the Company to expand its foodservice business.
On January 3, 2017, the Company completed the sale of Clougherty Packing, LLC, parent company of Farmer John and Saag’s Specialty Meats, along with PFFJ, LLC, farm operations in California, Arizona, and Wyoming. The closing price was $145.0 million in cash.
On May 26, 2016, the Company acquired Justin’s, LLC (Justin’s) of Boulder, Colorado, for a purchase price of $280.9 million. The purchase price was funded by the Company with cash on hand and by utilizing short-term financing. This acquisition allowed the Company to enhance its presence in the specialty natural and organic nut butter category.
On May 9, 2016, the Company completed the sale of Diamond Crystal Brands resulting in proceeds of $110.1 million, net of selling costs.
On July 13, 2015, the Company acquired Applegate Farms, LLC (Applegate) of Bridgewater, New Jersey, for a final purchase price of $774.1 million in cash. The purchase price was funded by the Company with cash on hand and by utilizing short-term financing. This acquisition allows the Company to expand the breadth of its protein offerings to provide consumers more choice in this fast growing category.
The Company has not been involved in any bankruptcy, receivership, or similar proceedings during its history. Substantially all the assets of the Company have been acquired in the ordinary course of business. The Company had no other significant change in the type of products produced or services rendered, or in the markets or methods of distribution, since the beginning of the 2018 fiscal year.
(b) Segments
The Company’s business is reported infollowing four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, (JOTS), and International & Other. Operating results from the Planters® snack nuts business are reported through the Grocery Products, Refrigerated Foods, and International & Other segments. Net sales to unaffiliated customers, operatingsegment profit, total assets, and the presentation of certain other financial information by segment areis reported in Note P - Segment Reporting of the Notes to Consolidated Financial Statements and in the Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.
Grocery Products: The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market, along with the sale of nutritional and private label shelf-stable products to retail, foodservice, and industrial customers. This segment also includes the results from the Company’s MegaMex Foods, LLC joint venture.
(c) DescriptionRefrigerated Foods: The Refrigerated Foods segment consists primarily of Businessthe processing, marketing, and sale of branded and unbranded pork, beef, and poultry products for retail, foodservice, deli, convenience store, and commercial customers.
Jennie-O Turkey Store: The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and commercial customers.
International & Other: The International & Other segment includes Hormel Foods International which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Company’s international joint ventures and royalty arrangements.
Products and Distribution
The Company develops, processes, and distributes a wide array of food products in a variety of markets and manufactures its products through various processing facilities and trusted co-manufacturers. The Company’s products primarily consist of meat, nuts, and other food products. The meat products are sold fresh, frozen, cooked, and canned. The percentages of total revenues contributed by classes of similar products for the last three fiscal years are as follows:
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| | | Fiscal Year Ended |
| | | October 28, 2018 | | October 29, 2017 | | October 30, 2016 |
| Perishable | | 55.9 | % | | 53.7 | % | | 53.1 | % |
| Poultry | | 19.3 | % | | 19.1 | % | | 20.5 | % |
| Shelf-stable | | 18.5 | % | | 20.2 | % | | 18.2 | % |
| Miscellaneous | | 6.3 | % | | 7.0 | % | | 8.2 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Reporting of revenues from external customers is based on similarity of products, as the same or similar products are sold across multiple distribution channels such as retail, foodservice, or international. Revenues reported are based on financial information used to produce the Company’s general-purpose financial statements.
The Perishable category includes fresh meats, frozen items, refrigerated meal solutions, sausages, hams, guacamole,U.S. Retail, U.S. Foodservice, U.S. Deli, and bacon (excluding Jennie-O Turkey Store) products. Shelf-stable includes canned luncheon meats, peanut butter, chilies, shelf-stable microwaveable meals, hash, stews, flour and corn tortillas, salsas, tortilla chips, and other items that do not require refrigeration. The Poultry category is composed primarily of JOTS products. The Miscellaneous category primarily consists of nutritional food products and supplements, dessert and drink mixes, and industrial gelatin products.International.
Domestically, the Company sells its products in all 50 states. The Company’s products are sold through its sales personnel, operating in assigned territories or as dedicated teams serving major customers coordinated from sales offices predominately located in most of the largermajor U.S. cities. The Company also utilizes independent brokers and distributors. As of October 28, 2018, the Company had approximately 1,030 sales personnel engaged in selling its products. Distribution of products to customers is primarily by common carrier.
Through HFIC,Internationally, the Company markets its products in various locations throughout the world. Some of the largerthrough Hormel Foods International Corporation (HFIC), a wholly owned subsidiary. HFIC has a global presence within several major international markets includeincluding Australia, Brazil, Canada, China, England, Japan, Mexico, Micronesia, the Philippines, Singapore, and South Korea. The distribution of export sales to customers is by common carrier, while the China and Brazil operations own and operate their own delivery system.systems. The Company, through HFIC, has licensed companies to manufacture various Company products internationally on a royalty basis, with the primary licensees being Tulip International of DenmarkDanish Crown UK Ltd., and CJ CheilJedang CorporationCorporation. HFIC also has a minority position in a food company in the Philippines (The Purefoods-Hormel Company, Inc., 40 percent holding).
Raw Materials
The Company has, forconcentrates on the past several years, been concentrating onmarketing and sale of branded, products for consumers with year-round demand to minimize the seasonal variation experienced with commodity-type products. Pork continues to be the primary raw material for Companyvalue-added food products. The Company’s expanding lineprincipal raw materials used by the Company include pork, turkey, beef, chicken, and nuts. The company takes a balanced approach to sourcing pork raw materials including hogs purchased for our Austin, Minnesota processing facility, long-term supply agreements for pork, and spot market purchases of branded products has reduced, but not eliminated, the sensitivity of Company results to raw material supply and price fluctuations.
pork. The majority of the hogs harvested by the Company are purchased under supply contracts from producers located principally in Minnesota, Iowa, Nebraska, and Kansas. The cost of hogs and the utilization of the Company’s facilities are affected by both the level and the methods of pork production in the United States. The Company uses supply contracts to ensure a stable supply of raw materials. The Company’s contracts are based on market-based formulas and/or markets of certain swine production inputs, to better balance input costs with customer pricing, and all contract costs are fully reflected in the Company’s reported financial statements. In fiscal 2018, the Company purchased 96 percent of its hogs under supply contracts. The Company also procures a portion of its hogs through farms it either owns or operates in Colorado.
In fiscal 2018, JOTS raised turkeys representing approximately 76 percent of the volume needed to meet its raw material requirements for branded turkey products and whole birds. Turkeys not sourced withinare raised by the Company are contracted with independent turkey growers. JOTS’ turkey-raising farms are located throughout Minnesota and Wisconsin.
Company. Production costs infrom raising hogs and turkeys are subject primarily to fluctuations in feed grain prices and fuel costs. To manage this risk,these risks, the Company hedgesuses futures, swaps, and options contracts to hedge a portion of its anticipated purchases of grain using futures contracts.
Additionally,grain. The Company also purchases raw materials from various suppliers. As the cost andCompany shifts its focus towards a more value-added portfolio, the Company has become increasingly dependent on these suppliers to meet its raw material needs. The Company utilizes supply of avocados, peanuts, whey, and natural and organic protein are impacted by the changing market forces ofcontracts to ensure an adequate supply and mitigate price fluctuations.
During fiscal 2021, the Company’s demand which can impactfor nuts significantly increased due to the costacquisition of the Company’s products.Planters® snack nuts business. Certain nut varieties, such as cashews, are sourced internationally which may cause additional risks to pricing and availability. The Company uses long-term supply contracts and forward buying in an attempt to manage these risks.
Human Capital
ManufacturingEmployees are pivotal resources that directly impact the success of the Company. As of October 31, 2021, the Company had more than 20,000 active employees, with over 90 percent located within the United States. The Company is subject to collective bargaining agreements (CBAs), with approximately 20 percent of employees covered by CBAs.
Diversity, Equity, and Inclusion
The Company welcomes the diversity of all team members, customers, and consumers, and encourages the integration of their unique skills, thoughts, experiences, and identities. The Company’s workforce is made up of approximately 40 percent women and over 50 percent ethnic minority groups. By fostering an inclusive culture, the Company enables every member of the workforce to leverage unique talents and high-performance standards to drive innovation and success.
The Company has one plantnine employee resource groups that harvests hogs for processing. Quality Pork Processors, Inc.support the Company’s mission to create a workplace where all people feel welcomed, respected, and valued. These groups play a critical role in diversity initiatives and provide numerous professional development and mentorship opportunities.
Senior leaders of Dallas, Texas, operates the harvesting facilityCompany are held accountable to creating an inclusive, diverse workplace through the annual incentive plan, a component of which focuses on overall belonging scores and the representation of women and underrepresented minorities in Austin, Minnesota, under a custom harvesting arrangement. salaried positions.
Employee Training, Safety, and Total Rewards
The Company currently has seven turkey harvestbelieves investing in the education, training, and processingdevelopment of employees contributes to the overall success of the business. The Company provides learning opportunities for employees through various training courses, including instructor-led internal and external programs and on-the-job training.
Hormel Foods is known for its award-winning safety programs. The Company’s dedicated corporate safety department develops and administers company-wide policies to ensure the safety of each employee and compliance with Occupational Safety and Health Administration standards. The Corporate Safety Steering Committee provides safety leadership and guidance to all Company locations, including monthly safety training and assessments and annual safety audits.
The Company believes its most important asset is its employees and its success is dependent on the attraction, development, and retention of a skilled and experienced workforce. The Company offers a competitive compensation package and a multitude of benefits including medical, life and disability insurance, contributory and non-contributory retirement savings plans, tuition reimbursement, and two years of tuition-free community and technical college for U.S. employees’ dependent children.
The nationwide challenges with labor availability have impacted the business, particularly in the second half of fiscal 2021. To address labor availability, the Company is taking actions to hire and retain team members and implement additional automation across manufacturing facilities.
COVID-19 Response
The ongoing COVID-19 pandemic presents unique challenges to the Company and its daily operations. At the onset in 2020, a COVID Response Committee was established to monitor cases and continuously adjust safety procedures to align with current conditions and guidance from the Centers for Disease Control and Prevention. Most employees working in an office setting transitioned to working remotely, which continued through much of fiscal 2021. As an essential business, plant production team members continued to work in the Company’s manufacturing facilities. The Company’s safety efforts in these facilities included proactive and transparent educational materials; a paid leave and protection program; access to personal protective equipment; enhanced sanitation procedures and daily wellness screenings. The Company also paid over $11.0 million in bonuses to full-time and part-time plant production team members in 2020. As vaccines became available in 2021, the Company coordinated onsite or offsite vaccination clinics at almost all its locations.
Governmental Regulation and Environmental Matters
The Company’s operations are subject to regulation by various governmental agencies which oversee areas such as food safety, workforce immigration, environmental laws, animal welfare, tax regulations, and 30 facilities that produce and distribute other manufactured items. Albert Lea Select Foods, Inc. operates the processing, facility in Albert Lea, Minnesota, under a custom manufacturing agreement. Company products are also custom manufactured by several other companies. The following arepackaging, storage, distribution, advertising, and labeling of the Company’s larger custom manufacturers: Abbyland Foods, Inc., Abbotsford, Wisconsin; Agropur Division Natrel USA, Maplewood, Minnesota; Algood Foodproducts. The Company Louisville, Kentucky; Cargill Meat Solutions, Minneapolis, MN; Cooper Farms, Van Wert, Ohio: Deitz & Watson, Inc., Philadelphia, Pennsylvania; Harris Ranch Beefbelieves it is in compliance with current laws and regulations and does not expect continued compliance to have a material impact on capital expenditures, earnings, or competitive position. The Company Gilroy, California; HP Hood LLC, Lynnfield, Massachusetts; OSI Industries LLC, Chicago, Illinois; Reichel Foods, Inc., Rochester, Minnesota; Reser’s Fine Foods, Topeka, Kansas;continues to monitor existing and Steuben Foods, Jamaica, New York. Exel, Inc., based in Westerville, Ohio, operates distribution centers forpending laws and regulations and while the impact of regulatory changes cannot be predicted with certainty, the Company does not expect compliance to have a material adverse effect. In addition to compliance with environmental laws and regulations, the Company sets goals to further improve its sustainability efforts and reduce its environmental impact. These goals include reducing product packaging, solid waste, water use, energy use, and greenhouse gas emissions. The Company has also put a focus on using renewable energy sources and investing in Dayton, Ohio, and Osceola, Iowa.sustainable agriculture.
Customers
During fiscal 2021, sales to Walmart Inc. (Walmart) represented approximately 15 percent of the Company's consolidated gross sales excluding returns and allowances. Walmart is a customer in all four segments. The Company's top five customers make up approximately 35 percent of consolidated gross sales excluding returns and allowances. The loss of one or more of the top customers in any of the four reporting segments could have a material adverse effect on the results of such segment.
Competition
The production and sale of meat and food products in the United States and internationally is highly competitive. The Company competes with manufacturers of pork and turkey products as well as national and regional producers of other meat and protein sources, such as beef, chicken, fish, nuts, and plant-based proteins.
All segments compete on the basis of price, product quality and attributes, brand identification, breadth of product line, and customer service. Through effective marketing and strong quality assurance programs, the Company’s strategy is to provide high quality products that possess strong brand recognition, which support higher value perceptions with customers.
Patents and Trademarks
There are numerous patents and trademarks important to the Company’s business. The Company holds 4539 U.S. issued and 9nine foreign patents. Most of the trademarks the Company uses are registered.registered in the U.S. and other countries. Some of the more significant owned or licensed trademarks used by the Company or its affiliates are:
HORMEL, ALWAYS TENDER, APPLEGATE, AUSTIN BLUES, BACON 1, BLACK LABEL, BREAD READY, BURKE, CAFÉ H, CERATTI, CHI-CHI’S, COLUMBUS, COMPLEATS, CORN NUTS, CURE 81, CYTOSPORT, DAN’S PRIZE, DI LUSSO, DINTY MOORE, DON MIGUEL, DOÑA MARIA, EMBASA, EVOLVE, FAST ‘N EASY, FIRE BRAISED, FONTANINI, HAPPY LITTLE PLANTS, HERDEZ, HORMEL GATHERINGS, HORMEL VITAL CUISINE, HOUSE OF TSANG, JENNIE-O, JUSTIN’S, LA VICTORIA, LAYOUT, LLOYD’S, MARY KITCHEN, MUSCLE MILK, NATURAL CHOICE, NUT-RITION, OLD SMOKEHOUSE, OVEN READY, PILLOW PACK, RANGE BRAND,PLANTERS, ROSA GRANDE, SADLER'S, SKIPPY, SPAM, SPECIAL RECIPE, THICK & EASY, VALLEY FRESH, and WHOLLY GUACAMOLE.WHOLLY.
The Company’s patents expire after a term that is typically 20 years from the date of filing, with earlier expiration possible based on the Company’s decision to pay required maintenance fees. As long as the Company intendscontinues to continue usinguse its trademarks, they are renewed indefinitely.
Customers and Backlog Orders
During fiscal 2018, sales to Walmart Inc. (Walmart) represented approximately 13.6 percent of the Company’s revenues (measured as gross sales less returns and allowances), compared to 14.4 percent in fiscal 2017. Walmart is a customer for all four segments of the Company. The five largest customers in each segment make up approximately the following percentage of segment sales: 42 percent of Grocery Products, 38 percent of Refrigerated Foods, 42 percent of JOTS, and 18 percent of International & Other. The loss of one or more of the top customers in any of these segments could have a material adverse effect on the results of such segment. Backlog orders are not significant due to the perishable nature of a large portion of the products. Orders are accepted and shipped on a current basis.
Competition
The production and sale of meat and food products in the United States and internationally are highly competitive. The Company competes with manufacturers of pork and turkey products, as well as national and regional producers of other meat and protein sources, such as beef, chicken, fish, peanut butter, and whey. The Company believes its largest domestic competitors for its Refrigerated Foods segment in 2018 were Tyson Foods, Inc. and Smithfield Foods, Inc.; for its Grocery Products segment, Conagra Brands, Inc., General Mills, Inc., Campbell Soup Co., J. M. Smucker Co., and Treehouse Foods Inc.; and for JOTS, Cargill, Inc. and Butterball, LLC.
All segments compete on the basis of price, product quality and attributes, brand identification, breadth of product line, and customer service. Through aggressive marketing and strong quality assurance programs, the Company’s strategy is to provide higher quality products that possess strong brand recognition, which would then support higher value perceptions from customers.
Employees
As of October 28, 2018, the Company had approximately 20,100 active domestic and foreign employees.
(e) Available Information
The Company makes available free of charge on its Web site at www.hormelfoods.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.1934 on its website at www.hormelfoods.com. These reports are accessible under the caption, “Investors – Filings & Reports – SEC Filings” on the Company’s Web sitewebsite and are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.Commission (SEC). These filings are also available on the SEC's website at www.sec.gov. The documents are also available in print, free of charge, to any stockholder who requests them.
(f) Executive Officers
FORWARD LOOKING STATEMENTS
This report contains “forward-looking” information within the meaning of the Registrantfederal securities laws. The “forward-looking” information may include statements concerning the Company’s outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts.
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| | | | CURRENT OFFICE AND PREVIOUS | | |
NAME | | AGE | | FIVE YEARS EXPERIENCE | | DATES |
James P. Snee | | 51 | | Chairman of the Board, President and Chief Executive Officer | | 11/20/17 to Present |
| | | | President and Chief Executive Officer | | 10/31/16 to 11/19/17 |
| | | | President and Chief Operating Officer | | 10/26/15 to 10/30/16 |
| | | | Group Vice President/President Hormel Foods International Corporation | | 10/29/12 to 10/25/15 |
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James N. Sheehan | | 63 | | Senior Vice President and Chief Financial Officer | | 10/31/16 to Present |
| | | | Vice President and Chief Accounting Officer | | 05/30/16 to 10/30/16 |
| | | | Vice President and Controller | | 05/01/00 to 05/29/16 |
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Thomas R. Day | | 60 | | Executive Vice President (Refrigerated Foods) | | 2/12/18 to Present |
| | | | Group Vice President (Refrigerated Foods) | | 10/28/13 to 2/11/18 |
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Glenn R. Leitch | | 58 | | Executive Vice President (Supply Chain) | | 12/04/17 to Present |
| | | | Group Vice President/President Jennie-O Turkey Store, Inc. | | 10/31/11 to 12/03/17 |
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Deanna T. Brady | | 53 | | Group Vice President/President Consumer Product Sales | | 10/26/15 to Present |
| | | | Group Vice President (Foodservice) | | 10/28/13 to 10/25/15 |
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Luis G. Marconi | | 52 | | Group Vice President (Grocery Products) | | 10/31/16 to Present |
| | | | Vice President (Grocery Products Marketing) | | 03/05/12/to 10/30/16 |
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James M. Splinter | | 56 | | Group Vice President (Corporate Strategy) | | 10/31/16 to Present |
| | | | Group Vice President (Grocery Products) | | 11/01/10 to 10/30/16 |
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Larry L. Vorpahl | | 55 | | Group Vice President/President Hormel Foods International Corporation | | 10/26/15 to Present |
| | | | Group Vice President/President Consumer Products Sales | | 10/31/05 to 10/25/15 |
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Mark A. Coffey | | 56 | | Senior Vice President (Supply Chain and Manufacturing) | | 03/28/17 to Present |
| | | | Vice President (Supply Chain) | | 02/06/17 to 03/27/17 |
| | | | Vice President (Affiliated Businesses) | | 10/31/11 to 02/05/17 |
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Janet L. Hogan | | 54 | | Senior Vice President (Human Resources) | | 03/28/17 to Present |
| | | | Vice President (Human Resources) | | 01/18/17 to 03/27/17 |
| | | | Senior Vice President (Human Resources), ProQuest LLC | | 02/02/16 to 01/17/17 |
| | | | Executive Vice President, Chief Human Resources Officer,
Oshkosh Corporation
| | 05/02/14 to 02/01/16 |
| | | | Vice President (Human Resources), Harsco Corporation | | 06/01/11 to 05/01/14 |
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Steven J. Lykken | | 48 | | Senior Vice President/President Jennie-O Turkey Store, Inc. | | 12/04/17 to Present |
| | | | President Applegate Farms, Inc. | | 04/11/16 to 12/03/17 |
| | | | Chief Operating Officer Applegate Farms, Inc. | | 08/17/15 to 04/10/16 |
| | | | Senior Vice President Jennie-O Turkey Store, Inc. (Commodity/
Supply Chain)
| | 06/06/11 to 08/16/15 |
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Lori J. Marco | | 51 | | Senior Vice President (External Affairs) and General Counsel | | 03/30/15 to Present |
| | | | Vice President (External Affairs) and General Counsel | | 01/24/11 to 03/29/15 |
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Kevin L. Myers, Ph.D. | | 53 | | Senior Vice President (Research and Development and Quality Control) | | 03/30/15 to Present |
| | | | Vice President (Research and Development) | | 10/28/13 to 03/29/15 |
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Jana L. Haynes | | 46 | | Vice President and Controller | | 05/30/16 to Present |
| | | | Director of Investor Relations | | 10/28/13 to 05/29/16 |
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Gary L. Jamison | | 53 | | Vice President and Treasurer | | 5/30/16 to Present |
| | | | Vice President and Chief Financial Officer Jennie-O Turkey Store, Inc. | | 12/31/12 to 05/29/16 |
No family relationship exists amongThe Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information. The Company is filing this cautionary statement in connection with the executive officers.
Executive officers are designated annuallyReform Act. When used in the Company’s Annual Report to Stockholders, other filings by the BoardCompany with the U.S. Securities and Exchange Commission, the Company's press releases, and oral statements made by the Company's representatives, the words or phrases "should result," "believe," "intend," "plan," "are expected to," "targeted," "will continue," "will approximate," "is anticipated," "estimate," "project," or similar expressions are intended to identify forward-looking statements within the meaning
of the first meeting followingReform Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected.
In connection with the Annual Meeting“safe harbor” provisions of Stockholders. Vacancies may be filledthe Reform Act, the Company is identifying risk factors that could affect financial performance and additional officers elected at any time. The May 2018 bylaw amendments delegated tocause the Company’s Chief Executive Officeractual results to differ materially from opinions or statements expressed with respect to future periods. The following discussion of risk factors contains certain cautionary statements regarding the authorityCompany’s business, which should be considered by investors and others. Such risk factors should be considered in conjunction with any discussions of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to appointsecurities analysts or investors, or other communications by the Company.
In making these statements, the Company is not undertaking, and remove Vice Presidents (other than Executive Vice Presidents, Group Vice Presidents,specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the Company’s business or results, and Senior Vice Presidents).is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the Company has attempted to list comprehensively these important cautionary risk factors, the Company wishes to caution investors and others that other factors may in the future prove to be important in affecting the Company’s business or results of operations.
The Company cautions readers not to place undue reliance on forward-looking statements, which represent current views as of the date made. Forward-looking statements are inherently at risk to any changes in the national and worldwide economic environment, which could include, among other things, changes resulting from the COVID-19 pandemic, economic conditions, political developments, civil unrest, currency exchange rates, interest and inflation rates, accounting standards, taxes, laws, and regulations affecting the Company and its markets.
Item 1A. RISK FACTORS
The Company’s operations are subject to the general risks of the food industry. The food products manufacturing industry is subject to the risks posed by:
| |
▪ | food contamination caused by disease-producing organisms or pathogens, such as Listeria monocytogenes, Salmonella, and pathogenic E coli.;
|
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▪ | nutritional and health-related concerns; |
| |
▪ | federal, state, and local food processing controls; |
| |
▪ | consumer product liability claims; |
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▪ | the possible unavailability and/or expense of liability insurance. |
Business and Operational Risks
The pathogens which may cause food contamination are found generally in livestock and in the environment and thus may be present in our products. These pathogens also can be introduced to our products as a result of improper handling by customers or consumers. We do not have control over handling procedures once our products have been shipped for distribution. If one or more of these risks were to materialize, the Company’s brand and business reputation could be negatively impacted. In addition, revenues could decrease, costs of doing business could increase, and the Company’s operating results could be adversely affected.
Deterioration of economic conditions could harm the Company’s business. The Company's business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, tax rates, availability of capital, energy availability and costs (including fuel surcharges), political developments, civil unrest, and the effects of governmental initiatives to manage economic conditions. Decreases in consumer spending rates and shifts in consumer product preferences could also negatively impact the Company.
Volatility in financial markets and the deterioration of national and global economic conditions could impact the Company’s operations as follows:
| |
▪ | The financial stability of our customers and suppliers may be compromised, which could result in additional bad debts for the Company or non-performance by suppliers; and |
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▪ | The value of our investments in debt and equity securities may decline, including most significantly the Company’s trading securities held as part of a rabbi trust to fund supplemental executive retirement plans and deferred income plans, and the Company’s assets held in pension plans. |
▪The financial stability of our customers and suppliers may be compromised, which could result in additional bad debts for the Company or non-performance by suppliers.
▪The value of our investments in debt and equity securities may decline, including most significantly the Company’s trading securities held as part of a rabbi trust to fund supplemental executive retirement plans and deferred income plans, and the Company’s assets held in pension plans.
▪Future volatility or disruption in the capital and credit markets could impair the Company's liquidity or increase costs of borrowing.
▪The Company may be required to redirect cash flow from operations or explore alternative strategies, such as disposing of assets, to fulfill the payment of principal and interest on its indebtedness.
The Company utilizes hedging programs to manage its exposure to various commodity market risks, such as commodity prices and interest rates, which qualify for hedge accounting for financial reporting purposes. Volatile fluctuations in market conditions could cause these instruments to become ineffective, which could require any gains or losses associated with these instruments to be reported in the Company’s earnings each period. These instruments may limit the Company’s ability to benefit from market gains if commodity prices and/or interest rates become more favorable than those secured under the Company’s hedging programs.
The Company's goodwill and indefinite lived intangible assets are initially recorded at fair value and are not amortized, but are reviewed for impairment annually or more frequently if impairment indicators arise. Impairment testing requires judgement around estimates and assumptions and is impacted by factors such as revenue growth rates, operating margins, tax rates, royalty rates, and discount rates. An unfavorable change in these factors may lead to the impairment of goodwill and/or intangible assets.
Additionally, if aanother highly pathogenic human disease outbreak developed in the United States, it may negatively impact the national economy, demand for Company products, and/or the Company’s workforce availability, and the Company’s financial results could suffer. The Company has developed contingency plans to address infectious disease scenarios and the potential impact on its operations, and will continue to update these plans as necessary. There can be no assurance given, however, these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
The uncertain and rapidly changing COVID-19 pandemic could adversely affect the Company’s business, financial condition and results of operations. The ongoing COVID-19 global pandemic has had, and will likely continue to have, negative impacts across many of the Company's business units and facilities. The Company's operations and business have been impacted directly and indirectly by various government actions taken to stop or slow the spread of COVID-19, including travel restrictions, border shutdowns, stay-at-home and shelter-in-place orders, shutdowns of non-essential businesses, and emergency declarations.
The near- and long-term impacts of COVID-19 are unknown and impossible to predict with any level of certainty. The following potential risk factors arising from COVID-19 pandemic have had and/or may continue to have one or more of the following impacts on the Company's operations:
▪One or more of the Company's manufacturing facilities may be shut down or have their operations significantly impacted due to employee illnesses, increased absenteeism, and/or actions by government agencies. Capital projects may be delayed as additional capacity is no longer currently needed or materials are unavailable. The Company's co-manufacturers and material suppliers may face similar impacts.
▪Regulatory restrictions and measures taken at the Company's facilities to prevent or slow down the spread of COVID-19 may impact the facilities’ efficiency.
▪Operating costs may increase as measures are put in place to prevent or slow down the spread of COVID-19, such as facility improvements, employee testing, short-term disability policies, and manufacturing employee bonus payments.
▪Any new or additional measures required by national, state or local governments to combat COVID-19, such as a COVID-19 vaccine mandate, may similarly add additional operational costs.
▪Ongoing closure or reduced operations at foodservice establishments may impact results for the Company's foodservice business. Bankruptcy filings and/or delinquent payments from foodservice industry or other customers may negatively impact cash flow.
▪A national and/or global economic downturn may impact consumer purchase behavior such as reduced volume for foodservice products and premium brands.
▪It may become more difficult and/or expensive to obtain debt or equity financing necessary to sustain the Company's operations, make capital expenditures, and/or finance future acquisitions.
▪The Company may face litigation by stockholders, employees, suppliers, customers, consumers, and others relating to COVID-19 and its effects.
▪The Company relies on its dedicated employees, many of whom have a long tenure with the Company. Operations may be negatively impacted if members of the Company's leadership team, or other key employees, become ill with COVID-19 or otherwise terminate their employment as a result of COVID-19. Further, the Company may face challenges hiring, onboarding, and training new employees, including leadership, which may impact results. The Company also may face operational challenges if government quarantine orders restrict movement of employees.
▪It is possible that the COVID-19 pandemic has and continues to negatively affect the Company's labor availability, relations, or labor costs.
▪Many of the Company's office-based employees continue to work remotely on occasion, which may bring additional information technology and data security risks.
▪Supply chain disruptions of various types arising from COVID-19 may impact the Company's ability to make products, the cost for such products, and the ability to deliver products to customers. Closure or reduced operations of material suppliers could result in shortages of key raw materials, as well as impact prices for those materials. The volatility in the market for raw material and supplies could impact the Company's profitability.
▪National, state, and local government orders closing or limiting operation of borders and ports, or imposing quarantine, could impact the Company's ability to obtain raw materials and to deliver finished goods to customers.
▪COVID-19 has wide-reaching impacts to society and the business, making all decisions, interactions, and transactions significantly more complex.
▪The Company is committed to being transparent through communications to inform shareholders, employees, customers, consumers, and others about the enhanced safety protocols implemented. The Company must keep pace with a rapidly changing media environment. If the Company's public relations efforts are not effective or if consumers perceive them to be irresponsible, the Company's competitive position, reputation, and market share may suffer.
The extent of the impact on the Company’s business, financial condition, and results of operations is dependent on the length and severity of the pandemic. Vaccines to prevent COVID-19 were approved by health agencies in the U.S. and other countries in which the Company operates, which began to be administered near the end of calendar year 2020. New variants of the virus appear to have increased transmissibility, which could complicate treatment and vaccination programs. The COVID-19 pandemic is an unprecedented situation and the Company's understanding of and response to its impacts is changing and evolving. The additional risk factors identified here are based upon information known at this time. The COVID-19 pandemic may adversely impact the Company's operations in one or more ways not identified to date.
The Company’s operations are subject to the general risks associated with acquisitions and divestitures. The Company has made several acquisitions and divestitures in recent years, including the acquisition of the Planters®snack nuts business in June 2021, that align with the Company’s strategic initiative of delivering long-term value to shareholders. The Company regularly reviews strategic opportunities to grow through acquisitions and to divest non-strategic assets. Potential risks associated with these transactions include the inability to consummate a transaction timely or on favorable terms, diversion of management's attention from other business concerns, potential loss of key employees and customers of current or acquired companies, inability to integrate or divest operations successfully, possible assumption of unknown liabilities, potential disputes with buyers or sellers, inability to obtain favorable financing terms, potential impairment charges if purchase assumptions are not achieved, and the inherent risks in entering markets or lines of business in which the Company has limited or no prior experience. Any or all of these risks could impact the Company’s financial results and business reputation. In addition, acquisitions outside the United States may present unique challenges and increase the Company's exposure to the risks associated with foreign operations. The Company's level of indebtedness increased significantly to fund the purchase of the Planters® snack nuts business and may continue to increase to fund future acquisitions. Higher levels of debt may among other things, impact the Company's liquidity and increase the Company's exposure to negative fluctuations in interest rates.
The Company is subject to disruption of operations at co-manufacturers, suppliers, logistics providers, customers, or other third-party service providers.
▪Disruption of operations at co‑manufacturers, suppliers, or logistics providers have and may continue to impact the Company’s product and input supplies as well as the ability to distribute products.
▪Disruptions related to significant customers or sales channels has and could continue to result in a reduction in sales or change in the mix of products sold.
▪Disruption in services from partners such as third-party service providers used to support various business functions such as benefit plan administration, payroll processing, information technology and cloud computing services could have an adverse effect on the Company's business.
Any of these disruptions could have an adverse effect on the Company’s financial results. Actions taken to mitigate the impact of any potential disruption, including increasing inventory in anticipation of a potential production or supply interruption, may adversely affect the Company’s financial results. Additionally, labor shortages have caused disruptions for many of these providers and may continue to impact the Company's ability to receive inputs or distribute products.
The Company is subject to the loss of a material contract. The Company is a party to several supply, distribution, contract packaging and other material contracts. The loss of a material contract or failure to obtain new material contracts could adversely affect the Company’s financial results.
The Company may be adversely impacted if the Company is unable to protect information technology systems against, or effectively respond to, cyber attacks or security breaches. Information technology systems are an important part of the Company’s business operations. In addition, the Company increasingly relies upon third-party service providers for a variety of business functions, including cloud-based services. Cyber incidents are occurring more frequently and are being made by groups and individuals with a wide range of motives and expertise. From time to time, the Company has experienced, and may experience in the future, breaches of our security measures due to human error, malfeasance, insider threats, system errors or vulnerabilities or other irregularities, none of which have been material to date.
In addition, the Company is in the midst of a multi-year transformation project (Project Orion) to achieve better analytics, customer service, and process efficiencies through the use of Oracle Cloud Solutions. This project is expected to improve the efficiency and effectiveness of certain financial and business transaction processes and the underlying systems environment. The initial phase to implement the human resource and payroll process was deployed during the first quarter of fiscal 2020. During the third quarter of fiscal 2020, the Company implemented the finance phase of the project. Additional integrations are expected to take place over the next few years. Such an implementation is a major undertaking from a financial, management, and personnel perspective. The implementation of the enterprise resource planning system may prove to be more difficult, costly, or time consuming than expected, and there can be no assurance that this system will be beneficial to the extent anticipated.
In an attempt to mitigate these risks, the Company has implemented and continues to evaluate security initiatives and business continuity plans.
Deterioration of labor relations, labor availability or increases in labor costs could harm the Company’s business. As of October 31, 2021, the Company employed more than 20,000 people worldwide, of which approximately 20 percent were represented by labor unions, principally the United Food and Commercial Workers Union. A significant increase in labor costs or a deterioration of labor relations at any of the Company’s facilities or co-manufacturing facilities resulting in work slowdowns or stoppages could harm the Company’s financial results. Labor and skilled labor availability challenges could continue to have an adverse effect on the Company's business.
Industry Risks
The Company’s operations are subject to the general risks of the food industry. The food products manufacturing industry is subject to the risks posed by:
▪food spoilage;
▪food contamination caused by disease-producing organisms or pathogens, such as Listeria monocytogenes, Salmonella, and pathogenic E coli.;
▪food allergens;
▪nutritional and health-related concerns;
▪federal, state, and local food processing controls;
▪consumer product liability claims;
▪product tampering; and
▪the possible unavailability and/or expense of liability insurance.
The pathogens that may cause food contamination are found generally in livestock and in the environment and thus may be present in our products. These pathogens can also be introduced to our products as a result of improper handling by customers or consumers. We do not have control over handling procedures once our products have been shipped for distribution. If one or more of these risks were to materialize, the Company’s brand and business reputation could be negatively impacted. In addition, revenues could decrease, costs of doing business could increase, and the Company’s operating results could be adversely affected.
Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins.
The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including African swine fever (ASF), Bovine Spongiform Encephalopathy (BSE), pneumo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease (FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI). The outbreak of such diseases could adversely affect the Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins. Additionally, the outbreak of disease may hinder the Company’s ability to market and sell products both domestically and internationally.
In recent years, the outbreak of ASF has impacted hog herds in China, Asia, Europe, and the Caribbean. If an outbreak of ASF were to occur in the United States, the Company's supply of hogs and pork could be materially impacted.
The Company has developed business continuity plans for various disease scenarios and will continue to update these plans as necessary. There can be no assurance given, however, that these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
Fluctuations in commodity prices and availability of pork, poultry, beef, feed grains, avocados, peanuts, energy,raw materials and wheyother inputs could harm the Company’s earnings.The Company’s results of operations and financial condition are largely dependent upon the cost and supply of pork, poultry, beef, feed grains, avocados, peanuts, and wheynuts as well as supplies, energy costsand other inputs and the selling prices for many of our products, which are determined by constantly changing market forces of supply and demand.
The live hog industry has evolvedcompany takes a balanced approach to large, vertically-integrated operations usingsourcing pork raw materials including hogs purchased for our Austin, Minnesota processing facility, long-term supply agreements.agreements for pork, and spot market purchases of pork. This has resulted in fewer hogs being available on the cash spot market. Consequently, the Company uses long-term supply contracts based on market-based formulas or the cost of production to ensureapproach ensures a more stable supply of raw materials while minimizing extreme fluctuations in costs over the long-term. This may result, in the short-term, in higher or lower live hog costs compared to the cash spot market depending on the relationship of the cash spot market to contract prices.market. Market-based pricing on certain product lines, and lead time required to implement pricing adjustments, may prevent all or part of these cost increases from being recovered, and these higher costs could adversely affect our short-term financial results.
JOTSJennie-O Turkey Store raises turkeys and contracts with turkey growers to meet its raw material requirements for whole birds and processed turkey products. Results in these operations are affected by the cost and supply of feed grains, which fluctuatefluctuates due to climate conditions, production forecasts, and supply and demand conditions at local, regional, national, and worldwide levels.markets. The Company attempts to manage some of its short-term exposure to fluctuations in feed prices by forward buying, using futures contracts, and pursuing pricing advances. However, these strategies may not be adequate to overcome sustained increases in market prices due to alternate uses for feed grains or other changes in these market conditions.
The supplyCompany may be subject to decreased availability or less favorable pricing for nuts, tomatoes, avocados, or other produce if poor growing conditions have a negative affect on agricultural productivity. Reductions in crop size or quality due to unfavorable growing conditions may have an adverse effect on the Company’s results.
The supplies of natural and organic proteins may impact the Company’s ability to ensure a continuing supply of these products. To mitigate this risk, the Company partners with multiple long-term suppliers.
International trade barriers and other restrictions or disruptions could result in lessdecreased foreign demand and increased domestic supply of proteins, which could lowerthereby potentially lowering prices. The Company occasionally utilizes in-country production to limit this exposure.
Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins.
The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including African Swine Fever (ASF), Bovine Spongiform Encephalopathy (BSE), pneumo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease (FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI). The outbreak of disease could adversely affect the Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins. Additionally, the outbreak of disease may hinder the Company’s ability to market and sell products both domestically and internationally. The Company has developed business continuity plans for various disease scenarios and will continue to update these plans as necessary. There can be no assurance given, however, these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
Market demand for the Company’s products may fluctuate. The Company faces competition from producers of alternative meats and protein sources, including pork, beef, turkey, chicken, fish, nuts, nut butters, whey, and whey.plant-based proteins. The basesfactors on which the Company competes include:
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▪ | product quality and attributes; |
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▪ | breadth of product line; and |
▪price;
▪product quality and attributes;
▪brand identification;
▪breadth of product line; and
▪customer service.
Demand for the Company’s products is also affected by competitors’ promotional spending, the effectiveness of the Company’s advertising and marketing programs, and consumer perceptions. Failure to identify and react to changes in food trends such as sustainability of product sources and animal welfare could lead to, among other things, reduced demand for the Company’s brands and products. The Company may be unable to compete successfully on any or all of these basesfactors in the future.
The Company’s operations are subject to the general risks associated with acquisitions. The Company has made several acquisitions in recent years, most recently the acquisitions of Columbus, Fontanini,Legal and Ceratti, and regularly reviews opportunities for strategic growth through acquisitions. Potential risks associated with acquisitions include the inability to integrate new operations successfully, the diversion of management's attention from other business concerns, the potential loss of key employees and customers of the acquired companies, the possible assumption of unknown liabilities, potential disputes with the sellers, potential impairment charges if purchase assumptions are not achieved or market conditions decline, and the inherent risks in entering markets or lines of business in which the Company has limited or no prior experience. Any or all of these risks could impact the Company’s financial results and business reputation. In addition, acquisitions outside the United States may present unique challenges and increase the Company's exposure to the risks associated with foreign operations.Regulatory Risks
The Company is subject to disruption of operations at co-packers or other suppliers. Disruption of operations at co‑packers or other suppliers may impact the Company’s product or raw material supply, which could have an adverse effect on the Company’s financial results. Additionally, actions taken to mitigate the impact of any potential disruption, including increasing inventory in anticipation of a potential production or supply interruption, may adversely affect the Company’s financial results.
The Company’s operations are subject to the general risks of litigation. The Company is involved on an ongoing basis in litigation arising in the ordinary course of business. Trends in litigation may include class actions involving employees, consumers, competitors, suppliers, shareholders, or injured persons,others, and claims relating to product liability, contract disputes, antitrust regulations, intellectual property, advertising, labeling, wage and hour laws, employment practices or environmental matters. LitigationNeither litigation trends andnor the outcomeoutcomes of litigation cannotcan be predicted with certainty and adverse litigation trends and outcomes could adverselynegatively affect the Company’s financial results.
The Company is subject to the loss of a material contract. The Company is a party to several supply, distribution, contract packaging, and other material contracts. The loss of a material contract could adversely affect the Company’s financial results.
Government regulation, present and future, exposes the Company to potential sanctions and compliance costs that could adversely affect the Company’s business. The Company’s operations are subject to extensive regulation by the U.S. Department of Homeland Security, the U.S. Department of Agriculture, the U.S. Food and Drug Administration, federal and state taxing authorities and other federal, state, and local authorities whowhich oversee workforce immigration, laws, tax regulations,taxation, animal welfare, food safety, standards, and the processing, packaging, storage, distribution, advertising, and labeling of the Company’s products. The Company’s manufacturing facilities and products are subject to continuousongoing inspection by federal, state and local authorities. Claims or enforcement proceedings could be brought against the Company in the future. The availability of government inspectors due to a government furlough could also cause disruption to the Company’s manufacturing facilities. Additionally, the Company is subject to new or modified laws, regulations, and accounting standards. The Company’s failure or inability to comply with such requirements could subject the Company to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions. A recent federal district court ruling has had a negative impact on harvest capacity and labor costs. Harvest facilities the Company uses are negotiating to resolve the situation and expect to reach a solution, but harvest capacity and labor costs will continue to be negatively impacted until a solution is reached. There can be no assurance a solution will be reached, in which case the negative impacts of the ruling would continue.
The Company is subject to stringent environmental regulation and potentially subject to environmental litigation, proceedings, and investigations. The Company’s past and present business operations and ownership and operation of real property are subject to stringent federal, state, and local environmental laws and regulations pertaining to the discharge of materials into the environment and the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment. Compliance with these laws and regulations, and the ability to comply withas well as any modifications, to these laws and regulations, is material to the Company’s business. New matters or sites may be identified in the future requiring additional investigation, assessment, or expenditures. In addition, someSome of the Company’s facilities have been in operation for many years and, over time, the Company and other prior operators of these facilities may have generated and disposed of wastes that now may be considered hazardous. Future discovery of contamination of property underlying or in the vicinity of the Company’s present or former properties or manufacturing facilities and/or waste disposal sites could require the Company to incur additional expenses.expenses related to additional investigation, assessment or other requirements. The occurrence of any of these events, the implementation of new laws and regulations or stricter interpretation of existing laws or regulations could adversely affect the Company’s financial results.
The Company’s foreign operations pose additional risks to the Company’s business. The Company operates its business and markets its products internationally. The Company’s foreign operations are subject to the risks described above, as well as risks related to fluctuations in currency values, foreign currency exchange controls, compliance with foreign laws, compliance with applicable U.S. laws, including the Foreign Corrupt Practices Act, and other economic or political uncertainties. International sales are subject to risks related to general economic conditions, imposition of tariffs, quotas, trade barriers and other restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws, and other economic and political uncertainties. All of these risks could result in increased costs or decreased revenues, which could adversely affect the Company’s financial results.
The Company may be adversely impacted if the Company is unable to protect information technology systems against, or effectively respond to, cyber-attacks or security breaches. Information technology systems are an important part
Deterioration of labor relations or increases in labor costs could harm the Company’s business. As of October 28, 2018, the Company had approximately 20,100 employees worldwide, of which approximately 4,450 were represented by labor unions, principally the United Food and Commercial Workers Union. A significant increase in labor costs or a deterioration of labor relations at any of the Company’s facilities or contracted hog processing facilities resulting in work slowdowns or stoppages could harm the Company’s financial results. Union contracts at the Company's facilities in Algona, Iowa; Atlanta, Georgia; Austin, Minnesota; and Beloit, Wisconsin will expire during fiscal 2019, covering approximately 2,300 employees. Negotiations have not yet been initiated.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
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| | | | | | | | | |
Location | | Principal Segment (1)
| | Approximate Area
(Square Feet,
Unless Noted)
| | Owned or
Leased
| | Lease
Expiration Date
|
Harvest and Processing Plants | | | | | | | | |
Austin, Minnesota | | Refrigerated Foods | | 1,464,000 |
| | Owned | | |
| | Grocery Products | | | | | | |
| | International & Other | | | | | | |
Barron, Wisconsin | | JOTS | | 425,000 |
| | Owned | | |
Faribault, Minnesota | | JOTS | | 191,000 |
| | Owned | | |
Melrose, Minnesota | | JOTS | | 550,000 |
| | Owned | | |
Willmar, Minnesota | | JOTS | | 339,000 |
| | Owned | | |
| | | | | | | | |
Processing Plants | | | | |
| | | | |
Albert Lea, Minnesota | | Refrigerated Foods | | 82,000 |
| | Owned | | |
Algona, Iowa | | Refrigerated Foods | | 154,000 |
| | Owned | | |
Alma, Kansas | | Refrigerated Foods | | 62,000 |
| | Owned | | |
Aurora, Illinois | | Grocery Products | | 141,000 |
| | Owned | | |
Beijing, China | | International & Other | | 95,000 |
| | 80% Owned | | |
Beloit, Wisconsin | | Grocery Products | | 341,000 |
| | Owned | | |
Browerville, Minnesota | | Refrigerated Foods | | 109,000 |
| | Owned | | |
Dubuque, Iowa | | Grocery Products | | 344,000 |
| | Owned | | |
Hayward, California | | Refrigerated Foods | | 128,000 |
| | Leased | | August 2032 |
Hayward, California | | Refrigerated Foods | | 67,000 |
| | Leased | | May 2021 |
The Company's global headquarters are located in Austin, Minnesota. The Company has various processing plants, warehouses and operational facilities, mainly located in the United States. The Company maintains a national sales force through strategic placement of sales offices throughout the United States. Properties are also maintained internationally to support global processing and sales. The majority of Company property is owned. Leased property is used as needed for Company production and sales. Property leases range in duration from one to twelve years.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Area* (Square feet, in thousands) | | Refrigerated Foods | | Grocery Products | | Jennie-O Turkey Store | | International & Other | | Corporate | | Total |
| Production Facilities | | 5,090 | | | 2,768 | | | 2,012 | | | 1,261 | | | — | | | 11,131 | |
| Warehouse/Distribution Centers | | 717 | | | 1,211 | | | 142 | | | 33 | | | — | | | 2,103 | |
| Live Production | | 861 | | | — | | | 314 | | | — | | | — | | | 1,175 | |
| Administrative/Sales/Research | | 60 | | | 6 | | | 66 | | | 31 | | | 575 | | | 738 | |
| Total | | 6,728 | | | 3,985 | | | 2,534 | | | 1,325 | | | 575 | | | 15,147 | |
|
| | | | | | | | | |
Location | | Principal Segment (1)
| | Approximate Area
(Square Feet,
Unless Noted)
| | Owned or
Leased
| | Lease
Expiration Date
|
Jiaxing, China | | International & Other | | 1,256,000 |
| | Owned | | |
Knoxville, Iowa | | Refrigerated Foods | | 135,000 |
| | Owned | | |
Lathrop, California | | Refrigerated Foods | | 88,000 |
| | Owned | | |
Little Rock, Arkansas | | Grocery Products | | 153,000 |
| | Owned | | |
Long Prairie, Minnesota | | Refrigerated Foods | | 92,000 |
| | Owned | | |
McCook, Illinois | | Refrigerated Foods | | 177,000 |
| | Owned | | |
Mendota Heights, Minnesota | | Refrigerated Foods | | 85,000 |
| | Owned | | |
Montevideo, Minnesota | | JOTS | | 89,000 |
| | Owned | | |
Nevada, Iowa | | Refrigerated Foods | | 239,000 |
| | Owned | | |
Osceola, Iowa | | Refrigerated Foods | | 382,000 |
| | Owned | | |
Pelican Rapids, Minnesota | | JOTS | | 375,000 |
| | Owned | | |
Quakertown, Pennsylvania | | Grocery Products | | 13,000 |
| | Owned | | |
Rochelle, Illinois | | Refrigerated Foods
| | 409,000 |
| | Owned | | |
| | Grocery Products | | | | | | |
Sparta, Wisconsin | | Grocery Products | | 397,000 |
| | Owned | | |
Tucker, Georgia | | Grocery Products | | 259,000 |
| | Owned | | |
| | Refrigerated Foods | | |
| | | | |
Vinhedo, Brazil | | International & Other | | 422,000 |
| | Leased | | June 2024 |
Weifang, China | | International & Other | | 117,000 |
| | Owned | | |
Wichita, Kansas | | Refrigerated Foods | | 247,000 |
| | Owned | | |
| | | | | | | | |
Warehouse/Distribution Centers | | | | |
| | | | |
Austin, Minnesota | | Refrigerated Foods | | 72,000 |
| | Owned | | |
| | Grocery Products | | | | | | |
Beijing, China | | International & Other | | 17,000 |
| | Leased | | June 2019 |
| | | | 8,000 |
| | Leased | | December 2018 |
Dayton, Ohio | | Refrigerated Foods | | 141,000 |
| | Owned | | |
| | Grocery Products | | | | | | |
Eldridge, Iowa | | Grocery Products | | 424,000 |
| | Leased | | July 2019 |
Hayward, California | | Refrigerated Foods | | 41,000 |
| | Leased | | May 2021 |
Hayward, California | | Refrigerated Foods | | 8,000 |
| | Leased | | August 2032 |
Jiaxing, China | | International & Other | | 54,000 |
| | Leased | | August 2021 |
Osceola, Iowa | | Refrigerated Foods | | 235,000 |
| | Owned | | |
Sparta, Wisconsin | | Grocery Products | | 50,000 |
| | Leased | | April 2020 |
Willmar, Minnesota | | JOTS | | 123,000 |
| | Owned | | |
| | | | 5,000 |
| | Leased | | September 2019 |
| | | | | | | | |
Hog Production Facilities | | | | |
| | | | |
Las Animas, Colorado | | Refrigerated Foods | | 815,000 |
| | Owned | | |
| | | | | | | | |
Hatcheries | | | | |
| | | | |
Barron, Wisconsin | | JOTS | | 29,000 |
| | Owned | | |
Detroit Lakes, Minnesota | | JOTS | | 27,000 |
| | Owned | | |
Henning, Minnesota | | JOTS | | 22,000 |
| | Owned | | |
| | | | | | | | |
Feed Mills | | | | |
| | | | |
Atwater, Minnesota | | JOTS | | 19,000 |
| | Owned | | |
Barron, Wisconsin | | JOTS | | 26,000 |
| | Owned | | |
Dawson, Minnesota | | JOTS | | 37,000 |
| | Owned | | |
Faribault, Minnesota | | JOTS | | 25,000 |
| | Owned | | |
Henning, Minnesota | | JOTS | | 5,000 |
| | Owned | | |
Northfield, Minnesota | | JOTS | | 17,000 |
| | Owned | | |
Perham, Minnesota | | JOTS | | 26,000 |
| | Owned | | |
Swanville, Minnesota | | JOTS | | 29,000 |
| | Owned | | |
| | | | | | | | |
Turkey Farms | | | | |
| | | | |
Minnesota and Wisconsin | | JOTS | | 13,700 |
| (2)
| Owned | | |
| | | | | | | | |
Research and Development | | | | |
| | | | |
Austin, Minnesota | | All Segments | | 136,000 |
| | Owned | | |
Willmar, Minnesota | | JOTS | | 10,000 |
| | Owned | | |
| | | | | | | | |
|
| | | | | | | | | |
Location | | Principal Segment (1)
| | Approximate Area
(Square Feet,
Unless Noted)
| | Owned or
Leased
| | Lease
Expiration Date
|
Administrative Offices | | | | |
| | | | |
Austin, Minnesota | | All Segments | | 292,000 |
| | Owned | | |
Beijing, China | | International & Other | | 4,000 |
| | Leased | | May 2019 |
Boulder, Colorado | | Grocery Products | | 7,000 |
| | Leased | | August 2019 |
Bridgewater, New Jersey | | Refrigerated Foods | | 29,000 |
| | Leased | | January 2024 |
Gainesville, Georgia | | Refrigerated Foods | | 5,000 |
| | Leased | | November 2019 |
Hayward, California | | Refrigerated Foods | | 17,000 |
| | Leased | | May 2021 |
Hayward, California | | Refrigerated Foods | | 12,000 |
| | Leased | | August 2032 |
Las Animas, Colorado | | Refrigerated Foods | | 2,000 |
| | Leased | | July 2019 |
Moorabbin, Australia | | International & Other | | 2,000 |
| | Leased | | September 2025 |
Shanghai, China | | International & Other | | 22,000 |
| | Leased | | October 2023 |
Vinhedo, Brazil | | International & Other | | 3,000 |
| | Leased | | October 2020 |
Walnut Creek, California | | Grocery Products | | 22,000 |
| | Leased | | April 2023 |
Willmar, Minnesota | | JOTS | | 56,000 |
| | Owned | | |
(1) *Many of the Company’s properties are not exclusive to any one segment, and a few of theCompany's properties are utilized by more than one segment. These facilities are reflected in all four segments. For locations that support multiple segments, but with a substantial percentage of activity attributable to certain segments, only the principal segments have been listed.principle segment for presentation purposes. Additionally, turkey growout facilities are excluded.
(2) Acres.
The Company believes its operating facilities are well maintained and suitable for current production volumes,volumes. The Company regularly engages in construction and expansion plans are either completed or in process to accommodate all volumes anticipated inother capital improvement projects with a focus on value-added capacity projects and automation. In fiscal 2021, the foreseeable future.Company acquired the Planters® snack nut business which included three production facilities primarily reflected within the Grocery Products segment.
Item 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings related to the on-goingongoing operation of its business, including claims both by and against the Company. At any time, such proceedings typically involve claims related to product liability, contract disputes, wage and hourlabeling, contracts, antitrust regulations, intellectual property, competition laws, employment practices, or other actions brought by employees, customers, consumers, competitors or suppliers. The Company establishes accruals for its potential exposure, as appropriate, for claims against the Company when losses become probable and reasonably estimable. However, future developments or settlements are uncertain and may require the Company to change such accruals as proceedings progress. Resolution of any currently known matters, either individually or in the aggregate, is not expected to have a material effect on the Company’s financial condition, results of operations, or liquidity.
The Company is a defendant in three sets of antitrust lawsuits broadly targeting the pork and turkey industries. None of these cases involve allegations of bid rigging or other criminal conduct. The Company has not established reserves as it does not believe it will have liability in any of these cases.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Information About Executive Officers
| | | | | | | | | | | | | | | | | | | | |
| | | | CURRENT OFFICE AND PREVIOUS | | |
| NAME | | AGE | | FIVE YEARS EXPERIENCE | | DATES |
| James P. Snee | | 54 | | Chairman of the Board, President and Chief Executive Officer | | 11/20/17 to Present |
| | | | President & Chief Executive Officer | | 10/31/16 to 11/19/17 |
| | | | | | |
| James N. Sheehan | | 66 | | Executive Vice President and Chief Financial Officer | | 01/29/19 to Present |
| | | | | | (Retires 12/31/21) |
| | | | Senior Vice President and Chief Financial Officer | | 10/31/16 to 01/28/19 |
| | | | | | |
| Jacinth C. Smiley | | 53 | | Executive Vice President and Chief Financial Officer | | Effective 01/01/2022 |
| | | | Group Vice President (Corporate Strategy) | | 04/05/21 to 12/31/21 |
| | | | Vice President and Chief Accounting Officer, LyondellBasell, a multinational chemical company | | 04/01/18 to 04/04/21 |
| | | | Chief Financial Officer, GE Oil and Gas North America, an oil and gas company | | 02/01/16 to 03/31/18 |
| | | | | | |
| Deanna T. Brady | | 56 | | Executive Vice President (Refrigerated Foods) | | 10/28/19 to Present |
| | | | Group Vice President/President Consumer Product Sales | | 10/26/15 to 10/27/19 |
| | | | | | |
| Mark A. Coffey | | 59 | | Group Vice President (Supply Chain) | | 04/26/21 to Present |
| | | | Senior Vice President (Supply Chain and Manufacturing) | | 03/28/17 to 04/25/21 |
| | | | Vice President (Supply Chain) | | 02/06/17 to 03/27/17 |
| | | | Vice President (Affiliated Businesses) | | 10/31/11 to 02/05/17 |
| | | | | | |
| PJ Connor | | 52 | | Group Vice President/President Consumer Product Sales | | 10/28/19 to Present |
| | | | Vice President (Senior Vice President Consumer Product Sales) | | 10/31/11 to 10/27/19 |
| | | | | | |
| Jeffery R. Frank | | 45 | | Group Vice President (Grocery Products) | | 11/01/21 to Present |
| | | | Vice President (Grocery Products Marketing) | | 03/01/21 to 10/31/21 |
| | | | Vice President (Foodservice Marketing) | | 04/30/18 to 02/28/21 |
| | | | President & Chief Executive Officer (MegaMex) | | 10/28/13 to 04/29/18 |
| | | | | | |
| Steven J. Lykken | | 51 | | Group Vice President (Jennie-O Turkey Store, Inc.) | | 03/22/21 to Present |
| | | | Senior Vice President/President Jennie-O Turkey Store, Inc. | | 12/04/17 to 03/21/21 |
| | | | President Applegate Farms, LLC | | 04/11/16 to 12/03/17 |
| | | | | | |
| Luis G. Marconi | | 55 | | Group Vice President (Grocery Products) | | 10/31/16 to Present |
| | | | | | (Retires 05/01/22) |
| | | | | | |
| Swen Neufeldt | | 48 | | Group Vice President (Hormel Foods International Corporation) | | 06/29/20 to Present |
| | | | Vice President (Meat Products) | | 10/31/16 to 06/28/20 |
| | | | | | |
| Janet L. Hogan | | 57 | | Senior Vice President (Human Resources) | | 03/28/17 to Present |
| | | | Vice President (Human Resources) | | 01/18/17 to 03/27/17 |
| | | | Senior Vice President (Human Resources), ProQuest LLC | | 10/10/16 to 01/17/17 |
| | | | | | |
| Pierre M. Lilly | | 50 | | Senior Vice President and Chief Compliance Officer | | 10/26/20 to Present |
| | | | Director of Internal Audit | | 05/30/16 to 10/25/20 |
| | | | | | |
| Lori J. Marco | | 54 | | Senior Vice President (External Affairs) and General Counsel | | 03/30/15 to Present |
| | | | | | |
| Kevin L. Myers, Ph.D. | | 56 | | Senior Vice President (Research and Development, Quality Control) | | 03/30/15 to Present |
| | | | | | |
| Wendy A. Watkins | | 55 | | Senior Vice President and Chief Communications Officer | | 11/01/21 to Present |
| | | | Vice President (Corporate Communications) | | 04/13/15 to 10/31/21 |
| | | | | | |
| Jana L. Haynes | | 49 | | Vice President and Controller | | 05/30/16 to Present |
| | | | | | |
| Gary L. Jamison | | 56 | | Vice President and Treasurer | | 05/30/16 to Present |
No family relationship exists among the executive officers.
Executive officers are designated annually by the Board of Directors at the first meeting following the Annual Meeting of Stockholders. Vacancies may be filled and additional officers elected at any time. The Company's Chief Executive Officer has the authority to appoint and remove Vice Presidents (other than Executive Vice Presidents, Group Vice Presidents, and Senior Vice Presidents).
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUERPURCHASES OF EQUITY SECURITIES
Market informationInformation
Hormel Foods Corporation’s common stock is traded on the New York Stock Exchange under the symbol HRL. The CUSIP number is 440452100.
Holders
There are approximately 12,60012,300 record stockholders and 126,900186,000 stockholders whose shares are held in street name by brokerage firms and financial institutions.
Issuer purchases of equity securities in the fourth quarter of fiscal 2018 are shown below: | | | | | | | | | | | | | | | | | | | | | | | |
| Issuer Purchases of Equity Securities |
| Fourth Quarter Ended October 31, 2021 |
| Period | Total Number of Shares Purchased1 | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs1 |
July 26, 2021 -
August 29, 2021 | — | | | — | | | — | | | 4,239,594 | |
August 30, 2021 -
September 26, 2021 | — | | | — | | | — | | | 4,239,594 | |
September 27, 2021 -
October 31, 2021 | 252,100 | | | $ | 40.88 | | | 252,100 | | | 3,987,494 | |
| Total | 252,100 | | | | | 252,100 | | | |
|
| | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
July 30, 2018 – September 2, 2018 | | - | | - | | - | | 9,121,823 |
September 3, 2018 – September 30, 2018 | | - | | - | | - | | 9,121,823 |
October 1, 2018 – October 28, 2018 | | 54,667 | | $39.45 | | 54,667 | | 9,067,156 |
| Total | | 54,667 | | $39.45 | | 54,667 | | |
(1) 1 On January 31,29, 2013, the Company announced itsCompany's Board of Directors had authorized the repurchase of 10,000,000 shares of its common stock with no expiration date. The repurchase program was authorized at a meeting of the Company’s Board of Directors onOn January 29, 2013. On November 23, 2015,26, 2016, the Board of Directors authorizedapproved a two-for-one split of the Company’s common stock.stock to be effective January 27, 2016. As part of the resolution to approve that stock split resolution, the number of shares remaining to be repurchased was adjusted proportionately.
Dividends
The stock splitCompany has paid dividends for 373 consecutive quarters. The annual dividend rate for fiscal 2022 was subsequently approved by stockholders atincreased 6 percent to $1.04 per share, representing the Company’s Annual Meeting on January 26, 2016, and effected January 27, 2016. All numbers in the table above reflect the impact56th consecutive annual dividend increase. The Company is dedicated to returning excess cash flow to shareholders through dividend payments.
Shareholder return performance graph
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend-reinvested basis, for the Company, the S&P 500 Index, and the S&P 500 Packaged Foods & Meats Index for the five years ended October 26, 2018.31, 2021. The graph assumes $100 was invested in each, as of the market close on October 28, 2013.31, 2016. Note that historic stock price performance is not necessarily indicative of future stock price performance.
Item 6. SELECTED FINANCIAL DATARESERVED
The information set forth below for the five years ended October 28, 2018, is not necessarily indicative of results of future operations, and should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Part II, Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below.
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share amounts) | | 2018 | | 2017 | | 2016* | | 2015** | | 2014** |
| Operations | | |
| | |
| | |
| | |
| | |
|
| Net Sales | | $ | 9,545,700 |
| | $ | 9,167,519 |
| | $ | 9,523,224 |
| | $ | 9,263,863 |
| | $ | 9,316,256 |
|
| Net Earnings | | 1,012,582 |
| | 847,103 |
| | 890,517 |
| | 687,264 |
| | 606,026 |
|
Net Earnings Attributable to Hormel Foods Corporation | | 1,012,140 |
| | 846,735 |
| | 890,052 |
| | 686,088 |
| | 602,677 |
|
| % of net sales | | 10.60 | % | | 9.24 | % | | 9.35 | % | | 7.41 | % | | 6.47 | % |
| EBIT(1) | | 1,198,479 |
| | 1,280,101 |
| | 1,323,430 |
| | 1,066,144 |
| | 928,271 |
|
| % of net sales | | 12.56 | % | | 13.96 | % | | 13.90 | % | | 11.51 | % | | 9.96 | % |
| EBITDA(2) | | 1,360,337 |
| | 1,411,078 |
| | 1,455,398 |
| | 1,199,578 |
| | 1,058,315 |
|
| % of net sales | | 14.25 | % | | 15.39 | % | | 15.28 | % | | 12.95 | % | | 11.36 | % |
Return on Invested Capital (3) | | 16.50 | % | | 16.35 | % | | 19.04 | % | | 15.62 | % | | 15.79 | % |
| Financial Position | | | | |
| | |
| | |
| | |
|
| Total Assets | | $ | 8,142,292 |
| | $ | 6,975,908 |
| | $ | 6,370,067 |
| | $ | 6,139,831 |
| | $ | 5,455,619 |
|
| Long-term Debt less Current Maturities | | 624,840 |
| | 250,000 |
| | 250,000 |
| | 250,000 |
| | 250,000 |
|
Hormel Foods Corporation Shareholders’ Investment | | 5,600,811 |
| | 4,935,907 |
| | 4,448,006 |
| | 3,998,198 |
| | 3,605,678 |
|
| Selected Cash Flow Data | | | | |
| | |
| | |
| | |
|
| Depreciation and Amortization | | $ | 161,858 |
| | $ | 130,977 |
| | $ | 131,968 |
| | $ | 133,434 |
| | $ | 130,044 |
|
| Capital Expenditures | | 389,607 |
| | 221,286 |
| | 255,524 |
| | 144,063 |
| | 159,138 |
|
| Acquisitions of Businesses | | 857,668 |
| | 520,463 |
| | 280,889 |
| | 770,587 |
| | 466,204 |
|
| Share Repurchase | | 46,898 |
| | 94,487 |
| | 87,885 |
| | 24,928 |
| | 58,937 |
|
| Dividends Paid | | 388,107 |
| | 346,010 |
| | 296,493 |
| | 250,834 |
| | 203,156 |
|
| Common Stock | | | | |
| | |
| | |
| | |
|
Weighted-Average Shares Outstanding – Basic | | 530,742 |
| | 528,363 |
| | 529,290 |
| | 528,143 |
| | 527,624 |
|
Weighted-Average Shares Outstanding – Diluted | | 543,869 |
| | 539,116 |
| | 542,473 |
| | 541,002 |
| | 540,431 |
|
| Earnings per Share – Basic | | $ | 1.91 |
| | $ | 1.60 |
| | $ | 1.68 |
| | $ | 1.30 |
| | $ | 1.14 |
|
| Earnings per Share – Diluted | | 1.86 |
| | 1.57 |
| | 1.64 |
| | 1.27 |
| | 1.12 |
|
| Dividends per Share | | 0.75 |
| | 0.68 |
| | 0.58 |
| | 0.50 |
| | 0.40 |
|
Hormel Foods Corporation Shareholders’ Investment Per Share | | 10.49 |
| | 9.34 |
| | 8.42 |
| | 7.57 |
| | 6.84 |
|
The Company provides EBIT, EBITDA, and Return on Invested Capital because these measures are useful to investors as indicators of operating strength and performance relative to prior years and are typically used to benchmark our Company’s performance against other companies in our industry. Management uses EBIT as a component of certain executive incentive plans but does not utilize EBITDA for any material purpose. These measures are calculated as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2018 | | 2017 | | 2016* | | 2015 | | 2014 |
(1) EBIT: | | |
| | |
| | |
| | |
| | |
|
Net Earnings Attributable to Hormel Foods Corporation | | $ | 1,012,140 |
| | $ | 846,735 |
| | $ | 890,052 |
| | $ | 686,088 |
| | $ | 602,677 |
|
| Plus: Income Tax Expense | | 168,702 |
| | 431,542 |
| | 426,698 |
| | 369,879 |
| | 316,126 |
|
| Plus: Interest Expense | | 26,494 |
| | 12,683 |
| | 12,871 |
| | 13,111 |
| | 12,704 |
|
| Less: Interest and Investment Income | | 8,857 |
| | 10,859 |
| | 6,191 |
| | 2,934 |
| | 3,236 |
|
| EBIT | | $ | 1,198,479 |
| | $ | 1,280,101 |
| | $ | 1,323,430 |
| | $ | 1,066,144 |
| | $ | 928,271 |
|
(2) EBITDA: | | | | |
| | |
| | |
| | |
|
| EBIT per (1) above | | 1,198,479 |
| | 1,280,101 |
| | 1,323,430 |
| | 1,066,144 |
| | 928,271 |
|
| Plus: Depreciation and Amortization | | 161,858 |
| | 130,977 |
| | 131,968 |
| | 133,434 |
| | 130,044 |
|
| EBITDA | | $ | 1,360,337 |
| | $ | 1,411,078 |
| | $ | 1,455,398 |
| | $ | 1,199,578 |
| | $ | 1,058,315 |
|
(3) Return on Invested Capital: | | | | |
| | |
| | |
| | |
|
| EBIT per (1) above | | 1,198,479 |
| | 1,280,101 |
| | 1,323,430 |
| | 1,066,144 |
| | 928,271 |
|
| X (1 – Effective Tax Rate***) | | 85.71 | % | | 66.24 | % | | 67.59 | % | | 64.97 | % | | 65.59 | % |
| After-tax EBIT | | $ | 1,027,336 |
| | $ | 848,067 |
| | $ | 894,506 |
| | $ | 692,674 |
| | $ | 608,887 |
|
| Divided by: | | | | |
| | |
| | |
| | |
|
| Total Debt | | 624,840 |
| | 250,000 |
| | 250,000 |
| | 435,000 |
| | 250,000 |
|
Hormel Foods Corporation Shareholders’ Investment | | 5,600,811 |
| | 4,935,907 |
| | 4,448,006 |
| | 3,998,198 |
| | 3,605,678 |
|
| Total Debt and Shareholders’ Investment | | $ | 6,225,651 |
| | $ | 5,185,907 |
| | $ | 4,698,006 |
| | $ | 4,433,198 |
| | $ | 3,855,678 |
|
| Return on Invested Capital | | 16.50 | % | | 16.35 | % | | 19.04 | % | | 15.62 | % | | 15.79 | % |
* Fiscal 2016 included 53 weeks.
** Shares and per share figures have been restated to reflect the two-for-one stock split distributed on February 9, 2016.
*** Excluding earnings attributable to noncontrolling interests.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OFOPERATIONS
Executive Overview
Fiscal 2018: 2021: The Company deliveredachieved record sales and earnings. The impact of the Tax Cuts and Jobs Act (Tax Act) along with strong performances by Refrigerated Foods and International & Other contributed to these results. These factors were able to offset continued weakness at JOTS, higher freight costs, and reduced sales and profitability from the CytoSport and contract manufacturing business in Grocery Products. Sales for the year were $9.5$11.4 billion, a 419 percent increase from last year.fiscal 2020, driven by double-digit growth from all four business segments and from all four go-to-market channels (U.S. retail, U.S. foodservice, U.S. deli, and international). Organic volume and organic net sales1 were down 1%. Diluted earnings per share for fiscal 2018 were $1.86, an 18 increased 1 percent increase compared to $1.57 per share last year. Adjusted diluted earnings per share1 were $1.89, a 20and 14 percent, increase. Fiscal 2018 net earnings attributable to the Company increased 20 percent to $1,012.1 million, compared to net earnings of $846.7 million last year.respectively (1seeSee explanation of non-GAAP financial measures in the Consolidated Results section).Strong growth from the foodservice businesses, higher pricing across all segments, and the inclusion of the Planters® snack nuts business were the primary drivers of net sales growth. Demand remained elevated across the domestic retail, domestic deli, and international channels, while the domestic foodservice business experienced a significant recovery after the sharp decline experienced last year as a result of the COVID-19 pandemic. Net earnings were in line with last year as improved volume and sales were unable to offset higher costs as a result of inflation on raw materials, freight, labor, and supplies. Diluted earnings per share for fiscal 2021 was $1.66, flat to last year. The net impact to after-tax earnings from one-time acquisition costs and accounting adjustments related to the acquisition of the Planters® snack nuts business were approximately $37 million, or six cents per share, for fiscal 2021.
Refrigerated Foods segment results exceeded lastprofit for the full year with contributionsincreased as higher earnings from the Columbusfoodservice business and Fontanini acquisitions. Strength in value-added products such as Hormel® Natural Choice® and Hormel® FirebraisedTM Meats overcame lower commodity profitsthe impact of numerous pricing actions fully offset significantly higher raw material costs, increased freight expenses, and higher freight expense.operational costs. Grocery Products segment profit increased due to the addition of the Planters® snack nuts business and improved organic sales. International & Other segment results surpassed lastprofit improved significantly for the full year, due to strong growthdriven by gains from exports, higher income from the China business, which benefited from lower inputCompany's partners in the Philippines, South Korea, and Europe, and strong results in China. Earnings for Jennie-O Turkey Store declined due primarily to higher feed costs and increased freight expenses. Volume, net sales, and segment profit for all business segments were constrained by production labor shortages and supply chain disruptions during the additionsecond half of the Ceratti acquisition. The JOTS segmentfiscal year.
During fiscal 2021, the Company continued to beprioritize investments to ensure the safety of all team members. For the full year, we absorbed approximately $21 million in direct incremental supply chain costs related to the COVID-19 pandemic to enhance safety measures in its production facilities related to the COVID-19 pandemic. The Company estimates most of these incremental supply chain costs are temporary and will eventually decline as the pandemic subsides. In addition to COVID-related investments, volume, net sales, and segment profit were negatively impacted by industry oversupply leading to low commodity prices in addition to increased freight. At the beginning of fiscal 2018, the Specialty Foods segment was merged into the Grocery Products segment. Despite sales growth of Wholly Guacamole® dipslabor shortages and Herdez® salsas, Grocery Products segment financial performance was down from fiscal 2017 as profits were impacted by weakness in the Company's contract manufacturing business, an impairment of the CytoSport trademark, and increased freight.supply chain disruption.
OurThe Company continued to generate record operating cash flows, which were reinvested into the business through acquisitions and capital expenditures while returningand returned a record amount of cash back to shareholders in the form of dividendsdividends. Capital expenditures in fiscal 2021 were $232 million, including investments in a pizza toppings expansion at our manufacturing facility in Nevada, Iowa, expanding capacity for Columbus® charcuterie in Omaha, Nebraska, significant progress on new production capabilities for retail and share repurchases. We completed the acquisitionfoodservice pepperoni, Project Orion, and many other projects to support growth of Columbus, an authentic, premium deli meat and salami company, for $857.4 million. This strategic acquisition positions us as a total deli solutions provider and enhances our other strong deli brands such as Hormel®, Jennie-O®, Applegate®, and DiLusso®. In connection with the acquisition, the Company borrowed $375.0 million under a term loan facility and $375.0 million under a revolving credit facility. As of the close of the year, we repaid the short-term debt.branded products. The annual dividend for 20192022 will be $0.84$1.04 per share and marks the 53rd56th consecutive year of dividend increases, representing an increase of 12 percent after a 10 percent increase6 percent.
In June 2021, the Company acquired the Planters® snack nuts business for $3.4 billion in cash. Included in the acquisition were the Planters® , NUT-rition® , Planters® Cheez Balls and Corn Nuts® brands. This acquisition amplifies our scale in snacking and entertaining by complementing its other brands in the space, including Hormel® Gatherings®, Herdez®, Wholly®, SKIPPY®, and Columbus®.
Fiscal 2022 Outlook: The Company expects all four segments to deliver sales and earnings growth in fiscal 2018. We repurchased 1.4 million shares2022. On a consolidated basis, growth is expected in excess of common stockour long-term growth algorithm due to strength in the Planters® snack nuts business, continued elevated demand across all businesses, improved production throughput, incremental capacity on high-growth categories such as pizza toppings and dry sausage, and the benefit from numerous pricing actions executed during fiscal 2018, spending $46.9 million.
Fiscal 2019 Outlook: We expect to grow sales and2021. The operating profits in fiscal 2019, with each segment contributing to growth. Momentum in branded, value-added businesses within Refrigerated Foods, especially foodservice and our newly created deli division, should more than offset the expected decline in commodity profits, increased freight, and expenses associated with the divestiture of the Fremont facility. Innovation from brands including Hormel® Bacon 1TM, Hormel® Natural Choice®, and Hormel® Fire BraisedTMmeatsenvironment is expected to provideremain complex. Industry-wide labor shortages, incremental growth. The contributions from branded items such as the SPAM® family of products, Wholly Guacamole® dips, Herdez® salsas,inflationary pressures, and Muscle Milk are expected to drive improved Grocery Products results. We expect the JOTS segment to return to growth as industry conditions improve. We anticipate value-added sales and volume growth led by Jennie-O® lean ground turkey and Jennie-O®Oven Ready® items. The International & Other segment plans to grow sales and earnings in both the China and Brazil businesses and expects to increase sales of the SPAM® and Skippy® families of products. Additionally, ourfurther supply chain organization is expecteddisruption pose the greatest risks to provide cost reductionsthe outlook.
The Company remains in numerous areas across the supply chain.
On December 3, 2018, the Company completed the sale of the Fremont processing facility with WholeStone Farms. The transaction included a processing facility and a multiyear agreementstrong financial position due to supply the Company pork raw materials. Up until the date of sale, this facility manufactured and harvested hogs for processing.
We plan to support our numerous iconic brands with continued advertising in fiscal 2019. Strongits consistent cash flow, along with a solidliquidity, and strong balance sheet, will enable us to continue to return cash to shareholders while investing capital into our value-added businesses.
Critical Accounting Policies
This 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 (U.S. GAAP). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company evaluates, on an ongoing basis, its estimates for reasonableness as changes occur in its business environment. The Company bases its estimates on experience, the use of independent third-party specialists, and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those reflective of significant judgments, estimates, and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company believes the following are its critical accounting policies:
Revenue Recognition: The Company recognizes sales when title passes upon delivery of its products to customers, net of applicable provisions for discounts, returns, and allowances. Products are delivered upon receipt of customer purchase orders with acceptable terms, including price and reasonably assured collectability.
The Company offers various sales incentives to customers and consumers. Incentives offered off-invoice include prompt pay allowances, will call allowances, spoilage allowances, and temporary price reductions. These incentives are recognized as reductions of revenue at the time title passes. Coupons are used as an incentive for consumers to purchase various products. The coupons reduce revenues at the time they are offered, based on estimated redemption rates. Promotional contracts are performed by customers to promote the Company’s products to consumers. These incentives reduce revenues at the time of performance through direct payments and accrued promotional funds. Accrued promotional funds are unpaid liabilities for promotional contracts in process or completed at the end of a quarter or fiscal year. Promotional contractual accruals are based on agreements with customers for defined performance. The liability relating to these agreements is based on a review of the outstanding contracts on which performance has taken place but which the promotional payments relating to such contracts remain unpaid as of the end of the fiscal year. The level of customer performance and the historical spend rate versus contracted rates are significant estimates used to determine these liabilities.
Inventory Valuation: The Company values inventories at the lower of cost or net realizable value. For pork inventories, when the carcasses are disassembled and transferred from primal processing to various manufacturing departments, the primal values, as adjusted by the Company for product specifications and further processing, become the basis for calculating inventory values. Turkey raw materials are represented by the deboned meat quantities. The Company values these raw materials using a concept referred to as the “meat cost pool.” The meat cost pool is determined by combining the cost to grow turkeys with processing costs, less any net sales revenue from by-products created from the processing and not used in producing Company products. The Company has developed a series of ratios using historical data and current market conditions (which themselves involve estimates and judgment determinations by the Company) to allocate the meat cost pool to each meat component. Substantially all inventoriable expenses, meat, packaging, and supplies are valued by the average cost method.
Goodwill and Other Indefinite-Lived Intangibles: Estimating the fair value of the Company’s goodwill reporting units and intangible assets requires significant judgement. Accordingly, the Company obtains the assistance of third-party valuation specialists who utilize available historical information along with future expectations to value the assets. Determining the useful life of an intangible asset also requires judgement. Certain acquired brands are expected to have indefinite lives based on their history and the Company’s planssheet. We plan to continue to support the business through marketing and build the brands. Other acquired assets such as customer relationships, are expected to have determinable useful lives.
Indefinite-lived intangible assets are originally recorded at their estimated fair values at the date of acquisition and the residual of the purchase price is recorded to goodwill. Goodwill and other indefinite-lived intangible assets are allocated to reporting units that will receive the related sales and income. Goodwill and indefinite-lived intangible assets are tested annuallyadvertising investments for impairment, or more frequently if impairment indicators arise.
In conducting the annual impairment test for goodwill, the Company has the option to first assess qualitative factors to determine whether it is more likely than not (> 50% likelihood) the fair value of any reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines an impairment is more likely than not, the Company is required to perform a quantitative impairment test. Otherwise, no further analysis is required. Alternatively, the Company may elect not to perform the qualitative assessment and proceed directly to the quantitative impairment test.
Prior to the fourth quarter of fiscal 2017, if the carrying value of a reporting unit exceeded its fair value, the Company completed the second step of the test to determine the amount of goodwill impairment loss, if any, to be recognized. In the second step, the Company estimated an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The impairment loss was equal to the excess of the carrying value of the goodwill over the implied fair value of that goodwill. In the fourth quarter of fiscal 2017, the Company adopted Accounting Standards Update (ASU) 2017-04, Simplifying the Test for Goodwill Impairment. As a result, the Company recognizes an impairment loss equal to the difference between the carrying value and estimated fair value of the reporting unit if the carrying value of a reporting unit exceeds its fair value.
In conducting a qualitative assessment, the Company analyzes actual and projected growth trends for net sales, gross margin, and segment profit for each reporting unit,our leading brands as well as historical performance versus planinvestments into our production capabilities, including new capacity for retail and foodservice pepperoni and a new production line for the resultsSPAM® family of prior quantitative tests performed. Additionally, the Company assesses critical areas that may impact its business, including macroeconomic conditions and the related impact, market-related exposures, any plansproducts. We also expect to market for sale all or a portion of their business, competitive changes, new or discontinued product lines, changes in key personnel, or any potential risks to their projected financial results.
If performed, the quantitative goodwill impairment test is performed at the reporting unit level. First, the fair value of each reporting unit is compared to its corresponding carrying value, including goodwill. The fair value of each reporting unit is estimated using discounted cash flow valuations (Level 3), which incorporate assumptions regarding future growth rates,
terminal values, and discount rates. The estimates and assumptions used consider historical performance and are consistent with the assumptions used in determining future profit plans for each reporting unit, which are approved by the Company’s Board of Directors. If the quantitative assessment results in the carrying value exceeding the fair value of any reporting unit, then the resultsbenefit from the quantitative analysis will be relied uponprogress we have made on our Project Orion and One Supply Chain initiatives to determine both the existencetransform our company and amount of goodwill impairment. An impairment loss will be recognizedposition it for the amount by which the reporting unit’s carrying amount exceeds its fair value, notlong-term growth. Lastly, we remain committed to exceed the carrying amount of goodwill in that reporting unit.
During the fourth quarter of fiscal 2018, the Company completed its annual goodwill impairment tests and electedreturning cash to perform a qualitative assessment. As a result of the qualitative testing during fiscal 2018 and 2016 and quantitative testing during fiscal 2017, no material goodwill impairment charges were recorded. An immaterial impairment charge was recorded in the second quarter of fiscal 2016 for the Company's Diamond Crystal Brands (DCB) business based on the agreed-upon sales price for the business.
In conducting the annual impairment test for its indefinite-lived intangible assets, the Company first performs a qualitative assessment to determine whether it is more likely than not (> 50% likelihood) that an indefinite-lived intangible asset is impaired. If the Company concludes this is the case, then a quantitative test for impairment must be performed. Otherwise, the Company does not need to perform a quantitative test.
In conducting the initial qualitative assessment, the Company analyzes growth rates for historical and projected net sales and the results of prior quantitative tests performed. Additionally, the Company assesses critical areas that may impact its intangible assets or the applicable royalty rates to determine if there are factors that could indicate impairment of the asset.
If performed, the quantitative impairment test compares the fair value to the carrying value of the indefinite-lived intangible asset. The fair value of indefinite-lived intangible assets is primarily determined on the basis of estimated discounted value, using the relief from royalty method (Level 3). This method incorporates assumptions regarding future sales projections and discount rates. If the carrying value exceeds fair value, the indefinite-lived intangible asset is considered impaired and an impairment charge is recorded. Even if not required, the Company periodically elects to perform the quantitative test in order to confirm the qualitative assessment.
During the 2017 annual impairment review, the Company completed a quantitative assessment of indefinite-lived intangible assets. As a result of the review, no material impairment charges were recorded; however, four trademarks were determined to have fair values exceeding their carrying values by less than a 10 percent margin. Due to the lack of excess value of these assets, the Company elected to test these assets using a quantitative analysis during fiscal 2018. For all other indefinite-lived intangible assets, the Company tested the assets using a qualitative analysis. During the qualitative review, it was determined that further assessmentshareholders in the form of a quantitative test was necessary for two additional indefinite-lived intangible assets. In total,dividends.
A detailed review of the Company performed a quantitative test for six trademarksCompany's fiscal 2021 performance compared to fiscal 2020 appears in following section. A detailed review of the fiscal 2018, one2020 performance compared to fiscal 2019 is set forth in Part II, Item 7 of which was determined to be impaired. During the fourth quarter of fiscal 2018, a $17.3 million intangible asset impairment charge was recordedCompany's Form 10-K for the CytoSport trademark. As a resultfiscal year ended October 25, 2020 under the caption “Management’s Discussion and Analysis of the 2018 quantitative test, one trademark was determined to have fair value exceeding its carrying valueFinancial Condition and Results of Operations,” which is incorporated herein by approximately a 10 percent margin. See additional discussion regarding the Company’s goodwill and intangible assets in Note D. During fiscal years 2018, 2017, and 2016, there were no other material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition. reference.
Employee Benefit Plans: The Company incurs expenses relating to employee benefits, such as noncontributory defined benefit pension plans and post-retirement health care benefits. In accounting for these employment costs, management must make a variety of assumptions and estimates including mortality rates, discount rates, overall compensation increases, expected return on plan assets, and health care cost trend rates. The Company considers historical data as well as current facts and circumstances when determining these estimates. The Company uses third-party specialists to assist management in the determination of these estimates and the calculation of certain employee benefit expenses and the outstanding obligation.
Income Taxes: The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur. Due to passage of the Tax Act, the tax provision at the end of fiscal 2018 was provisional. The Company will continue to refine such amounts within the measurement period allowed, which will be completed no later than the first quarter of fiscal 2019.
The Company computes its provision for income taxes based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it operates. Significant judgment is required in evaluating the Company’s tax positions and determining its annual tax provision. While the Company considers all of its tax positions fully supportable, the Company is occasionally challenged by various tax authorities regarding the amount of taxes due. The Company recognizes a tax position in its financial statements when it is more likely than not the position will be sustained upon examination, based on the technical merits of the position. This position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. A change in judgment related to the expected ultimate resolution of uncertain tax positions will be recognized in earnings in the quarter of such change.
Contingent Liabilities: At any time, the Company may be subject to investigations, legal proceedings, or claims related to the on-going operation of its business, including claims both by and against the Company. Such proceedings typically involve claims
related to product liability, contract disputes, wage and hour laws, employment practices, or other actions brought by employees, consumers, competitors, or suppliers. The Company routinely assesses the likelihood of any adverse outcomes related to these matters on a case by case basis, as well as the potential ranges of losses and fees. The Company establishes accruals for its potential exposure, as appropriate, for claims against the Company when losses become probable and reasonably estimable. Where the Company is able to reasonably estimate a range of potential losses, the Company records the amount within that range which constitutes the Company’s best estimate. The Company also discloses the nature and range of loss for claims against the Company when losses are reasonably possible and material. These accruals and disclosures are determined based on the facts and circumstances related to the individual cases and require estimates and judgments regarding the interpretation of facts and laws, as well as the effectiveness of strategies or factors beyond our control.
Results of Operations
OVERVIEWOverview
The Company is a processor of branded and unbranded food products for retail, foodservice, deli, and commercial customers. As a result of a business realignment at the beginning of fiscal 2018, the former Specialty Foods segment results are now reported as part of the Grocery products segment. Periods presented herein have been recast to reflect this change.
The Company operates in the following four reportable segments:
| | | | | |
| Segment | Business Conducted |
| |
Segment | Business Conducted |
| |
| Grocery Products | This segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market, along with the sale of nutritional and private label shelf-stable products to retail, foodservice, and industrial customers. This segment also includes the results from the Company’s MegaMex Foods, LLC (MegaMex) joint venture. |
| |
| Refrigerated Foods | This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork, beef, chicken, and turkeypoultry products for retail, foodservice, deli, convenience store, and commercial customers. |
| |
| Jennie-O Turkey Store | This segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and commercial customers. |
| |
| International & Other | This segment includes Hormel Foods International, which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Company’s international joint ventures and royalty arrangements. |
The Company’s fiscal year consisted of 53 weeks in fiscal year 2021 and 52 weeks in fiscal years 20182020 and 2017.2019. Fiscal 2016 consisted2022 will consist of 5352 weeks.
CONSOLIDATED RESULTS
FISCAL YEARS 2018 AND 2017:
Consolidated Results
Net Earnings and Diluted Earnings perPer Share
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
(in thousands, except per share amounts) | | October 28, 2018 | | October 29, 2017 | | % Change | | October 28, 2018 | | October 29, 2017 | | % Change |
| Net earnings | | $ | 261,406 |
| | $ | 218,154 |
| | 19.8 | | $ | 1,012,140 |
| | $ | 846,735 |
| | 19.5 |
| Diluted earnings per share | | 0.48 |
| | 0.41 |
| | 17.1 | | 1.86 |
| | 1.57 |
| | 18.5 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| (in thousands, except per share amounts) | | October 31, 2021 | | October 25, 2020 | | % Change | | October 31, 2021 | | October 25, 2020 | | % Change |
| Net Earnings | | $ | 281,738 | | | $ | 234,356 | | | 20.2 | | | $ | 908,839 | | | $ | 908,082 | | | 0.1 | |
| Diluted Earnings Per Share | | 0.51 | | | 0.43 | | | 18.6 | | | 1.66 | | | 1.66 | | | — | |
Adjusted Diluted Earnings Per Share (1) | | 0.51 | | | 0.43 | | | 18.6 | | | 1.73 | | | 1.66 | | | 4.2 | |
Volume and Net Sales
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| (in thousands) | | October 28, 2018 | | October 29, 2017 | | % Change | | October 28, 2018 | | October 29, 2017 | | % Change |
| Volume (lbs.) | | 1,265,292 |
| | 1,275,270 |
| | (0.8 | ) | | 4,798,178 |
| | 4,770,485 |
| | 0.6 |
|
| Organic volume(1) | | 1,232,728 |
| | 1,275,270 |
| | (3.3 | ) | | 4,622,170 |
| | 4,690,031 |
| | (1.4 | ) |
| Net sales | | $ | 2,524,697 |
| | $ | 2,492,608 |
| | 1.3 |
| | $ | 9,545,700 |
| | $ | 9,167,519 |
| | 4.1 |
|
| Organic net sales(1) | | 2,407,405 |
| | 2,492,608 |
| | (3.4 | ) | | 8,984,841 |
| | 9,067,288 |
| | (0.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| (in thousands) | | October 31, 2021 | | October 25, 2020 | | % Change | | October 31, 2021 | | October 25, 2020 | | % Change |
| Volume (lbs.) | | 1,379,848 | | | 1,209,434 | | | 14.1 | | | 4,933,136 | | | 4,794,706 | | | 2.9 | |
Organic Volume(1) | | 1,308,606 | | | 1,209,434 | | | 8.2 | | | 4,818,820 | | | 4,794,706 | | | 0.5 | |
| Net Sales | | $ | 3,454,751 | | | $ | 2,420,105 | | | 42.8 | | | $ | 11,386,189 | | | $ | 9,608,462 | | | 18.5 | |
Organic Net Sales(1) | | 3,185,297 | | | 2,420,105 | | | 31.6 | | | 10,940,372 | | | 9,608,462 | | | 13.9 | |
(1) COMPARISON OF U.S. GAAP TO NON-GAAP FINANCIAL MEASUREMENTS See the "Non-GAAP Financial Measures" section below for a description of the Company's use of measures not defined by Generally Accepted Accounting Principles (GAAP)
The non-GAAP adjusted financial measurements of organic volume and organic net sales are presented to provide investors additional information to facilitate the comparison of past and present operations. The Company believes these non-GAAP financial measurements provide useful information to investors because they are the measurements used to evaluate performance on a comparable year-over-year
basis. Non-GAAP measurements are not intended to be a substitute for U.S. GAAP measurements in analyzing financial performance. These non-GAAP measurements are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.
Organic net sales and organic volume are defined as net sales and volume excluding the impact of acquisitions and divestitures. Organic net sales and organic volume exclude the impacts of the acquisition of Columbus Craft Meats (November 2017), the acquisition of Fontanini Italian Meats and Sausages (August 2017), and the divestiture of Farmer John (January 2017), in Refrigerated Foods and the acquisition of Ceratti (August 2017) in International. The tables below show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in the fourth quarter and fourth quarter and full year of fiscal 2018.
Adjusted segment profit and adjusted earnings per share exclude the impact of a non-cash impairment charge associated with the CytoSport business which was recognized in the Grocery Products segment. The tables below show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in the fourth quarter and fourth quarter and full year of fiscal 2018. The effective tax rate was used to determine the tax effect of the impairment.
4th Quarter
Volume (lbs.)
|
| | | | | | | | | | | | | | | |
| | | FY 2018 | | FY 2017 | | |
| (in thousands) | | Reported (GAAP) | | Acquisitions | | Organic (Non-GAAP) | | Reported (GAAP) | | Organic % change |
| Grocery Products | | 350,399 |
| | — |
| | 350,399 |
| | 366,485 |
| | (4.4 | ) |
| Refrigerated Foods | | 558,843 |
| | (22,757 | ) | | 536,086 |
| | 547,196 |
| | (2.0 | ) |
| Jennie-O Turkey Store | | 260,450 |
| | — |
| | 260,450 |
| | 270,175 |
| | (3.6 | ) |
| International & Other | | 95,600 |
| | (9,807 | ) | | 85,793 |
| | 91,414 |
| | (6.1 | ) |
| Total Volume | | 1,265,292 |
| | (32,564 | ) | | 1,232,728 |
| | 1,275,270 |
| | (3.3 | ) |
Net Sales
|
| | | | | | | | | | | | | | | | | | | |
| | | FY 2018 | | FY 2017 | | |
| (in thousands) | | Reported (GAAP) | | Acquisitions | | Organic (Non-GAAP) | | Reported (GAAP) | | Organic % change |
| Grocery Products | | $ | 658,845 |
| | $ | — |
| | $ | 658,845 |
| | $ | 685,961 |
| | (4.0 | ) |
| Refrigerated Foods | | 1,232,650 |
| | (102,262 | ) | | 1,130,388 |
| | 1,166,661 |
| | (3.1 | ) |
| Jennie-O Turkey Store | | 466,811 |
| | — |
| | 466,811 |
| | 484,856 |
| | (3.7 | ) |
| International & Other | | 166,391 |
| | (15,030 | ) | | 151,361 |
| | 155,130 |
| | (2.4 | ) |
| Total Net Sales | | $ | 2,524,697 |
| | $ | (117,292 | ) | | $ | 2,407,405 |
| | $ | 2,492,608 |
| | (3.4 | ) |
Full Year
Volume (lbs.)
|
| | | | | | | | | | | | | | | | | | | | | |
| | | FY 2018 | | FY 2017 | | |
| (in thousands) | Reported (GAAP) | | Acquisitions | | Organic (Non-GAAP) | | Reported (GAAP) | | Divestitures | | Organic (Non-GAAP) | | Organic % change |
| Grocery Products | | 1,345,904 |
| | — |
| | 1,345,904 |
| | 1,374,665 |
| | — |
| | 1,374,665 |
| | (2.1 | ) |
| Refrigerated Foods | | 2,199,994 |
| | (130,301 | ) | | 2,069,693 |
| | 2,180,407 |
| | (80,454 | ) | | 2,099,953 |
| | (1.4 | ) |
| Jennie-O Turkey Store | | 894,590 |
| | — |
| | 894,590 |
| | 890,518 |
| | — |
| | 890,518 |
| | 0.5 |
|
| International & Other | | 357,690 |
| | (45,707 | ) | | 311,983 |
| | 324,895 |
| | — |
| | 324,895 |
| | (4.0 | ) |
| Total Volume | | 4,798,178 |
| | (176,008 | ) | | 4,622,170 |
| | 4,770,485 |
| | (80,454 | ) | | 4,690,031 |
| | (1.4 | ) |
Net Sales
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | FY 2018 | | FY 2017 | | |
| (in thousands) | | Reported (GAAP) | | Acquisitions | | Organic (Non-GAAP) | | Reported (GAAP) | | Divestitures | | Organic (Non-GAAP) | | Organic % change |
| Grocery Products | | $ | 2,521,992 |
| | $ | — |
| | $ | 2,521,992 |
| | $ | 2,555,613 |
| | $ | — |
| | $ | 2,555,613 |
| | (1.3 | ) |
| Refrigerated Foods | | 4,771,836 |
| | (485,960 | ) | | 4,285,876 |
| | 4,403,732 |
| | (100,231 | ) | | 4,303,501 |
| | (0.4 | ) |
| Jennie-O Turkey Store | | 1,627,433 |
| | — |
| | 1,627,433 |
| | 1,663,160 |
| | — |
| | 1,663,160 |
| | (2.1 | ) |
| International & Other | | 624,439 |
| | (74,899 | ) | | 549,540 |
| | 545,014 |
| | — |
| | 545,014 |
| | 0.8 |
|
| Total Net Sales | | $ | 9,545,700 |
| | $ | (560,859 | ) | | $ | 8,984,841 |
| | $ | 9,167,519 |
| | $ | (100,231 | ) | | $ | 9,067,288 |
| | (0.9 | ) |
4th Quarter and Full Year
Segment Profit and Diluted Earnings per Share
|
| | | | | | |
| | FY 2018 |
| | Grocery Products |
| | 4th Quarter | Full Year |
| Non-GAAP Adjusted Segment Profit | $ | 98,861 |
| $ | 380,029 |
|
| Cytosport Impairment | (17,279 | ) | (17,279 | ) |
| GAAP Segment Profit | $ | 81,582 |
| $ | 362,750 |
|
| | | |
| | Total Company |
| | 4th Quarter | Full Year |
| Non-GAAP Adjusted Diluted EPS | $ | 0.51 |
| $ | 1.89 |
|
| Cytosport Impairment | (0.03 | ) | (0.03 | ) |
| GAAP Diluted EPS | $ | 0.48 |
| $ | 1.86 |
|
The increase in net sales for the fourth quarter of fiscal 2018 was driven bywere an all-time record, benefiting from pricing actions across the inclusion of sales from the acquisitions of the Columbus, Fontanini,entire portfolio, organic volume growth, and Ceratti. Higher sales of Wholly Guacamole® dips, Hormel® Natural Choice®products, Hormel® pepperoni, and foodservice sales of Jennie-O® turkey breast and Austin Blues® smoked barbecue products were more than offset by declines due to lower whole bird sales at JOTS, declines in the Company's contract manufacturing business in Grocery Products, and lower hog harvest volumes.
For fiscal 2018, the increase in net sales was primarily related to the inclusion of the Columbus, Fontanini,Planters® snack nuts business. Results from the foodservice businesses in Refrigerated Foods and Ceratti acquisitions, more than offsetting declines at JOTS,Jennie-O Turkey Store were particularly strong due to the Company's contract manufacturingcontinued recovery in the foodservice industry after a significant decline in net sales in the fourth quarter of 2020.
For fiscal 2021, net sales were an all-time record. Strong growth from the foodservice businesses, higher pricing across all segments, and the inclusion of the Planters® snack nuts business and CytoSport in Grocery Products.were the primary drivers.
In fiscal 2019,2022, the Company expects net sales growth with contributions from all four business segments, driven primarily by the impact of higher pricing across the portfolio, volume growth from the value-added productsbusinesses, and innovation. Thethe benefit of a full year of the Planters® snack nuts business. Offsetting a portion of this growth will be the impact from the new deli organization in Refrigerated Foodspork supply agreement, which is expected to drive sales ofhave a negative cumulative impact on the Columbus® brand. Foodservice sales should benefit from the full integration of FontaniniRefrigerated Foods and new capacity for Hormel®Bacon 1™ fully cooked bacon and Hormel® FirebraisedTM meats. The Company anticipates sales growth from products such as Wholly Guacamole® dips, Herdez® salsas, and Muscle Milk® protein beverages in the Grocery Products segment. JOTS is expecting sales growth due to increases in turkey commodity markets, improved whole-bird pricing, and continued demand for Jennie-O® branded products. The International & Other segment plans to show growth in China, Brazil, and through increased branded export salesbusiness segments of SPAM® luncheon meat and Skippy® peanut butter.approximately $350 million.
Cost of Products Sold
| | | | | Fourth Quarter Ended | | Year Ended | | | Fourth Quarter Ended | | Year Ended |
| | | October 28, | | October 29, | | | | October 28, | | October 29, | | | | | October 31, | | October 25, | | | | October 31, | | October 25, | | |
| (in thousands) | | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change | (in thousands) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Cost of products sold | | $ | 1,987,301 |
| | $ | 1,981,054 |
| | 0.3 | | $ | 7,550,267 |
| | $ | 7,164,356 |
| | 5.4 | |
| Cost of Products Sold | | Cost of Products Sold | | $ | 2,876,669 | | | $ | 1,962,340 | | | 46.6 | | | $ | 9,458,283 | | | $ | 7,782,498 | | | 21.5 | |
TheFor fiscal 2021, cost of products sold for the fourth quarter and full year increased due to inflationary pressures stemming from raw materials, packaging, freight, labor, and many other inputs. The inclusion of the Planters® snack nuts business during the third quarter was also a driver of higher costs.
Direct incremental supply chain costs related to the COVID-19 pandemic for fiscal year2021 were approximately $21 million. This compares to approximately $80 million of higher operational costs related to the COVID-19 pandemic incurred during fiscal 2018 were2020.
In fiscal 2022, the Company expects cost of products sold to be higher as a result ofdue to the inclusion of the Columbus, Fontanini,Planters® snack nuts business and Ceratti acquisitions along with higher freightcontinued inflation. Raw material input costs especially in the Refrigerated Foodsfor pork, beef, turkey, and JOTS segments.feed are anticipated to remain above historical levels.
Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 31, | | October 25, | | | | October 31, | | October 25, | | |
| (in thousands) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Gross Profit | | $ | 578,081 | | | $ | 457,765 | | | 26.3 | | | $ | 1,927,906 | | | $ | 1,825,963 | | | 5.6 | |
| Percentage of Net Sales | | 16.7 | % | | 18.9 | % | | | | 16.9 | % | | 19.0 | % | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 28, | | October 29, | | | | October 28, | | October 29, | | |
| (in thousands) | | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change |
| Gross profit | | $ | 537,396 |
| | $ | 511,554 |
| | 5.1 | | $ | 1,995,433 |
| | $ | 2,003,163 |
| | (0.4 | ) |
| Percentage of net sales | | 21.3 | % | | 20.5 | % | | | | 20.9 | % | | 21.9 | % | | |
|
Consolidated gross profit as a percentage of net sales for the fourth quarter and full year declined, driven primarily by broad-based inflationary pressures and a lag in mitigating pricing actions. Gross profit as a percentage of net sales for the fourth quarter of fiscal 2021 increased sequentially compared to the third quarter of fiscal 2021 as pricing actions across the entire portfolio became effective. Gross profit as a percentage of net sales declined for all four business segments in the fourth quarter and for the full year compared to fiscal 2020.
In fiscal 2022, the Company expects gross profit as a percentage of net sales to improve due to reduced commodity profitability, higher freight costs, and inputthe impact of pricing actions taken across all business segments during fiscal 2021. Incremental cost volatility.
inflation poses the largest risk to this assumption. The Company also expects favorable pork input costs in 2019 and modestly-improved conditionsto benefit in the turkey industry. Refrigerated Foods will benefitfirst half of fiscal 2022 from new manufacturing capacity and continued growththe positive mix impact from the addition of the value-added businesses. Grocery Products and International & Other should see improvement from lower input costs on core branded items and branded exports, respectively. Turkey breast prices are anticipated to increase throughout the year, leading to a steady improvement for JOTS. The global trade environment, potential impact of hog disease in China, and market volatility pose the largest threats to the Company's profitability.Planters® snack nuts business.
Selling, General, and Administrative (SG&A)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 31, | | October 25, | | | | October 31, | | October 25, | | |
| (in thousands) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| SG&A | | $ | 230,441 | | | $ | 190,797 | | | 20.8 | | | $ | 853,071 | | | $ | 761,315 | | | 12.1 | |
| Percentage of Net Sales | | 6.7 | % | | 7.9 | % | | | | 7.5 | % | | 7.9 | % | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 28, | | October 29, | | | | October 28, | | October 29, | | |
| (in thousands) | | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change |
| SG&A | | $ | 204,537 |
| | $ | 194,218 |
| | 5.3 | | $ | 838,205 |
| | $ | 762,104 |
| | 10.0 |
| Percentage of net sales | | 8.1 | % | | 7.8 | % | | | | 8.8 | % | | 8.3 | % | | |
ForSG&A expenses for the fourth quarter and fiscal 2018, SG&A expensesfull year increased due to the inclusion ofincremental and one-time acquisition-related costs related to the Columbus, Fontanini, and Ceratti acquisitions, higher advertising investments,Planters® snack nuts business and higher employee-related expenses. As a percentage of sales, SG&A declined for both the fourth quarter and full year due to record net sales and disciplined expense management.
Advertising investments in the fourth quarter were $43 million compared to $29 million in fiscal 2020, an increase of 48 percent. Advertising investments increased 12 percent for the full year.
In fiscal 2019,2022, the Company intends to continue building brand awareness through advertising investmentsinvesting in key brands such as including Planters®, SPAM®, SKIPPY®, Columbus®, Hormel® Black Label®, Hormel® pepperoni, Columbus® Craft Meats, the SPAM® family of products, Wholly Guacamole® dips, and Jennie-O®Oven ReadyTM products..
Research and development continues to be a vital part of the Company's strategy to extendgrow existing brands and expand into new branded items. Research and development expenses were $8.7$8.3 million and $33.8$33.6 million for the fiscal 20182021 fourth quarter and year, respectively, compared to $8.2$8.4 million and $34.2$31.9 million for the corresponding periods in fiscal 2017.
Goodwill/Intangible Impairment: An impairment charge related to the CytoSport trademark totaling $17.3 million was recorded in the fourth quarter of fiscal 2018. Impairment charges related to an indefinite-lived intangible asset of $0.2 million were recorded in the fourth quarter of fiscal 2017.2020.
Equity in Earnings of Affiliates
| | | | | Fourth Quarter Ended | | Year Ended | | | Fourth Quarter Ended | | Year Ended |
| | | October 28, | | October 29, | | | | October 28, | | October 29, | | | | | October 31, | | October 25, | | | | October 31, | | October 25, | | |
| (in thousands) | | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change | (in thousands) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Equity in earnings of affiliates | | $ | 8,814 |
| | $ | 12,214 |
| | (27.8 | ) | | $ | 58,972 |
| | $ | 39,590 |
| | 49.0 | |
| Equity in Earnings of Affiliates | | Equity in Earnings of Affiliates | | $ | 10,041 | | | $ | 9,729 | | | 3.2 | | | $ | 47,763 | | | $ | 35,572 | | | 34.3 | |
ResultsEquity in earnings of affiliates for the fourth quarter of fiscal 2021 increased due to improved earnings from the Company's joint venture in the Philippines. For the full year, equity in earnings of affiliates increased significantly due to strength at MegaMex and fiscal 2018 were negatively impacted by increases in advertising and freight costs at MegaMex. For fiscal 2018, strong MegaMex results and tax reform drove the significant increase over the prior year.Philippines.
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 atas of October 28, 2018,31, 2021, was as follows:
| | | | | |
| (in thousands) | Investments/Receivables |
| United States | $ | 205,413 | |
| Foreign | 93,606 | |
| Total | $ | 299,019 | |
|
| | | |
| (in thousands) | Investments/Receivables |
| Country | |
|
| United States | $ | 205,148 |
|
| Foreign | 68,005 |
|
| Total | $ | 273,153 |
|
Interest and Investment Income and Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 31, | | October 25, | | | | October 31, | | October 25, | | |
| (in thousands) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Interest and Investment Income | | $ | 10,138 | | | $ | 10,306 | | | (1.6) | | | $ | 46,878 | | | $ | 35,596 | | | 31.7 | |
| Interest Expense | | (15,589) | | | (8,270) | | | (88.5) | | | (43,307) | | | (21,069) | | | (105.5) | |
Effective Tax Rate
|
| | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 28, | | October 29, | | October 28, | | October 29, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| Effective tax rate % | | 18.7 | % | | 33.8 | % | | 14.3 | % | | 33.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 31, | | October 25, | | October 31, | | October 25, |
| | | 2021 | | 2020 | | 2021 | | 2020 |
| Effective Tax Rate | | 20.0 | % | | 15.9 | % | | 19.3 | % | | 18.5 | % |
The lower effective tax rate for both the fourth quarter and fiscal year reflects the impact of2021 was impacted by stock-based compensation. The Tax Cuts and Jobs Act, signed into law on December 22, 2017. For fiscal 2018, the Company recorded a net tax benefit of $72.9 million. This provisional net tax benefit arises from a benefit of $81.2 million from re-measuring the Company’s net U.S. deferred tax liabilities, partially offset by the Company’s accrual for the transition tax and other U.S. tax law changes of $8.3 million. These one-time tax events and reduction in the federal statutoryeffective tax rate were the main drivers of the Company's effectivefor fiscal 2020 was impacted by stock-based compensation and state tax rates for the fourth quarter and fiscal year of 18.7 percent and 14.3 percent, respectively, compared to 33.8 percent and 33.7 percent for the respective periods last year.settlements. For a further description,additional information, refer to Note K "Income Taxes".N - Income Taxes.
The Company expects the effective tax rate in fiscal 20192022 to be between 20.5 and 23.022.5 percent.
Segment ResultsSEGMENT RESULTS
Net sales and operating profits for each of the Company’s reportable segments are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the operating profit and other financial information shown below. (AdditionalAdditional segment financial information can be found in Note P “Segment- Segment Reporting.”)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 31, | | October 25, | | | | October 31, | | October 25, | | |
| (in thousands) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Net Sales | | | | | | | | | | | | |
| Grocery Products | | $ | 905,030 | | | $ | 580,617 | | | 55.9 | | | $ | 2,809,445 | | | $ | 2,385,291 | | | 17.8 | |
| Refrigerated Foods | | 1,888,311 | | | 1,308,842 | | | 44.3 | | | 6,333,410 | | | 5,271,061 | | | 20.2 | |
| Jennie-O Turkey Store | | 459,754 | | | 373,471 | | | 23.1 | | | 1,495,151 | | | 1,333,459 | | | 12.1 | |
| International & Other | | 201,655 | | | 157,175 | | | 28.3 | | | 748,183 | | | 618,650 | | | 20.9 | |
| Total Net Sales | | $ | 3,454,751 | | | $ | 2,420,105 | | | 42.8 | | | $ | 11,386,189 | | | $ | 9,608,462 | | | 18.5 | |
| Segment Profit | | | | | | | | | | | | |
| Grocery Products | | $ | 111,235 | | | $ | 81,642 | | | 36.2 | | | $ | 382,197 | | | $ | 358,008 | | | 6.8 | |
| Refrigerated Foods | | 196,819 | | | 157,810 | | | 24.7 | | | 664,558 | | | 609,406 | | | 9.1 | |
| Jennie-O Turkey Store | | 30,492 | | | 32,618 | | | (6.5) | | | 76,006 | | | 105,585 | | | (28.0) | |
| International & Other | | 31,343 | | | 27,047 | | | 15.9 | | | 115,943 | | | 93,782 | | | 23.6 | |
| Total Segment Profit | | 369,888 | | | 299,116 | | | 23.7 | | | 1,238,704 | | | 1,166,782 | | | 6.2 | |
| Net Unallocated Expense | | 17,669 | | | 20,553 | | | (14.0) | | | 112,836 | | | 52,307 | | | 115.7 | |
| Noncontrolling Interest | | 12 | | | 169 | | | (93.1) | | | 301 | | | 272 | | | 10.8 | |
| Earnings Before Income Taxes | | $ | 352,230 | | | $ | 278,732 | | | 26.4 | | | $ | 1,126,170 | | | $ | 1,114,747 | | | 1.0 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 28, | | October 29, | | | | October 28, | | October 29, | | |
| (in thousands) | | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change |
| Net Sales | | | | | | | | | | | | |
| Grocery Products | | $ | 658,845 |
| | $ | 685,961 |
| | (4.0 | ) | | $ | 2,521,992 |
| | $ | 2,555,613 |
| | (1.3 | ) |
| Refrigerated Foods | | 1,232,650 |
| | 1,166,661 |
| | 5.7 |
| | 4,771,836 |
| | 4,403,732 |
| | 8.4 |
|
| Jennie-O Turkey Store | | 466,811 |
| | 484,856 |
| | (3.7 | ) | | 1,627,433 |
| | 1,663,160 |
| | (2.1 | ) |
| International & Other | | 166,391 |
| | 155,130 |
| | 7.3 |
| | 624,439 |
| | 545,014 |
| | 14.6 |
|
| Total Net Sales | | $ | 2,524,697 |
| | $ | 2,492,608 |
| | 1.3 |
| | $ | 9,545,700 |
| | $ | 9,167,519 |
| | 4.1 |
|
| Segment Operating Profit | | | | | | | | | | | | |
| Grocery Products | | $ | 81,582 |
| | $ | 104,848 |
| | (22.2 | ) | | $ | 362,750 |
| | $ | 387,637 |
| | (6.4 | ) |
| Refrigerated Foods | | 181,988 |
| | 145,613 |
| | 25.0 |
| | 617,626 |
| | 587,929 |
| | 5.1 |
|
| Jennie-O Turkey Store | | 48,829 |
| | 70,370 |
| | (30.6 | ) | | 175,684 |
| | 247,322 |
| | (29.0 | ) |
| International & Other | | 24,802 |
| | 23,113 |
| | 7.3 |
| | 88,953 |
| | 85,304 |
| | 4.3 |
|
| Total Segment Operating Profit | | 337,201 |
| | 343,944 |
| | (2.0 | ) | | 1,245,013 |
| | 1,308,192 |
| | (4.8 | ) |
Net interest and investment (income) expense | | 2,890 |
| | (639 | ) | | 552.3 |
| | 17,637 |
| | 1,824 |
| | 866.9 |
|
| General corporate expense | | 12,897 |
| | 14,783 |
| | (12.8 | ) | | 46,534 |
| | 28,091 |
| | 65.7 |
|
| Noncontrolling interest | | 90 |
| | 209 |
| | (56.9 | ) | | 442 |
| | 368 |
| | 20.1 |
|
| Earnings Before Income Taxes | | $ | 321,504 |
| | $ | 330,009 |
| | (2.6 | ) | | $ | 1,181,284 |
| | $ | 1,278,645 |
| | (7.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 31, | | October 25, | | | | October 31, | | October 25, | | |
| (in thousands) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Volume (lbs.) | | 403,550 | | | 317,743 | | | 27.0 | | | 1,340,895 | | | 1,281,562 | | | 4.6 | |
| Net Sales | | $ | 905,030 | | | $ | 580,617 | | | 55.9 | | | $ | 2,809,445 | | | $ | 2,385,291 | | | 17.8 | |
| Segment Profit | | 111,235 | | | 81,642 | | | 36.2 | | | 382,197 | | | 358,008 | | | 6.8 | |
Grocery Products: Results
Net sales for the fourth quarter of fiscal 2021 increased significantly due to the inclusion of the Planters® snack nuts business, higher pricing, and organic volume growth from the center store and Mexican foods portfolios. Growth from brands such as SPAM®, Hormel® Compleats®, Wholly®, and SKIPPY® contributed to the strong results. For fiscal 2021, net sales increased due to the contribution from the Planters® snack nuts business and the benefit of pricing actions across the portfolio, especially in the fourth fiscal quarter.
For the fourth quarter and full year, segment profit increased due to the addition of the Planters® snack nuts business and improved organic sales. Higher pricing across the portfolio helped mitigate inflationary pressure. Volume, net sales, and segment profit were constrained by production labor shortages and supply chain disruptions.
Looking ahead to fiscal 2022, Grocery Products segment comparedexpects to continue to benefit from the prior year are as follows: addition of the Planters® snack nuts business, pricing actions taken on most product lines, and strong demand for many of its leading retail and Mexican foods brands. Risks to profitability include additional inflationary pressures and labor shortages impacting production on key product lines.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 28, | | October 29, | | | | October 28, | | October 29, | | |
| (in thousands) | | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change |
| Volume (lbs.) | | 350,399 |
| | 366,485 |
| | (4.4 | ) | | 1,345,904 |
| | 1,374,665 |
| | (2.1 | ) |
| Net sales | | $ | 658,845 |
| | $ | 685,961 |
| | (4.0 | ) | | $ | 2,521,992 |
| | $ | 2,555,613 |
| | (1.3 | ) |
| Segment profit | | 81,582 |
| | 104,848 |
| | (22.2 | ) | | 362,750 |
| | 387,637 |
| | (6.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 31, | | October 25, | | | | October 31, | | October 25, | | |
| (in thousands) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Volume (lbs.) | | 657,488 | | | 572,873 | | | 14.8 | | | 2,437,217 | | | 2,360,571 | | | 3.2 | |
| Net Sales | | $ | 1,888,311 | | | $ | 1,308,842 | | | 44.3 | | | $ | 6,333,410 | | | $ | 5,271,061 | | | 20.2 | |
| Segment Profit | | 196,819 | | | 157,810 | | | 24.7 | | | 664,558 | | | 609,406 | | | 9.1 | |
Net
The continued recovery in the foodservice industry, numerous pricing actions, and strong demand led to significant net sales improvement in Wholly Guacamole® dips and Herdez® salsasgrowth in the fourth quarter of fiscal 2018 were unable2021. Compared to offset declines in contract manufacturing. For fiscal 2018,last year, the net sales decrease was driven by declines across the Company's contract manufacturingfoodservice business and the CytoSport portfolio.
For the fourth quarter and fiscal year, segment profit decreased as a result of declines in contract manufacturing, a $17.3 million impairment of the CytoSport trademark, and increased freight. Looking ahead to fiscal 2019, the Company anticipates positive momentum to continue in Herdez® salsas and Wholly Guacamole® dips along with improvement at CytoSport.
Refrigerated Foods: Results for the Refrigerated Foods segment compared to the prior year are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 28, | | October 29, | | | | October 28, | | October 29, | | |
| (in thousands) | | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change |
| Volume (lbs.) | | 558,843 |
| | 547,196 |
| | 2.1 | | 2,199,994 |
| | 2,180,407 |
| | 0.9 |
| Net sales | | $ | 1,232,650 |
| | $ | 1,166,661 |
| | 5.7 | | $ | 4,771,836 |
| | $ | 4,403,732 |
| | 8.4 |
| Segment profit | | 181,988 |
| | 145,613 |
| | 25.0 | | 617,626 |
| | 587,929 |
| | 5.1 |
For the fourth quarter and fiscal 2018,delivered volume and net sales increases were driven by the Columbusgains in every category. Retail and Fontanini acquisitions in addition to strong retaildeli net sales of benefited from higher pricing and continued elevated demand for products such as Columbus® grab-and-go items, Hormel® Gatherings® party trays, Hormel® Black Label® bacon, Hormel® pepperoni, and Applegate®natural and organic products, and Hormel®Natural Choice® products,meats. For the full year, net sales increased due to strong growth from the retail, deli, and foodservice sales of Austin Blues® authentic barbeque products. Lower hog harvest volumes offset some of these gains.
For the fourth quarter and fiscal year,businesses within Refrigerated Foods, delivered increases in segment profit aswhich benefited from pricing actions impacting the benefit from acquisitions and strong performances fromsecond half of the value-added businesses overcame significant declines in commodity profits, a double-digit increase in per-unit freight costs, and higher advertising investments.year.
Looking forward, the Company anticipates value-added growth in the foodservice and retail channels as well as a benefit from the new deli organization.
Jennie-O Turkey Store: Results for the JOTS segment compared to the prior year are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 28, | | October 30, | | | | October 28, | | October 30, | | |
| (in thousands) | | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change |
| Volume (lbs.) | | 260,450 |
| | 270,175 |
| | (3.6 | ) | | 894,590 |
| | 890,518 |
| | 0.5 |
|
| Net sales | | $ | 466,811 |
| | $ | 484,856 |
| | (3.7 | ) | | $ | 1,627,433 |
| | $ | 1,663,160 |
| | (2.1 | ) |
| Segment profit | | 48,829 |
| | 70,370 |
| | (30.6 | ) | | 175,684 |
| | 247,322 |
| | (29.0 | ) |
For the fourth quarter and fiscal 2018, volume and sales decreased primarily due to lower whole bird sales. Jennie-O® premium deli products and Jennie-O® lean ground turkey delivered strong sales gains, partially offsetting the decline.
Segment profit for the fourth quarter increased primarily due to higher foodservice sales. Higher pricing across the portfolio helped mitigate inflationary pressure. For fiscal 2021, higher earnings from the foodservice business and 2018 decreasedthe impact of numerous pricing actions fully offset significantly higher raw material costs, increased freight expenses, and higher operational expenses. Volume, net sales, and segment profit were constrained by production labor shortages and supply chain disruptions.
In fiscal 2022, Refrigerated Foods is expecting continued net sales growth from the retail, deli, and foodservice businesses due to strong demand and pricing actions taken throughout fiscal 2021. Net sales will be negatively impacted by lower commodity sales due to the new pork supply contract. Profitability is expected to improve due to higher pricing and a more profitable product mix. Risks to profitability include additional inflationary pressures and labor shortages impacting production on key product lines.
Jennie-O Turkey Store
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 31, | | October 30, | | | | October 31, | | October 30, | | |
| (in thousands) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Volume (lbs.) | | 240,771 | | | 237,435 | | | 1.4 | | | 824,184 | | | 815,425 | | | 1.1 | |
| Net Sales | | $ | 459,754 | | | $ | 373,471 | | | 23.1 | | | $ | 1,495,151 | | | $ | 1,333,459 | | | 12.1 | |
| Segment Profit | | 30,492 | | | 32,618 | | | (6.5) | | | 76,006 | | | 105,585 | | | (28.0) | |
For the fourth quarter of fiscal 2021, volume and sales increased as a result of lower profitsthe continued recovery in foodservice, strong demand for Jennie-O® retail items, and higher prices across the portfolio more than offset the negative impact from shifting whole bird and commodityshipments to earlier in the year. For the full year, sales increased freightsignificantly due to favorable commodity prices and higher value-added volumes and pricing.
Segment profit for the fourth quarter and full year 2021 declined due primarily to higher feed costs and increased advertising investments.freight expenses.
JOTSLooking ahead to fiscal 2022, Jennie-O Turkey Store expects momentum from its value-added volume and sales growth in fiscal 2019, led by Jennie-O® lean ground turkeycommodity businesses to continue due to the benefit of improved pricing and foodservice products.strong demand. Segment profit is expected to be modestly ahead ofimprove in fiscal 2018 as conditions2022 due to higher pricing. Increased feed, operational, and logistics costs are expected to weigh on profitability near-term, with improvement expected in the industry improve.back half of the year.
International & Other
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 31, | | October 25, | | | | October 31, | | October 25, | | |
| (in thousands) | | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| Volume (lbs.) | | 78,039 | | | 81,383 | | | (4.1) | | | 330,841 | | | 337,149 | | | (1.9) | |
| Net Sales | | $ | 201,655 | | | $ | 157,175 | | | 28.3 | | | $ | 748,183 | | | $ | 618,650 | | | 20.9 | |
| Segment Profit | | 31,343 | | | 27,047 | | | 15.9 | | | 115,943 | | | 93,782 | | | 23.6 | |
International & Other: ResultsNet sales growth for the International & Other segment compared to the priorfourth quarter and full year are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 28, | | October 29, | | | | October 28, | | October 29, | | |
| (in thousands) | | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change |
| Volume (lbs.) | | 95,600 |
| | 91,414 |
| | 4.6 | | 357,690 |
| | 324,895 |
| | 10.1 |
| Net sales | | $ | 166,391 |
| | $ | 155,130 |
| | 7.3 | | $ | 624,439 |
| | $ | 545,014 |
| | 14.6 |
| Segment profit | | 24,802 |
| | 23,113 |
| | 7.3 | | 88,953 |
| | 85,304 |
| | 4.3 |
Volumewas broad-based, driven by strong demand and sales increaseshigher prices for branded exports and improved results in China. Fresh pork export volume declined for the quarter and fiscalfor the full year were driven by the addition of the Ceratti business and stronger branded exports, partially offset by lower fresh pork exports due to tariffs.labor shortages.
Segment profit increased for bothFor the fourth quarter of fiscal 2021, all areas of the business delivered growth in segment profits, led by higher export margins and fiscal year primarily reflectingChina. Segment profit improved profitabilitysignificantly for the China business due to favorable input costs,full year, driven by gains from exports, higher income from the inclusion ofCompany's partners in the Ceratti business,Philippines, South Korea, and stronger exports of branded items. Global trade uncertainty negatively impacted the profitability of pork exports.Europe, and strong results in China.
Entering fiscal 2019, theThe International & Other segment anticipates continued expansionbusiness momentum to continue, led by growth in China, strong export demand, and Brazil as well as improvedthe impact of higher prices in fiscal 2022. Net sales and profits will be modestly impacted by lower commodity sales due to the new pork supply contract. International shipping interruptions pose a risk to export results across all key brands, including SPAM®sales and Skippy®. Tariffs impacting global trade and hog disease in China present near-term risk.profit growth.
Unallocated Income and Expense: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 corporate.the corporate level. Equity in earningsEarnings of affiliatesAffiliates is included in segment operating profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included in the segment table for the purpose of reconciling segment results to earnings before income taxes.Earnings Before Income Taxes.
|
| | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 28, | | October 29, | | October 28, | | October 29, |
| (in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
| Interest and investment income | | $ | 3,439 |
| | $ | 4,216 |
| | $ | 8,857 |
| | $ | 10,859 |
|
| Interest expense | | (6,329 | ) | | (3,577 | ) | | (26,494 | ) | | (12,683 | ) |
| General corporate expense | | (12,897 | ) | | (14,783 | ) | | (46,534 | ) | | (28,091 | ) |
| Noncontrolling interest | | 90 |
| | 209 |
| | 442 |
| | 368 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 31, | | October 25, | | October 31, | | October 25, |
| (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
| Net Unallocated Expense | | $ | 17,669 | | | $ | 20,553 | | | $ | 112,836 | | | $ | 52,307 | |
| Noncontrolling Interest | | 12 | | | 169 | | | 301 | | | 272 | |
Net interest and investment income was lowerUnallocated Expense decreased for the fourth quarter of fiscal 2021 as favorable reserve adjustments more than offset higher interest expense and fiscallower investment income. For the full year, which was driven by reduced deferred compensation accruals. Interest expense was higher for the fourth quarter and fiscal yearNet Unallocated Expense increased significantly due to additional debtone-time acquisition costs and accounting adjustments related to the Columbus acquisition. General corporate expense was marginally lower foracquisition of the fourth quarter, reflecting positive accrual adjustments. For the year, general corporate expensesPlanters® snack nuts business of $43 million and higher interest expense. These increases were partially offset by higher as a result of higher employee-related expenses and the universal stock option grant.investment income.
FISCAL YEARS 2017 AND 2016:
Consolidated Results
Net Earnings and Diluted Earnings per Share
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
(in thousands, except per share amounts) | | October 29, 2017 | | October 30, 2016 | | % Change | | October 29, 2017 | | October 30, 2016 | | % Change |
| Net earnings | | $ | 218,154 |
| | $ | 243,940 |
| | (10.6 | ) | | $ | 846,735 |
| | $ | 890,052 |
| | (4.9 | ) |
| Diluted earnings per share | | 0.41 |
| | 0.45 |
| | (8.9 | ) | | 1.57 |
| | 1.64 |
| | (4.3 | ) |
Volume and Net Sales
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| (in thousands) | | October 29, 2017 | | October 30, 2016 | | % Change | | October 29, 2017 | | October 30, 2016 | | % Change |
| Volume (lbs.) | | 1,275,270 |
| | 1,420,986 |
| | (10.3 | ) | | 4,770,485 |
| | 5,192,027 |
| | (8.1 | ) |
| Organic volume(1) | | 1,250,659 |
| | 1,231,044 |
| | 1.6 |
| | 4,658,990 |
| | 4,588,581 |
| | 1.5 |
|
| Net sales | | $ | 2,492,608 |
| | $ | 2,627,941 |
| | (5.1 | ) | | $ | 9,167,519 |
| | $ | 9,523,224 |
| | (3.7 | ) |
| Organic net sales(1) | | 2,439,006 |
| | 2,325,779 |
| | 4.9 |
| | 8,970,540 |
| | 8,710,616 |
| | 3.0 |
|
(1) COMPARISON OF U.S. GAAP TO NON-GAAP FINANCIAL MEASUREMENTS
The non-GAAP adjusted financial measurements of organic volumeadjusted operating income, adjusted selling, general, and organic net salesadministrative expenses, and adjusted diluted earnings per share are presented to provide investors with additional information to facilitate the comparison of past and present operations. These measurements exclude 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 net sales and organic volume are presented to provide investors with additional information to facilitate the comparison of past and present operations. Organic net sales and organic volume are defined as net sales and volume, excluding the impact of acquisitions and divestitures. Organic net sales and organic volume exclude the impacts of the acquisition of the Planters® snack nuts business (June 2021) in the Grocery Products, Refrigerated Foods, and International & Other segments and the Sadler's Smokehouse acquisition (March 2020) in the Refrigerated Foods segment.
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.
Organic net sales and organic volume are defined as net sales and volume excluding the impact of acquisitions, divestitures and the impact of the 53rd reporting week in 2016. Organic net sales and organic volume exclude the impacts of the acquisition of Justin’s (May 2016) in Grocery Products, the acquisition of Fontanini Italian Meats and Sausages (August 2017) and the divestiture of Farmer John (January 2017), in Refrigerated Foods, the divestiture of Diamond Crystal Brands (May 2016) from Grocery Products, and the acquisition of Ceratti (August 2017) in International. The tables below show the calculations to reconcile from the non-GAAP adjustedGAAP measures to the GAAP measures in the fourth quarternon-GAAP adjusted measures.
| | | | | | | | | | | | | | | | | | |
| ADJUSTED DILUTED EARNINGS PER SHARE (NON-GAAP) |
| | | | | | |
| Year Ended |
| October 31, 2021 | | October 25, 2020 | |
| (in thousands, except per share amounts) | Reported
GAAP | Acquisition Costs and Adjustments | Non-GAAP | | Reported
GAAP | Non-GAAP
% Change |
| Net Sales | $ | 11,386,189 | | $ | — | | $ | 11,386,189 | | | $ | 9,608,462 | | 18.5 | |
| Cost of Products Sold | 9,458,283 | | (12,900) | | 9,445,383 | | | 7,782,498 | | 21.4 | |
| Gross Profit | 1,927,906 | | 12,900 | | 1,940,806 | | | 1,825,963 | | 6.3 | |
| Selling, General, and Administrative | 853,071 | | (30,303) | | 822,768 | | | 761,315 | | 8.1 | |
| Equity in Earnings of Affiliates | 47,763 | | — | | 47,763 | | | 35,572 | | 34.3 | |
| Operating Income | 1,122,599 | | 43,203 | | 1,165,802 | | | 1,100,220 | | 6.0 | |
| Interest and Investment Income (Expense) | 46,878 | | — | | 46,878 | | | 35,596 | | 31.7 | |
| Interest Expense | (43,307) | | — | | (43,307) | | | (21,069) | | 105.5 | |
| Earnings Before Income Taxes | 1,126,170 | | 43,203 | | 1,169,373 | | | 1,114,747 | | 4.9 | |
| Provision for Income Taxes | 217,029 | | 5,975 | | 223,004 | | | 206,393 | | 8.0 | |
| Net Earnings | 909,140 | | 37,228 | | 946,368 | | | 908,354 | | 4.2 | |
| Less: Net Earnings Attributable to Noncontrolling Interest | 301 | | — | | 301 | | | 272 | | 10.7 | |
| Net Earnings Attributable to Hormel Foods Corporation | $ | 908,839 | | $ | 37,228 | | $ | 946,067 | | | $ | 908,082 | | 4.2 | |
| | | | | | |
| Diluted Net Earnings Per Share | $ | 1.66 | | $ | 0.06 | | $ | 1.73 | | | $ | 1.66 | | 4.2 | |
ORGANIC VOLUME (NON-GAAP)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fourth Quarter Ended |
| | | October 31, 2021 | | October 25, 2020 | | |
| (lbs., in thousands) | | Reported
(GAAP) | | Acquisitions | | | | Organic
(Non-GAAP) | | Reported
(GAAP) | | | | | | Organic
% Change |
| Grocery Products | | 403,550 | | | (58,665) | | | | | 344,885 | | | 317,743 | | | | | | | 8.5 | |
| Refrigerated Foods | | 657,488 | | | (10,738) | | | | | 646,750 | | | 572,873 | | | | | | | 12.9 | |
| Jennie-O Turkey Store | | 240,771 | | | — | | | | | 240,771 | | | 237,435 | | | | | | | 1.4 | |
| International & Other | | 78,039 | | | (1,838) | | | | | 76,201 | | | 81,383 | | | | | | | (6.4) | |
| Total Volume | | 1,379,848 | | | (71,242) | | | | | 1,308,606 | | | 1,209,434 | | | | | | | 8.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| | October 31, 2021 | | October 25, 2020 | | |
| (lbs., in thousands) | | Reported
(GAAP) | | Acquisitions | | | | Organic
(Non-GAAP) | | Reported
(GAAP) | | | | | | Organic
% Change |
| Grocery Products | | 1,340,895 | | | (88,789) | | | | | 1,252,106 | | | 1,281,562 | | | | | | | (2.3) | |
| Refrigerated Foods | | 2,437,217 | | | (22,688) | | | | | 2,414,529 | | | 2,360,571 | | | | | | | 2.3 | |
| Jennie-O Turkey Store | | 824,184 | | | — | | | | | 824,184 | | | 815,425 | | | | | | | 1.1 | |
| International & Other | | 330,841 | | | (2,840) | | | | | 328,001 | | | 337,149 | | | | | | | (2.7) | |
| Total Volume | | 4,933,136 | | | (114,316) | | | | | 4,818,820 | | | 4,794,706 | | | | | | | 0.5 | |
ORGANIC NET SALES (NON-GAAP)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fourth Quarter Ended |
| | | October 31, 2021 | | October 25, 2020 | | |
| (in thousands) | | Reported
(GAAP) | | Acquisitions | | | | Organic
(Non-GAAP) | | Reported
(GAAP) | | | | | | Organic
% Change |
| Grocery Products | | $ | 905,030 | | | $ | (221,689) | | | | | $ | 683,341 | | | $ | 580,617 | | | | | | | 17.7 | |
| Refrigerated Foods | | 1,888,311 | | | (41,418) | | | | | 1,846,893 | | | 1,308,842 | | | | | | | 41.1 | |
| Jennie-O Turkey Store | | 459,754 | | | — | | | | | 459,754 | | | 373,471 | | | | | | | 23.1 | |
| International & Other | | 201,655 | | | (6,346) | | | | | 195,309 | | | 157,175 | | | | | | | 24.3 | |
| Total Net Sales | | $ | 3,454,751 | | | $ | (269,454) | | | | | $ | 3,185,297 | | | $ | 2,420,105 | | | | | | | 31.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| | October 25, 2020 | | October 25, 2020 | | |
| (in thousands) | | Reported
(GAAP) | | Acquisitions | | | | Organic
(Non-GAAP) | | Reported
(GAAP) | | | | | | Organic
% Change |
| Grocery Products | | $ | 2,809,445 | | | $ | (339,370) | | | | | $ | 2,470,075 | | | $ | 2,385,291 | | | | | | | 3.6 | |
| Refrigerated Foods | | 6,333,410 | | | (97,444) | | | | | 6,235,966 | | | 5,271,061 | | | | | | | 18.3 | |
| Jennie-O Turkey Store | | 1,495,151 | | | — | | | | | 1,495,151 | | | 1,333,459 | | | | | | | 12.1 | |
| International & Other | | 748,183 | | | (9,003) | | | | | 739,180 | | | 618,650 | | | | | | | 19.5 | |
| Total Net Sales | | $ | 11,386,189 | | | $ | (445,817) | | | | | $ | 10,940,372 | | | $ | 9,608,462 | | | | | | | 13.9 | |
EBIT and the full yearEBITDA
| | | | | | | | | | | | | | |
| | | Year Ended |
| (in thousands) | | October 31, 2021 | | October 25, 2020 |
| EBIT: | | | | |
| Net Earnings Attributable to Hormel Foods Corporation | | $ | 908,839 | | | $ | 908,082 | |
| Plus: Income Tax Expense | | 217,029 | | | 206,393 | |
| Plus: Interest Expense | | 43,307 | | | 21,069 | |
| Less: Interest and Investment Income | | 46,878 | | | 35,596 | |
| EBIT | | $ | 1,122,297 | | | $ | 1,099,948 | |
| EBITDA: | | | | |
| EBIT per above | | 1,122,297 | | | 1,099,948 | |
| Plus: Depreciation and Amortization | | 228,406 | | | 205,781 | |
| EBITDA | | $ | 1,350,704 | | | $ | 1,305,729 | |
LIQUIDITY AND CAPITAL RESOURCES
When assessing liquidity and fiscal 2017.
4th Quarter
Volume (lbs.)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | FY 2017 | | FY 2016 |
| (in thousands) | | Reported (GAAP) | | Acquisitions | | Divestitures | | Organic (Non-GAAP) | | Reported (GAAP) | | Divestitures | | 53rd Week | | Organic (Non-GAAP) | | Organic % change |
| Grocery Products | | 366,485 |
| | — |
| | — |
| | 366,485 |
| | 385,439 |
| | — |
| | (27,531 | ) | | 357,908 |
| | 2.4 |
|
| Refrigerated Foods | | 547,196 |
| | (16,727 | ) | | — |
| | 530,469 |
| | 658,506 |
| | (95,246 | ) | | (40,233 | ) | | 523,027 |
| | 1.4 |
|
| Jennie-O Turkey Store | | 270,175 |
| | — |
| | — |
| | 270,175 |
| | 291,587 |
| | — |
| | (20,828 | ) | | 270,759 |
| | (0.2 | ) |
| International & Other | | 91,414 |
| | (7,884 | ) | | — |
| | 83,530 |
| | 85,454 |
| | — |
| | (6,104 | ) | | 79,350 |
| | 5.3 |
|
| Total Volume | | 1,275,270 |
| | (24,611 | ) | | — |
| | 1,250,659 |
| | 1,420,986 |
| | (95,246 | ) | | (94,696 | ) | | 1,231,044 |
| | 1.6 |
|
Net Sales
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | FY 2017 | | FY 2016 |
| (in thousands) | | Reported (GAAP) | | Acquisitions | | Divestitures | | Organic (Non-GAAP) | | Reported (GAAP) | | Divestitures | | 53rd Week | | Organic (Non-GAAP) | | Organic % change |
| Grocery Products | | $ | 685,961 |
| | $ | — |
| | $ | — |
| | $ | 685,961 |
| | $ | 708,398 |
| | $ | — |
| | $ | (50,600 | ) | | $ | 657,798 |
| | 4.3 |
|
| Refrigerated Foods | | 1,166,661 |
| | (44,450 | ) | | — |
| �� | 1,122,211 |
| | 1,237,276 |
| | (123,256 | ) | | (79,573 | ) | | 1,034,447 |
| | 8.5 |
|
| Jennie-O Turkey Store | | 484,856 |
| | — |
| | — |
| | 484,856 |
| | 541,409 |
| | — |
| | (38,672 | ) | | 502,737 |
| | (3.6 | ) |
| International & Other | | 155,130 |
| | (9,152 | ) | | — |
| | 145,978 |
| | 140,858 |
| | — |
| | (10,061 | ) | | 130,797 |
| | 11.6 |
|
| Total Net Sales | | $ | 2,492,608 |
| | $ | (53,602 | ) | | $ | — |
| | $ | 2,439,006 |
| | $ | 2,627,941 |
| | $ | (123,256 | ) | | $ | (178,906 | ) | | $ | 2,325,779 |
| | 4.9 |
|
Full Year
Volume (lbs.)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | FY 2017 | | FY 2016 |
| (in thousands) | | Reported (GAAP) | | Acquisitions | | Divestitures | | Organic (Non-GAAP) | | Reported (GAAP) | | Divestitures | | 53rd Week | | Organic (Non-GAAP) | | Organic % change |
| Grocery Products | | 1,374,665 |
| | (6,430 | ) | | — |
| | 1,368,235 |
| | 1,489,469 |
| | (133,733 | ) | | (27,531 | ) | | 1,328,205 |
| | 3.0 |
| Refrigerated Foods | | 2,180,407 |
| | (16,727 | ) | | (80,454 | ) | | 2,083,226 |
| | 2,493,358 |
| | (375,017 | ) | | (40,233 | ) | | 2,078,108 |
| | 0.2 |
| Jennie-O Turkey Store | | 890,518 |
| | — |
| | — |
| | 890,518 |
| | 902,073 |
| | — |
| | (20,828 | ) | | 881,245 |
| | 1.1 |
| International & Other | | 324,895 |
| | (7,884 | ) | | — |
| | 317,011 |
| | 307,127 |
| | — |
| | (6,104 | ) | | 301,023 |
| | 5.3 |
| Total Volume | | 4,770,485 |
| | (31,041 | ) | | (80,454 | ) | | 4,658,990 |
| | 5,192,027 |
| | (508,750 | ) | | (94,696 | ) | | 4,588,581 |
| | 1.5 |
Net Sales
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | FY 2017 | | FY 2016 |
| (in thousands) | | Reported (GAAP) | | Acquisitions | | Divestitures | | Organic (Non-GAAP) | | Reported (GAAP) | | Divestitures | | 53rd Week | | Organic (Non-GAAP) | | Organic % change |
| Grocery Products | | $ | 2,555,613 |
| | $ | (43,146 | ) | | $ | — |
| | $ | 2,512,467 |
| | $ | 2,623,890 |
| | $ | (140,084 | ) | | $ | (50,600 | ) | | $ | 2,433,206 |
| | 3.3 |
|
| Refrigerated Foods | | 4,403,732 |
| | (44,450 | ) | | (100,231 | ) | | 4,259,051 |
| | 4,647,173 |
| | (493,618 | ) | | (79,573 | ) | | 4,073,982 |
| | 4.5 |
|
| Jennie-O Turkey Store | | 1,663,160 |
| | — |
| | — |
| | 1,663,160 |
| | 1,740,968 |
| | — |
| | (38,672 | ) | | 1,702,296 |
| | (2.3 | ) |
| International & Other | | 545,014 |
| | (9,152 | ) | | — |
| | 535,862 |
| | 511,193 |
| | — |
| | (10,061 | ) | | 501,132 |
| | 6.9 |
|
| Total Net Sales | | $ | 9,167,519 |
| | $ | (96,748 | ) | | $ | (100,231 | ) | | $ | 8,970,540 |
| | $ | 9,523,224 |
| | $ | (633,702 | ) | | $ | (178,906 | ) | | $ | 8,710,616 |
| | 3.0 |
|
The impact of one fewer week in fiscal 2017 was the primary driver for lower sales in the fourth quarter. International & Other posted sales growth in the fourth quarter while the other four segments showed declines. For the full year, sales declined in Grocery Products and Refrigerated Foods due to the divestitures of DCB and Farmer John. JOTS sales were lower for the fourth quarter and fiscal year due to the impact of record low commodity prices.
Cost of Products Sold
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 29, | | October 30, | | | | October 29, | | October 30, | | |
| (in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Cost of products sold | | $ | 1,981,054 |
| | $ | 2,029,421 |
| | (2.4 | ) | | $ | 7,164,356 |
| | $ | 7,365,049 |
| | (2.7 | ) |
The decrease in cost of products sold for the fourth quarter of fiscal 2017 is primarily a result of the divestiture of Farmer John, which was partially offset by the acquisitions of Fontanini and Ceratti. For the full year, cost of products sold decreased due to the divestiture of Farmer John.
Gross Profit
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 29, | | October 30, | | | | October 29, | | October 30, | | |
| (in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Gross profit | | $ | 511,554 |
| | $ | 598,520 |
| | (14.5 | ) | | $ | 2,003,163 |
| | $ | 2,158,175 |
| | (7.2 | ) |
| Percentage of net sales | | 20.5 | % | | 22.8 | % | | |
| | 21.8 | % | | 22.7 | % | | |
|
Lower margins from the JOTS, Refrigerated Foods, and Grocery Products segments in the fourth quarter of fiscal 2017 more than offset improved results in the International & Other segment. The lower gross profit for JOTS was due to lower commodity meat prices. Refrigerated Foods and Grocery Products segment margins were impacted by higher input costs, though Grocery Products margins finished marginally up for the year. The International & Other segment delivered higher gross margins for the fourth quarter due to improved multinational business results and stronger branded exports. Full year margins also benefited from strong pork exports.
Selling, General and Administrative (SG&A)
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| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 29, | | October 30, | | | | October 29, | | October 30, | | |
| (in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| SG&A | | $ | 194,218 |
| | $ | 244,006 |
| | (20.4 | ) | | $ | 762,104 |
| | $ | 871,974 |
| | (12.6 | ) |
| Percentage of net sales | | 7.8 | % | | 9.3 | % | | |
| | 8.3 | % | | 9.2 | % | | |
|
Selling, general and administrative expenses decreased ascapital resources, the Company reduced advertising expenses by $68.6 millionevaluates cash and incurred lower employee-related expenses.cash equivalents, short-term and long-term investments, income from operations, and borrowing capacity.
Cash Flow Highlights
Research and development expenses were $8.2 million and $34.2 million for the fiscal 2017 fourth quarter and year, respectively, compared to $9.6 million and $34.7 million for the corresponding periods in fiscal 2016. | | | | | | | | |
| Year Ended |
| (in millions) | October 31, 2021 | October 25, 2020 |
| Cash and Cash Equivalents | $ | 614 | | $ | 1,714 | |
| Cash Provided By (Used in) Operating Activities | 1,002 | | 1,128 | |
| Cash Provided by (Used in) Investing Activities | (3,626) | | (656) | |
| Cash Provided by (Used in) Financing Activities | 1,521 | | 566 | |
Goodwill/Intangible Impairment: Impairment charges related to an indefinite-lived intangible asset of $0.2 million were recorded in the fourth quarter of fiscal 2017. Goodwill impairment charges related to the divestiture of DCB of $1.0 million were recorded in the second quarter of fiscal 2016.
Equity in Earnings of Affiliates
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| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 29, | | October 30, | | | | October 29, | | October 30, | | |
| (in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Equity in earnings of affiliates | | $ | 12,214 |
| | $ | 11,236 |
| | 8.7 |
| | $ | 39,590 |
| | $ | 38,685 |
| | 2.3 |
|
The increase for both the fourth quarter and fiscal 2017 was largely the result of improved earnings from the Company’s 50 percent-owned MegaMex joint venture.
The Company accounts for its majority-owned operations under the consolidation method. Investments in which the Company owns a minority interest, and which there are no other indicators of control, are accounted for under the equity or cost method. These investments, along with receivables from other affiliates, are included in the Consolidated Statements of Financial Position as investments in and receivables from affiliates. The composition of this line item at October 29, 2017, was as follows:
|
| | | |
| (in thousands) | Investments/Receivables |
| Country | |
|
| United States | $ | 177,657 |
|
| Foreign | 64,712 |
|
| Total | $ | 242,369 |
|
Effective Tax Rate
|
| | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 29, | | October 30, | | October 29, | | October 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Effective tax rate % | | 33.8 | % | | 33.0 | % | | 33.7 | % | | 32.4 | % |
The fiscal 2017 rate was higher as the fiscal 2016 rate benefited from a foreign tax credit.
Segment Results
Net sales and operating profits for each of the Company’s reportable segments are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the operating profit and other financial information shown below. (Additional segment financial information can be found in Note P “Segment Reporting.”)
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| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 29, | | October 30, | | | | October 29, | | October 30, | | |
| (in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Net Sales | | | | | | | | | | | | |
| Grocery Products | | $ | 685,961 |
| | $ | 708,398 |
| | (3.2 | ) | | $ | 2,555,613 |
| | $ | 2,623,890 |
| | (2.6 | ) |
| Refrigerated Foods | | 1,166,661 |
| | 1,237,276 |
| | (5.7 | ) | | 4,403,732 |
| | 4,647,173 |
| | (5.2 | ) |
| Jennie-O Turkey Store | | 484,856 |
| | 541,409 |
| | (10.4 | ) | | 1,663,160 |
| | 1,740,968 |
| | (4.5 | ) |
| International & Other | | 155,130 |
| | 140,858 |
| | 10.1 |
| | 545,014 |
| | 511,193 |
| | 6.6 |
|
| Total Net Sales | | $ | 2,492,608 |
| | $ | 2,627,941 |
| | (5.1 | ) | | $ | 9,167,519 |
| | $ | 9,523,224 |
| | (3.7 | ) |
| Segment Operating Profit | | |
| | |
| | | | |
| | |
| | |
|
| Grocery Products | | $ | 104,848 |
| | $ | 102,916 |
| | 1.9 |
| | $ | 387,637 |
| | $ | 379,378 |
| | 2.2 |
|
| Refrigerated Foods | | 145,613 |
| | 168,040 |
| | (13.3 | ) | | 587,929 |
| | 585,652 |
| | 0.4 |
|
| Jennie-O Turkey Store | | 70,370 |
| | 92,299 |
| | (23.8 | ) | | 247,322 |
| | 329,427 |
| | (24.9 | ) |
| International & Other | | 23,113 |
| | 19,570 |
| | 18.1 |
| | 85,304 |
| | 78,409 |
| | 8.8 |
|
| Total Segment Operating Profit | | 343,944 |
| | 382,825 |
| | (10.2 | ) | | 1,308,192 |
| | 1,372,866 |
| | (4.7 | ) |
Net interest and investment (income) expense | | (639 | ) | | 1,017 |
| | (162.8 | ) | | 1,824 |
| | 6,680 |
| | (72.7 | ) |
| General corporate expense | | 14,783 |
| | 17,325 |
| | (14.7 | ) | | 28,091 |
| | 49,436 |
| | (43.2 | ) |
| Noncontrolling interest | | 209 |
| | 250 |
| | (16.4 | ) | | 368 |
| | 465 |
| | (20.9 | ) |
| Earnings Before Income Taxes | | $ | 330,009 |
| | $ | 364,733 |
| | (9.5 | ) | | $ | 1,278,645 |
| | $ | 1,317,215 |
| | (2.9 | ) |
Grocery Products: Results for the Grocery Products segment compared to the prior year are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 29, | | October 30, | | | | October 29, | | October 30, | | |
| (in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Volume (lbs.) | | 366,485 |
| | 385,439 |
| | (4.9 | ) | | 1,374,665 |
| | 1,489,469 |
| | (7.7 | ) |
| Net sales | | $ | 685,961 |
| | $ | 708,398 |
| | (3.2 | ) | | $ | 2,555,613 |
| | $ | 2,623,890 |
| | (2.6 | ) |
| Segment profit | | 104,848 |
| | 102,916 |
| | 1.9 |
| | 387,637 |
| | 379,378 |
| | 2.2 |
|
Full-year results reflect the addition of Justin’s, acquired on May 25, 2016, in addition to increased sales of Wholly Guacamole® dips, Herdez® salsas, and the SPAM® family of products. Results were offset by the impact of one fewer week compared to fiscal 2016. The volume, sales, and segment profit for the fourth quarter and fiscal year were also negatively offset by increased competitive activity for Muscle Milk® ready-to-drink protein beverages in the convenience store channel stemming from the impact of the recall in fiscal 2016.
Refrigerated Foods: Results for the Refrigerated Foods segment compared to the prior year are as follows:
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| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 29, | | October 30, | | | | October 29, | | October 30, | | |
| (in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Volume (lbs.) | | 547,196 |
| | 658,506 |
| | (16.9 | ) | | 2,180,407 |
| | 2,493,358 |
| | (12.6 | ) |
| Net sales | | $ | 1,166,661 |
| | $ | 1,237,276 |
| | (5.7 | ) | | $ | 4,403,732 |
| | $ | 4,647,173 |
| | (5.2 | ) |
| Segment profit | | 145,613 |
| | 168,040 |
| | (13.3 | ) | | 587,929 |
| | 585,652 |
| | 0.4 |
|
The results for the fourth quarter and fiscal year reflect the January 2017 divestiture of Farmer John, resulting in lower sales and volume in fiscal 2017. The results of Fontanini have been included as of the date of acquisition on August 24, 2017. Product lines showing exceptional sales growth for the quarter include foodservice sales of Hormel®Bacon 1™ fully cooked bacon and Hormel®Fire Braised™ meats along with retail sales of Hormel®Natural Choice® meats. Segment profit was impacted by the divestiture of Farmer John, which was partially offset by the addition of Fontanini and strong value-added product growth.
Jennie-O Turkey Store: Results for the JOTS segment compared to the prior year are as follows:
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| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 29, | | October 30, | | | | October 29, | | October 30, | | |
| (in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Volume (lbs.) | | 270,175 |
| | 291,587 |
| | (7.3 | ) | | 890,518 |
| | 902,073 |
| | (1.3 | ) |
| Net sales | | $ | 484,856 |
| | $ | 541,409 |
| | (10.4 | ) | | $ | 1,663,160 |
| | $ | 1,740,968 |
| | (4.5 | ) |
| Segment profit | | 70,370 |
| | 92,299 |
| | (23.8 | ) | | 247,322 |
| | 329,427 |
| | (24.9 | ) |
Net sales, volume, and segment profit were lower than last year as the segment continued to be impacted by higher industry supply and corresponding lower commodity meat prices. Pricing pressure from competing proteins and higher expenses also contributed to the lower results for the full year.
Segment profit for the fourth quarter was lower than last year as continued softness in the commodity and whole turkey markets and a more competitive industry environment pressured value-added margins.
International & Other: Results for the International & Other segment compared to the prior year are as follows:
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| | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 29, | | October 30, | | | | October 29, | | October 30, | | |
| (in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Volume (lbs.) | | 91,414 |
| | 85,454 |
| | 7.0 |
| | 324,895 |
| | 307,127 |
| | 5.8 |
|
| Net sales | | $ | 155,130 |
| | $ | 140,858 |
| | 10.1 |
| | $ | 545,014 |
| | $ | 511,193 |
| | 6.6 |
|
| Segment profit | | 23,113 |
| | 19,570 |
| | 18.1 |
| | 85,304 |
| | 78,409 |
| | 8.8 |
|
Volume and sales for the fourth quarter were driven by improved export sales of Skippy® peanut butter products and SPAM® luncheon meat and also reflect the September 2017 acquisition of the Ceratti® brand. For the fiscal year, improved market conditions resulted in an overall increase in export sales. In China, the Skippy® peanut butter business continued to grow in both retail and foodservice channels and the Company’s meat business experienced more favorable markets throughout fiscal 2017.
Segment profit results for both the fourth quarter and fiscal year primarily reflect better margins for the China business and improved exports of branded items.
Unallocated Income and Expense: The Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at
corporate. Equity in earnings of affiliates is included in segment operating profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included in the segment table for the purpose of reconciling segment results to earnings before income taxes.
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| | | | | | | | | | | | | | | | |
| | | Fourth Quarter Ended | | Year Ended |
| | | October 29, | | October 30, | | October 29, | | October 30, |
| (in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Net interest and investment income | | $ | 4,216 |
| | $ | 2,271 |
| | $ | 10,859 |
| | $ | 6,191 |
|
| Interest expense | | (3,577 | ) | | (3,288 | ) | | (12,683 | ) | | (12,871 | ) |
| General corporate expense | | (14,783 | ) | | (17,325 | ) | | (28,091 | ) | | (49,436 | ) |
| Noncontrolling interest | | 209 |
| | 250 |
| | 368 |
| | 465 |
|
Net interest and investment expense was lower in fiscal 2017 than in fiscal year 2016 due to higher interest income, favorable currency exchange, and improved returns on the rabbi trust. General corporate expense was lower for both the fourth quarter and fiscal year primarily reflecting lower employee-related expenses.
Liquidity and Capital Resources
Cash and cash equivalents were $459.1 million atdeclined in fiscal 2021 as the endCompany made significant investments in the acquisition of fiscal 2018 comparedthe Planters® snack nuts business, dividend payments, repayment of long-term debt, and capital expenditures. Additional details related to $444.1 million at the endsignificant drivers of fiscal 2017 and $415.1 million at the end of fiscal 2016.cash flows are provided below.
During fiscal 2018, cash providedCash Provided by (Used in) Operating Activities
▪Cash flows from operating activities was $1,241.7 million compared to $1,033.9were largely impacted by changes in operating assets and liabilities.
–Accounts receivable increased $192 million in fiscal 20172021 primarily due to increased sales and $1,040.0the incremental impact of the Planters® snack nuts business. The $120 million increase in fiscal 2020 is largely due to increased sales and the timing of collections.
–In fiscal 2021, inventory increased $145 million due to inflation in raw material and supplies and the acquisition of the Planters® snack nuts business.
–Accounts payable and accrued expenses increased $115 million in fiscal 2016. The2021 related to the incremental impact of the Planters® snack nuts business. In fiscal 2020, cash flows benefited from a $111 million increase in fiscal 2018 was primarily due to a lower tax rate and improvements in working capital.the timing of payments.
Cash used in investing activities increased to $1,235.4Provided by (Used in) Investing Activities
▪In fiscal 2021, the Company acquired the Planters® snack nuts business for $3.4 billion. In fiscal 2020, the Company acquired the assets of Sadler's Smokehouse for $271 million.
▪Capital expenditures were $232 million and $368 million in fiscal 2018 from $587.2 million in fiscal 20172021 and $408.5 million in fiscal 2016. Fiscal 20182020, respectively. Significant spending included $857.4 million to purchase Columbus. Fiscal 2017 included $520.5 million to purchase Fontanini and Ceratti, partially offset byseveral multi-year projects including the sale of Farmer John for $135.9 million. Fiscal 2016 included $280.9 million to purchase Justin’s, partially offset by the sale of DCB for $110.1 million. Capital expenditures in fiscal 2018 increased to $389.6 million, from $221.3 million in 2017, and $255.5 million in 2016. Projects in fiscal 2018 included thepizza toppings expansion of value-added capacity at Dold Foods in Wichita, Kansas, a highly automated whole birdour manufacturing facility in Melrose, Minnesota,Nevada, Iowa, a new dry sausage facility in Omaha, Nebraska, and Project Orion, as well as ongoing investments forto support food and employee safety. Projectssafety and the growth of branded products.
Cash Provided by (Used in) Financing Activities
▪The Company issued $2.3 billion and $1.0 billion of long-term debt in fiscal 2017 included completion2021 and 2020, respectively. Proceeds from these issuances, along with cash on hand, were used to fund the acquisition of the Company’s plant in Jiaxing, China, replacement of the JOTS whole bird production facility in Melrose, Minnesota,Planters® snack nuts business. See Note L - Long-term Debt and the bacon expansion in Wichita, Kansas. Capital expenditures in fiscal 2016 are primarily related to the Company's new plant in Jiaxing, China, and a lean ground turkey expansion at JOTS. Capital expendituresOther Borrowing Arrangements for fiscal 2019 are estimated to be approximately $350.0 million. Major projects include the expansion of value-added capacity, investments to improve efficiencies, and expanded automation in the Company's operations.more information.
Cash provided by financing activities was $11.6 million in fiscal 2018 compared to cash used in financing activities of $418.8 million in fiscal 2017 and $557.3 million in fiscal 2016. In connection with the purchase of Columbus, the Company borrowed $375.0 million under a revolving credit facility, which was paid off during the year, and $375.0 million under a term loan facility, which was paid off during the year. The Company repurchased $46.9 million of its common stock in fiscal 2018 compared to $94.5 million and $87.9 million repurchased during fiscal 2017 and 2016, respectively. For additional information pertaining to the Company’s share repurchase plans or programs, see Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”
During fiscal 2018, the Company repurchased 1.4 million shares of its common stock at an average price per share of $33.86. During fiscal 2017, the Company repurchased 2.7 million shares of its common stock at an average price per share of $34.51. During fiscal 2016, the Company repurchased 2.4 million shares of its common stock at an average price per share of $36.84. On January 29, 2013, the Company’s Board of Directors authorized the repurchase of 10.0 million shares of its common stock with no expiration date, which was adjusted for the stock split during the first quarter of fiscal 2016. As of the end of fiscal 2018, there were 9.1 million shares remaining for repurchase under that authorization.
▪Cash dividends paid to the Company’s shareholders continues to be an ongoing financing activity for the Company with $388.1 million in dividends paid in fiscal 2018 compared to $346.0 million in the fiscal 2017 and $296.5payments totaling $523 million in fiscal 2016.2021 and $487 million in fiscal 2020. The dividend rate was $0.75$0.98 per share in fiscal 2018,2021, which reflected a 10.35 percent increase over the fiscal 20172020 rate of $0.68$0.93 per share.
▪The Company has paid dividendsrepaid $250 million of its senior unsecured notes upon maturity in fiscal 2021.
Sources and Uses of Cash
The Company believes its balanced business model, with diversification across raw material inputs, channels, and categories, provides stability in ever changing economic environments. The Company applies a waterfall approach to capital resource allocation, which focuses first on required uses of cash such as capital expenditures to maintain facilities, dividend returns to investors, and mandatory debt repayments. Next, the Company looks to strategic items in support of growth initiatives such as acquisitions and innovation investments, which is followed by 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's ability to leverage its balance sheet through the issuance of debt provides the flexibility to take advantage of strategic opportunities which may require additional funding.
Capital expenditures for 361 consecutive quarters.fiscal 2022 are estimated to be $310 million. The largest projects are expected to include new capacity for retail and foodservice pepperoni and a new production line for the SPAM® family of products.
The Company remains committed to providing a return to investors through cash dividends. The annual dividend rate for fiscal 20192022 was increased 12.06 percent to $0.84$1.04 per share, representing the 53rd56th consecutive annual dividend increase.
Cash flows from operating activities continue to provide the Company with its principal source of liquidity. The Company does not anticipate a significant risk to cash flows from this source in the foreseeable future because the Company operates in a relatively stable industry and has strong brands across many categories and channels.
The Company is dedicated to returning excess cash flow to shareholders through dividend payments. Growing the business through innovation and evaluating opportunities for strategic acquisitions remains a focus for the Company. Reinvestments in
the business to ensure employee and food safety are a top priority for the Company. Capital spending to enhance and expand current operations will also be a significant cash outflow in fiscal 2019.
Contractual Obligations and Commercial Commitments
The following table outlinesshows the Company’s future contractual financial obligationsCompany's other material cash commitments as of October 28, 2018, (for additional information regarding these obligations, see Note F “Long-term Debt and Other Borrowing Arrangements” and Note N “Commitments and Contingencies"):31, 2021: |
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Periods |
| Contractual Obligations (in thousands) | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| Purchase obligations: | | |
| | |
| | |
| | |
| | |
|
Hog and turkey commitments(1) | | $ | 2,381,549 |
| | $ | 1,013,544 |
| | $ | 1,071,379 |
| | $ | 278,100 |
| | $ | 18,526 |
|
Grain commitments(1) | | 116,100 |
| | 114,718 |
| | 1,382 |
| | — |
| | — |
|
Turkey grow-out contracts(2) | | 151,430 |
| | 19,522 |
| | 33,441 |
| | 28,574 |
| | 69,893 |
|
| Current and long-term debt | | 624,840 |
| | — |
| | 624,840 |
| | — |
| | — |
|
Interest payments on long-term debt(3) | | 29,484 |
| | 14,412 |
| | 15,072 |
| | — |
| | — |
|
| Leases | | 62,470 |
| | 12,886 |
| | 15,984 |
| | 9,754 |
| | 23,846 |
|
Other long-term liabilities(4) (5) | | 64,839 |
| | 6,420 |
| | 11,919 |
| | 11,189 |
| | 35,311 |
|
| Total Contractual Cash Obligations | | $ | 3,430,712 |
| | $ | 1,181,502 |
| | $ | 1,774,017 |
| | $ | 327,617 |
| | $ | 147,576 |
|
| | | | | | | | | | | | | | | | | |
| (in millions) | Payments Due by Periods |
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
Purchase Commitments(1) | $ | 3,650 | | $ | 1,180 | | $ | 1,391 | | $ | 776 | | $ | 302 | |
Debt Repayments(2) | 3,300 | | — | | 950 | | — | | 2,350 | |
Interest Payments on Long-term Debt(2) | 797 | | 55 | | 108 | | 98 | | 536 | |
Pension & Other Post-retirement Benefit Payments(3) | 322 | | 31 | | 64 | | 65 | | 161 | |
Lease Obligations(4) | 141 | | 30 | | 49 | | 29 | | 32 | |
(1) In the normal course of business, theThe Company commits to purchase fixed quantities of livestock, grain, and other raw materials from producers to ensure a steady supply of production inputs. Some of these contracts are based on market prices at the time of delivery, for which the Company has estimated the purchase commitment using current market prices as of October 28, 2018.
(2) The Company utilizes grow-out contractsuses hedging programs to manage price risk associated with independent farmers to raise turkeys for the Company. Under these contracts, the turkeys, feed, and other supplies are owned by the Company. The farmers provide the required labor and facilities, and receive a fee per pound when the turkeys are delivered. Someportion of the facilities are sub-leased byfuture grain and hog commitments. The purchase commitments listed above do not reflect the Company toimpact of the independent farmers.hedging instruments that manage the risk of fluctuating commodity markets. See Note F - Derivatives and Hedging and Note J - Commitments and Contingencies for more information.
(2) As of October 28, 2018,31, 2021, 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. As of October 31, 2021, the Company had approximately 100 active contracts ranging from one to twenty-five yearswas in duration. The grow-out activity is assumed to continue through the term of these active contracts, and amounts in the table represent the Company’s obligation based on turkeys expected to be delivered from these farmers.
(3)compliance with all debt covenants. See Note F, "Long-termL - Long-term Debt and Other Borrowing Arrangements".Arrangements for additional details.
(4) Other long-term liabilities represent payments under the Company’s deferred compensation plans. Excluded from the table above are payments under the Company’s defined benefit(3) Represents pension and other post-retirement benefit payments related to the Company's unfunded defined benefit plans. (See estimated benefitBenefit payments reflect expectations for the next ten fiscal years inas estimates are not readily available beyond that point. See Note G “Pension- Pension and Other Post-retirement Benefits.”)Benefits for additional details.
(5) As discussed in(4) For more information on the Company's lease obligations, see Note K "Income Taxes," the total liability for unrecognized tax benefits, including interest and penalties, at October 28, 2018, was $26.3 million, which is not included in the table above as the ultimate amount or timing of settlement of the Company's reserves for income taxes cannot be reasonably estimated.- Leases.
In addition to the commitments set forth in the above table, at October 28, 2018, the Company had $45.5 million in standby letters of credit issued on behalf of the Company. The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs.
The Company believes its financial resources, including a revolving credit facility for $400.0 million and anticipated funds from operations, will be adequate to meet all current commitments.
Off-Balance Sheet Arrangements
As of October 28, 2018,31, 2021, the Company had $45.5$47.3 million of standby letters of credit issued on its behalf. The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs. However, this amount includes revocable standby letters of credit totaling $2.4$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.
Trademarks
References
CRITICAL ACCOUNTING ESTIMATES
This 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 (U.S. GAAP). 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. As conditions resulting from the COVID-19 pandemic continue to evolve, the Company expects these judgments and estimates may be subject to change, which could materially impact future periods. 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 revenues at the time they are offered, based on estimated redemption rates. Promotional contracts are performed by customers to promote the Company’s brandsproducts to consumers. These incentives reduce revenues at the time of performance through direct payments and accrued promotional funds. Accrued promotional funds are unpaid liabilities for promotional contracts in process or products in italics within this report represent valuable trademarks ownedcompleted at the end of a quarter or licensed byfiscal year. Accruals with customers are based on defined performance.
Hormel Foods, LLC or other subsidiaries
Sensitivity of Hormel Foods Corporation.
Forward-Looking Statements
This report contains “forward-looking” information within the meaningEstimate to Change: The liability relating to these agreements is based on a review of the federal securities laws.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 “forward-looking”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 31, 2021, the Company had $27.1 million of unrecognized tax benefits, including 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 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 statements concerningprojected 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 outlookintent 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: 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 more 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 to be 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 2021, the Company elected to perform a quantitative assessment of goodwill. No goodwill impairment charges were recorded as a result of the testing and the estimated fair value of each goodwill reporting unit exceeded the calculated carrying value by more than 50 percent. 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 elected to perform quantitative impairment testing for indefinite-lived intangible assets. The estimated fair value of each indefinite-lived intangible asset exceeded the carrying value by more than 10 percent as such no impairment charges were recorded. 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, and health care cost trend rates. The Company considers historical data as well as other statementscurrent facts and circumstances when determining these estimates. Expected long-term rate of beliefs,return on plan assets is based on fair value, composition of the asset portfolio, historical long-term rates of return, and estimates of future plans, strategies, or anticipated eventsperformance. Mortality and similar expressions concerning matters thatdiscount rates used are not historical facts.
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information.based on actuarial tables elected at each fiscal year-end. The Company is filing this cautionary statement in connection with the Reform Act. When useduses third-party specialists to assist in the Company’s Annual Reportdetermination 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 Stockholders,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 filings byqualitative 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, and health care cost trend rate have a significant impact on the amounts reported for the benefit plans. For the year ended October 31, 2021, the Company withhad $1,712.0 million and $274.7 million in pension benefit obligation and post-retirement benefit obligation, respectively. For fiscal 2022, the U.S. SecuritiesCompany expects a credit of $6.6 million in pension benefit costs and Exchange Commission,an expense of $10.5 million in post-retirement benefit costs. A one-percentage-point change in these rates would have the Company's press releases,following effects:
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| | 1-Percentage-Point |
| | Benefit Cost | | Benefit Obligation |
| (in millions) | | Increase | | Decrease | | Increase | | Decrease |
| Pension Benefits | | | | | | | | |
| Discount Rate | | $ | (6.5) | | | $ | 23.3 | | | $ | (219.3) | | | $ | 277.3 | |
| Expected Long-term Rate of Return on Plan Assets | | (16.7) | | | 16.7 | | | — | | | — | |
| Rate of Future Compensation Increase | | 5.9 | | | (5.2) | | | 16.3 | | | (14.6) | |
| Post-retirement Benefits | | | | | | | | |
| Discount Rate | | $ | (0.8) | | | $ | 5.5 | | | $ | (24.6) | | | $ | 29.4 | |
| Health Care Cost Trend Rate | | 0.7 | | | (0.9) | | | 27.2 | | | (23.4) | |
As of October 31, 2021, the Company had $109.4 million and oral statements made by the Company's representatives, the words or phrases "should result," "believe," "intend," "plan," "are expected to," "targeted," "will continue," "will approximate," "is anticipated," "estimate," "project," or similar expressions are intended to identify forward-looking statements within the meaning
$821.8 million of the Reform Act. Such statementsprivate equity and NAV investments, respectively. These valuations are subject to certain risksjudgments and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected.
In connection with the “safe harbor” provisionsassumptions of the Reform Act, the Company is identifying risk factors that could affect financial performance and cause the Company’s actual results to differ materially from opinions or statements expressed with respect to future periods. The following discussion of risk factors contains certain cautionary statements regarding the Company’s business,funds which should be considered by investors and others. Such risk factors should be considered in conjunction with any discussions of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the Company.
In making these statements, the Company is not undertaking, and specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the Company’s business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the Company has attempted to list comprehensively these important cautionary risk factors, the Company wishes to caution investors and others that other factors may in the future prove to be importantincorrect, resulting in affecting the Company’s business or resultsrisks of operations.
incorrect valuation of these investments. The Company cautions readers notseeks to place undue reliance on forward-looking statements, which represent current views asmitigate these risks by evaluating the appropriateness of the date made. Forward-looking statements are inherently at risk to any changesfunds’ judgments and assumptions by reviewing the financial data included in the national and worldwide economic environment,funds’ financial statements. The Company also holds quarterly meetings with the investment adviser to review fund performance, which could include among other things, economic conditions, political developments, currency exchange rates, interest and inflation rates, accounting standards, taxes, and laws and regulations affectingcomparisons 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 its markets.Other Post-retirement Benefits for additional information.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Hog Markets: The Company’s earnings are affected by fluctuations in the live hog market. To minimize the impact on earnings and to ensure a steady supply of quality hogs, the Company has entered into contracts with producers for the purchase of hogs at formula-based prices over periods of up to 10 years. Purchased hogsHogs purchased under contract accounted for 96 percent and 95 percent of the total hogs purchased by the Company during fiscal 20182021 and 2017.2020, respectively. The majority of these contracts use market-based formulas based on hog futures, hog primal values, or industry reported hog markets. Other contracts use a formula based on the cost of production, which can fluctuate independently from hog markets. The Company’s value-added, branded portfolio helps mitigate changes in hog and pork market prices. Therefore, a hypothetical 10 percent change in the cash hog market would have had an immaterial effect on the Company’s results of operations.
In the second quarter of 2017, theThe Company initiatedutilizes a hedge program to reduce exposure and offset the fluctuationfluctuations in the Company’s future direct hog purchases. This program utilizes lean hog futures and these contractswhich are accounted for under cash flow hedge accounting. The fair value of the Company’s open futures contracts in this program as of October 28, 2018,31, 2021, was $0.7$(0.2) million before tax, compared to $1.7$3.1 million before tax, as of October 29, 2017.25, 2020. The Company measures its market risk exposure on its lean hog futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for lean hogs. A 10 percent decrease in the market price for lean hogs would have negatively impacted the fair value of the Company’s October 28, 2018,31, 2021, open lean hog contracts by $2.5$7.9 million, which in turn would lower the Company’s future cost on purchased hogs by a similar amount.
Turkey Production Costs: The Company raises or contracts for live turkeys to meet the majority of its raw material supply requirements. Production costs in raising turkeys are subject primarily to fluctuations in feed prices and, to a lesser extent, fuel costs. Under normal, long-term market conditions, changes in the cost to produce turkeys are offset by proportional changes in the turkey market.
To reduce the Company’s exposure to changes in grain prices, theThe Company utilizes a hedge program to reduce exposure and offset the fluctuation in the Company’s future direct grain purchases. This program utilizes corngrain futures, swaps, and options for JOTS,Jennie-O Turkey Store, and these contracts are accounted for under cash flow hedge accounting. The fair value of the Company’s open futuresgrain contracts as of October 28, 2018,31, 2021, was $(1.3)$25.5 million compared to $(2.2)$(0.1) million before tax, as of October 29, 2017.25, 2020. The Company measures its market risk exposure on its grain futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for grain. A 10 percent decrease in the market price for grain would have negatively impacted the fair value of the Company’s October 28, 2018,31, 2021, open grain contracts by $6.7$14.5 million, which in turn would lower the Company’s future cost on purchased grain by a similar amount.
Other Input Costs: The costs of raw materials, packaging materials, freight, fuel, and energy may cause the Company's results to fluctuate significantly. To manage input cost volatility, the Company pursues cost saving measures, forward pricing, derivatives, and pricing actions when necessary.
Long-Term Debt: A principal market risk affecting the Company is the exposure to changes in interest rates on the Company’s fixed-rate, long-term debt. Market risk for fixed-rate, long-term debt is estimated as the potential increase in fair value, resulting from a hypothetical 10 percent decrease in interest rates, and amounts to approximately $1.9 million. The fair value of the Company’s long-term debt was estimated using discounted future cash flows based on the Company’s incremental borrowing rates for similar types of borrowing arrangements.
Investments: The Company has corporate-owned life insurance policies classified as trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. As of October 28, 2018,31, 2021, the balance of these securities totaled $137.3$203.0 million compared to $128.5$173.1 million as of October 29, 2017. A majority of these securities represent25, 2020. The rabbi trust is invested primarily in fixed income funds. The Company is subject to market risk due to fluctuations in the value of the remaining investments as unrealized gains and losses associated with these securities are included in the Company’s net earnings on a mark-to-market basis. A 10 percent decline in the value of the investments not held in fixed income funds would have a direct negative impact to the Company’s pretax earnings of approximately $4.3$10.0 million, while a 10 percent increase in value would have a positive impact of the same amount.
International Assets: The fair values of certain Company assets are subject to fluctuations in foreign currencies. The Company’s net asset position in foreign currencies as of October 28, 2018,31, 2021, was $687.7$657.2 million, compared to $781.3$541.2 million as of October 29, 2017,25, 2020, with most of the exposure existing in Chinese yuan and Brazilian real. Changes in currency exchange rates impact the fair values of the Company assets either currently through the Consolidated Statements of Operations as currency gains/ losses,within Interest and Investment Income or by affecting other comprehensive loss.through the Consolidated Statements of Financial Position within Accumulated Other Comprehensive Loss.
The Company measures its foreign currency exchange risk by using a 10 percent sensitivity analysis on the Company’s primary foreign net asset position, the Chinese yuan and the Brazilian real, as of October 28, 2018.31, 2021. A 10 percent strengthening in the value of the Chinese yuan relative to the U.S. dollar would result in other comprehensive income of approximately $51.0$43.3 million pretax. A 10 percent weakening in the value of the Chinese yuan relative to the U.S. dollar would result in other comprehensive loss of approximately $41.7$35.4 million pretax. A 10 percent strengthening in the value of the Brazilian real relative to the U.S. dollar would result in other comprehensive income of approximately $13.1$11.7 million pretax. A 10 percent weakening in the value of the Brazilian real relative to the U.S. dollar would result in other comprehensive loss of approximately $10.7$9.6 million pretax. During fiscal 2018, the value of the Brazilian real declined 21.9 percent. (See Note J for additional details).
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management
Management’s Responsibility for Financial Statements
The accompanying financial statements were prepared by the management of Hormel Foods Corporation which is responsible for their integrity and objectivity. These statements have been prepared in accordance with U.S. generally accepted accounting principles appropriate in the circumstances and, as such, include amounts that are based on our best estimates and judgments.
Hormel Foods Corporation has developed a system of internal controls designed to assure that the records reflect the transactions of the Company and that the established policies and procedures are adhered to. This system is augmented by well-communicated written policies and procedures, a strong program of internal audit and well-qualified personnel.
These financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm, and their report is included herein. The audit was conducted in accordance with the standards of the U.S. Public Company Accounting Oversight Board (United States) and includes a review of the Company’s accounting and financial controls and tests of transactions.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the independent auditors, management, and the internal auditors to assure that each is carrying out its responsibilities. Both Ernst & Young LLP and our internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the results of their audit work and their opinions on the adequacy of internal controls and the quality of financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of Hormel Foods Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rule 13a–15(f). The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting standards. Under the supervision, and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
On June 7, 2021, the Company acquired the Planters®snack nuts business. In conducting its assessment of the effectiveness of the Company's internal control over financial reporting at October 31, 2021, management has excluded the acquired business from the assessment. The Planters® snack nuts business represented approximately 4 percent and 4 percent of the Company’s consolidated Net Sales and Total Assets, respectively, for the fiscal year ended October 31, 2021. The acquired business is in process of being fully integrated into the Company's existing operations. Based on our evaluation under the framework in Internal Control - Integrated Framework, we concluded that our internal control over financial reporting was effective as of October 28, 2018.31, 2021. Our internal control over financial reporting as of October 28, 2018,31, 2021, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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| /s/ James P. Snee | | /s/ James N. Sheehan |
| Chairman of the Board, | Senior | Executive Vice President |
President and Chief Executive Officer and Director | | and Chief Financial Officer |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Thethe Board of Directors of Hormel Foods Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Hormel Foods Corporation’s internal control over financial reporting as of October 28, 2018,31, 2021, based on criteria established in Internal Control–Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Hormel Foods Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of October 28, 2018,31, 2021, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Hormel Foods Corporation as of October 28, 2018 and October 29, 2017 and the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended October 28, 2018 and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the consolidated financial statements) and our report dated December 7, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting includedAs indicated in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinionReporting, management's assessment of and conclusion on the company’seffectiveness of internal controlcontrols over financial reporting based on our audit. We are a public accounting firm registered withdid not include the PCAOB and are required to be independent with respect tointernal controls of the Planters® snack nuts business, which is included in the 2021 consolidated financial statements of the Company in accordance withand constituted 4% of total assets as of October 31, 2021 and 4% of revenues for the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
year then ended. Our audit included obtaining an understanding of internal control over financial reporting assessingof the risk that a material weakness exists, testing and evaluatingCompany also did not include the design and operating effectivenessevaluation of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Planters® snack nuts business.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
December 7, 2018
Report of Independent Registered Public Accounting Firm
To the Shareholders and The Board of Directors of Hormel Foods Corporation
Opinion on the Financial Statements
We have audited the consolidated balance sheets of Hormel Foods Corporation (the Company) as of October 28, 2018 and October 29, 2017, the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended October 28, 2018, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 28, 2018 and October 29, 2017, and the results of its operations and its cash flows for each of the three years in the period ended October 28, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control overaccompanying consolidated statements of financial reportingposition of the Company as of October 28, 2018, based on criteria established31, 2021 and October 25, 2020, the related consolidated statements of operations, comprehensive income, changes in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizationsshareholders’ investment, and cash flows for each of the Treadway Commission (2013 framework)three years in the period ended October 31, 2021 and the related notes and financial statement schedule listed in the index at Item 15 and our report dated December 7, 201810, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
December 10, 2021
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hormel Foods Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Hormel Foods Corporation (the Company) as of October 31, 2021 and October 25, 2020, the related consolidated statements of operations, comprehensive income, changes in shareholders’ investment, and cash flows for each of the three years in the period ended October 31, 2021 and the related notes and financial statement schedule listed in the index at Item 15 (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 31, 2021 and October 25, 2020, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated December 10, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
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| Valuation of Alternative Investments - Pension Assets |
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| Description of the Matter | At October 31, 2021, the Company had $1.7 billion in plan assets related to the defined benefit pension plans. Approximately 55% of the total pension assets are in private equity funds, real estate – domestic funds, global stocks – collective investment funds, hedge funds, fixed income – hedge funds, and fixed income – collective investment funds. These types of investments are referred to as “alternative investments.” As documented in Note F of the financial statements, these alternative investments are valued at net asset value (NAV) or are valued using significant unobservable inputs. |
| Auditing the fair value of these alternative investments is challenging because of the higher estimation uncertainty of the inputs to the fair value calculations, including the underlying NAVs, discounted cash flow valuations, comparable market valuations, and adjustments for currency, credit liquidity and other risks. Additionally, certain information regarding the fair value of these alternative investments is based on unaudited information available to management at the time of valuation. |
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| | | | | | | | | | | | | | |
| Valuation of Alternative Investments - Pension Assets |
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| | | | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls addressing the risk of material misstatement relating to valuation of alternative investments. This included testing management's review controls over the valuation of alternative investments, for example, a review of fund performance in comparison to the selected benchmark and meetings with the investment advisor on a quarterly basis to review market performance and fund returns in comparison with relevant indices and the investment policy. We also tested management’s independent price testing of underlying investments performed for certain investments on a quarterly basis. |
| Our audit procedures included, among others, inquiring of management and the investment advisor regarding changes to the investment portfolio and investment strategies. We confirmed the fair value of the investments and ownership interest directly with the fund managers. We inspected the trust statement for observable transactions near year end to compare to the estimated fair value. We also obtained the latest audited financial statements for certain investments, performed a rollforward of the investment balance to compute an estimated market return on investment, and compared the market return to relevant benchmarks. |
| | | | |
| Valuation of acquired intangible assets - trade names |
| Description of the Matter | As described in Note B to the consolidated financial statements, during the year-ended October 31, 2021, the Company completed the acquisition of the Planters® snack nuts business for a cash purchase price of $3.4 billion. The Company’s accounting for this acquisition included determining the fair value of the $763 million of identifiable intangible assets acquired, which included trade names and customer relationships, with the remaining residual value recorded as goodwill. |
| Auditing the Company's accounting for its acquisition of the Planters® snack nuts business was complex due to the significant estimation uncertainty in the Company’s determination of the fair value of the identified intangible assets. The primary intangible assets identified were trade names which were determined to have a fair value of $712 million. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business. The Company used a relief from royalty model to measure the identified trade names. The significant assumptions used to estimate the value of the trade names included net sales projections, royalty rates, and discount rates, which are forward looking and could be affected by future economic and market conditions. |
| | | | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s accounting for acquisitions. For example, our tests included controls over the estimation process supporting the recognition and measurement of consideration transferred and trade names. We also tested management’s review of the valuation models and significant assumptions used in the valuations. |
| To test the estimated fair value of the trade name intangible assets, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodology, evaluating the methods and significant assumptions used by management, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. We compared the significant assumptions to current industry, market and economic trends, to the assumptions used to value similar assets in other acquisitions, and to the historical results of the acquired business. We also performed sensitivity analyses of significant assumptions to evaluate the changes in fair value of the acquired trade name intangible assets that would result from changes in the assumptions. |
| | | | |
/s/ Ernst & Young LLP
We have served as the Corporation’sCompany's auditor since 1931.
Minneapolis, Minnesota
December 7, 201810, 2021
Consolidated Statements of Financial Position
| | | | | | | | | | | | | | |
| | | October 31, | | October 25, |
| (in thousands, except share and per share amounts) | | 2021 | | 2020 |
| Assets | | | | |
| Current Assets | | | | |
| Cash and Cash Equivalents | | $ | 613,530 | | | $ | 1,714,309 | |
| Short-term Marketable Securities | | 21,162 | | | 17,338 | |
Accounts Receivable (Net of Allowance for Doubtful Accounts of $4,033 at October 31, 2021, and $4,012 at October 25, 2020) | | 895,719 | | | 702,419 | |
| Inventories | | 1,369,198 | | | 1,072,762 | |
| Taxes Receivable | | 8,293 | | | 41,449 | |
| Prepaid Expenses | | 24,971 | | | 18,349 | |
| Other Current Assets | | 14,943 | | | 12,438 | |
| Total Current Assets | | 2,947,816 | | | 3,579,063 | |
| | | | |
| | | | |
| Goodwill | | 4,929,102 | | | 2,612,727 | |
| Other Intangibles | | 1,822,273 | | | 1,076,285 | |
| Pension Assets | | 289,096 | | | 183,232 | |
| Investments In and Receivables from Affiliates | | 299,019 | | | 308,372 | |
| Other Assets | | 299,907 | | | 250,382 | |
| Property, Plant, and Equipment | | | | |
| Land | | 72,133 | | | 62,543 | |
| Buildings | | 1,332,881 | | | 1,250,529 | |
| Equipment | | 2,415,063 | | | 2,084,930 | |
| Construction in Progress | | 316,455 | | | 369,453 | |
| Less: Allowance for Depreciation | | (2,027,414) | | | (1,869,233) | |
| Net Property, Plant, and Equipment | | 2,109,117 | | | 1,898,222 | |
| Total Assets | | $ | 12,696,329 | | | $ | 9,908,282 | |
| | | | |
| Liabilities and Shareholders’ Investment | | | | |
| Current Liabilities | | | | |
| Accounts Payable | | $ | 793,310 | | | $ | 644,609 | |
| Accrued Expenses | | 51,192 | | | 59,136 | |
| Accrued Workers Compensation | | 27,350 | | | 25,070 | |
| Accrued Marketing Expenses | | 114,746 | | | 108,502 | |
| Employee Related Expenses | | 241,977 | | | 252,845 | |
| Taxes Payable | | 23,520 | | | 22,480 | |
| Interest and Dividends Payable | | 154,803 | | | 132,632 | |
| Current Maturities of Long-term Debt | | 8,756 | | | 258,691 | |
| Total Current Liabilities | | 1,415,654 | | | 1,503,965 | |
| | | | |
| Long-term Debt Less Current Maturities | | 3,315,147 | | | 1,044,936 | |
| Pension and Post-retirement Benefits | | 546,362 | | | 552,878 | |
| Other Long-term Liabilities | | 162,623 | | | 157,399 | |
| Deferred Income Taxes | | 278,183 | | | 218,779 | |
| Shareholders’ Investment | | | | |
Preferred Stock, Par Value $0.01 a Share — Authorized 160,000,000 Shares; Issued — None | | — | | | — | |
Common Stock, Nonvoting, Par Value $0.01 a Share — Authorized 400,000,000 Shares; Issued — None | | — | | | — | |
Common Stock, Par Value $0.01465 a Share — Authorized 1,600,000,000 Shares; Issued 542,412,403 Shares October 31, 2021 Issued 539,887,092 Shares October 25, 2020 | | 7,946 | | | 7,909 | |
| Additional Paid-in Capital | | 360,336 | | | 289,554 | |
| Accumulated Other Comprehensive Loss | | (277,269) | | | (395,250) | |
| Retained Earnings | | 6,881,870 | | | 6,523,335 | |
| Hormel Foods Corporation Shareholders’ Investment | | 6,972,883 | | | 6,425,548 | |
| Noncontrolling Interest | | 5,478 | | | 4,778 | |
| Total Shareholders’ Investment | | 6,978,360 | | | 6,430,326 | |
| Total Liabilities and Shareholders’ Investment | | $ | 12,696,329 | | | $ | 9,908,282 | |
|
| | | | | | | | |
| | | October 28, | | October 29, |
| (in thousands, except share and per share amounts) | | 2018 | | 2017 |
| Assets | | |
| | |
|
| Current Assets | | |
| | |
|
| Cash and cash equivalents | | $ | 459,136 |
| | $ | 444,122 |
|
Accounts receivable (net of allowance for doubtful accounts of
$4,051 at October 28, 2018, and $4,246 at October 29, 2017) | | 600,438 |
| | 618,351 |
|
| Inventories | | 963,527 |
| | 921,022 |
|
| Income taxes receivable | | 3,995 |
| | 22,346 |
|
| Prepaid expenses | | 16,342 |
| | 16,144 |
|
| Other current assets | | 6,662 |
| | 4,538 |
|
| Total Current Assets | | 2,050,100 |
| | 2,026,523 |
|
| | | | | |
| Goodwill | | 2,714,116 |
| | 2,119,813 |
|
| Other Intangibles | | 1,207,219 |
| | 1,027,014 |
|
| Pension Assets | | 195,153 |
| | 171,990 |
|
| Investments In and Receivables From Affiliates | | 273,153 |
| | 242,369 |
|
| Other Assets | | 189,951 |
| | 184,948 |
|
| Property, Plant and Equipment | | | | |
| Land | | 50,332 |
| | 51,249 |
|
| Buildings | | 956,260 |
| | 866,855 |
|
| Equipment | | 1,863,020 |
| | 1,710,537 |
|
| Construction in progress | | 332,205 |
| | 148,064 |
|
| Less: Allowance for depreciation | | (1,689,217 | ) | | (1,573,454 | ) |
| Net Property, Plant and Equipment | | 1,512,600 |
| | 1,203,251 |
|
| Total Assets | | $ | 8,142,292 |
| | $ | 6,975,908 |
|
| | | | | |
| Liabilities and Shareholders’ Investment | | | | |
| Current Liabilities | | | | |
| Accounts payable | | $ | 618,830 |
| | $ | 552,714 |
|
| Accrued expenses | | 48,298 |
| | 76,966 |
|
| Accrued workers compensation | | 24,594 |
| | 26,585 |
|
| Accrued marketing expenses | | 118,887 |
| | 101,573 |
|
| Employee related expenses | | 224,736 |
| | 209,562 |
|
| Taxes payable | | 2,490 |
| | 525 |
|
| Interest and dividends payable | | 101,079 |
| | 90,287 |
|
| Total Current Liabilities | | 1,138,914 |
| | 1,058,212 |
|
| | | | | |
| Long-Term Debt – less current maturities | | 624,840 |
| | 250,000 |
|
| Pension and Post-Retirement Benefits | | 477,557 |
| | 530,249 |
|
| Other Long-Term Liabilities | | 99,070 |
| | 99,340 |
|
| Deferred Income Taxes | | 197,093 |
| | 98,410 |
|
| Shareholders’ Investment | | | | |
Preferred stock, par value $0.01 a share — authorized 160,000,000 shares;
issued — none | |
|
| |
|
|
Common stock, nonvoting, par value $0.01 a share —
authorized 400,000,000 shares; issued — none | |
|
| |
|
|
Common stock, par value $0.01465 a share — authorized 1,600,000,000 shares;
issued 534,135,484 shares October 28, 2018
issued 528,423,605 shares October 29, 2017 | | 7,825 |
| | 7,741 |
|
| Additional paid-in capital | | 106,528 |
| | 13,670 |
|
| Accumulated other comprehensive loss | | (243,498 | ) | | (248,075 | ) |
| Retained earnings | | 5,729,956 |
| | 5,162,571 |
|
| Hormel Foods Corporation Shareholders’ Investment | | 5,600,811 |
| | 4,935,907 |
|
| Noncontrolling Interest | | 4,007 |
| | 3,790 |
|
| Total Shareholders’ Investment | | 5,604,818 |
| | 4,939,697 |
|
| Total Liabilities and Shareholders’ Investment | | $ | 8,142,292 |
| | $ | 6,975,908 |
|
Statements.Statements
Consolidated Statements of Operations
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 28, | | October 29, | | October 30, |
| (in thousands, except per share amounts) | | 2018 | | 2017 | | 2016*
|
| Net sales | | $ | 9,545,700 |
| | $ | 9,167,519 |
| | $ | 9,523,224 |
|
| Cost of products sold | | 7,550,267 |
| | 7,164,356 |
| | 7,365,049 |
|
| Gross Profit | | 1,995,433 |
| | 2,003,163 |
| | 2,158,175 |
|
| Selling, general and administrative | | 838,205 |
| | 762,104 |
| | 871,974 |
|
| Goodwill/intangible impairment | | 17,279 |
| | 180 |
| | 991 |
|
| Equity in earnings of affiliates | | 58,972 |
| | 39,590 |
| | 38,685 |
|
| Operating Income | | 1,198,921 |
| | 1,280,469 |
| | 1,323,895 |
|
| Other income and expense: | | | | | | |
| Interest and investment income | | 8,857 |
| | 10,859 |
| | 6,191 |
|
| Interest expense | | (26,494 | ) | | (12,683 | ) | | (12,871 | ) |
| Earnings Before Income Taxes | | 1,181,284 |
| | 1,278,645 |
| | 1,317,215 |
|
| Provision for income taxes | | 168,702 |
| | 431,542 |
| | 426,698 |
|
| Net Earnings | | 1,012,582 |
| | 847,103 |
| | 890,517 |
|
| Less: Net earnings attributable to noncontrolling interest | | 442 |
| | 368 |
| | 465 |
|
| Net Earnings Attributable to Hormel Foods Corporation | | $ | 1,012,140 |
| | $ | 846,735 |
| | $ | 890,052 |
|
| | | | | | | |
| Net Earnings per Share: | | | | | | |
| Basic | | $ | 1.91 |
| | $ | 1.60 |
| | $ | 1.68 |
|
| Diluted | | $ | 1.86 |
| | $ | 1.57 |
| | $ | 1.64 |
|
| Weighted-Average Shares Outstanding: | | | | | | |
| Basic | | 530,742 |
| | 528,363 |
| | 529,290 |
|
| Diluted | | 543,869 |
| | 539,116 |
| | 542,473 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 31, | | October 25, | | October 27, |
| (in thousands, except per share amounts) | | 2021 | | 2020 | | 2019 |
| Net Sales | | $ | 11,386,189 | | | $ | 9,608,462 | | | $ | 9,497,317 | |
| Cost of Products Sold | | 9,458,283 | | | 7,782,498 | | | 7,612,669 | |
| Gross Profit | | 1,927,906 | | | 1,825,963 | | | 1,884,648 | |
| Selling, General, and Administrative | | 853,071 | | | 761,315 | | | 727,584 | |
| | | | | | |
| Equity in Earnings of Affiliates | | 47,763 | | | 35,572 | | | 39,201 | |
| Operating Income | | 1,122,599 | | | 1,100,220 | | | 1,196,265 | |
| Other Income and Expense: | | | | | | |
| Interest and Investment Income | | 46,878 | | | 35,596 | | | 31,520 | |
| Interest Expense | | (43,307) | | | (21,069) | | | (18,070) | |
| Earnings Before Income Taxes | | 1,126,170 | | | 1,114,747 | | | 1,209,715 | |
| Provision for Income Taxes | | 217,029 | | | 206,393 | | | 230,567 | |
| Net Earnings | | 909,140 | | | 908,354 | | | 979,148 | |
| Less: Net Earnings Attributable to Noncontrolling Interest | | 301 | | | 272 | | | 342 | |
| Net Earnings Attributable to Hormel Foods Corporation | | $ | 908,839 | | | $ | 908,082 | | | $ | 978,806 | |
| | | | | | |
| Net Earnings Per Share: | | | | | | |
| Basic | | $ | 1.68 | | | $ | 1.69 | | | $ | 1.83 | |
| Diluted | | $ | 1.66 | | | $ | 1.66 | | | $ | 1.80 | |
| Weighted-average Shares Outstanding: | | | | | | |
| Basic | | 541,114 | | | 538,007 | | | 534,578 | |
| Diluted | | 547,580 | | | 546,592 | | | 545,232 | |
*Fiscal 2016 included 53 weeks.
See Notes to Consolidated Financial Statements.Statements
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 28, | | October 29, | | October 30, |
| (in thousands) | | 2018 | | 2017 | | 2016* |
| Net earnings | | $ | 1,012,582 |
| | $ | 847,103 |
| | $ | 890,517 |
|
| Other comprehensive income (loss), net of tax: | | | | | | |
| Foreign currency translation | | (38,233 | ) | | (1,335 | ) | | (6,718 | ) |
| Pension and other benefits | | 44,862 |
| | 54,077 |
| | (69,286 | ) |
| Deferred hedging | | (2,277 | ) | | (4,492 | ) | | 5,109 |
|
| Total Other Comprehensive Income (Loss) | | 4,352 |
| | 48,250 |
| | (70,895 | ) |
| Comprehensive Income | | 1,016,934 |
| | 895,353 |
| | 819,622 |
|
| Less: Comprehensive income attributable to noncontrolling interest | | 217 |
| | 390 |
| | 205 |
|
| Comprehensive Income Attributable to Hormel Foods Corporation | | $ | 1,016,717 |
| | $ | 894,963 |
| | $ | 819,417 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 31, | | October 25, | | October 27, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Net Earnings | | $ | 909,140 | | | $ | 908,354 | | | $ | 979,148 | |
| Other Comprehensive Income (Loss), Net of Tax: | | | | | | |
| Foreign Currency Translation | | 13,379 | | | (10,812) | | | (8,414) | |
| Pension and Other Benefits | | 71,967 | | | 15,698 | | | (97,486) | |
| Deferred Hedging | | 33,034 | | | (284) | | | 3,425 | |
| Total Other Comprehensive Income (Loss) | | 118,380 | | | 4,602 | | | (102,475) | |
| Comprehensive Income | | 1,027,520 | | | 912,956 | | | 876,673 | |
| Less: Comprehensive Income Attributable to Noncontrolling Interest | | 700 | | | 624 | | | 70 | |
| Comprehensive Income Attributable to Hormel Foods Corporation | | $ | 1,026,820 | | | $ | 912,332 | | | $ | 876,603 | |
*Fiscal 2016 included 53 weeks.
See Notes to Consolidated Financial Statements.Statements
Consolidated Statements of Changes in Shareholders’ Investment
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Hormel Foods Corporation Shareholders | | | | |
| (in thousands, except per | | Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Non-controlling Interest | | Total Shareholders’ Investment |
share amounts)
| | Shares | | Amount | | Shares | | Amount | | | | | |
| Balance at October 25, 2015* | | 528,412 |
| | $ | 7,741 |
| | — |
| | $ | — |
| | $ | — |
| | $ | 4,216,125 |
| | $ | (225,668 | ) | | $ | 3,195 |
| | $ | 4,001,393 |
|
| Net earnings | | | | | | | | | | | | 890,052 |
| | | | 465 |
| | 890,517 |
|
| Other comprehensive loss | | | | | | | | | | | | | | (70,635 | ) | | (260 | ) | | (70,895 | ) |
| Purchases of common stock | | | | | | (2,386 | ) | | (87,885 | ) | | | | | | | | | | (87,885 | ) |
Stock-based compensation expense | | | | 1 |
| | | | | | 17,828 |
| | | | | | | | 17,829 |
|
Exercise of stock options/ restricted shares | | 2,458 |
| | 35 |
| | | | | | 7,476 |
| | | | | | | | 7,511 |
|
| Shares retired | | (2,386 | ) | | (35 | ) | | 2,386 |
| | 87,885 |
| | (25,304 | ) | | (62,546 | ) | | | | | | — |
|
Declared cash dividends —
$0.58 per share | | | | | | | | | | | | (307,064 | ) | | | | | | (307,064 | ) |
| Balance at October 30, 2016 | | 528,484 |
| | $ | 7,742 |
| | — |
| | $ | — |
| | $ | — |
| | $ | 4,736,567 |
| | $ | (296,303 | ) | | $ | 3,400 |
| | $ | 4,451,406 |
|
| Net earnings | | | | | | | | | | | | 846,735 |
| | | | 368 |
| | 847,103 |
|
| Other comprehensive income | | | | | | | | | | | | | | 48,228 |
| | 22 |
| | 48,250 |
|
| Purchases of common stock | | | | | | (2,738 | ) | | (94,487 | ) | | | | | | | | | | (94,487 | ) |
Stock-based compensation expense | | | | 1 |
| | | | | | 15,590 |
| | | | | | | | 15,591 |
|
Exercise of stock options/ restricted shares | | 2,678 |
| | 38 |
| | | | | | 30,827 |
| | | | | | | | 30,865 |
|
| Shares retired | | (2,738 | ) | | (40 | ) | | 2,738 |
| | 94,487 |
| | (32,747 | ) | | (61,700 | ) | | | | | | — |
|
Declared cash dividends —
$0.68 per share | | | | | | | | | | | | (359,031 | ) | | | | | | (359,031 | ) |
| Balance at October 29, 2017 | | 528,424 |
| | $ | 7,741 |
| | — |
| | $ | — |
| | $ | 13,670 |
| | $ | 5,162,571 |
| | $ | (248,075 | ) | | $ | 3,790 |
| | $ | 4,939,697 |
|
| Net earnings | | | | | | | | | | | | 1,012,140 |
| | | | 442 |
| | 1,012,582 |
|
| Other comprehensive income | | | | | | | | | | | | | | 4,577 |
| | (225 | ) | | 4,352 |
|
| Purchases of common stock | | | | | | (1,385 | ) | | (46,898 | ) | | | | | | | | | | (46,898 | ) |
Stock-based compensation expense | | | | 1 |
| | | | | | 20,594 |
| | | | | | | | 20,595 |
|
Exercise of stock options/ restricted shares | | 7,096 |
| | 103 |
| | | | | | 72,399 |
| | | | | | | | 72,502 |
|
| Shares retired | | (1,385 | ) | | (20 | ) | | 1,385 |
| | 46,898 |
| | (135 | ) | | (46,743 | ) | | | | | | — |
|
Declared cash dividends —
$0.75 per share | | | | | | | | | | | | (398,012 | ) | | | | | | (398,012 | ) |
| Balance at October 28, 2018 | | 534,135 |
| | $ | 7,825 |
| | — |
| | $ | — |
| | $ | 106,528 |
| | $ | 5,729,956 |
| | $ | (243,498 | ) | | $ | 4,007 |
| | $ | 5,604,818 |
|
*Shares have been restated, as appropriate, to reflect the two-for-one stock split distributed on February 9, 2016. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Hormel Foods Corporation Shareholders | | | | |
| (in thousands, except per | | Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Non-controlling Interest | | Total Shareholders’ Investment |
| share amounts) | | Shares | | Amount | | Shares | | Amount | | | | | |
| Balance at October 28, 2018 | | 534,135 | | | $ | 7,825 | | | — | | | $ | — | | | $ | 106,528 | | | $ | 5,729,956 | | | $ | (243,498) | | | $ | 4,007 | | | $ | 5,604,818 | |
| Net Earnings | | | | | | | | | | | | 978,806 | | | | | 342 | | | 979,148 | |
Other Comprehensive Income
(Loss) | | | | | | | | | | | | | | (102,203) | | | (272) | | | (102,475) | |
| Purchases of Common Stock | | | | | | (4,309) | | | (174,246) | | | | | | | | | | | (174,246) | |
Stock-based Compensation
Expense | | | | 1 | | | | | | | 19,706 | | | | | | | | | 19,707 | |
Exercise of Stock Options/
Restricted Shares | | 4,663 | | | 67 | | | | | | | 59,974 | | | | | | | | | 60,041 | |
| Shares Retired | | (4,309) | | | (63) | | | 4,309 | | | 174,246 | | | (1,287) | | | (172,896) | | | | | | | — | |
| Cumulative Effect Adjustment from the Adoption of: | | | | | | | | | | | | | | | | | | |
| ASU 2016-16 | | | | | | | | | | | | (10,475) | | | | | | | (10,475) | |
| ASU 2017-12 | | | | | | | | | | | | 21 | | | (21) | | | | | — | |
| ASU 2018-02 | | | | | | | | | | | | 52,342 | | | (53,778) | | | | | (1,436) | |
Declared Cash Dividends — $0.84 per Share | | | | | | | | | | | | (449,547) | | | | | | | (449,547) | |
| Balance at October 27, 2019 | | 534,489 | | | $ | 7,830 | | | — | | | $ | — | | | $ | 184,921 | | | $ | 6,128,207 | | | $ | (399,500) | | | $ | 4,077 | | | $ | 5,925,535 | |
| Net Earnings | | | | | | | | | | | | 908,082 | | | | | 272 | | | 908,354 | |
Other Comprehensive Income
(Loss) | | | | | | | | | | | | | | 4,250 | | | 352 | | | 4,602 | |
Contribution from
Non-controlling Interest | | | | | | | | | | | | | | | | 77 | | | 77 | |
| Purchases of Common Stock | | | | | | (302) | | | (12,360) | | | | | | | | | | | (12,360) | |
Stock-based Compensation
Expense | | | | | | | | | | 22,458 | | | | | | | | | 22,458 | |
Exercise of Stock Options/
Restricted Shares | | 5,700 | | | 83 | | | | | | | 82,324 | | | | | | | | | 82,407 | |
| Shares Retired | | (302) | | | (4) | | | 302 | | | 12,360 | | | (149) | | | (12,207) | | | | | | | — | |
Declared Cash Dividends — $0.93 per Share | | | | | | | | | | | | (500,747) | | | | | | | (500,747) | |
| Balance at October 25, 2020 | | 539,887 | | | $ | 7,909 | | | — | | | $ | — | | | $ | 289,554 | | | $ | 6,523,335 | | | $ | (395,250) | | | $ | 4,778 | | | $ | 6,430,326 | |
| Net Earnings | | | | | | | | | | | | 908,839 | | | | | 301 | | | 909,140 | |
Other Comprehensive Income
(Loss) | | | | | | | | | | | | | | 117,981 | | | 399 | | | 118,380 | |
| | | | | | | | | | | | | | | | | | |
| Purchases of Common Stock | | | | | | (469) | | | (19,958) | | | | | | | | | | | (19,958) | |
Stock-based Compensation
Expense | | 38 | | 1 | | | | | | 24,743 | | | | | | | | | 24,744 | |
Exercise of Stock Options/
Restricted Shares | | 2,956 | | | 43 | | | | | | | 46,326 | | | | | | | | | 46,369 | |
| Shares Retired | | (469) | | | (7) | | | 469 | | | 19,958 | | | (287) | | | (19,664) | | | | | | | — | |
Declared Cash Dividends — $0.98 per Share | | | | | | | | | | | | (530,640) | | | | | | | (530,640) | |
| Balance at October 31, 2021 | | 542,412 | | | $ | 7,946 | | | — | | | $ | — | | | $ | 360,336 | | | $ | 6,881,870 | | | $ | (277,269) | | | $ | 5,478 | | | $ | 6,978,360 | |
| | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 31, | | October 25, | | October 27, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Operating Activities | | | | | | |
| Net Earnings | | $ | 909,140 | | | $ | 908,354 | | | $ | 979,148 | |
| Adjustments to Reconcile to Net Cash Provided by Operating Activities: | | | | | | |
| Depreciation | | 183,772 | | | 165,716 | | | 153,182 | |
| Amortization | | 44,634 | | | 40,065 | | | 12,027 | |
| | | | | | |
| Equity in Earnings of Affiliates | | (47,763) | | | (35,572) | | | (39,201) | |
| Distributions Received from Equity Method Investees | | 44,999 | | | 37,499 | | | 22,500 | |
| Provision for Deferred Income Taxes | | 28,677 | | | 32,039 | | | 28,641 | |
| Loss (Gain) on Property/Equipment Sales and Plant Facilities | | 3,731 | | | 1,793 | | | (811) | |
| Gain on Sale of Business | | — | | | — | | | (16,469) | |
| | | | | | |
| Non-cash Investment Activities | | (24,215) | | | (15,315) | | | (20,180) | |
| Stock-based Compensation Expense | | 24,744 | | | 22,458 | | | 19,707 | |
| Changes in Operating Assets and Liabilities, Net of Acquisitions: | | | | | | |
| Decrease (Increase) in Accounts Receivable | | (191,627) | | | (119,516) | | | (11,146) | |
| Decrease (Increase) in Inventories | | (145,176) | | | (1,839) | | | (123,843) | |
| Decrease (Increase) in Prepaid Expenses and Other Current Assets | | 34,555 | | | 5,860 | | | (10,105) | |
| Increase (Decrease) in Pension and Post-retirement Benefits | | (15,448) | | | (10,509) | | | (10,416) | |
| Increase (Decrease) in Accounts Payable and Accrued Expenses | | 115,099 | | | 111,277 | | | (44,109) | |
| Increase (Decrease) in Net Income Taxes Payable | | 36,811 | | | (14,286) | | | (15,929) | |
| | | | | | |
| Net Cash Provided by (Used in) Operating Activities | | $ | 1,001,934 | | | $ | 1,128,024 | | | $ | 922,996 | |
| Investing Activities | | | | | | |
| Net (Purchase) Sale of Securities | | $ | (4,364) | | | $ | (2,589) | | | $ | (14,496) | |
| Proceeds from Sale of Business | | — | | | — | | | 479,806 | |
| Acquisitions of Businesses and Intangibles | | (3,396,246) | | | (270,789) | | | — | |
| Purchases of Property and Equipment | | (232,416) | | | (367,501) | | | (293,838) | |
| Proceeds from Sales of Property and Equipment | | 2,216 | | | 1,916 | | | 37,402 | |
Decrease (Increase) in Investments, Equity in Affiliates, and Other Assets | | (343) | | | (21,124) | | | (6,479) | |
| Proceeds from Company-owned Life Insurance | | 5,315 | | | 3,772 | | | 17,758 | |
| | | | | | |
| Net Cash Provided by (Used in) Investing Activities | | $ | (3,625,839) | | | $ | (656,316) | | | $ | 220,153 | |
| Financing Activities | | | | | | |
| | | | | | |
| Proceeds from Long-term Debt | | $ | 2,276,292 | | | $ | 992,381 | | | $ | — | |
| Repayments of Long-term Debt and Finance Leases | | (258,617) | | | (8,368) | | | (374,840) | |
| Dividends Paid on Common Stock | | (523,114) | | | (487,376) | | | (437,053) | |
| Share Repurchase | | (19,958) | | | (12,360) | | | (174,246) | |
| Proceeds from Exercise of Stock Options | | 45,919 | | | 81,818 | | | 59,895 | |
| Proceeds from Noncontrolling Interest | | — | | | 77 | | | — | |
| | | | | | |
| | | | | | |
| Net Cash Provided by (Used in) Financing Activities | | $ | 1,520,520 | | | $ | 566,172 | | | $ | (926,244) | |
| Effect of Exchange Rate Changes on Cash | | 2,606 | | | 3,526 | | | (3,140) | |
| Increase (Decrease) in Cash and Cash Equivalents | | (1,100,778) | | | 1,041,407 | | | 213,765 | |
| Cash and Cash Equivalents at Beginning of Year | | 1,714,309 | | | 672,901 | | | 459,136 | |
| Cash and Cash Equivalents at End of Year | | $ | 613,530 | | | $ | 1,714,309 | | | $ | 672,901 | |
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 28, | | October 29, | | October 30, |
| (in thousands) | | 2018 | | 2017 | | 2016* |
| Operating Activities | | | | | | |
| Net earnings | | $ | 1,012,582 |
| | $ | 847,103 |
| | $ | 890,517 |
|
| Adjustments to reconcile to net cash provided by operating activities: | | | | | | |
| Depreciation | | 149,205 |
| | 122,594 |
| | 123,581 |
|
| Amortization of intangibles | | 12,653 |
| | 8,383 |
| | 8,387 |
|
| Goodwill/intangible impairment | | 17,279 |
| | 180 |
| | 991 |
|
| Equity in earnings of affiliates | | (58,972 | ) | | (39,590 | ) | | (38,685 | ) |
| Distributions received from equity method investees | | 30,023 |
| | 27,521 |
| | 46,190 |
|
| Provision for deferred income taxes | | (7,441 | ) | | 62,166 |
| | 44,327 |
|
| (Gain) loss on property/equipment sales and plant facilities | | (2,867 | ) | | 322 |
| | 80 |
|
| Gain on insurance proceeds | | — |
| | (3,914 | ) | | — |
|
| Non-cash investment activities | | (7,908 | ) | | (4,864 | ) | | (1,287 | ) |
| Stock-based compensation expense | | 20,595 |
| | 15,591 |
| | 17,829 |
|
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
| Decrease (increase) in accounts receivable | | 36,133 |
| | (29,717 | ) | | 20,904 |
|
| (Increase) decrease in inventories | | (8,293 | ) | | 41,028 |
| | (12,281 | ) |
| (Increase) decrease in prepaid expenses and other current assets | | (4,771 | ) | | (22,459 | ) | | 13,235 |
|
| (Decrease) increase in pension and post-retirement benefits | | (13,216 | ) | | (13,275 | ) | | (34,510 | ) |
| Increase (decrease) in accounts payable and accrued expenses | | 48,376 |
| | (2,553 | ) | | (40,783 | ) |
| Increase (decrease) in net income taxes payable | | 18,351 |
| | 25,369 |
| | 1,525 |
|
| Net Cash Provided by Operating Activities | | $ | 1,241,729 |
| | $ | 1,033,885 |
| | $ | 1,040,020 |
|
| Investing Activities | | | | | | |
| Proceeds from sale of business | | $ | — |
| | $ | 135,944 |
| | 110,149 |
|
| Acquisitions of businesses/intangibles | | (857,668 | ) | | (520,463 | ) | | (280,889 | ) |
| Purchases of property/equipment | | (389,607 | ) | | (221,286 | ) | | (255,524 | ) |
| Proceeds from sales of property/equipment | | 9,749 |
| | 3,754 |
| | 6,227 |
|
| (Increase) decrease in investments, equity in affiliates, and other assets | | (7,546 | ) | | 5,095 |
| | 10,214 |
|
| Proceeds from company-owned life insurance | | 9,704 |
| | 5,323 |
| | 1,349 |
|
| Proceeds from insurance recoveries | | — |
| | 4,454 |
| | — |
|
| Net Cash Used in Investing Activities | | $ | (1,235,368 | ) | | $ | (587,179 | ) | | $ | (408,474 | ) |
| Financing Activities | | | | | | |
| Principal payments on short-term debt | | $ | — |
| | $ | — |
| | $ | (185,000 | ) |
| Proceeds from long-term debt | | 375,000 |
| | — |
| | — |
|
| Principal payments on long-term debt | | (160 | ) | | — |
| | — |
|
| Dividends paid on common stock | | (388,107 | ) | | (346,010 | ) | | (296,493 | ) |
| Share repurchase | | (46,898 | ) | | (94,487 | ) | | (87,885 | ) |
| Proceeds from exercise of stock options | | 71,803 |
| | 21,726 |
| | 12,075 |
|
| Net Cash Provided by (Used in) Financing Activities | | $ | 11,638 |
| | $ | (418,771 | ) | | $ | (557,303 | ) |
| Effect of exchange rate changes on cash | | (2,985 | ) | | 1,044 |
| | (6,339 | ) |
| Increase in Cash and Cash Equivalents | | 15,014 |
| | 28,979 |
| | 67,904 |
|
| Cash and cash equivalents at beginning of year | | 444,122 |
| | 415,143 |
| | 347,239 |
|
| Cash and Cash Equivalents at End of Year | | $ | 459,136 |
| | $ | 444,122 |
| | $ | 415,143 |
|
*Fiscal 2016 included 53 weeks.
See Notes to Consolidated Financial Statements.Statements
Notes to Consolidated Financial Statements
Note A
Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the accounts of Hormel Foods Corporation (the Company) and all of its majority-owned subsidiaries after elimination of intercompany accounts, transactions, and profits.
Stock Split: On November 23, 2015, the Company’s Board of Directors authorized a two-for-one split of the Company’s voting common stock, which was subsequently approved by shareholders at the Company’s Annual Meeting on January 26, 2016, and effected on January 27, 2016. The Company’s voting common stock was reclassified by reducing the par value from$.0293 per share to $0.01465 per share and the number of authorized shares was increased from 800 million to 1.6 billion shares, in order to effect the two-for-one stock split. The Company distributed the additional shares of $.01465 par value common stock on February 9, 2016, and the shares began trading at the post-split price on February 10, 2016.
Unless otherwise noted, all prior year share amounts and per share calculations throughout this Annual Report have been restated to reflect the impact of this split and to provide data on a comparable basis. Such restatements include calculations regarding the Company’s weighted-average shares, earnings per share, and dividends per share, as well as disclosures regarding the Company’s stock-based compensation plans and share repurchase activity.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. These estimates and assumptions take into account historical and forward looking factors, including but not limited to the potential impacts arising from COVID-19 and related public and private sector policies and initiatives.
Rounding: Certain amounts in the Consolidated Financial Statements and associated notes may not foot due to rounding. All percentages have been calculated using unrounded amounts.
Fiscal Year: The Company’s fiscal year ends on the last Sunday in October. Fiscal 2021 consisted of 53 weeks. Fiscal years 20182020 and 20172019 consisted of 52 weeks and fiscal 2016 consistedweeks. Fiscal 2022 will consist of 5352 weeks.
Cash and Cash Equivalents: The Company considers all investments with an original maturity of three months or less on their acquisition date to be cash equivalents. The Company’s cash equivalents as of October 28, 2018,31, 2021, and October 29, 2017,25, 2020, consisted primarily of bank deposits, money market funds rated AAA, or other highly liquid investment accounts. The Net Asset Value (NAV) of the Company’s money market funds is based on the market value of the securities in theirthe portfolio.
Fair Value Measurements: Pursuant to the provisions of Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (ASC 820), the Company measures certain assets and liabilities at fair value or discloses the fair value of certain assets and liabilities recorded at cost in the consolidated financial statements. Fair value is calculated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). ASC 820 establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of three levels based on the inputs used in the valuation. The Company classifies assets and liabilities in their entirety based on the lowest level of input significant to the fair value measurement. The three levels are defined as follows:
Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Observable inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.
Level 3:Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.
See additional discussion regarding the Company’s fair value measurements in NotesNote F - Derivatives and Hedging, Note G H,- Pension and M.Other Post-retirement Benefits, and Note I - Fair Value Measurements.
Investments:Compensation: The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred incomecompensation plans. Under the plans, the participants can defer certain types of compensation and elect to receive a return on the deferred amounts based on the changes in fair value of various investment options, primarily a variety of mutual funds. The Company has corporate-owned life insurance policies on certain participants in the deferred compensation plans. The cash surrender value of the policies is included in other assetsOther Assets on the Consolidated Statements of Financial Position. The securities held by the trust are classified as trading securities. Therefore, unrealized losses and gains associated with these investments are included in the Company’s earnings. Securities held by the trust generated gains (losses) gains of $(0.4)$21.2 million, $6.2$7 million, and $2.6$8.3 million for fiscal years 2018, 2017,2021, 2020, and 2016,2019, respectively.
Inventories: Inventories are stated at the lower of cost or net realizable value. Cost is determined principally under the average cost method. Adjustments to the Company’s lower of cost or net realizable value inventory reserve are reflected in costCost of products soldProducts Sold in the Consolidated Statements of Operations.
Property, Plant, and Equipment: Property, plantPlant, and equipmentEquipment are stated at cost. The Company uses the straight-line method in computing depreciation. The annual provisions for depreciation have been computed principally using the following ranges of asset lives: buildings 20 to 40 years, machinery and equipment 3 to 1014 years.
Leases: The Company determines if an arrangement contains a lease at inception. Right-of-use assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at the commencement date. Leases with an initial term of twelve months or less are not recorded on the Consolidated Statements of Financial Position. The Company combines lease and non-lease components together in determining the minimum lease payments for all leases.
The length of the lease term used in recording right-of-use assets and lease liabilities is based on the contractually required lease term adjusted for any options to renew, early terminate, or purchase the lease that are reasonably certain of being exercised. Most leases include 1 or more options to renew or terminate. The exercise of lease renewal and termination options is at the Company’s discretion and generally is not reasonably certain at lease commencement. The Company’s lease agreements typically do not contain material residual value guarantees. The Company has 1 lease with an immaterial residual value guarantee that is included in the minimum lease payments.
Certain lease agreements include rental payment increases over the lease term that can be fixed or variable. Fixed payment increases and variable payment increases based on an index or rate are included in the initial lease liability using the index or rate at commencement date. Variable payment increases not based on an index or rate are recognized as incurred.
If the rate implicit in the lease is not readily determinable, the Company used its periodic incremental borrowing rate, based on the information available at commencement date, to determine the present value of future lease payments. Leases and right-of-use assets that existed prior to the adoption of ASU 2016-02, Leases (Topic 842) were valued using the incremental borrowing rate on October 28, 2019.
Impairment of Long-Lived Assets and Definite-Lived Intangible Assets: Definite-lived intangible assets are amortized over their estimated useful lives. The Company reviews long-lived assets and definite-lived intangible assets for impairment annually, or more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets and any related goodwill, the carrying value is reduced to the estimated fair value. The Company recorded no material impairment charges for long-lived or definite-lived assets in fiscal years 2021, 2020, or 2019.
Internal-use software development and implementation costs are expensed until the Company has determined that the software will result in probable future economic benefits, and management has committed to funding the project. Thereafter, all material development and implementation costs, and purchased software costs are capitalized as part of machinery and equipment and amortized using the straight-line method over the remaining estimated useful lives.
Goodwill and Other Indefinite-Lived Intangibles: Indefinite-lived intangible assets are originally recorded at their estimated fair values at date of acquisition and the residual of the purchase price is recorded to goodwill. GoodwillAcquired goodwill and other indefinite-lived intangible assets are allocated to reporting units that will receive the related sales and income.benefits. Goodwill and indefinite-lived intangible assets are tested annually for impairment during the fourth quarter following the annual planning process or more frequently if impairment indicators arise. See additional discussion regarding the Company’s goodwill and intangible assets in Note C - Goodwill and Intangible Assets.
Goodwill
In conducting the annual impairment test for goodwill, the Company has the option to first assess qualitative factors to determine whether it is more likely than not (> 50%50 percent likelihood) that the fair value of any reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines an impairment is more likely than not, the Company is required to perform a quantitative impairment test. Otherwise, no further analysis is required. Alternatively, the Company may elect not to perform the qualitative assessment and proceed directly to the quantitative impairment test.
In conducting a qualitative assessment, the Company analyzes actual and projected growth trends for net sales, gross margin and segment profit for each reporting unit, as well as historical performance versus plan and the results of prior quantitative tests performed.tests. Additionally, the Company assesses critical areasfactors that may impact its business, includingthe business's financial results such as macroeconomic conditions and the related impact, market-related exposures, any plans to market for sale all or a portion of theirthe business, competitive changes, new or discontinued product lines, and changes in key personnel, or any other potential risks to their projected financial results.personnel.
If performed, the quantitative goodwill impairment test is performed at the reporting unit level. First, the fair value of each reporting unit is compared to its corresponding carrying value, including goodwill. The fair value of each reporting unit is estimated using discounted cash flow valuations (Level 3), which incorporate assumptions regarding future growth rates, terminal values and discount rates. The estimates and assumptions used consider historical performance and are consistent with the assumptions used in determining future profit plans for each reporting unit, which are approved by the Company’s Board of Directors. If the quantitative assessment results in the carrying value exceeding the fair value of any reporting unit, then the results from the quantitative analysis will be relied upon to determine both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.
During the fourth quarter of fiscal 2018,2021, the Company completed its annual goodwill impairment tests and elected to perform a qualitative assessment. Asperformed quantitative assessments. No impairment charges were recorded as a result of the qualitative testing performed during fiscal 20182021. The Company performed qualitative assessments in fiscal years 2020 and 2016 and quantitative testing during fiscal 2017,2019 with no material impairment charges were recorded. An immaterial impairment charge was recorded in the second quartereither year.
Indefinite-Lived Intangibles
In conducting the annual impairment test for its indefinite-lived intangible assets, the Company first performs a qualitative assessment to determine whether it is more likely than not (> 50%50 percent likelihood) that an indefinite-lived intangible asset is impaired. If the Company concludes that this is the case, then a quantitative test for impairment must be performed. Otherwise, the Company does not need to perform a quantitative test.
In conducting the qualitative assessment, the Company analyzes growth rates for historical and projected net sales and the results of prior quantitative tests performed.tests. Additionally, each reporting unitoperating segment assesses critical areasitems that may impact the value of their intangible assets or the applicable royalty rates to determine if there are factors that could indicate impairment of the asset.may be indicated.
If performed, the quantitative impairment test compares the fair value and carrying valueamount of the indefinite-lived intangible asset. The fair value of indefinite-lived intangible assets is primarily determined on the basis of estimated discounted value using the relief from royalty method (Level 3), which incorporates assumptions regarding future sales projections, discount rates and discountroyalty rates. If the carrying valueamount exceeds fair value, the indefinite-lived intangible asset is considered impaired and an impairment charge is recorded for the difference. Even if not required, the Company periodically electsmay elect to perform the quantitative test in order to confirmgain further assurance in the qualitative assessment.
During the 2017 annual impairment review,fourth quarter of fiscal 2021, the Company completed aits annual indefinite-lived asset impairment tests by performing quantitative assessment of indefinite-lived intangible assets. Asassessments. No impairment charges were recorded as a result of the review, no material impairment charges were recorded; however, four trademarks were determined to have fair values exceeding their carrying values by less than a 10 percent margin. Due to the lacktesting during fiscal year 2021. The Company performed qualitative assessments of excess value of theseindefinite-lived intangible assets in fiscal year 2020. During fiscal 2019, the Company elected to quantitatively test these2 indefinite-lived intangible assets usingand to perform a qualitative assessment for the remaining assets. No impairment charges were recorded as a result of the qualitative and quantitative analysistesting during fiscal 2018. For all other indefinite-lived
intangible assets, the Company tested the assets using a qualitative analysis. During the qualitative review, it was revealed that further assessment in the form of a quantitative test was necessary for two additional indefinite-lived intangible assets. In total, the Company performed a quantitative test for six trade names in fiscal 2018years 2020 and only one was determined to be impaired. During the fourth quarter of fiscal 2018, a $17.3 million intangible asset impairment charge was recorded for the CytoSport trademark. See additional discussion regarding the Company’s goodwill and intangible assets in Note D. During fiscal years 2018, 2017, and 2016, there were no other material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
Impairment of Long-Lived Assets and Definite-Lived Intangible Assets: Definite-lived intangible assets are amortized over their estimated useful lives. The Company reviews long-lived assets and definite-lived intangible assets for impairment annually, or more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets and any related goodwill, the carrying value is reduced to the estimated fair value.
Assets Held for Sale: The Company classifies assets as held for sale when management approves and commits to a formal plan of sale with the expectation the sale will be completed within one year. The net assets of the business held for sale are then recorded at the lower of their current carrying value or the fair market value, less costs to sell. See additional discussion regarding the Company’s assets held for sale in Note E.2019.
Employee Benefit Plans: Pension and Other Post-retirement Benefits: The Company has elected to use the corridor approach to recognize expenses related to its defined benefit pension and other post-retirement benefit plans. Under the corridor approach, actuarial gains or losses resulting from experience different from that assumed and from changes in assumptions are deferred and amortized over future periods. For the defined benefit pension plans, the unrecognized gains and losses are amortized when the net gain or loss exceeds 10.0%10 percent of the greater of the projected benefit obligation or the fair value of plan assets at the beginning of the year. For the other post-retirement plans, the unrecognized gains and losses are amortized when the net gain or loss exceeds 10.0%10 percent of the accumulated pension benefit obligation at the beginning of the year. For plans with active employees, net gains or losses in excess of the corridor are amortized over the average remaining service period of participating employees expected to receive benefits under those plans. For plans with only retiree participants, net gains or losses in excess of the corridor are amortized over the average remaining life of the retirees receiving benefits under those plans.
Contingent Liabilities: The Company may be subject to investigations, legal proceedings, or claims related to the on-goingongoing operation of its business, including claims both by and against the Company. Such proceedings typically involve claims related to product liability, contract disputes, antitrust regulations, wage and hour laws, employment practices, or other actions brought by employees, consumers, competitors or suppliers. The Company establishes accruals for its potential exposure as appropriate, for claims against the Company when losses become probable and reasonably estimable. Where the Company is able to reasonably estimate a range of potential losses, the Company records the amount within that range which constitutes the Company’s best estimate. The Company also discloses the nature of and range of loss for claims against the Company when losses are reasonably possible and material.
Foreign Currency Translation: Assets and liabilities denominated in foreign currency are translated at the current exchange rate as of the statementdate of financial position date, and amountsthe Consolidated Statements of Financial Position. Amounts in the statementConsolidated Statements of operationsOperations are translated at the average monthly exchange rate. Translation adjustments resulting from fluctuations in exchange rates are recorded as a component of accumulated other comprehensive lossAccumulated Other Comprehensive Loss in shareholders’ investment.Shareholders’ Investment.
When calculating foreign currency translation, the Company deemed its foreign investments to be permanent in nature and has not provided for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars.
Derivatives and Hedging Activity: The Company uses commodity and currency positions to manage its exposure to price fluctuations in those markets. The contracts are recorded at fair value on the Consolidated Statements of Financial Position within other current assetsOther Current Assets or accounts payable.Accounts Payable. Additional information on hedging activities is presented in Note H.F - Derivatives and Hedging.
Equity Method Investments: The Company has a number of investments in joint ventures where its voting interests are in excess of 20 percent but not greater than 50 percent and for which there are no other indicators of control. The Company accounts for such investments under the equity method of accounting and its underlying share of each investee’s equity is reported in the Consolidated Statements of Financial Position as part of investments inInvestments In and receivablesReceivables from affiliates.Affiliates.
The Company regularly monitors and evaluates the fair value of its equity investments. If events and circumstances indicate that a decline in the fair value of these assets has occurred and is other than temporary, the Company will record a charge in equityEquity in earningsEarnings of affiliatesAffiliates in the Consolidated Statements of Operations. The Company’sDuring the fourth quarter of fiscal 2021, the Company completed its annual assessment of its equity investments do not have a readily determinable fair value as none of them are publicly traded. The fair values of the Company’s private equity investments are determined by discounting the estimated future cash flows of each entity. These cash flow estimates include assumptions on growth rates and future currency exchange rates (Level 3).investments. The Company did not record an impairment charge on any of its equity investments in fiscal years 2018, 2017,2021, 2020, or 2016.2019. See additional discussion regarding the Company’s equity method investments in Note I.D - Investments In and Receivables From Affiliates.
Revenue Recognition: The Company’s customer contracts predominantly contain a single performance obligation to fulfill customer orders for the purchase of specified products. Revenue from product sales is primarily identified by purchase orders (“contracts”) which in some cases are governed by a master sales agreement. The purchase orders in combination with the invoice typically specify quantity and product(s) ordered, shipping terms, and certain aspects of the transaction price including discounts. Contracts are at standalone pricing or governed by pricing lists or brackets. The Company's revenue is recognized at the point in time when performance obligations have been satisfied and control of the product has transferred to the customer. This is typically once the shipped product is received or picked up by the customer. Revenues are recognized at the net consideration the Company expects to receive in exchange for the goods. The amount of net consideration recognized includes estimates of variable consideration, including costs for trade promotion programs, consumer incentives, and allowances and discounts associated with distressed or potentially unsaleable products.
A majority of the Company’s revenue is short-term in nature with shipments within one year from order date. The Company's payment terms generally range between 7 to 45 days and vary by sales channel and other factors. The Company recognizes sales when title passes upon deliveryaccounts for shipping and handling costs as contract fulfillment costs and excludes taxes imposed on and collected from customers in revenue producing transactions from the transaction price. The Company does not have significant deferred revenue or unbilled receivable balances as a result of its productstransactions with customers. Costs to customers, netobtain contracts with a duration of applicable provisions for discounts, returns,one year or less are expensed and allowances. Products are delivered upon receiptincluded in the Consolidated Statements of customer purchase orders with acceptable terms, including price and reasonably assured collectability.Operations.
The Company offers various salespromotes products through advertising, consumer incentives, and trade promotions. These programs include discounts, slotting fees, coupons, rebates, and in-store display incentives. Customer trade promotion and consumer incentive activities are recorded as a reduction to customers and consumers. Incentives offered off-invoice include prompt pay allowances, will call allowances, spoilage allowances, and temporarythe sale price reductions. These incentives are recognizedbased on amounts estimated as reductions of revenuevariable consideration. The Company estimates variable consideration at the time title passes. Coupons are used as an incentive for consumers to purchase various products. The coupons reduce revenues at the time they are offered, based on estimated redemption rates. Promotional contracts are performed by customers to promote the Company’s products to consumers. These incentives reduce revenues at the time of performance through direct payments and accrued promotional funds. Accrued promotional funds are unpaid liabilities for promotional contracts in process or completed at the end of a quarter or fiscal year. Promotional contract accruals are based on a review of the unpaid outstanding contracts on which performance has taken place. Estimates usedexpected value method to determine the total consideration which the Company expects to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue reductionrecognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the leveltransaction price are based largely on an assessment of customeranticipated performance and the historical spend rate versus contracted rates.all information (historical, current,and forecasted) that is reasonably available.
The Company discloses revenue by reportable segment, sales channel, and class of similar product in Note P - Segment Reporting.
Allowance for Doubtful Accounts: The Company estimates the allowanceAllowance for doubtful accountsDoubtful Accounts based on a combination of factors, including the ageevaluations, and professional judgments of its accounts receivable balances, customer history, collection experience,historical data while considering current and current market factors. Additionally, a specific reserve may be established if the Company becomes aware of a customer’s inability to meet its financial obligations.future economic conditions alongside management’s input.
Advertising Expenses: Advertising costs are included in Selling, General, and Administrative and expensed when incurred. Advertising expenses include all media advertising but exclude the costs associated with samples, demonstrations, and market research. Advertising costs for fiscal years 2018, 2017,2021, 2020, and 20162019 were $151.5$138.5 million, $135.6$123.6 million, and $204.1$131.1 million, respectively.
Shipping and Handling Costs: The Company’s shipping and handling expenses are included in costCost of products sold.Products Sold on the Consolidated Statements of Operations.
Research and Development Expenses: Research and development costs are expensed as incurred and are included in selling, generalSelling, General, and administrative expenses.Administrative expenses on the Consolidated Statements of Operations. Research and development expenses incurred for fiscal years 2018, 2017,2021, 2020, and 20162019 were $33.8$33.6 million, $34.2$31.9 million, and $34.7$32.5 million, respectively.
Income Taxes: The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur.
In accordance with ASC 740, Income Taxes, the Company recognizes a tax position in its financial statements when it is more likely than not that the position will be sustained upon examination based on the technical merits of the position. That position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Employee Stock Options:
Stock-Based Compensation: The Company records stock-based compensation expense in accordance with ASC 718, Compensation – Stock Compensation. For options subject to graded vesting, the Company recognizes stock-based compensation expense ratably over the shorter of the vesting period or requisite service period. Stock-based compensation expense for grants made to retirement-eligible employees is recognizedthe individual's retirement eligibility date. The Company estimates forfeitures at the time of grant based on the date of grant.historical experience and revises in subsequent periods if actual forfeitures differ.
Share Repurchases: On January 29, 2013, the Company’s Board of Directors authorized the repurchase of 10.0 million shares (pre-split) of its common stock with no expiration date. The Company may purchase shares of its common stock through open market and privately negotiated transactions at prices deemed appropriate by management. On November 23, 2015, the Company’s Board of Directors authorized a two-for-one split of the Company’s voting common stock. As part of the Board’s approval of that stock split, the number of shares remaining to be repurchased was adjusted proportionately. The timing and amount of repurchase transactions under the repurchase authorization depend on market conditions as well as corporate and regulatory considerations. During the year ended October 28, 2018, the Company repurchased a totalFor additional share repurchases information, see Part II, Item 5 - Market for Registrants' Common Equity, Related Stockholder Matters and Issuer Purchases of 1.4 million shares at an average price of $33.86. As of October 28, 2018, the remaining share repurchase authorization under the program was 9.1 million shares (post-split).Equity Securities.
Supplemental Cash Flow Information: Non-cash investment activities presented on the Consolidated Statements of Cash Flows primarily consist of unrealized gains or losses on the Company’s rabbi trust. The noted investments are included in other assetsOther Assets on the Consolidated Statements of Financial Position. Changes in the value of these investments are included in the Company’s net earnings and are presented in the Consolidated Statements of Operations as either interestInterest and investment income (loss) or interest expense, as appropriate.Investment Income.
Reclassifications: Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. The reclassifications had no impact on net earnings or operating cash flows as previously reported.
Accounting Changes and Recent Accounting Pronouncements
New Accounting Pronouncements adopted in current fiscal year
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330). The updated guidance requires that inventory be measured at the lower of cost and net realizable value. The guidance is limited to inventory measured using the first-in, first-out (FIFO) or average cost methods and excludes inventory measured using last-in, first-out (LIFO) or retail inventory methods. Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company adopted the updated provisions on a prospective basis at the beginning of fiscal 2018. The adoption did not have a material impact on its consolidated financial statements, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718). The update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted in any interim or annual period, with adjustments reflected as of the beginning of the fiscal year. Accordingly, the Company adopted the provisions of this new accounting standard at the beginning of fiscal 2018. This resulted in the excess tax benefits and tax deficiencies realized upon exercise or vesting of stock-based awards being recorded in its Consolidated Statements of Operations instead of additional paid-in capital within its Consolidated Statements of Financial Position. The amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement have been applied prospectively. Excess tax benefits of $19.6 million and $40.4 million were recorded as a reduction of income tax expense for the fourth quarter and fiscal year ended October 28, 2018, respectively. The effective tax rate was reduced by 6.1 percent and 3.4 percent for the fourth quarter and twelve months ended October 28, 2018, respectively, as a result of the exercise activity. The Company applied the amendments related to the presentation of excess tax benefits on the Consolidated Statement of Cash Flows using a retrospective transition method, and as a result, realized windfalls were reclassified from financing activities to operating activities in its Consolidated Statements of Cash Flows. In accordance with ASU 2016-09, the Company has made the accounting policy election to estimate forfeitures and adjust as actual forfeitures occur.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230). The update makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted provided all amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company early adopted the provisions of the new accounting standard at the beginning of fiscal 2018 and elected to account for distributions received from equity method investees as cash flows from operating activities using the nature of distribution approach accounting policy. Under the nature of the distribution approach, distributions are classified based on the nature of the activity that generated them. The guidance requires cash received from the settlement of insurance claims to be classified on the basis of the related insurance coverage. Accordingly, the Company classified cash settlements received from insurance claims to the specific type of loss to determine the cash flow classification of the proceeds. The guidance also requires cash proceeds from the settlement of corporate-owned life insurance policies to be classified as investing activities. Accordingly, the Company classified the cash proceeds received from corporate-owned life insurance policies as cash flows from investing activities. The adoption did not have a material impact on its consolidated financial statements.
The following tables reconciles the Consolidated Statements of Cash Flows line items impacted by the adoption of these standards at October 29, 2017 for fiscal years 2017 and 2016: |
| | | | | | | | | | | | | | | |
| (in thousands) | Reported October 29, 2017 | | ASU 2016-09 | | ASU 2016-15 | | Adjusted October 29, 2017 |
| Operating Activities | | | | | | | |
| Equity in earnings of affiliates | $ | (12,069 | ) | | $ | — |
| | $ | (27,521 | ) | | $ | (39,590 | ) |
| Distributions received from equity method investees | — |
| | — |
| | 27,521 |
| | 27,521 |
|
| Gain on insurance proceeds | — |
| | — |
| | (3,914 | ) | | (3,914 | ) |
| Excess tax benefit from stock-based compensation | (29,513 | ) | | 29,513 |
| | — |
| | |
| Increase in accounts receivable | (28,091 | ) | | — |
| | (1,626 | ) | | (29,717 | ) |
| Decrease in inventories | 41,312 |
| | — |
| | (284 | ) | | 41,028 |
|
| Net Cash Provided by Operating Activities | 1,010,196 |
| | 29,513 |
| | (5,824 | ) | | 1,033,885 |
|
| | | | | | | | |
| Investing Activities | | | | | | | |
| Proceeds from sales of property/equipment | 4,010 |
| | — |
| | (256 | ) | | 3,754 |
|
| Increase in investments, equity in affiliates, and other assets | 8,792 |
| | — |
| | (3,697 | ) | | 5,095 |
|
| Proceeds from company-owned life insurance | — |
| | — |
| | 5,323 |
| | 5,323 |
|
| Proceeds from insurance recoveries | — |
| | — |
| | 4,454 |
| | 4,454 |
|
| Net Cash Used in Investing Activities | (593,003 | ) | | — |
| | 5,824 |
| | (587,179 | ) |
| | | | | | | | |
| Financing Activities | | | | | | | |
| Excess tax benefit from stock-based compensation | 29,513 |
| | (29,513 | ) | | — |
| | — |
|
| Net Cash Used in Financing Activities | (389,258 | ) | | (29,513 | ) | | — |
| | (418,771 | ) |
| Effect of Exchange Rate Changes on Cash | 1,044 |
| | — |
| | — |
| | 1,044 |
|
| Increase in Cash and Cash Equivalents | $ | 28,979 |
| | $ | — |
| | $ | — |
| | $ | 28,979 |
|
| Cash and cash equivalents at beginning of year | 415,143 |
| | — |
| | — |
| | 415,143 |
|
| Cash and Cash Equivalents at the End of Year | $ | 444,122 |
| | $ | — |
| | $ | — |
| | $ | 444,122 |
|
|
| | | | | | | | | | | | | | | |
| (in thousands) | Reported October 30, 2016* | | ASU 2016-09 | | ASU 2016-15 | | Adjusted October 30, 2016* |
| Operating Activities | | | | | | | |
| Equity in earnings of affiliates | $ | 7,505 |
| | $ | — |
| | $ | (46,190 | ) | | $ | (38,685 | ) |
| Distributions received from equity method investees | — |
| | — |
| | 46,190 |
| | 46,190 |
|
| Excess tax benefit from stock-based compensation | (47,657 | ) | | 47,657 |
| | — |
| | — |
|
| Increase in accounts receivable | 21,389 |
| | — |
| | (485 | ) | | 20,904 |
|
| Net Cash Provided by Operating Activities | 992,848 |
| | 47,657 |
| | (485 | ) | | 1,040,020 |
|
| | | | | | | | |
| Investing Activities | | | | | | | |
| Increase in investments, equity in affiliates, and other assets | 11,078 |
| | — |
| | (864 | ) | | 10,214 |
|
| Proceeds from company-owned life insurance | — |
| | — |
| | 1,349 |
| | 1,349 |
|
| Net Cash Used in Investing Activities | (408,959 | ) | | — |
| | 485 |
| | (408,474 | ) |
| | | | | | | | |
| Financing Activities | | | | | | | |
| Excess tax benefit from stock-based compensation | 47,657 |
| | (47,657 | ) | | — |
| | — |
|
| Net Cash Used in Financing Activities | (509,646 | ) | | (47,657 | ) | | — |
| | (557,303 | ) |
| Effect of Exchange Rate Changes on Cash | (6,339 | ) | | — |
| | — |
| | (6,339 | ) |
| Increase in Cash and Cash Equivalents | $ | 67,904 |
| | $ | — |
| | $ | — |
| | $ | 67,904 |
|
| Cash and cash equivalents at beginning of year | 347,239 |
| | — |
| | — |
| | 347,239 |
|
| Cash and Cash Equivalents at the End of Year | $ | 415,143 |
| | $ | — |
| | $ | — |
| | $ | 415,143 |
|
*Fiscal 2016 included 53 weeks.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The update provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (Tax Act). SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The Company’s accounting for certain income tax effects are incomplete; however, reasonable estimates have been determined for those tax effects. The Company recognized a measurement-period adjustment during the fiscal year ended October 28, 2018, and expects to have all provisional amounts related to the effects of the Tax Act finalized within the one year measurement period. Refer to Note I for further details regarding the Tax Act.
New Accounting Pronouncements not yet adoptedRecently Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This topic converges the guidance within U.S. GAAP and international financial reporting standards and supersedes ASC 605, Revenue Recognition. The new standard requires companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions which were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. The new guidance is effective for annual reporting periods beginning after December 15, 2017. The updated guidance is to be applied either retrospectively or by using a cumulative effect adjustment. The Company will adopt the provisions of the new standard using the full retrospective method at the beginning of fiscal 2019. The Company has completed its detailed assessments relating to revenue streams and customer arrangements, and is focused on controls to support recognition and disclosure requirements under the new guidance. The Company plans to make the following policy elections upon adoption: to account for shipping and handling costs as contract fulfillment costs and to exclude taxes imposed on and collected from customers in revenue producing transactions (e.g., sales, use, and value added taxes) from the transaction price. The Company will account for variable consideration using the expected value method. The Company also plans to apply the practical expedient to not capitalize contract costs to obtain contracts with a duration of one year or less, which are expensed and included in the Consolidated Statements of Operations. The Company will not have a cumulative effect adjustment as a result of adoption. Adoption of the new standard will not have a material impact on the Company’s results of operations.Fiscal 2021
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement, and presentation of expenses will depend on the classification as a finance or operating lease. The update also requires certain quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. In July 2018, the FASB issued ASU 2018-11, which provides an optional transition method in addition to the existing modified retrospective transition method allowing entities to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The requirements of the new standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company expects to adopt the provisions of this new accounting standard at the beginning of fiscal 2020 and is in the process of evaluating the impact of adoption on its consolidated financial statements and related disclosures.
In June 2016, the FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 958)326). The update provides guidance on the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The amendment replaces the current incurred loss impairment methodologyapproach with a methodology to reflect expected credit losses and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The updated guidance is to be applied on a modified retrospective approach and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. EarlyThe Company adopted the provisions of this new accounting standard at the beginning of fiscal 2021. The adoption did not have a material impact on the Company's consolidated financial statements, thus no cumulative-effect adjustment to retained earnings was necessary.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance requires entities to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Amendments in this guidance also require disclosure of transfers into and out of Level 3 of the fair value hierarchy, purchases and issues of Level 3 assets and liabilities, and clarify that the measurement uncertainty disclosure is permittedas of the reporting date. The guidance removes requirements to disclose the amounts and reasons for transfers between Level 1 and Level 2, policy for timing between of transfers between levels, and the valuation processes for Level 3 fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2021. Presentation and disclosure requirements were applied prospectively and retrospectively as required by the amendments. The adoption did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans (Topic 715). The updated guidance requires additional disclosures of weighted-average interest crediting rates for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation. Amendments in the guidance also clarify the requirement to disclose the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets. The same disclosure is needed for the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The guidance removes certain previous disclosure requirements no longer considered cost beneficial. The amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2021. Presentation and disclosure requirements were applied retrospectively to all periods presented. The adoption did not have a material impact on the Company’s consolidated financial statements.
Fiscal 2020
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize a right-of-use asset and lease liability for all entitiesleases with terms of more than twelve months. Recognition, measurement, and presentation of expenses will depend on the classification as a finance or operating lease. The update also requires expanded quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The requirements of the new standard are effective for fiscal years beginning after December 15, 2018, andincluding interim periods therein.within those fiscal years. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2020. For transition purposes, the
Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. The Company elected the comparative periods practical expedient, and as a result, the Company did not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date. Upon adoption, the Company recognized right-of-use assets of $112.7 million and lease liabilities of $114.1 million in the Consolidated Statements of Financial Position as of October 28, 2019. The new standard did not have a material impact on the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.
Fiscal 2019
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This topic converges the guidance within U.S. GAAP and international financial reporting standards and supersedes ASC 605, Revenue Recognition. The standard requires companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. The standard provides enhanced disclosures about revenue, guidance for transactions which were not previously addressed, and improves guidance for multiple-element arrangements. The guidance was effective for annual reporting periods beginning after December 15, 2017. The updated guidance is currently assessingto be applied either retrospectively or by using a cumulative effect adjustment. The Company adopted the timing and impactprovisions of adopting the updated provisions.new standard using the full retrospective method at the beginning of fiscal 2019.
In October 2016, the FASB issued ASU 2016-16,Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). The updated guidance requires the recognition of the income tax consequences of an intra-entity asset transfer, other than transfers of inventory, when the transfer occurs. For intra-entity transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The updated guidance iswas effective for reporting periods beginning after December 15, 2017, with early adoption permitted only within the first interim period of a fiscal year. The guidance is required to be applied on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company will adoptadopted the updated provisions of the new accounting standard at the beginning of fiscal 2019, which will resultresulting in a reclassification from prepaid tax assets to deferred tax assets. In addition, due to the impact of the lower tax rate on deferred tax balances resulting from the Tax Cuts and Jobs Act (Tax Act), the Company expects to recognizerecognized a cumulative effect adjustment to retained earningsRetained Earnings of approximately $10.5 million.million in fiscal 2019.
In March 2017, the FASB issued ASU 2017-07,Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). The updated guidance requires an employer to report the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in the same line item or items as other compensation costs. The updated guidance also requires the otherOther components of net periodic pension cost and net periodic post-retirement benefit cost tomust be presented in the income statement separately from the service cost component and outside income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable.capitalization. This guidance iswas effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The updated guidance should be applied retrospectively for the presentation of the service cost component and other components of net benefit cost in the income statement and prospectively on and after the effective date, for the capitalization of the service cost component of net benefit cost. The Company will adoptadopted the updated provisions of this new accounting standard at the beginning of fiscal 2019. In connection with thisThe Company elected to utilize a practical expedient which allows the Company to use historical amounts disclosed in the Pension and Other Post-retirement Benefits footnote as an estimation basis for retrospectively applying the requirements to separately report the other components in the Consolidated Statements of Operations. Due to the retrospective adoption, we expect to record reductions inthe Company reclassified $19.0 million of non-service cost components of net periodic benefit costs from Operating Income to Interest and Investment Income on the Consolidated Statements of $19.0 million and $3.7 million with corresponding increases in Other IncomeOperations for fiscal yearsthe year ended October 28, 2018, and October 29, 2017, respectively.2018.
In August 2017, the FASB issued ASU 2017-12,Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities (Topic 815). The updated guidance expands an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. Entities will apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirementrequirements apply prospectively. The updated guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim or annual period. The Company plans to early adoptadopted the provisions of this new accounting standardupdated guidance at the beginning of fiscal 20192019; therefore, eliminating the requirement to separately measure and does not expectreport hedge ineffectiveness. The Company applied the amendment to cash flow hedge relationships existing on the date of adoption using a material impactmodified retrospective approach. Presentation and disclosure requirements were applied on a prospective basis. The adoption resulted in an immaterial adjustment from Retained Earnings to its consolidated financial statements.Accumulated Other Comprehensive Loss.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220).The updated guidance allows entities to reclassify stranded income tax effects resulting from the Tax Act from accumulated otherAccumulated Other comprehensive income to retained earnings in their consolidated financial statements. Under the Tax Act, deferred taxes were adjusted to reflect the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate, which left the tax effects on items within accumulated other comprehensive incomeAccumulated Other Comprehensive Loss stranded at an inappropriate tax rate. The updated
guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim period and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company will adoptearly adopted the updated provisions of this new accounting standard at the beginning of fiscal 2019. The adoption will result2019, resulting in a reclassification of $50.7$53.8 million from Accumulated Other Comprehensive IncomeLoss to Retained Earnings.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. Improvements. This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification (ASC). The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will beare effective upon issuance of ASU 2018-09. However, manyThe amendments effective upon issuance did not have a material impact on the Company's consolidated financial statements. A majority of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018. The Company is currently assessingearly adopted the remaining amendments in the fourth quarter of fiscal 2019. The adoption did not have an impact of adoption on itsthe Company’s consolidated financial statements, results of operations and cash flows.statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidanceimproves the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans (Topic 715). The updated guidance improves disclosure requirements for employers who sponsor defined benefit pension or other postretirement plans. The amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company is currently assessing the timing and impact of adopting the updated provisions.
In August 2018, the FASB issued ASU No. 2018-15,Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Topic 350). The amendments in the update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal useinternal-use software license). The amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years and is to be applied either retrospectively or prospectively to all implementation costs incurred after the adoption date. Early adoption is permitted, including adoption in any interim period. The Company is currently evaluatingearly adopted the effectupdated provisions on a prospective basis at the beginning of this updatefiscal 2019.
New Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions in Topic 740 and expects toclarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company will adopt the provisions of this new accounting standard at the beginning of fiscal 2019.2022 and does not expect adoption to have a material impact on its consolidated financial statements.
Any other recently
Recently issued accounting standards or pronouncements not disclosed above have been excluded as they either are not relevant to the Company, or they are not expected to have a material effect on its business practices, financial condition, results of operations, or disclosures.Company.
Note B
Acquisitions and Divestitures
Acquisitions: On November 27, 2017,June 7, 2021, the Company acquired Columbus Manufacturing, Inc. (Columbus)the Planters®snack nuts business from The Kraft Heinz Company. The acquisition includes the Planters®, an authentic premium deli meatNUT-rition®, Planters®Cheez Balls, and salami company, from Chicago-based Arbor Investments for aCorn Nuts®brands. The final purchase price, of $857.4 million.including working capital adjustments, was $3.4 billion. The transaction was funded with the Company’s cash on hand and by borrowing $375.0 million under a term loan facilityfrom the issuance of long-term debt. See Note L - Long-term Debt and $375.0 million under a revolving credit facility.Other Borrowing Arrangements for additional details.
Columbus specializes in authentic premium deli meatPlanters®is an iconic snack brand and salami. Thisthis acquisition allowssignificantly expands the Company to enhance its scaleCompany's presence, and should broaden the scope for future acquisitions, in the deli by broadening its portfoliogrowing snacking space. Operating results for this acquisition have been included in the Company's Consolidated Statements of products, customers,Operations from the date of acquisition and consumers.are reflected in the Grocery Products, Refrigerated Foods, and International & Other segments. The acquisition contributed $410.8 million of net sales since the date of acquisition. As the acquisition has been integrated within the Company's existing operations, post-acquisition net income is not discernible. Acquisition-related costs were $30.3 million for the fiscal year ended October 31, 2021, which are reflected in the Consolidated Statements of Operations as Selling, General, and Administrative. Additional one-time adjustments related to the revaluation of acquired inventory of $12.9 million were recognized in the Consolidated Statements of Operations as Cost of Products Sold for the fiscal year ended October 31, 2021. The combined impact of these one-time acquisition costs and accounting adjustments was $43.2 million for the fiscal year ended October 31, 2021.
The acquisition was accounted for as a business combination using the acquisition method. The Company obtained andetermined the acquisition date fair values of the assets acquired using independent appraisal. A final allocationappraisals. The Company completed purchase accounting allocations in the fourth quarter of fiscal 2021. Allocations of the purchase price to the acquired assets, liabilities,including goodwill and goodwill isintangibles assets, are presented in the table below.
|
| | | |
| (in thousands) | |
| Accounts receivable | $ | 21,199 |
|
| Inventory | 32,817 |
|
| Prepaid and other assets | 881 |
|
| Other assets | 936 |
|
| Property, plant and equipment | 83,662 |
|
| Intangible assets | 223,704 |
|
| Goodwill | 610,602 |
|
| Current liabilities | (21,366 | ) |
| Deferred taxes | (95,077 | ) |
| Purchase price | $ | 857,358 |
|
| | | | | |
| (in thousands) | Purchase Allocation |
| Inventory | $ | 149,224 | |
| Property, Plant and Equipment | 170,958 | |
| Goodwill | 2,313,064 | |
| Other Intangibles: | |
| Tradenames | 712,000 | |
| Customer Relationships | 51,000 | |
| Purchase Price | $ | 3,396,246 | |
Goodwill is calculated as the excess of the purchase price over the fair valuevalues of the identifiable net assets recognized.acquired and is expected to be deductible for tax purposes. The goodwill recorded as part of the acquisition primarily reflects the value of the potential to expand the Company's presence in the deli channelgrowing snacking space and serve as a platform for innovation.
The following unaudited pro forma financial information presents the catalyst for uniting allcombined results of operations as if the acquisition of the Company's deli businesses into one customer-facing organization. Planters® snack nuts business had occurred on October 27, 2019. These unaudited pro forma results do not necessarily reflect the actual results of operations that would have been achieved had the acquisition occurred on that date, nor are they necessarily indicative of future results of operations.
| | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| (in thousands) | | | | | October 31, 2021 | | October 25, 2020 |
| Pro Forma Net Sales | | | | | $ | 12,061,686 | | | $ | 10,657,992 | |
| Pro Forma Net Earnings Attributable to Hormel Foods Corporation | | | | | 985,881 | | | 934,783 | |
The goodwill balance is not expectedpro forma results include charges for depreciation and amortization of acquired assets and interest expense on debt issued to be deductiblefinance the acquisition, as well as the related income taxes. The pro forma results for the fiscal year ended October 25, 2020 also include nonrecurring adjustments relating to the recognition of transaction costs incurred and revaluation of inventory acquired, along with the related income tax purposes.effects, which in the aggregate reduce pro forma net earnings by $41.1 million. The goodwillpro forma results for the fiscal year ended October 31, 2021 include an adjustment to add back the transaction costs incurred and intangiblerevaluation of inventory acquired in those periods, along with the related income tax effects, since those costs are reflected in the preceding fiscal year on a pro forma basis.
On March 2, 2020, the Company acquired the assets have been allocatedcomprising the Sadler's Smokehouse business (Sadler's) for a final purchase price of $270.8 million. Sadler's is an authentic, pit-smoked meats business based in Henderson, Texas. This acquisition strengthens the Company's foodservice position and provides an opportunity to further extend the Refrigerated Foods segment.Sadler's product line into the retail and deli channels.
The transaction was funded with cash on hand and accounted for as a business combination using the acquisition method. The Company completed an allocation of the fair value of the assets acquired utilizing third-party valuation appraisals during fiscal 2020.
Operating results for this acquisition have been included in the Company’sCompany's Consolidated Statements of Operations from the date of acquisition and are reflected in the Refrigerated Foods segment. Pro forma results are not material for inclusion.
On August 22, 2017, the Company acquired Cidade do Sol (Ceratti) for a final purchase price of $103.3 million. The transaction was funded by the Company with cash on hand. The Company has completed a final allocation of the fair value of Ceratti. Allocations are based on the acquisition method of accountingSee Note C - Goodwill and third party valuation appraisals. Refer to Note DIntangible Assets for amounts assigned to goodwill and intangible assets.
Ceratti is a growing, branded, value-added meats company in Brazil offering more than 70 products inDivestiture: On April 15, categories including authentic meats such as mortadella, sausage, and salami for Brazilian retail and foodservice markets under the popular Ceratti® brand. The acquisition of the Ceratti® brand allows2019, the Company completed the sale of CytoSport, Inc. (CytoSport), which includes the Muscle Milk® and Evolve® brands, to establishPepsiCo, Inc., and received final proceeds of $479.8 million. The divestiture resulted in a full in-country presencepretax gain of $16.5 million recognized in Selling, General, and Administrative expense and a tax benefit of $17.0 million recognized within the Provision for Income Taxes on the Consolidated Statements of Operations.
CytoSport's results of operations through the date of divestiture are included within Earnings Before Income Taxes in the fast-growing Brazilian market with a premium brand.
Operating results for this acquisition have been included in the Company’s Consolidated Statements of Operations from the date of acquisition and are reflected inwithin the Grocery Products and International & Other segment.segments.
On August 16, 2017, the Company acquired Fontanini Italian Meats and Sausages (Fontanini), a branded foodservice business, from Capitol Wholesale Meats, Inc. for a final purchase price of $425.7 million. The transaction provides a cash flow benefit resulting from the amortization of the tax basis of assets, the net present value of which is approximately $64.7 million. The transaction was funded by the Company with cash on hand and by utilizing short-term financing. Primary assets acquired include goodwill of $223.7 million and intangibles of $110.3 million.
The Company has completed a final allocation of the fair value of Fontanini. Allocations are based on the acquisition method of accounting and third party valuation appraisals. Refer to Note D for amounts assigned to goodwill and intangible assets.
Fontanini specializes in authentic Italian meats and sausages, as well as a variety of other premium meat products including pizza toppings and meatballs and allows the Company to expand the foodservice business.
Operating results for this acquisition have been included in the Company’s Consolidated Statements of Operations from the date of acquisition and are reflected in the Refrigerated Foods segment.
On May 26, 2016, the Company acquired Justin’s, LLC (Justin’s) of Boulder, Colorado, for a final purchase price of $280.9 million. The purchase price was funded by the Company with cash on hand and by utilizing short-term financing. Primary assets acquired include goodwill of $186.4 million and intangibles of $89.9 million.
Justin’s is a pioneer in nut butter-based snacking and this acquisition allows the Company to enhance its presence in the specialty natural and organic nut butter category, complementing Skippy® peanut butter products.
Operating results for this acquisition are included in the Company’s Consolidated Statements of Operations from the date of acquisition and are reflected in the Grocery Products segment.
Note C
Inventories
Principal components of inventories are:
|
| | | | | | | | |
| (in thousands) | | October 28, 2018 | | October 29, 2017 |
| Finished products | | $ | 525,628 |
| | $ | 511,789 |
|
| Raw materials and work-in-process | | 247,495 |
| | 237,903 |
|
| Operating supplies | | 126,644 |
| | 114,098 |
|
| Maintenance materials and parts | | 63,760 |
| | 57,232 |
|
| Total | | $ | 963,527 |
| | $ | 921,022 |
|
Note DC
Goodwill and Intangible Assets
Goodwill: The changes in the carrying amount of goodwill for the fiscal years ended October 28, 2018,31, 2021, and October 29, 2017, are presented25, 2020, are:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Grocery
Products | | Refrigerated
Foods | | Jennie-O
Turkey Store | | International
& Other | | Total |
| | | | | | | | | | |
| | | | | | | | | | |
| Balance at October 27, 2019 | | $ | 632,301 | | | $ | 1,458,692 | | | $ | 176,628 | | | $ | 214,024 | | | $ | 2,481,645 | |
| Goodwill Acquired | | — | | | 148,313 | | | — | | | — | | | 148,313 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Foreign Currency Translation | | — | | | — | | | — | | | (17,232) | | | (17,232) | |
| Balance at October 25, 2020 | | $ | 632,301 | | | $ | 1,607,005 | | | $ | 176,628 | | | $ | 196,793 | | | $ | 2,612,727 | |
| Goodwill Acquired | | 1,766,053 | | | 487,416 | | | — | | | 59,595 | | | 2,313,064 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Foreign Currency Translation | | — | | | — | | | — | | | 3,311 | | | 3,311 | |
| Balance at October 31, 2021 | | $ | 2,398,354 | | | $ | 2,094,421 | | | $ | 176,628 | | | $ | 259,699 | | | $ | 4,929,102 | |
The increase in the table below. Additions relate to the acquisitions of Columbus on November 27, 2017, for fiscal 2018 and the acquisitions of Fontanini on August 16, 2017, and Ceratti on August 22, 2017, for fiscal 2017. The reductiongoodwill during fiscal 20172021 represents the allocation of goodwill to reportable segments as part of the acquisition of the Planters® snack nuts business. The increase to goodwill during fiscal 2020 is due to the saleacquisition of Clougherty Packing, LLC, parent companySadler's. See Note B - Acquisitions and Divestitures for additional information.
Intangible Assets: The carrying amounts for indefinite-lived intangible assets are:
| | | | | | | | | | | | | | |
| | October 31, | | October 25, |
| (in thousands) | | 2021 | | 2020 |
| Brands/Tradenames/Trademarks | | $ | 1,665,190 | | | $ | 953,190 | |
| Other Intangibles | | 184 | | | 184 | |
| Foreign Currency Translation | | (6,646) | | | (6,923) | |
| Total | | $ | 1,658,728 | | | $ | 946,452 | |
The increase in Brands/Tradenames/Trademarks represents the fair value of Farmer Johnindefinite-lived assets acquired as part of the acquisition of the Planters® snack nuts business. See Note B - Acquisitions and Saag’s Specialty Meats, along with PFFJ, LLC, farm operations in California, Arizona, and Wyoming (Farmer John) on January 3, 2017. SeeDivestitures for additional discussion regarding the Company’s assets held for sale in Note E.information.
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Grocery Products | | Refrigerated Foods | | Jennie-O Turkey Store | | International & Other | | Total |
| Balance as of October 30, 2016 | | $ | 882,582 |
| | $ | 584,443 |
| | $ | 203,214 |
| | $ | 164,258 |
| | $ | 1,834,497 |
|
| Goodwill acquired | | — |
| | 223,082 |
| | — |
| | 74,060 |
| | 297,142 |
|
| Goodwill sold | | — |
| | (11,826 | ) | | — |
| | — |
| | (11,826 | ) |
| Balance as of October 29, 2017 | | $ | 882,582 |
| | $ | 795,699 |
| | $ | 203,214 |
| | $ | 238,318 |
| | $ | 2,119,813 |
|
| Goodwill acquired | | — |
| | 610,602 |
| | — |
| | — |
| | 610,602 |
|
| Foreign currency translation | | — |
| | — |
| | — |
| | (20,224 | ) | | (20,224 | ) |
| Purchase adjustments | | — |
| | 596 |
| | — |
| | 3,329 |
| | 3,925 |
|
| Balance as of October 28, 2018 | | $ | 882,582 |
| | $ | 1,406,897 |
| | $ | 203,214 |
| | $ | 221,423 |
| | $ | 2,714,116 |
|
The gross carrying amount and accumulated amortization for definite-lived intangible assets are presentedare:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 31, 2021 | | October 25, 2020 |
| | Gross | | | | Weighted- | | Gross | | | | Weighted- |
| | Carrying | | Accumulated | | Avg Life | | Carrying | | Accumulated | | Avg Life |
| (in thousands) | | Amount | | Amortization | | (in Years) | | Amount | | Amortization | | (in Years) |
| Customer Lists/Relationships | | $ | 168,239 | | | $ | (56,882) | | | 12.7 | | $ | 117,239 | | | $ | (45,996) | | | 12.2 |
| Other Intangibles | | 60,241 | | | (8,356) | | | 13.8 | | 60,631 | | | (4,298) | | | 13.8 |
| Tradenames/Trademarks | | 10,536 | | | (5,700) | | | 4.9 | | 10,536 | | | (3,518) | | | 4.9 |
| Foreign Currency Translation | | — | | | (4,534) | | | — | | | — | | | (4,760) | | | — | |
| Total | | $ | 239,016 | | | $ | (75,471) | | | 12.7 | | $ | 188,406 | | | $ | (58,572) | | | 12.3 |
The increase in Customer Lists/Relationships represents the table below. In fiscal 2018, customer relationshipsfair value of $29.4 million weredefinite-lived assets acquired related to Columbus. In fiscal 2017, customer relationshipsas part of $13.1 million were acquired related to Cerattithe acquisition of the Planters® snack nuts business. See Note B - Acquisitions and $10.0 million were acquired related to Fontanini. Once fully amortized, the definite-lived intangible assets are removed from the table. Divestitures for additional information.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | October 28, 2018 | | October 29, 2017 |
| | | Gross | | | | Weighted- | | Gross | | | | Weighted- |
| | | Carrying | | Accumulated | | Avg Life | | Carrying | | Accumulated | | Avg Life |
| (in thousands) | | Amount | | Amortization | | (in Years) | | Amount | | Amortization | | (in Years) |
| Customer lists/relationships | | $ | 137,039 |
| | $ | (36,367 | ) | | 12.4 |
| | $ | 115,940 |
| | $ | (25,767 | ) | | 12.3 |
|
| Other intangibles | | 6,155 |
| | (1,547 | ) | | 6.4 |
| | 3,100 |
| | (2,044 | ) | | 5.8 |
|
| Formulas and recipes | | — |
| | — |
| | — |
| | 1,950 |
| | (1,950 | ) | | 10.0 |
|
| Foreign currency translation | | — |
| | (2,883 | ) | | — |
| | — |
| | (206 | ) | | — |
|
| Total | | $ | 143,194 |
| | $ | (40,797 | ) | | 12.2 |
| | $ | 120,990 |
| | $ | (29,967 | ) | | 12.1 |
|
Amortization expense for the last three fiscal years was as follows:was:
| | | | | | | | |
| (in thousands) | | |
| 2021 | | $ | 17,518 | |
| 2020 | | 14,251 | |
| 2019 | | 11,586 | |
|
| | | | |
| (in millions) | | |
|
| 2018 | | $ | 12.7 |
|
| 2017 | | 8.4 |
|
| 2016 | | 8.4 |
|
Estimated annual amortization expense for the five fiscal years after October 28, 2018,31, 2021, is as follows:
|
| | | | |
| (in millions) | | |
| 2019 | | $ | 12.6 |
|
| 2020 | | 12.6 |
|
| 2021 | | 12.7 |
|
| 2022 | | 12.4 |
|
| 2023 | | 11.6 |
|
The carrying amounts for indefinite-lived intangible assets are in the following table. The increases largely represent the fair value of trademarks acquired with Columbus of $193.0 million in fiscal 2018. Fiscal 2017 additions included the trademarks acquired with Ceratti and Fontanini of $15.9 million and $100.4 million, respectively.
|
| | | | | | | | |
| | | October 28, | | October 29, |
| (in thousands) | | 2018 | | 2017 |
| Brands/tradenames/trademarks | | $ | 1,108,122 |
| | $ | 935,816 |
|
| Other intangibles | | 184 |
| | 184 |
|
| Foreign currency translation | | (3,484 | ) | | (9 | ) |
| Total | | $ | 1,104,822 |
| | $ | 935,991 |
|
| | | | | | | | |
| (in thousands) | | |
| 2022 | | $ | 19,244 | |
| 2023 | | 18,351 | |
| 2024 | | 16,352 | |
| 2025 | | 14,627 | |
| 2026 | | 14,170 | |
During the fourth quarter of fiscal years 2018, 2017,2021, 2020, and 2016,2019, the Company completed the required annual impairment tests of indefinite-lived intangible assets and goodwill. An impairment was indicated for the CytoSport trademark in the Grocery Products segment, resulting in a charge of $17.3 million in fiscal 2018. No other impairment was indicated. Useful lives of intangible assets were also reviewed during this process with no material changes identified.
Note ED
Assets HeldInvestments In and Receivables From Affiliates
The Company accounts for Sale
Atits majority-owned operations under the end of fiscal 2016,consolidation method. Investments in which the Company was actively marketing Farmer John. Through this process,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 any related receivables from affiliates, are included in the Consolidated Statements of Financial Position as Investments In and Receivables From Affiliates.
Investments In and Receivables from Affiliates consists of:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Segment | | Percent Owned | | October 31, 2021 | | October 25, 2020 |
| MegaMex Foods, LLC | | Grocery Products | | 50% | | $ | 205,413 | | | $ | 220,907 | |
| Other Joint Ventures | | International & Other | | Various (20 – 40%) | | 93,606 | | | 87,466 | |
| Total | | | | | | $ | 299,019 | | | $ | 308,372 | |
Equity in Earnings of Affiliates consists of:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Segment | | 2021 | | 2020 | | 2019 |
| MegaMex Foods, LLC | | Grocery Products | | $ | 38,178 | | | $ | 31,919 | | | $ | 38,676 | |
| Other Joint Ventures | | International & Other | | 9,585 | | | 3,653 | | | 525 | |
| Total | | | | $ | 47,763 | | | $ | 35,572 | | | $ | 39,201 | |
Dividends received from affiliates for the fiscal years ended October 31, 2021, October 25, 2020, and October 27, 2019, were $45.0 million, $37.5 million, and $22.5 million, respectively.
The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $11.0 million is remaining as of October 31, 2021. This difference is being amortized through Equity in Earnings of Affiliates.
Note E
Inventories
Principal components of inventories are:
| | | | | | | | | | | | | | |
| (in thousands) | | October 31, 2021 | | October 25, 2020 |
| Finished Products | | $ | 725,115 | | | $ | 546,070 | |
| Raw Materials and Work-in-Process | | 395,403 | | | 318,975 | |
| Operating Supplies | | 163,416 | | | 136,547 | |
| Maintenance Materials and Parts | | 85,264 | | | 71,170 | |
| Total | | $ | 1,369,198 | | | $ | 1,072,762 | |
Note F
Derivatives and Hedging
The Company uses hedging programs to manage price risk associated with commodity purchases and interest rates. These programs utilize futures, swaps, and options contracts to manage the Company’s exposure to price fluctuations in the markets. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Effectiveness testing is performed on a quarterly basis to ascertain a high level of effectiveness for cash flow and fair value hedging programs.
Cash Flow Commodity Hedges: The Company designates grain and lean hog futures, swaps, and options used to offset price fluctuations in the Company’s future direct grain and hog purchases as cash flow hedges. Effective gains or losses related to these cash flow hedges are reported in Accumulated Other Comprehensive Loss (AOCL) and reclassified into earnings, through Cost of Products Sold, in the period or periods in which the hedged transactions affect earnings. The Company typically does not hedge its grain exposure beyond the next two upcoming fiscal years and its hog exposure beyond the next fiscal year. Due to extreme market volatility, the Company identifiedtook strategic hedges to cover a significant portion of its expected grain purchases through fiscal 2022.
Fair Value Commodity Hedges: The Company designates the specific assets and liabilitiesfutures it uses to be sold and allocated goodwill based onminimize the relative fair values of the assets held for sale and the assets that would be retained by the Company. In November 2016, the Company entered into an agreement for the sale and the transaction closed on January 3, 2017. The purchase price was $145 million in cash. The assets held for sale were reported within the Company’s Refrigerated Foods segment. The assets held for sale were not materialrisk assumed when fixed forward priced contracts are offered to the Company’s annual net sales, net earnings,commodity suppliers as fair value hedges. The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery. Changes in the fair value of the futures contracts, along with the gain or earnings per share.
Amounts classified as assets and liabilities held for sale on October 30, 2016, were presentedloss on the Company’shedged purchase commitment, are marked-to-market through earnings and recorded on the Consolidated StatementStatements of Financial Position within their respective accounts,as a Current Asset and includeLiability, respectively. Effective gains or losses related to these fair value hedges are recognized through Cost of Products Sold in the following: period or periods in which the hedged transactions affect earnings.
|
| | | |
| Assets held for sale (in thousands) | |
| Current assets | $ | 80,861 |
|
| Goodwill | 12,703 |
|
| Intangibles | 14,321 |
|
| Property, plant and equipment | 74,812 |
|
| Total assets held for sale | $ | 182,697 |
|
`
|
| | | |
| Liabilities held for sale (in thousands) | |
| Total current liabilities held for sale | $ | 44,066 |
|
Cash Flow Interest Rate Hedges: In the second quarter of fiscal 2021, the Company designated 2 separate interest rate locks as cash flow hedges to manage interest rate risk associated with the anticipated debt transactions required to fund the acquisition of the Planters® snack nuts business. The total notional amount of the Company's locks was $1,250 million. In the third quarter of fiscal 2021, the associated unsecured senior notes were issued with a tenor of 7 and 30 years and both locks were lifted (See Note F
L - Long-term Debt and Other Borrowing ArrangementsArrangements). Mark-to-market gains and losses on these instruments were deferred as a component of AOCL. The resulting gain in AOCL is reclassified to Interest Expense in the period when the hedged transactions affect earnings.
Long-term debt consists of:
|
| | | | | | | | |
(in thousands) | | October 28, 2018 | | October 29, 2017 |
| Term loan | | $ | 374,840 |
| | $ | — |
|
Senior unsecured notes, with interest at 4.125%, interest due semi-
annually through April 2021 maturity date | | 250,000 |
| | 250,000 |
|
| Less: current maturities | | — |
| | — |
|
| Total | | $ | 624,840 |
| | $ | 250,000 |
|
Other Derivatives: The Company holds certain futures contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets. The Company has not applied hedge accounting to these positions. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.
Volume: The Company's outstanding contracts related to its commodity hedging programs include:
| | | | | | | | |
| Volume |
| Commodity Contracts | October 31, 2021 | October 25, 2020 |
| Corn | 33.1 million bushels | 26.0 million bushels |
| Lean Hogs | 120.0 million pounds | 153.7 million pounds |
Fair Value of Derivatives: The fair values of the Company’s derivative instruments designated as hedges are:
| | | | | | | | | | | | | | | | | | | | |
| | Location on Consolidated | | Gross Fair Value(1) |
| (in thousands) | | Statements of Financial Position | | October 31, 2021 | | October 25, 2020 |
| Commodity Contracts | | Other Current Assets | | $ | 21,798 | | | $ | (1,330) | |
(1) Amounts represent the gross fair value of commodity derivative assets and liabilities. The Company nets the derivative assets and liabilities for each of its commodity hedging programs, including cash collateral, when a $400.0master netting arrangement exists between the Company and the counterparty to the derivative contract. The amount or timing of cash collateral balances may impact the classification of the commodity derivative in the Consolidated Statements of Financial Position. The gross asset position as of October 31, 2021 is offset by the obligation to return cash collateral of $10.8 million unsecured revolving linecontained within the master netting arrangement. The gross liability position as of creditOctober 25, 2020, is offset by the right to reclaim cash collateral of $12.3 million. See Note I - Fair Value Measurements for a discussion of these net amounts as reported in the Consolidated Statements of Financial Position.
Fair Value Hedge - Assets (Liabilities): The carrying amount of the Company’s fair value hedge assets (liabilities) are:
| | | | | | | | | | | | | | |
| Location on Consolidated Statements of Financial Position | | Carrying Amount(1) of the Hedged Assets/(Liabilities) |
| (in thousands) | | October 31, 2021 | | October 25, 2020 |
| Accounts Payable | | $ | 3,432 | | | $ | 4,269 | |
(1) Amounts represent the carrying amount of fair value hedged assets and liabilities which maturesare offset by other assets included in June 2021. The unsecured revolving line of credit bears interest at a variable rate based on LIBOR, and a fixed fee is paid for the availability of this credit line. master netting arrangements described above.
Accumulated Other Comprehensive Loss Impact: As of October 28, 2018, and October 29, 201731, 2021, the Company had no outstanding draws from this lineincluded in AOCL hedging gains (before tax) of credit.
$32.0 million on commodity contracts and $14.5 million related to interest rate settled positions. The Company expects to recognize the majority of the gains on commodity contracts over the next twelve months. Gains on interest rate contracts offset the hedged interest payments over the tenor of the debt instruments.
The Company had a $300.0 million term loan facilityeffect of AOCL for gains or losses (before tax) related to the Company's derivative instruments are:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Gain/(Loss) Recognized in AOCL(1) | | Location on
Consolidated
Statements
of Operations | | Gain/(Loss) Reclassified from AOCL into Earnings(1) |
| (in thousands) | | Fiscal Year Ended | | | Fiscal Year Ended |
| Cash Flow Hedges: | | October 31, 2021 | | October 25, 2020 | | | October 31, 2021 | | October 25, 2020 |
| Commodity Contracts | | $ | 59,143 | | | $ | (38,213) | | | Cost of Products Sold | | $ | 31,044 | | | $ | (37,834) | |
Excluded Component(2) | | 1,078 | | | — | | | | | — | | | — | |
| Interest Rate Contracts | | 14,864 | | | — | | | Interest Expense | | 399 | | | — | |
(1) See Note H - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on Net Earnings.
(2) Represents the time value of corn options excluded from the assessment of effectiveness for which expiredthe difference between changes in December 2016. Withfair value and periodic amortization is recorded in AOCL.
Consolidated Statements of Operations Impact: The effect on the acquisitionConsolidated Statements of Columbus Manufacturing Inc. in November 2017,Operations for gains or losses (before tax) related to the Company's derivative instruments for the fiscal years ended are:
| | | | | | | | | | | | | | | | | |
| Consolidated Statement of Operations Impact |
| (in thousands) | October 31, 2021 | | October 25, 2020 | | October 27, 2019 |
| Net Earnings Attributable to Hormel Foods Corporation | $ | 908,839 | | | $ | 908,082 | | | $ | 978,806 | |
| | | | | |
| Cash Flow Hedges - Commodity Contracts | | | | | |
| Gain (Loss) Reclassified from AOCL | $ | 31,787 | | | $ | (37,834) | | | $ | (1,701) | |
| Amortization of Excluded Component from Options | (3,033) | | | — | | | (2,489) | |
Gain (Loss) Reclassified from AOCL Due to Discontinuance of Cash Flow Hedges(1) | (743) | | | — | | | — | |
| | | | | |
| Fair Value Hedges - Commodity Contracts | | | | | |
Gain (Loss) on Commodity Futures(2) | (28,078) | | | 13,192 | | | 5,197 | |
| | | | | |
Total Gain (Loss) on Commodity Contracts(3) | $ | (67) | | | $ | (24,642) | | | $ | 1,007 | |
| | | | | |
| Cash Flow Hedges - Interest Rate Locks | | | | | |
| Amortization of Gain on Interest Rate Locks | $ | 399 | | | $ | — | | | $ | — | |
| | | | | |
Total Gain on Interest Rate Locks(4) | $ | 399 | | | $ | — | | | $ | — | |
| | | | | |
| Total Gain (Loss) Recognized in Earnings | $ | 332 | | | $ | (24,642) | | | $ | 1,007 | |
(1) During the fourth quarter of fiscal 2021, the Company obtaineddiscontinued hedge accounting on 2.8 million bushels of corn usage that was deemed no longer probable to occur. A loss of $0.7 million related to the discontinued hedges was reclassified directly into earnings.
(2) Amounts represent gains or losses on commodity contracts designated as fair value hedges that were closed during the year, which were offset by a two-year $375.0 million term loan which is due in full in November 2019. In December 2018,corresponding gain or loss on the Company will consider this term loan short term since the due date is less than one year.
The Company is required by certain covenants in its debt agreementsunderlying hedged purchase commitment. Additional gains or losses related to maintain specified levels of financial ratios and financial position. At the end of the current fiscal year, the Company was in compliance with all of these covenants.
Total interest paidchanges in the last three fiscal yearsfair value of open commodity contracts, along with the offsetting gain or loss on the hedged purchase commitment, are also marked-to-market through earnings with no impact on a net basis.
(3) Total Gain (Loss) on Commodity Contracts is as follows: recognized in earnings through Cost of Products Sold.
(4) Total Gain on Interest Rate Locks is recognized in earnings through Interest Expense.
|
| | | | |
| (in millions) | | |
|
| 2018 | | $ | 25.6 |
|
| 2017 | | 12.7 |
|
| 2016 | | 12.9 |
|
Note G
Pension and Other Post-retirement Benefits
The Company has several defined benefit plans and defined contribution plans covering most employees. Benefits for defined benefit pension plans covering hourly employees are provided based on stated amounts for each year of service, while plan benefits covering salaried employees are based on final average compensation. In fiscal 2011, an amendment was enacted for a defined benefit plan which included a change in the pension formula effective January 1, 2017. The amended formula remains a defined benefit formula, but bases the accrued benefit credit on age and service and defines the benefit as a lump sum. Effective October 31, 2016, the 401(k) match for these participants was increased. Total costs associated with the Company’s defined contribution benefit plans in fiscal years 2018, 2017,2021, 2020, and 20162019 were $44.2$46.7 million, $45.2$44.5 million, and $33.5$43.0 million, respectively.
Certain groups of employees are eligible for post-retirement health or welfare benefits. Benefits for retired employees vary for each group depending on respective retirement dates and applicable plan coverage in effect. Contribution requirements for retired employees are governed by the Retiree Health Care Payment Program and may change each year as the cost to provide coverage is determined.
Net periodic cost of defined benefit plans included the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-retirement Benefits |
| (in thousands) | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Service Cost | | $ | 37,127 | | | $ | 35,584 | | | $ | 26,042 | | | $ | 533 | | | $ | 770 | | | $ | 690 | |
| Interest Cost | | 50,399 | | | 53,642 | | | 60,385 | | | 7,945 | | | 9,306 | | | 12,016 | |
| Expected Return on Plan Assets | | (102,693) | | | (101,283) | | | (92,492) | | | — | | | — | | | — | |
| Amortization of Prior Service Cost | | (1,496) | | | (2,168) | | | (2,795) | | | (669) | | | (2,651) | | | (2,675) | |
| Recognized Actuarial Loss (Gain) | | 22,742 | | | 22,383 | | | 14,805 | | | 2,020 | | | 1,045 | | | — | |
| Curtailment (Gain) Charge | | — | | | — | | | 2,825 | | | — | | | — | | | 1,219 | |
| Net Periodic Cost | | $ | 6,080 | | | $ | 8,158 | | | $ | 8,770 | | | $ | 9,830 | | | $ | 8,470 | | | $ | 11,250 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-retirement Benefits |
| (in thousands) | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Service cost | | $ | 31,612 |
| | $ | 30,256 |
| | $ | 26,951 |
| | $ | 980 |
| | $ | 1,106 |
| | $ | 1,297 |
|
| Interest cost | | 56,196 |
| | 54,263 |
| | 55,728 |
| | 11,169 |
| | 11,630 |
| | 13,346 |
|
| Expected return on plan assets | | (99,091 | ) | | (90,936 | ) | | (88,681 | ) | | — |
| | — |
| | — |
|
| Amortization of prior service cost | | (2,468 | ) | | (3,000 | ) | | (4,120 | ) | | (3,111 | ) | | (4,274 | ) | | (4,282 | ) |
| Recognized actuarial loss (gain) | | 18,166 |
| | 26,166 |
| | 20,318 |
| | 179 |
| | 2,424 |
| | 1,617 |
|
| Curtailment (gain) charge | | — |
| | — |
| | (4,438 | ) | | — |
| | — |
| | — |
|
| Net periodic cost | | $ | 4,415 |
| | $ | 16,749 |
| | $ | 5,758 |
| | $ | 9,217 |
| | $ | 10,886 |
| | $ | 11,978 |
|
Non-service cost components of net pension and post-retirement benefit cost are presented within Interest and Investment Income on the Consolidated Statements of Operations.
Actuarial gains and losses and any adjustments resulting from plan amendments are deferred and amortized to expense over periods ranging from 9-238-20 years for pension benefits and 5-184-15 years for post-retirement benefits. The following amounts have not been recognized in net periodic pension cost and are included in accumulated other comprehensive loss:Accumulated Other Comprehensive Loss:
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-retirement Benefits |
| (in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
| Unrecognized prior service credit | | $ | 8,097 |
| | $ | 10,565 |
| | $ | 6,461 |
| | $ | 4,585 |
|
| Unrecognized actuarial losses | | (336,894 | ) | | (380,114 | ) | | (9,302 | ) | | (30,857 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-retirement Benefits |
| (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
| Unrecognized Prior Service Credit | | $ | (3,624) | | | $ | (2,128) | | | $ | (154) | | | $ | 514 | |
| Unrecognized Actuarial Losses | | (305,433) | | | (402,289) | | | (35,616) | | | (36,144) | |
The following amounts are expected to be recognized in net periodic benefit expense in fiscal 2019:
|
| | | | | | | | |
| (in thousands) | | Pension Benefits | | Post- retirement Benefits |
| Amortized prior service credit | | $ | (2,468 | ) | | $ | (2,937 | ) |
| Recognized actuarial losses | | 15,670 |
| | — |
|
The following is a reconciliation of the beginning and ending balances of the benefit obligation, the fair value of plan assets, and the funded status of the plans as of the October 28, 2018,31, 2021, and the October 29, 2017,25, 2020, measurement dates:
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-retirement Benefits |
| (in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
| Change in benefit obligation | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 1,460,098 |
| | $ | 1,394,870 |
| | $ | 304,683 |
| | $ | 317,472 |
|
| Service cost | | 31,612 |
| | 30,256 |
| | 980 |
| | 1,106 |
|
| Interest cost | | 56,196 |
| | 54,263 |
| | 11,169 |
| | 11,630 |
|
| Actuarial (gain) loss | | (134,924 | ) | | 35,379 |
| | (24,515 | ) | | (10,977 | ) |
| Plan amendments | | — |
| | 3,483 |
| | — |
| | 4,986 |
|
| Participant contributions | | — |
| | — |
| | 2,232 |
| | 2,661 |
|
| Medicare Part D subsidy | | — |
| | — |
| | 768 |
| | 1,355 |
|
| Benefits paid | | (62,079 | ) | | (58,153 | ) | | (23,045 | ) | | (23,550 | ) |
| Benefit obligation at end of year | | $ | 1,350,903 |
| | $ | 1,460,098 |
| | $ | 272,272 |
| | $ | 304,683 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Post-retirement Benefits |
| (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
| Change in Benefit Obligation | | | | | | | | |
| Benefit Obligation at Beginning of Year | | $ | 1,666,886 | | | $ | 1,616,177 | | | $ | 285,293 | | | $ | 290,946 | |
| Service Cost | | 37,127 | | | 35,584 | | | 533 | | | 770 | |
| Interest Cost | | 50,399 | | | 53,642 | | | 7,945 | | | 9,306 | |
| Actuarial (Gain) Loss | | 34,247 | | | 77,447 | | | 1,539 | | | 2,362 | |
| | | | | | | | |
| | | | | | | | |
| Participant Contributions | | — | | | — | | | 2,113 | | | 2,344 | |
| Medicare Part D Subsidy | | — | | | — | | | 461 | | | 555 | |
| Benefits Paid | | (76,702) | | | (115,965) | | | (23,218) | | | (20,990) | |
| Benefit Obligation at End of Year | | $ | 1,711,958 | | | $ | 1,666,886 | | | $ | 274,666 | | | $ | 285,293 | |
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-retirement Benefits |
| (in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
| Change in plan assets | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 1,379,953 |
| | $ | 1,232,626 |
| | $ | — |
| | $ | — |
|
| Actual return on plan assets | | (10,780 | ) | | 184,126 |
| | — |
| | — |
|
| Participant contributions | | — |
| | — |
| | 2,232 |
| | 2,661 |
|
| Employer contributions | | 6,286 |
| | 21,354 |
| | 20,813 |
| | 20,889 |
|
| Benefits paid | | (62,079 | ) | | (58,153 | ) | | (23,045 | ) | | (23,550 | ) |
| Fair value of plan assets at end of year | | $ | 1,313,380 |
| | $ | 1,379,953 |
| | $ | — |
| | $ | — |
|
| Funded status at end of year | | $ | (37,523 | ) | | $ | (80,145 | ) | | $ | (272,272 | ) | | $ | (304,683 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Post-retirement Benefits |
| (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
| Change in Plan Assets | | | | | | | | |
| Fair Value of Plan Assets at Beginning of Year | | $ | 1,553,532 | | | $ | 1,477,288 | | | $ | — | | | $ | — | |
| Actual Return on Plan Assets | | 211,054 | | | 183,647 | | | — | | | — | |
| Participant Contributions | | — | | | — | | | 2,113 | | | 2,344 | |
| Employer Contributions | | 10,712 | | | 8,562 | | | 21,105 | | | 18,646 | |
| Benefits Paid | | (76,702) | | | (115,965) | | | (23,218) | | | (20,990) | |
| Fair Value of Plan Assets at End of Year | | $ | 1,698,596 | | | $ | 1,553,532 | | | $ | — | | | $ | — | |
| Funded Status at End of Year | | $ | (13,362) | | | $ | (113,354) | | | $ | (274,666) | | | $ | (285,293) | |
Amounts recognized in the Consolidated Statements of Financial Position as of October 28, 2018,31, 2021, and October 29, 2017,25, 2020, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-retirement Benefits |
| (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
| Pension Assets | | $ | 289,096 | | | $ | 183,232 | | | $ | — | | | $ | — | |
| Employee-related Expenses | | (11,173) | | | (9,332) | | | (19,589) | | | (19,669) | |
| Pension and Post-retirement Benefits | | (291,285) | | | (287,254) | | | (255,077) | | | (265,624) | |
| Net Amount Recognized | | $ | (13,362) | | | $ | (113,354) | | | $ | (274,666) | | | $ | (285,293) | |
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Post-retirement Benefits |
| (in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
| Pension assets | | $ | 195,153 |
| | $ | 171,990 |
| | $ | — |
| | $ | — |
|
| Employee-related expenses | | (6,851 | ) | | (5,957 | ) | | (20,540 | ) | | (20,612 | ) |
| Pension and post-retirement benefits | | (225,825 | ) | | (246,178 | ) | | (251,732 | ) | | (284,071 | ) |
| Net amount recognized | | $ | (37,523 | ) | | $ | (80,145 | ) | | $ | (272,272 | ) | | $ | (304,683 | ) |
The accumulated benefit obligation for all pension plans was $1.3$1.7 billion and $1.6 billion as of October 28, 2018,31, 2021, and $1.4 billion as of October 29, 2017.25, 2020, respectively. The following table provides information for pension plans with projected and accumulated benefit obligations in excess of plan assets:
| | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 |
| Projected Benefit Obligation | | $ | 302,458 | | | $ | 296,585 | |
| Accumulated Benefit Obligation | | 292,877 | | | 288,359 | |
| Fair Value of Plan Assets | | — | | | — | |
|
| | | | | | | | |
| (in thousands) | | 2018 | | 2017 |
| Projected benefit obligation | | $ | 232,676 |
| | $ | 252,136 |
|
| Accumulated benefit obligation | | 227,015 |
| | 247,687 |
|
| Fair value of plan assets | | — |
| | — |
|
Weighted-average assumptions used to determine benefit obligations are as follows:
| | | | | | | | | | | | | | |
| | | 2021 | | 2020 |
| Discount Rate | | 3.00 | % | | 3.06 | % |
Rate of Future Compensation Increase (For Plans that Base Benefits on Final Compensation Level) | | 4.14 | % | | 4.09 | % |
|
| | | | | | |
| | | 2018 | | 2017 |
| Discount rate | | 4.55 | % | | 3.91 | % |
Rate of future compensation increase (for plans that base benefits on final compensation level) | | 3.96 | % | | 3.95 | % |
Weighted-average assumptions used to determine net periodic benefit costs are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| Discount Rate | | 3.06 | % | | 3.37 | % | | 4.55 | % |
Rate of Future Compensation Increase (For Plans that Base Benefits on Final Compensation Level) | | 4.09 | % | | 4.06 | % | | 3.96 | % |
| Expected Long-term Return on Plan Assets | | 6.75 | % | | 7.00 | % | | 7.15 | % |
|
| | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Discount rate | | 3.91 | % | | 3.94 | % | | 4.50 | % |
Rate of future compensation increase (for plans that base benefits on final compensation level) | | 3.95 | % | | 3.96 | % | | 3.92 | % |
| Expected long-term return on plan assets | | 7.30 | % | | 7.50 | % | | 7.60 | % |
The expected long-term rate of return on plan assets is based on fair value and is developed in consultation with outside advisors. A range is determined based on the composition of the asset portfolio, historical long-term rates of return, and estimates of future performance.
For measurement purposes, an 8.0%8 percent annual rate of increase in the per capita cost of covered health care benefits for pre-Medicare and post-Medicare retirees’ coverage is assumed for 2019.2022. The pre-Medicare and post-Medicare rate is assumed to decrease to 5.0%5 percent for 2024,2027 and remain steady thereafter.
The assumed discount rate, expected long-term rate of return on plan assets, rate of future compensation increase, and health care cost trend rate have a significant impact on the amounts reported for the benefit plans. A one-percentage-point change in these rates would have the following effects:
|
| | | | | | | | | | | | | | | | |
| | | 1-Percentage-Point |
| | | Expense | | Benefit Obligation |
| (in thousands) | | Increase | | Decrease | | Increase | | Decrease |
| Pension benefits | | | | | | | | |
| Discount rate | | $ | (11,445 | ) | | $ | 14,215 |
| | $ | (163,270 | ) | | $ | 203,780 |
|
| Expected long-term rate of return on plan assets | | (12,849 | ) | | 12,849 |
| | — |
| | — |
|
| Rate of future compensation increase | | 3,421 |
| | (2,965 | ) | | 5,279 |
| | (4,592 | ) |
| Post-retirement benefits | | | | | | | | |
| Discount rate | | $ | 1,172 |
| | $ | 158 |
| | $ | (23,946 | ) | | $ | 28,491 |
|
| Health care cost trend rate | | 1,290 |
| | (1,104 | ) | | 26,017 |
| | (22,482 | ) |
The Company’s funding policy is to make annual contributions of not less than the minimum required by applicable regulations. The Company expects to make contributions of $28.0$31.1 million during fiscal 20192022 that represent benefit payments for unfunded plans.
Benefits expected to be paid over the next ten fiscal years are as follows:
|
| | | | | | | | |
| (in thousands) | | Pension Benefits | | Post-retirement Benefits |
| 2019 | | $ | 63,348 |
| | $ | 20,999 |
|
| 2020 | | 65,640 |
| | 20,880 |
|
| 2021 | | 67,796 |
| | 20,762 |
|
| 2022 | | 70,275 |
| | 20,642 |
|
| 2023 | | 74,272 |
| | 20,397 |
|
| 2024-2028 | | 422,443 |
| | 94,912 |
|
| | | | | | | | | | | | | | |
| (in thousands) | | Pension Benefits | | Post-retirement Benefits |
| 2022 | | $ | 75,704 | | | $ | 19,832 | |
| 2023 | | 77,767 | | | 19,760 | |
| 2024 | | 79,870 | | | 19,445 | |
| 2025 | | 82,118 | | | 18,901 | |
| 2026 | | 86,066 | | | 18,265 | |
| 2027-2031 | | 459,902 | | | 80,310 | |
Post-retirementPlan assets for certain defined benefit pension plans are held in the Hormel Foods Corporation Master Trust (Master Trust). The investment strategy for the Master Trust attempts to minimize the long-term cost of pension benefits, are netreduce the volatility of expected federal subsidy receipts relatedpension expense, and achieve a healthy funded status for the plans. The Company establishes target allocations in consultation with outside advisors through the use of asset-liability modeling in an effort to prescription drug benefits granted undermatch the Medicare Prescription Drug, Improvement and Modernization Actduration of 2003, which are estimated to be $0.5 million per year through 2028.the plan assets with the duration of the Company’s projected benefit liability.
The actual and target weighted-average asset allocations for the Company’s pension plan assets as of the plan measurement date are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | 2020 |
| Asset Category | | Actual % | | Target
Range % | Actual % | | Target
Range % |
| Fixed Income | | 43.8 | | | 35-60 | 46.3 | | | 35-60 |
| Global Stocks | | 40.7 | | | 20-55 | 39.2 | | | 20-55 |
| Private Equity | | 6.4 | | | 0-10 | 5.4 | | | 0-10 |
| Real Estate | | 5.3 | | | 0-10 | 5.2 | | | 0-10 |
| Hedge Funds | | 2.6 | | | 0-10 | 2.4 | | | 0-10 |
| Cash and Cash Equivalents | | 1.1 | | | — | 1.5 | | | — |
|
| | | | | | | | | | |
| | | 2018 | | 2017 |
| Asset Category | | Actual % | | Target Range % | | Actual % | | Target Range % |
| Large capitalization equity | | 13.7 | | 12-22 |
| | 22.1 | | 12-22 |
|
| Small capitalization equity | | 12.7 | | 3-13 |
| | 5.4 | | 3-13 |
|
| International equity | | 14.9 | | 10-20 |
| | 15.1 | | 10-20 |
|
| Global equity | | 12.4 | | 5-20 |
| | 12.0 | | 5-20 |
|
| Private equity | | 5.8 | | 0-15 |
| | 5.4 | | 0-15 |
|
| Total equity securities | | 59.5 | | 50-75 |
| | 60.0 | | 50-75 |
|
| Fixed income | | 33.6 | | 25-45 |
| | 33.5 | | 25-45 |
|
| Real estate | | 5.7 | | 0-10 |
| | 5.0 | | 0-10 |
|
| Cash and cash equivalents | | 1.2 | | — |
| | 1.5 | | — |
|
Target allocations are established in consultation with outside advisors through the use of asset-liability modeling to attempt to match the duration of the plan assets with the duration of the Company’s projected benefit liability. The asset allocation strategy attempts to minimize the long-term cost of pension benefits, reduce the volatility of pension expense, and achieve a healthy funded status for the plans.
The following tables show the categories of defined benefit pension plan assets and the level under which fair values were determined inpursuant to the fair value hierarchy.provisions of ASC 820. Assets measured at fair value using the net asset value (NAV) per share practical expedient are not required to be classified in the fair value hierarchy. These amounts are provided to permit reconciliation to the total fair value of plan assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of October 31, 2021 |
| (in thousands) | | Total
Fair Value | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Plan Assets in Fair Value Hierarchy | | | | | | | | |
Cash Equivalents(1) | | $ | 19,328 | | | $ | — | | | $ | 19,328 | | | $ | — | |
Private Equity(2) | | | | | | | | |
| Domestic | | 53,229 | | | — | | | — | | | 53,229 | |
| International | | 56,190 | | | — | | | — | | | 56,190 | |
Fixed Income(3) | | | | | | | | |
| U.S. Government Issues | | 262,181 | | | 164,357 | | | 97,824 | | | — | |
| Municipal Issues | | 14,024 | | | — | | | 14,024 | | | — | |
| Corporate Issues – Domestic | | 321,639 | | | — | | | 321,639 | | | — | |
| Corporate Issues – Foreign | | 56,102 | | | — | | | 56,102 | | | — | |
Global Stocks - Mutual Funds(4) | | 94,115 | | | 94,115 | | | — | | | — | |
| Plan Assets in Fair Value Hierarchy | | $ | 876,808 | | | $ | 258,472 | | | $ | 508,917 | | | $ | 109,419 | |
| | | | | | | | |
| Plan Assets at Net Asset Value | | | | | | | | |
Real Estate – Domestic(5) | | $ | 90,106 | | | | | | | |
Global Stocks - Collective Investment Funds(6) | | 596,985 | | | | | | | |
Hedge Funds(7) | | 44,848 | | | | | | | |
Fixed Income - Hedge Funds(8) | | 62,609 | | | | | | | |
Fixed Income - Collective Investment Funds(9) | | 27,239 | | | | | | | |
| Plan Assets at Net Asset Value | | $ | 821,787 | | | | | | | |
| Total Plan Assets at Fair Value | | $ | 1,698,596 | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of October 28, 2018 |
| (in thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Plan assets in fair value hierarchy | | |
| | |
| | |
| | |
|
| Cash equivalents (1) | | $ | 16,129 |
| | $ | 16,129 |
| | $ | — |
| | $ | — |
|
| Large capitalization equity (2) | | | | | | | | |
| Domestic | | 113,086 |
| | 113,086 |
| | — |
| | — |
|
| Foreign | | 29,810 |
| | 29,810 |
| | — |
| | — |
|
| Small capitalization equity (3) | | | | | | | | |
| Domestic | | 145,872 |
| | 145,872 |
| | — |
| | — |
|
| Foreign | | 21,417 |
| | 21,417 |
| | — |
| | — |
|
| Private equity (4) | | | | | | | | |
| Domestic | | 51,377 |
| | — |
| | — |
| | 51,377 |
|
| International | | 24,880 |
| | — |
| | — |
| | 24,880 |
|
| Fixed income (5) | | | | | | | | |
| US government issues | | 157,312 |
| | 153,566 |
| | 3,746 |
| | — |
|
| Municipal issues | | 19,456 |
| | — |
| | 19,456 |
| | — |
|
| Corporate issues – domestic | | 222,617 |
| | — |
| | 222,617 |
| | — |
|
| Corporate issues – foreign | | 42,513 |
| | — |
| | 42,513 |
| | — |
|
| Plan assets in fair value hierarchy | | $ | 844,469 |
| | $ | 479,880 |
| | $ | 288,332 |
| | $ | 76,257 |
|
| | | | | | | | | |
| Plan assets at net asset value | | | | | | | | |
| Large capitalization equity – domestic (6) | | $ | 37,176 |
| | | | | | |
| International equity – mutual fund (7) | | 107,956 |
| | | | | | |
| International equity – collective trust (8) | | 86,641 |
| | | | | | |
| Global equity – mutual fund (9) | | 162,630 |
| | | | | | |
| Real estate – domestic (10) | | 74,508 |
| | | | | | |
| Plan assets at net asset value | | $ | 468,911 |
| | | | | | |
| Total plan assets at fair value | | $ | 1,313,380 |
| | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of October 29, 2017 |
| (in thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Plan assets in fair value hierarchy | | |
| | |
| | |
| | |
|
| Cash equivalents (1) | | $ | 21,653 |
| | $ | 21,653 |
| | $ | — |
| | $ | — |
|
| Large capitalization equity (2) | | | | | | | | |
| Domestic | | 189,536 |
| | 189,536 |
| | — |
| | — |
|
| Foreign | | 47,069 |
| | 47,069 |
| | — |
| | — |
|
| Small capitalization equity (3) | | | | | | | | |
| Domestic | | 64,448 |
| | 64,448 |
| | — |
| | — |
|
| Foreign | | 9,486 |
| | 9,486 |
| | — |
| | — |
|
| Private equity (4) | | | | | | | | |
| Domestic | | 53,652 |
| | — |
| | — |
| | 53,652 |
|
| International | | 20,552 |
| | — |
| | — |
| | 20,552 |
|
| Fixed income (5) | | | | | | | | |
| US government issues | | 159,690 |
| | 154,977 |
| | 4,713 |
| | — |
|
| Municipal issues | | 21,002 |
| | — |
| | 21,002 |
| | — |
|
| Corporate issues – domestic | | 228,753 |
| | — |
| | 228,753 |
| | — |
|
| Corporate issues – foreign | | 52,610 |
| | — |
| | 52,610 |
| | — |
|
| Plan assets in fair value hierarchy | | $ | 868,451 |
| | $ | 487,169 |
| | $ | 307,078 |
| | $ | 74,204 |
|
| | | | | | | | | |
| Plan assets at net asset value | | | | | | | | |
| Large capitalization equity – domestic (6) | | $ | 68,579 |
| | | | | | |
| International equity – mutual fund (7) | | 123,608 |
| | | | | | |
| International equity – collective trust (8) | | 85,317 |
| | | | | | |
| Global equity – mutual fund (9) | | 165,138 |
| | | | | | |
| Real estate – domestic (10) | | 68,860 |
| | | | | | |
| Plan assets at net asset value | | $ | 511,502 |
| | | | | | |
| Total plan assets at fair value | | $ | 1,379,953 |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of October 25, 2020 |
| (in thousands) | | Total
Fair Value | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Plan Assets in Fair Value Hierarchy | | | | | | | | |
Cash Equivalents(1) | | $ | 23,392 | | | $ | 1,294 | | | $ | 22,098 | | | $ | — | |
Private Equity(2) | | | | | | | | |
| Domestic | | 43,479 | | | — | | | — | | | 43,479 | |
| International | | 40,359 | | | — | | | — | | | 40,359 | |
Fixed Income(3) | | | | | | | | |
| U.S. Government Issues | | 239,239 | | | 158,525 | | | 80,714 | | | — | |
| Municipal Issues | | 15,768 | | | — | | | 15,768 | | | — | |
| Corporate Issues – Domestic | | 323,070 | | | — | | | 323,070 | | | — | |
| Corporate Issues – Foreign | | 52,132 | | | — | | | 52,132 | | | — | |
Global Stocks - Mutual Funds(4) | | 151,175 | | | 151,175 | | | — | | | — | |
| Plan Assets in Fair Value Hierarchy | | $ | 888,614 | | | $ | 310,994 | | | $ | 493,782 | | | $ | 83,838 | |
| | | | | | | | |
| Plan Assets at Net Asset Value | | | | | | | | |
Real Estate – Domestic(5) | | $ | 81,015 | | | | | | | |
Global Stocks - Collective Investment Funds(6) | | 457,713 | | | | | | | |
Hedge Funds(7) | | 37,293 | | | | | | | |
Fixed Income - Hedge Funds(8) | | 51,956 | | | | | | | |
Fixed Income - Collective Investment Funds(9) | | 36,941 | | | | | | | |
| Plan Assets at Net Asset Value | | $ | 664,918 | | | | | | | |
| Total Plan Assets at Fair Value | | $ | 1,553,532 | | | | | | | |
The following is a description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments:
(1) Cash Equivalents: These Level 1 and Level 2 investments consist primarily of highly liquid money market mutual funds traded in active markets.markets in addition to highly liquid futures and T-bills with an observable daily settlement price.
(2) Large Capitalization Equity: The Level 1 investments include a mix of predominately U.S. common stocks and foreign common stocks, which are valued at the closing price reported on the active market in which the individual securities are traded.
(3) Small Capitalization Equity: The Level 1 investments include a mix of predominately U.S. common stocks and foreign common stocks, which are valued at the closing price reported on the active market in which the individual securities are traded.
(4) Private Equity: These Level 3 investments consist of various collective investment funds, which are managed by a third party, invested in a well-diversified portfolio of equity investments from top performing, high quality firms focused on U.S. and foreign small to mid-markets, venture capitalists, and entrepreneurs with a concentration in areas of innovation. Investment strategies include buyouts, growth capital, buildups, and distressed, as well as early stages of company development mainly in the U.S. The fair value of these funds is based on the fair value of the underlying investments.
(5)(3) Fixed Income: The Level 1 investments include U.S. Treasury bonds and notes, which are valued at the closing price reported on the active market in which the individual securities are traded. The Level 2 investments consist principally of U.S. government securities, which are valued daily using institutional bond quote sources and mortgage-backed securities pricing sources, and municipal, domestic, and foreign securities, which are valued daily using institutional bond quote sources.
(6) Large Capitalization Equity – Domestic: The collective investment is valued at the publicly available NAV of shares held by the Master Trust at year end. The investment objective is to maintain a portfolio of equity securities that approximate the weighted total rate of return within the Standard & Poor’s 500 stock index. There are no restrictions on redemptions.
(7) International Equity –(4) Global Stocks - Mutual Funds: TheFund: These Level 1 investments include open-ended mutual funds are valued at the publicly available NAV of shares held by the Master Trust at year end. The investment seeks long term growth of principal and income by investing in medium to large well established companies. There are no restrictions on redemptions.
(8) International Equity – Collective Trust: The collective investment funds are valued at the NAV of shares held by the Master Trust at year end. The investment objective of this fund is to generate a long term return through investments in quoted international equities. Redemptions can be made on a monthly basis as of the first business day of each month.
(9) Global Equity – Mutual Fund: This investment includes an open-ended mutual fund consisting of a mix of U.S. common stocks and foreign common stocks, which isare valued at closing price reported on the publicly available NAV of shares held byactive market in which the Master Trust at year end.fund is traded. The investment strategy is to obtain long term capital appreciation by focusing on companies generating above average earnings growth and are leading growth businesses in the marketplace. There are no restrictions on redemptions.
(10)(5) Real Estate:Estate - Domestic: These investments include ownership in open-ended real estate funds, which manage diversified portfolios of commercial properties within the office, residential, retail, and industrial property sectors. Investment strategies aim to acquire, own, hold, or dispose of investments with the goal of achieving
current income and/or capital appreciation. The real estate investments are valued at the NAV of shares held by the Master Trust. Requests to redeem shares are granted on a quarterly basis with either 45 or 90 days advance notice, subject to availability of cash.
(6) Global Stocks - Collective Investment Funds: These investments include commingled funds consisting of a mix of U.S. common stocks and foreign common stocks. The collective investment funds are valued at the NAV of shares held by the Master Trust. The investment strategy is to obtain long term capital appreciation by focusing on companies generating above average earnings growth and are leading growth businesses in the marketplace. All funds are daily liquid with the exception of one that is available on the first business day of the month for subscriptions and withdrawals.
(7) Hedge Funds: These investments are designed to provide diversification to an overall institutional portfolio and, in particular, provide protection against equity market downturns. They are comprised of Commodity Trading Advisor Managed Futures, Global Macro (Discretionary and/or Quant) and Long Volatility/Tail Risk Hedging strategies. The hedge funds are valued at the NAV of shares held by the Master Trust. Requests to redeem shares are granted daily, monthly or quarterly.
(8) Fixed Income - Hedge Funds: These investments target absolute, risk-adjusted returns by taking advantage of price dislocations and inconsistencies within credit markets. Funds are comprised primarily of U.S. and European corporate credit and structured credit. The investments are valued at the NAV of shares held by the Master Trust. Requests to redeem shares are granted on a quarterly basis on the three year fund anniversary with a ninety day notice period.
(9) Fixed Income - Collective Investment Funds: These investments include commingled funds consisting of a mix of U.S. government and investment grade corporate bonds. The collective investment funds are valued at NAV of the shares held by the Master Trust. The investment strategy is to achieve an investment return that approximates as closely to the Bloomberg Barclays U.S. Aggregate Bond Index over the long term by investing in the securities that comprise the benchmark. There are no restrictions on redemptions.
A reconciliation of the beginning and ending balance of the investments measured at fair value using significant unobservable inputs (Level 3) is as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 |
| Beginning Balance | | $ | 83,838 | | | $ | 84,901 | |
| Purchases, Issuances, and Settlements (Net) | | (23,151) | | | (10,151) | |
Unrealized Gains (Losses)(1) | | 26,879 | | | (4,577) | |
| Realized Gains | | 604 | | | 8,130 | |
| Interest and Dividend Income | | 21,248 | | | 5,535 | |
| Ending Balance | | $ | 109,419 | | | $ | 83,838 | |
|
| | | | | | | | |
| (in thousands) | | 2018 | | 2017 |
| Beginning balance | | $ | 74,204 |
| | $ | 68,102 |
|
| Purchases, issuances, and settlements (net) | | (14,867 | ) | | (8,630 | ) |
| Unrealized gains (losses) | | 3,724 |
| | (2,251 | ) |
| Realized gains | | 11,331 |
| | 15,560 |
|
| Interest and dividend income | | 1,865 |
| | 1,423 |
|
| Ending balance | | $ | 76,257 |
| | $ | 74,204 |
|
During fiscal 2021, the value of the Level 3 investments ranged from $83.8 million to $109.4 million, with an average value of $97.6 million.
The Company has commitments totaling $125.0 million for the private equity investments within the pension plans. The unfunded private equity commitment balance for each investment category as of October 28, 2018,31, 2021, and October 29, 201725, 2020, is as follows:
|
| | | | | | | | |
| (in thousands) | | 2018 | | 2017 |
| Domestic equity | | $ | 677 |
| | $ | 1,585 |
|
| International equity | | 36,142 |
| | 41,076 |
|
| Unfunded commitment balance | | $ | 36,819 |
| | $ | 42,661 |
|
| | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 |
| Domestic Equity | | $ | 81 | | | $ | 203 | |
| International Equity | | 9,794 | | | 15,919 | |
| Unfunded Commitment Balance | | $ | 9,875 | | | $ | 16,122 | |
Funding for future private equity capital calls will come from existing pension plan asset investmentsassets and not from additional cash contributions into the Company’s pension plans.
Note H
Derivatives and Hedging
The Company uses hedging programs to manage price risk associated with commodity purchases. These programs utilize futures contracts to manage the Company’s exposure to price fluctuations in the commodities markets. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged.Company.
Cash Flow Hedges: The Company utilizes corn and lean hog futures to offset price fluctuations in the Company’s future direct grain and hog purchases. The financial instruments are designated and accounted for as cash flow hedges, and the Company measures the effectiveness of the hedges at least quarterly. Effective gains or losses related to these cash flow hedges are reported in accumulated other comprehensive loss (AOCL) and reclassified into earnings, through cost of products sold, in the period or periods in which the hedged transactions affect earnings. Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold. The Company typically does not hedge its grain exposure beyond the next two upcoming fiscal years and its hog exposure beyond the next fiscal year. As of October 28, 2018, and October 29, 2017, the Company had the following outstanding commodity futures contracts that were entered into to hedge forecasted purchases:
|
| | |
| Volume |
Commodity | October 28, 2018 | October 29, 2017 |
Corn | 16.8 million bushels | 11.5 million bushels |
Lean hogs | 0.4 million cwt | 0.3 million cwt |
As of October 28, 2018, the Company has included in AOCL hedging losses of $1.4 million (before tax) relating to its positions, compared to gains of $1.8 million (before tax) as of October 29, 2017. The Company expects to recognize the majority of these losses over the next 12 months.
Fair Value Hedges: The Company utilizes futures to minimize the price risk assumed when fixed forward priced contracts are offered to the Company’s commodity suppliers. The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery. The futures contracts are designated and accounted for as fair value hedges, and the Company measures the effectiveness of the hedges at least quarterly. Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and are recorded on the Consolidated Statements of Financial Position as a current asset and liability, respectively. Effective gains or losses related to these fair value hedges are recognized through cost of products sold in the period or periods in which the hedged transactions affect earnings. Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold. As of October 28, 2018, and October 29, 2017, the Company had the following outstanding commodity futures contracts designated as fair value hedges:
|
| | |
| Volume |
Commodity | October 28, 2018 | October 29, 2017 |
Corn | 6.2 million bushels | 4.1 million bushels |
Lean hogs | 0.2 million cwt | 0.4 million cwt |
Other Derivatives: The Company holds certain futures and options contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets. The Company has not applied hedge accounting to these positions.
As of October 28, 2018, the Company had an immaterial amount of outstanding corn futures and options contracts related to these programs and none at October 29, 2017.
Fair Values: The fair values of the Company’s derivative instruments as of October 28, 2018, and October 29, 2017, were as follows:
|
| | | | | | | | | | |
| | | | | Fair Value(1) |
| (in thousands) | | Location on Consolidated Statements of Financial Position | | October 28, 2018 | | October 29, 2017 |
| Asset derivatives | | | | |
| | |
|
| Derivatives designated as hedges | | | | | | |
| Commodity contracts | | Other current assets | | $ | (30 | ) | | $ | 326 |
|
| Derivatives not designated as hedges | | | | | | |
| Commodity contracts | | Other current assets | | 6 |
| | — |
|
| Total asset derivatives | | | | $ | (24 | ) | | $ | 326 |
|
(1) Amounts represent the gross fair value of derivative assets and liabilities. The Company nets the derivative assets and liabilities for each of its hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The amount or timing of cash collateral balances may impact the classification of the derivative in the Consolidated Statements of Financial Position. See Note M “Fair Value Measurements” for a discussion of these net amounts as reported in the Consolidated Statements of Financial Position.
Derivative Gains and Losses: Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the fiscal years ended October 28, 2018, and October 29, 2017, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Gain/(Loss) Recognized in AOCL (Effective Portion) (1) | | Location on Consolidated Statements of Operations | | Gain/(Loss) Reclassified from AOCL into Earnings (Effective Portion) (1) | | Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (4) |
| | | Fiscal Year Ended | | | Fiscal Year Ended | | Fiscal Year Ended |
| Cash Flow Hedges: | | October 28, 2018 | | October 29, 2017 | | | October 28, 2018 | | October 29, 2017 | | October 28, 2018 | | October 29, 2017 |
| Commodity contracts | | $ | (8,634 | ) | | $ | (1,393 | ) | | Cost of products sold | | $ | (5,480 | ) | | $ | 5,994 |
| | $ | (177 | ) | | $ | 156 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | Location on Consolidated Statements of Operations | | Gain/(Loss) Recognized in Earnings (Effective Portion) (3) | | Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (5) |
| | | | | | Fiscal Year Ended | | Fiscal Year Ended |
| Fair Value Hedges: | | | | | | | October 28, 2018 | | October 29, 2017 | | October 28, 2018 | | October 29, 2017 |
| Commodity contracts | | | | | | Cost of products sold | | $ | 3,572 |
| | $ | (327 | ) | | $ | (171 | ) | | $ | 267 |
|
|
| | | | | | | | | | | | | | | | | | |
| | | | | Location on Consolidated Statements of Operations | | Gain/(Loss) Recognized in Earnings | | |
| | | | | | Fiscal Year Ended | | |
| Derivatives Not Designated as Hedges: | | | October 28, 2018 | | October 29, 2017 | | | | |
| Commodity contracts | | | | | | Cost of products sold | | $ | 20 |
| | $ | (408 | ) | | | | |
(1) Amounts represent gains or losses in AOCL before tax. See Note J for the after tax impact of these gains or losses on net earnings.
(2) There were no gains or losses excluded from the assessment of hedge effectiveness during the fiscal year.
(3) Amounts represent losses on commodity contracts designated as fair value hedges that were closed during the fiscal year, which were offset by a corresponding gain on the underlying hedged purchase commitment. Additional gains or losses related to changes in the fair value of open commodity contracts, along with the offsetting gain or loss on the hedged purchase commitment, are also marked-to-market through earnings with no impact on a net basis.
(4) There were no gains or losses resulting from the discontinuance of cash flow hedges during the fiscal year.
(5) There were no gains or losses recognized as a result of a hedged firm commitment no longer qualifying as a fair value hedge during the fiscal year.
Note IH
Investments In and Receivables From Affiliates
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 any related receivables from affiliates, are included in the Consolidated Statements of Financial Position as investments in and receivables from affiliates.
Investments in and receivables from affiliates consists of the following: |
| | | | | | | | | | | | |
| (in thousands) | | Segment | | % Owned | | October 28, 2018 | | October 29, 2017 |
| MegaMex Foods, LLC | | Grocery Products | | 50% | | $ | 205,148 |
| | $ | 177,657 |
|
| Foreign joint ventures | | International & Other | | Various (26 – 40%) | | 68,005 |
| | 64,712 |
|
| Total | | | | | | $ | 273,153 |
| | $ | 242,369 |
|
Equity in earnings of affiliates consists of the following:
|
| | | | | | | | | | | | | | |
| (in thousands) | | Segment | | 2018 | | 2017 | | 2016 |
| MegaMex Foods, LLC | | Grocery Products | | $ | 52,988 |
| | $ | 31,357 |
| | $ | 30,651 |
|
| Foreign joint ventures | | International & Other | | 5,984 |
| | 8,233 |
| | 8,034 |
|
| Total | | | | $ | 58,972 |
| | $ | 39,590 |
| | $ | 38,685 |
|
Dividends received from affiliates for the fiscal years ended October 28, 2018, October 29, 2017, and October 30, 2016, were $30.0 million, $27.5 million, and $46.2 million, respectively. The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $13.6 million is remaining as of October 28, 2018. This difference is being amortized through equity in earnings of affiliates.
Note J
Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive lossAccumulated Other Comprehensive Loss are as follows:
|
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | Foreign Currency Translation | | Pension & Other Benefits | | | Deferred Gain (Loss) – Hedging | | | Accumulated Other Comprehensive Loss |
| Balance at October 25, 2015 | | $ | 969 |
| | $ | (227,266 | ) | | | $ | 629 |
| | | $ | (225,668 | ) |
| Unrecognized gains (losses) | | | | | | | | | | |
| Gross | | (6,458 | ) | | (124,783 | ) | | | 6,852 |
| | | (124,389 | ) |
| Tax effect | | — |
| | 47,068 |
| | | (2,792 | ) | | | 44,276 |
|
| Reclassification into net earnings | | | | | | | | | | |
| Gross | | — |
| | 13,533 |
| (1) | | 1,310 |
| (2) | | 14,843 |
|
| Tax effect | | — |
| | (5,104 | ) | | | (261 | ) | | | (5,365 | ) |
| Net of tax amount | | (6,458 | ) | | (69,286 | ) | | | 5,109 |
| | | (70,635 | ) |
| Balance at October 30, 2016 | | $ | (5,489 | ) | | $ | (296,552 | ) | | | $ | 5,738 |
| | | $ | (296,303 | ) |
| Unrecognized gains (losses) | | | | | | | | | | |
| Gross | | (1,357 | ) | | 65,305 |
| | | (1,393 | ) | | | 62,555 |
|
| Tax effect | | — |
| | (24,535 | ) | | | 759 |
| | | (23,776 | ) |
| Reclassification into net earnings | | | | | | | | | | |
| Gross | | — |
| | 21,316 |
| (1) | | (5,994 | ) | (2) | | 15,322 |
|
| Tax effect | | — |
| | (8,009 | ) | | | 2,136 |
| | | (5,873 | ) |
| Net of tax amount | | (1,357 | ) | | 54,077 |
| | | (4,492 | ) | | | 48,228 |
|
| Balance at October 29, 2017 | | $ | (6,846 | ) | | $ | (242,475 | ) | | | $ | 1,246 |
| | | $ | (248,075 | ) |
| Unrecognized gains (losses) | | | | | | | | | | |
| Gross | | (38,008 | ) | | 46,430 |
| | | (8,634 | ) | | | (212 | ) |
| Tax effect | | — |
| | (11,244 | ) | | | 2,090 |
| | | (9,154 | ) |
| Reclassification into net earnings | | �� | | | | | | | | |
| Gross | | — |
| | 12,766 |
| (1) | | 5,480 |
| (2) | | 18,246 |
|
| Tax effect | | — |
| | (3,090 | ) | | | (1,213 | ) | | | (4,303 | ) |
| Net of tax amount | | (38,008 | ) | | 44,862 |
| | | (2,277 | ) | | | 4,577 |
|
| Balance at October 28, 2018 | | $ | (44,854 | ) | | $ | (197,613 | ) | | | $ | (1,031 | ) | | | $ | (243,498 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Foreign
Currency
Translation | Pension & Other
Post-retirement Benefits | | Deferred Hedging
Gain (Loss) | | Accumulated
Other
Comprehensive
Loss |
| Balance at October 28, 2018 | | $ | (44,854) | | | $ | (197,613) | | | | $ | (1,031) | | | | $ | (243,498) | |
| Impact of Adoption of ASU: | | | | | | | | | | |
| ASU 2017-12 | | — | | | — | | | | (21) | | (3) | | (21) | |
| ASU 2018-02 | | — | | | (53,778) | | (3) | | — | | | | (53,778) | |
| Adjusted balance at October 28, 2018 | | $ | (44,854) | | | $ | (251,391) | | | | $ | (1,052) | | | | $ | (297,297) | |
| Unrecognized Gains (Losses) | | | | | | | | | | |
| Gross | | (8,142) | | | (138,356) | | | | 2,834 | | | | (143,664) | |
| Tax Effect | | — | | | 33,822 | | | | (699) | | | | 33,123 | |
| Reclassification into Net Earnings | | | | | | | | | | |
| Gross | | — | | | 9,335 | | (1) | | 1,701 | | (2) | | 11,036 | |
| Tax Effect | | — | | | (2,287) | | | | (411) | | | | (2,698) | |
| Net of Tax Amount | | (8,142) | | | (97,486) | | | | 3,425 | | | | (102,203) | |
| Balance at October 27, 2019 | | $ | (52,996) | | | $ | (348,877) | | | | $ | 2,373 | | | | $ | (399,500) | |
| Unrecognized Gains (Losses) | | | | | | | | | | |
| Gross | | (11,164) | | | 2,003 | | | | (38,213) | | | | (47,374) | |
| Tax Effect | | — | | | (404) | | | | 9,324 | | | | 8,920 | |
| Reclassification into Net Earnings | | | | | | | | | | |
| Gross | | — | | | 18,609 | | (1) | | 37,834 | | (2) | | 56,443 | |
| Tax Effect | | — | | | (4,510) | | | | (9,229) | | | | (13,739) | |
| Net of Tax Amount | | (11,164) | | | 15,698 | | | | (284) | | | | 4,250 | |
| Balance at October 25, 2020 | | $ | (64,161) | | | $ | (333,178) | | | | $ | 2,089 | | | | $ | (395,250) | |
| Unrecognized Gains (Losses) | | | | | | | | | | |
| Gross | | 12,980 | | | 72,623 | | | | 75,084 | | | | 160,687 | |
| Tax Effect | | — | | | (17,715) | | | | (18,259) | | | | (35,974) | |
| Reclassification into Net Earnings | | | | | | | | | | |
| Gross | | — | | | 22,597 | | (1) | | (31,443) | | (2) | | (8,846) | |
| Tax Effect | | — | | | (5,538) | | | | 7,652 | | | | 2,114 | |
| Net of Tax Amount | | 12,980 | | | 71,967 | | | | 33,034 | | | | 117,981 | |
| Balance at October 31, 2021 | | $ | (51,181) | | | $ | (261,211) | | | | $ | 35,123 | | | | $ | (277,269) | |
(1) Included in computation of net periodic cost (seecost. See Note G - Pension and Other Post-retirement Benefits for additional details).details.
(2) Included in costCost of products soldProducts Sold and Interest Expense in the Consolidated Statements of Operations. See Note F - Derivatives and Hedging.
(3) Cumulative effect from the adoption of Accounting Standards Updates. See Note A - Summary of Significant Accounting Policies.
Note KI
Income TaxesFair Value Measurements
On December 22, 2017,Pursuant to the United States enacted comprehensive tax legislation into law, H.R.provisions of ASC 820, the Company’s financial assets and liabilities carried at fair value on a recurring basis in the consolidated financial statements as of October 31, 2021, and October 25, 2020, and their level within the fair value hierarchy are presented in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at October 31, 2021 |
| | Total Fair
Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) | | | | |
| Assets at Fair Value | | | | | | | | |
Cash and Cash Equivalents(1) | | $ | 613,530 | | | $ | 611,111 | | | $ | 2,419 | | | $ | — | |
Short-term Marketable Securities(2) | | 21,162 | | | 8,790 | | | 12,372 | | | — | |
Other Trading Securities(3) | | 203,020 | | | — | | | 203,020 | | | — | |
Commodity Derivatives(4) | | 13,522 | | | 8,104 | | | 5,418 | | | — | |
| Total Assets at Fair Value | | $ | 851,234 | | | $ | 628,005 | | | $ | 223,229 | | | $ | — | |
| Liabilities at Fair Value | | | | | | | | |
Deferred Compensation(3) | | $ | 70,466 | | | $ | — | | | $ | 70,466 | | | $ | — | |
| Total Liabilities at Fair Value | | $ | 70,466 | | | $ | — | | | $ | 70,466 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at October 25, 2020 |
| | Total Fair
Value | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) | | | | |
| Assets at Fair Value | | | | | | | | |
Cash and Cash Equivalents(1) | | $ | 1,714,309 | | | $ | 1,713,098 | | | $ | 1,211 | | | $ | — | |
Short-term Marketable Securities(2) | | 17,338 | | | 5,728 | | | 11,610 | | | — | |
Other Trading Securities(3) | | 173,114 | | | — | | | 173,114 | | | — | |
Commodity Derivatives(4) | | 10,950 | | | 10,950 | | | — | | | — | |
| Total Assets at Fair Value | | $ | 1,915,711 | | | $ | 1,729,776 | | | $ | 185,935 | | | $ | — | |
| Liabilities at Fair Value | | | | | | | | |
Deferred Compensation(3) | | $ | 65,154 | | | $ | — | | | $ | 65,154 | | | $ | — | |
| Total Liabilities at Fair Value | | $ | 65,154 | | | $ | — | | | $ | 65,154 | | | $ | — | |
The following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:
(1) The Company’s cash equivalents considered Level 1 commonly referredconsist primarily of bank deposits, money market funds rated AAA or other highly liquid investment accounts and have a maturity date of three months or less. Cash equivalents considered Level 2 are funds holding agency bonds or securities booked at amortized cost.
(2) The Company holds securities as part of a portfolio maintained to generate investment income and to provide cash for operations of the Company, if necessary. The portfolio is managed by a third party who is responsible for daily trading activities and all assets within the portfolio are highly liquid. The cash, U.S. government securities and exchange-traded funds held by the portfolio are classified as the Tax Act. ExceptLevel 1. The current investment portfolio also includes corporate bonds and other asset backed securities for which there is an active, quoted market. Market prices are obtained from a variety of industry providers, large financial institutions and other third-party sources to calculate a representative daily market value, and therefore, these securities are classified as Level 2.
(3) The Company maintains a rabbi trust to fund certain provisions, the Tax Act is effective for tax years beginning on or after January 1, 2018. As a fiscal year U.S. taxpayer, thesupplemental executive retirement plans and deferred compensation plans. A majority of the funds held in the rabbi trust relate to the supplemental executive retirement plans and have been invested in fixed income funds managed by a third party. The declared rate on these funds is set based on a formula using the yield of the general account investment portfolio supporting the fund as adjusted for expenses and other charges. The rate is guaranteed for one year at issue and may be reset annually on the policy anniversary, subject to a guaranteed minimum rate. As the value is based on adjusted market rates and the fixed rate is only reset on an annual basis, these funds are classified as Level 2.
Under the deferred compensation plans, participants can defer certain types of compensation and elect to receive a return on the deferred amounts based on the changes in fair value of various investment options. These funds are managed by a third-party insurance policy, the values of which represent their cash surrender value based on the fair value of the underlying investments in the account and include equity securities, money market accounts, bond funds or other portfolios for which there is an active quoted market. Therefore, these policies are classified as Level 2. The Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based on a specified percentage of the I.R.S. applicable federal rates. These balances are also classified as Level 2. The funds held in the rabbi trust are included in Other Assets on the Consolidated Statements of Financial Position.
The related deferred compensation liabilities are included in Other Long-term Liabilities on the Consolidated Statements of Financial Position with investment options generally mirroring those funds held by the rabbi trust. Therefore, these investment balances are classified as Level 2. Securities held by the trust are classified as trading securities. Unrealized gains and losses associated with these investments are included in the Company's earnings. Securities held by the trust generated gains of $21.2 million, $7.0 million, and $8.3 million for fiscal years 2021, 2020, and 2019, respectively.
(4) The Company’s commodity derivatives represent futures, swaps, and options contracts used in its hedging or other programs to offset price fluctuations associated with purchases of corn and hogs, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers. The Company’s futures contracts for corn are traded on the Chicago Board of Trade, while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange. These are active markets with quoted prices available, and these contracts are classified as Level 1. Over-the-counter (OTC) derivative
instruments are valued using discounted cash flow models, observable and non-observable market inputs, and other mathematical pricing models. The Company’s corn futures options contracts are OTC instruments classified as Level 2 whose value is calculated using the Black-Scholes pricing model, corn future prices quoted from the Chicago Board of Trade, and other adjustments to inputs that are observable in active markets. All derivatives are reviewed for potential credit risk and risk of nonperformance. The net balance for each program is included in Other Current Assets or Accounts Payable, as appropriate, in the Consolidated Statements of Financial Position. As of October 31, 2021, the Company has recognized the obligation to return net cash collateral of $10.8 million from various counterparties (including cash of $45.6 million less $34.8 million of realized gain). As of October 25, 2020, the Company had recognized the right to reclaim net cash collateral of $12.3 million from various counterparties (including cash of $25.5 million less $13.2 million of realized loss ).
The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value. The Company does not carry its long-term debt at fair value in its Consolidated Statements of Financial Position. The fair value of long-term debt, utilizing discounted cash flows (Level 2), was $3.3 billion as of October 31, 2021, and $1.2 billion as of October 25, 2020. See Note L - Long Term Debt and Other Borrowing Arrangements for additional information.
In accordance with the provisions such as eliminatingof ASC 820, the domestic manufacturing deduction, creating new taxesCompany measures certain nonfinancial assets and liabilities at fair value, which are recognized or disclosed on certain foreign sourced income,a nonrecurring basis (e.g. goodwill, intangible assets, and introducing new limitationsproperty, plant, and equipment). See additional discussion regarding the Company’s goodwill and intangible assets in Note D - Goodwill and Intangible Assets. During fiscal years 2021, 2020, and 2019, there were no other material remeasurements of assets or liabilities at fair value on certain business deductions, will not applya nonrecurring basis subsequent to their initial recognition.
Note J
Commitments and Contingencies
To ensure a steady supply of hogs and turkeys and keep the cost of products stable, the Company has entered into contracts with producers for the purchase of hogs and turkeys at formula-based prices over periods up to 10 years. The Company has also entered into grow-out contracts with independent farmers to raise turkeys for the Company until fiscal 2019. For fiscal 2018,for periods up to 25 years. Under these arrangements, the Company owns the livestock, feed, and effective inother supplies while the first quarter,independent farmers provide facilities and labor. In addition, the most significant impacts include loweringCompany has contracted for the purchase of corn, soybean meal, feed ingredients, and other raw materials from independent suppliers for periods up to 4 years. Under these contracts, the U.S. federal corporate income tax rate, remeasuring certain net deferred tax liabilities, and requiring the transition tax on the deemed repatriation of certain foreign earnings. The phase-in of the lower federal corporate income tax rate resulted in a blended rate of 23.4 percentCompany is committed to make purchases, assuming current price levels, as follows:
| | | | | |
| (in thousands) | October 31, 2021 |
| 2022 | $ | 1,180,277 | |
| 2023 | 778,324 | |
| 2024 | 612,248 | |
| 2025 | 439,812 | |
| 2026 | 336,428 | |
| Later Years | 302,455 | |
| Total | $ | 3,649,544 | |
Purchases under these contracts for fiscal 2018, as compared toyears 2021, 2020, and 2019 were $1.1 billion, $0.9 billion, and $1 billion, respectively.
As of October 31, 2021, the previous 35.0 percent, and is basedCompany has $47.3 million of standby letters of credit issued on the applicable tax rates before and after passageits behalf. The standby letters of the Tax Act and the number of days in the fiscal year. The tax rate will be reduced to 21.0 percent in subsequent fiscal years.
In March 2018, the FASB issued ASU 2018-05, which provides guidance for companiescredit are primarily related to the Tax Act. ASU 2018-05 allowsCompany’s self-insured workers compensation programs. However, that amount includes revocable standby letters of credit totaling $3.1 million for a measurement periodobligations of up to one year after the enactment datean affiliated party that may arise under workers compensation claims. Letters of the Tax Act to finalize the recording of the related tax impacts. Based on current interpretation of the Tax Act, the Company made reasonable estimates to record provisional adjustments during the fiscal 2018, as described above. As the Company accumulates and processes data to finalize the underlying calculations, and as regulators issue further guidance, estimates may change during the first quarter of fiscal 2019. The Company will continue to refine such amounts within the measurement period allowed, which will be completed no later than the first quarter of fiscal 2019.
In connection withcredit are not reflected in the Company’s ongoing analysisConsolidated Statements of the impact of the U.S. tax law changes, which is provisional and subject to change, the Company recorded a net tax benefit of $72.9 million during fiscal 2018. This provisional net tax benefit arises from a benefit of $81.2 million from re-measuring the Company’s net U.S. deferred tax liabilities, partially offset by the Company’s accrual for the transition tax and other U.S. tax law changes of $8.3 million.
With respect to the new Tax Act provision on global intangible low-tax income (GILTI), which will apply to the Company starting in fiscal 2019, we have not made an accounting policy election on the deferred tax treatment.
The components of the provision for income taxes are as follows:
|
| | | | | | | | | | | | |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Current | | | | | | |
| U.S. Federal | | $ | 134,869 |
| | $ | 329,707 |
| | $ | 341,799 |
|
| State | | 27,782 |
| | 32,719 |
| | 33,753 |
|
| Foreign | | 13,492 |
| | 6,950 |
| | 6,819 |
|
| Total current | | 176,143 |
| | 369,376 |
| | 382,371 |
|
| Deferred | | | | | | |
| U.S. Federal | | (15,573 | ) | | 57,533 |
| | 40,456 |
|
| State | | 10,975 |
| | 4,510 |
| | 3,770 |
|
| Foreign | | (2,843 | ) | | 123 |
| | 101 |
|
| Total deferred | | (7,441 | ) | | 62,166 |
| | 44,327 |
|
| Total provision for income taxes | | $ | 168,702 |
| | $ | 431,542 |
| | $ | 426,698 |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred income tax liabilities and assets are as follows:
|
| | | | | | | | |
| (in thousands) | | October 28, 2018 | | October 29, 2017 |
| Deferred tax liabilities | | |
| | |
|
| Goodwill and intangible assets | | $ | (266,709 | ) | | $ | (298,159 | ) |
| Tax over book depreciation and basis differences | | (117,861 | ) | | (107,076 | ) |
| Other, net | | (11,221 | ) | | (18,657 | ) |
| Deferred tax assets | | | | |
| Pension and post-retirement benefits | | 75,501 |
| | 144,392 |
|
| Employee compensation related liabilities | | 64,852 |
| | 100,311 |
|
| Marketing and promotional accruals | | 22,595 |
| | 32,011 |
|
| Other, net | | 35,750 |
| | 48,768 |
|
| Net deferred tax (liabilities) assets | | $ | (197,093 | ) | | $ | (98,410 | ) |
Reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
| | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| U.S. statutory rate | | 23.4 | % | | 35.0 | % | | 35.0 | % |
| State taxes on income, net of federal tax benefit | | 2.6 |
| | 1.7 |
| | 2.1 |
|
| Domestic production activities deduction | | (1.5 | ) | | (2.4 | ) | | (2.8 | ) |
| Foreign tax credit | | — |
| | — |
| | (0.9 | ) |
| Provisional tax law change | | (6.3 | ) |
| — |
|
| — |
|
| Equity based compensation | | (3.4 | ) |
| — |
|
| — |
|
| All other, net | | (0.5 | ) | | (0.6 | ) | | (1.0 | ) |
| Effective tax rate | | 14.3 | % | | 33.7 | % | | 32.4 | % |
In fiscal 2016, the Company approved a repatriation of $38.0 million of foreign earnings related to an international entity restructuring which generated a U.S. tax benefit of $12.1 million. The Company recorded a favorable discrete tax event related to this transaction.
During 2018, the Company provisionally recorded the transition tax on its foreign earnings. Those foreign earnings, aggregating to approximately $105.9 million at October 28, 2018, have been deemed repatriated for U.S. federal tax purposes. The Company maintains all earnings are permanently reinvested. Accordingly, no additional income taxes have been provided for withholding tax, state tax, or other taxes.
Total income taxes paid during fiscal years 2018, 2017, and 2016 were $147.5 million, $336.0 million, and $372.0 million, respectively.
The following table sets forth changes in the unrecognized tax benefits, excluding interest and penalties, for fiscal years 2017 and 2018.
|
| | | | |
| (in thousands) | | |
| Balance as of October 30, 2016 | | $ | 27,389 |
|
| Tax positions related to the current period | | |
| Increases | | 3,094 |
|
| Tax positions related to prior periods | | |
| Increases | | 8,923 |
|
| Decreases | | (2,388 | ) |
| Settlements | | (1,825 | ) |
| Decreases related to a lapse of applicable statute of limitations | | (2,396 | ) |
| Balance as of October 29, 2017 | | $ | 32,797 |
|
| Tax positions related to the current period | | |
| Increases | | 3,540 |
|
| Tax positions related to prior periods | | |
| Increases | | 3,712 |
|
| Decreases | | (1,874 | ) |
| Settlements | | (2,702 | ) |
| Decreases related to a lapse of applicable statute of limitations | | (2,356 | ) |
| Balance as of October 28, 2018 | | $ | 33,117 |
|
The amount of unrecognized tax benefits, including interest and penalties, is recorded in other long-term liabilities. If recognized as of October 28, 2018, and October 29, 2017, $26.3 million and $20.2 million, respectively, would impact the Company’s effective tax rate. The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense, with losses of $0.6 million and $0.1 million included in expense for fiscal 2018 and 2017, respectively. The amount of accrued interest and penalties at October 28, 2018, and October 29, 2017, associated with unrecognized tax benefits was $6.5 million and $7.1 million, respectively.Financial Position.
The Company is regularly audited by federal and state taxing authorities. The United States Internal Revenue Service (I.R.S.) concluded their examination of fiscal 2016involved in litigation on an ongoing basis arising in the first quarterordinary course of fiscal 2018. business. In the opinion of management, the outcome of litigation currently pending will not materially affect the Company’s results of operations, financial condition, or liquidity.
Note K
Leases
The Company has electedoperating leases for manufacturing facilities, office space, warehouses, transportation equipment, and miscellaneous real estate and equipment contracts. Finance leases primarily include turkey growing facilities and an aircraft. The Company's lessor portfolio consists primarily of immaterial operating leases of farmland to participatethird parties.
Lease information included in the Compliance Assurance Process (CAP)Consolidated Statements of Financial Position are:
| | | | | | | | | | | | | | |
| (in thousands) | Location on Consolidated Statements of
Financial Position | | October 31, 2021 | October 25, 2020 |
| Right-of-Use Assets | | | | |
| Operating | Other Assets | | $ | 72,291 | | $ | 53,119 | |
| Finance | Net Property, Plant, and Equipment | | 53,433 | | 61,059 | |
| Total Right-of-Use Assets | | $ | 125,724 | | $ | 114,179 | |
| Liabilities | | | | |
| Current | | | | |
| Operating | Accrued Expenses | | $ | 18,331 | | $ | 12,025 | |
| Finance | Current Maturities of Long-term Debt | | 8,362 | | 8,308 | |
| Noncurrent | | | | |
| Operating | Other Long-term Liabilities | | 56,779 | | 43,126 | |
| Finance | Long-term Debt Less Current Maturities | | 44,637 | | 52,722 | |
| Total Lease Liabilities | | | $ | 128,109 | | $ | 116,182 | |
Lease expenses are:
| | | | | | | | | | | |
| | Fiscal Year Ended |
| (in thousands) | | October 31, 2021 | October 25, 2020 |
Operating Lease Cost (1) | | $ | 21,993 | | $ | 19,602 | |
| Finance Lease Cost | | | |
| Amortization of Right-of-Use Assets | | 8,104 | | 7,985 | |
| Interest on Lease Liabilities | | 2,019 | | 2,304 | |
Variable Lease Cost (2) | | 544,635 | | 424,955 | |
| Net Lease Cost | | $ | 576,751 | | $ | 454,846 | |
(1) Includes short-term lease costs, which are immaterial.
(2) ASC 842 - Leases requires disclosure of payments related to agreements with an embedded lease that are not otherwise reflected on the balance sheet. The Company's variable lease costs primarily include inventory related expenses, such as materials, labor, and overhead from manufacturing and service agreements that contain embedded leases. Variability of these costs is determined based on usage or output and may vary for other reasons such as changes in material prices.
The weighted-average remaining lease term and discount rate for lease liabilities included in the Consolidated Statements of Financial Position are:
| | | | | | | | |
| October 31, 2021 | October 25, 2020 |
| Weighted Average Remaining Lease Term | | |
| Operating Leases | 5.92 years | 7.31 years |
| Finance Leases | 7.18 years | 8.14 years |
| Weighted Average Discount Rate | | |
| Operating Leases | 1.76 | % | 2.28 | % |
| Finance Leases | 3.48 | % | 3.54 | % |
Supplemental cash flow and other information related to leases for the fiscal years throughyear-end are:
| | | | | | | | | | | |
| (in thousands) | | October 31, 2021 | October 25, 2020 |
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities | | | |
| Operating Cash Flows from Operating Leases | | $ | 20,305 | | $ | 15,412 | |
| Operating Cash Flows from Finance Leases | | 2,019 | | 2,304 | |
| Financing Cash Flows from Finance Leases | | 8,598 | | 8,189 | |
| | | |
| Right-of-Use Assets obtained in exchange for new operating lease liabilities | | 31,962 | | 5,210 | |
The maturity of the Company's lease liabilities as of October 31, 2021, are:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Operating Leases | | Finance Leases (1) | | Total |
| 2022 | | $ | 20,062 | | | $ | 10,025 | | | $ | 30,088 | |
| 2023 | | 17,334 | | | 9,827 | | | 27,161 | |
| 2024 | | 12,548 | | | 9,688 | | | 22,236 | |
| 2025 | | 9,557 | | | 8,134 | | | 17,690 | |
| 2026 | | 5,856 | | | 5,652 | | | 11,508 | |
| 2027 and beyond | | 16,516 | | | 15,540 | | | 32,056 | |
| Total Lease Payments | | $ | 81,872 | | | $ | 58,867 | | | $ | 140,738 | |
| Less: Imputed Interest | | 6,762 | | | 5,868 | | | 12,630 | |
| Present Value of Lease Liabilities | | $ | 75,110 | | | $ | 52,999 | | | $ | 128,109 | |
(1) Over the life of the lease contracts, finance lease payments include $8.7 million related to purchase options which are reasonably certain of being exercised.
Prior to the adoption of ASC 842 on October 28, 2019, rent expense under operating leases was $23.1 million in fiscal year 2019.
Note L
Long-term Debt and Other Borrowing Arrangements
Long-term Debt consists of:
| | | | | | | | |
| (in thousands) | October 31, 2021 | October 25, 2020 |
| | |
Senior Unsecured Notes, with Interest at 3.050%, Interest Due Semi-annually through June 2051 Maturity Date | $ | 600,000 | | $ | — | |
Senior Unsecured Notes, with Interest at 1.800%, Interest Due Semi-annually through June 2030 Maturity Date | 1,000,000 | | 1,000,000 | |
Senior Unsecured Notes, with Interest at 1.700%, Interest Due Semi-annually through June 2028 Maturity Date | 750,000 | | — | |
Senior Unsecured Notes, with Interest at 0.650%, Interest Due Semi-annually through June 2024 Maturity Date | 950,000 | | — | |
Senior Unsecured Notes, with Interest at 4.125%, Interest Due Semi-annually through April 2021 Maturity Date | — | | 250,000 | |
| Unamortized Discount on Senior Notes | (8,484) | | (2,630) | |
| Unamortized Debt Issuance Costs | (23,435) | | (7,979) | |
Finance Lease Liabilities(1) | 52,999 | | 61,030 | |
| Other Financing Arrangements | 2,823 | | 3,206 | |
| Total | 3,323,903 | | 1,303,627 | |
| Less: Current Maturities of Long-term Debt | 8,756 | | 258,691 | |
| Long-term Debt Less Current Maturities | $ | 3,315,147 | | $ | 1,044,936 | |
(1) See Note K - Leases for additional information
Senior Unsecured Notes: The objectiveCompany repaid its $250.0 million senior unsecured notes upon maturity in April 2021.
On June 11, 2020, the Company issued senior notes in an aggregate principal amount of CAP is$1.0 billion, due June 11, 2030. The notes bear interest at a fixed rate of 1.800% per annum, with interest paid semi-annually in arrears on June 11 and December 11 of each year, commencing December 11, 2020. The notes may be redeemed in whole or in part at any time at the applicable redemption price set forth in the prospectus supplement. If a change of control triggering event occurs, the Company must offer to contemporaneously workpurchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
On June 3, 2021, the Company issued $950.0 million aggregate principal amount of its 0.650% notes due 2024 (the "2024 Notes"), $750.0 million aggregate principal amount of its 1.700% notes due 2028 (the "2028 Notes"), and $600.0 million aggregate principal amount of its 3.050% notes due 2051 (the "2051 Notes"). Interest will accrue per annum at the stated rates with interest on the notes being paid semi-annually in arrears on June 3 and December 3 of each year, commencing December 3, 2021. Interest rate risk was hedged utilizing interest rate locks on the 2028 Notes and 2051 Notes. The Company lifted the hedges in conjunction with the I.R.S. to achieve federal tax complianceissuance of these notes. See Note F - Derivatives and resolve allHedging for additional details. The 2024 Notes may be redeemed in whole or mostin part one year after their issuance without penalty for early partial payments or full redemption. The 2028 Notes and 2051 Notes may be redeemed in whole or in part at any time at the applicable redemption price. If a change of the issues prior to filing of the tax return. The Company may elect to continue participating in CAP for future tax years;control triggering event occurs, the Company may withdraw frommust offer to purchase the programnotes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
Unsecured Revolving Credit Facility: On May 6, 2021, the Company entered into an unsecured revolving credit agreement with Wells Fargo Bank, National Association as administrative agent, swingline lender and issuing lender, U.S. Bank National Association, JPMorgan Chase Bank, N.A. and BofA Securities, Inc. as syndication agents and the lenders party thereto. In connection with entering the revolving credit agreement, the Company terminated its existing credit facility that was entered into on June 24, 2015. The revolving credit agreement provides for an unsecured revolving credit facility with an aggregate principal commitment amount at any time.time outstanding of up to $750.0 million with an uncommitted increase option of an additional $375.0 million upon the satisfaction of certain conditions. The unsecured revolving line of credit bears interest, at the Company’s election, at either a Base Rate plus margin of 0.0% to 0.150% or the Eurocurrency Rate plus margin of 0.575% to 1.150% and a variable fee of 0.050% to 0.100% is paid for the availability of this credit line. Extensions of credit under the facility may be made in the form of revolving loans, swingline loans and letters of credit. The lending commitments under the agreement 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 31, 2021, and October 25, 2020, the Company had no outstanding draws from these facilities.
Debt Covenants: The Company is required by certain covenants in various stagesits debt agreements to maintain specified levels of audit by several state taxing authorities on a varietyfinancial ratios and financial position. As of October 31, 2021, the Company was in compliance with all of these covenants.
Total interest paid in the last three fiscal years is as far back as 2011. While it is reasonably possible that one or more of these audits may be completed within the next 12 months and the related unrecognized tax benefits may change based on the status of the examinations, it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.follows:
| | | | | | | | |
| (in millions) | | |
| 2021 | | $ | 25.1 | |
| 2020 | | 14.5 | |
| 2019 | | 19.0 | |
Note LM
Stock-Based CompensationFair Value Measurements
Pursuant to the provisions of ASC 820, the Company’s financial assets and liabilities carried at fair value on a recurring basis in the consolidated financial statements as of October 31, 2021, and October 25, 2020, and their level within the fair value hierarchy are presented in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at October 31, 2021 |
| | Total Fair
Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) | | | | |
| Assets at Fair Value | | | | | | | | |
Cash and Cash Equivalents(1) | | $ | 613,530 | | | $ | 611,111 | | | $ | 2,419 | | | $ | — | |
Short-term Marketable Securities(2) | | 21,162 | | | 8,790 | | | 12,372 | | | — | |
Other Trading Securities(3) | | 203,020 | | | — | | | 203,020 | | | — | |
Commodity Derivatives(4) | | 13,522 | | | 8,104 | | | 5,418 | | | — | |
| Total Assets at Fair Value | | $ | 851,234 | | | $ | 628,005 | | | $ | 223,229 | | | $ | — | |
| Liabilities at Fair Value | | | | | | | | |
Deferred Compensation(3) | | $ | 70,466 | | | $ | — | | | $ | 70,466 | | | $ | — | |
| Total Liabilities at Fair Value | | $ | 70,466 | | | $ | — | | | $ | 70,466 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at October 25, 2020 |
| | Total Fair
Value | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) | | | | |
| Assets at Fair Value | | | | | | | | |
Cash and Cash Equivalents(1) | | $ | 1,714,309 | | | $ | 1,713,098 | | | $ | 1,211 | | | $ | — | |
Short-term Marketable Securities(2) | | 17,338 | | | 5,728 | | | 11,610 | | | — | |
Other Trading Securities(3) | | 173,114 | | | — | | | 173,114 | | | — | |
Commodity Derivatives(4) | | 10,950 | | | 10,950 | | | — | | | — | |
| Total Assets at Fair Value | | $ | 1,915,711 | | | $ | 1,729,776 | | | $ | 185,935 | | | $ | — | |
| Liabilities at Fair Value | | | | | | | | |
Deferred Compensation(3) | | $ | 65,154 | | | $ | — | | | $ | 65,154 | | | $ | — | |
| Total Liabilities at Fair Value | | $ | 65,154 | | | $ | — | | | $ | 65,154 | | | $ | — | |
The following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:
(1) The Company’s cash equivalents considered Level 1 consist primarily of bank deposits, money market funds rated AAA or other highly liquid investment accounts and have a maturity date of three months or less. Cash equivalents considered Level 2 are funds holding agency bonds or securities booked at amortized cost.
(2) The Company issues stock options and restricted sharesholds securities as part of its stock incentivea portfolio maintained to generate investment income and to provide cash for operations of the Company, if necessary. The portfolio is managed by a third party who is responsible for daily trading activities and all assets within the portfolio are highly liquid. The cash, U.S. government securities and exchange-traded funds held by the portfolio are classified as Level 1. The current investment portfolio also includes corporate bonds and other asset backed securities for which there is an active, quoted market. Market prices are obtained from a variety of industry providers, large financial institutions and other third-party sources to calculate a representative daily market value, and therefore, these securities are classified as Level 2.
(3) The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred compensation plans. A majority of the funds held in the rabbi trust relate to the supplemental executive retirement plans and have been invested in fixed income funds managed by a third party. The declared rate on these funds is set based on a formula using the yield of the general account investment portfolio supporting the fund as adjusted for employeesexpenses and non-employee directors.other charges. The rate is guaranteed for one year at issue and may be reset annually on the policy anniversary, subject to a guaranteed minimum rate. As the value is based on adjusted market rates and the fixed rate is only reset on an annual basis, these funds are classified as Level 2.
Under the deferred compensation plans, participants can defer certain types of compensation and elect to receive a return on the deferred amounts based on the changes in fair value of various investment options. These funds are managed by a third-party insurance policy, the values of which represent their cash surrender value based on the fair value of the underlying investments in the account and include equity securities, money market accounts, bond funds or other portfolios for which there is an active quoted market. Therefore, these policies are classified as Level 2. The Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based on a specified percentage of the I.R.S. applicable federal rates. These balances are also classified as Level 2. The funds held in the rabbi trust are included in Other Assets on the Consolidated Statements of Financial Position.
The related deferred compensation liabilities are included in Other Long-term Liabilities on the Consolidated Statements of Financial Position with investment options generally mirroring those funds held by the rabbi trust. Therefore, these investment balances are classified as Level 2. Securities held by the trust are classified as trading securities. Unrealized gains and losses associated with these investments are included in the Company's earnings. Securities held by the trust generated gains of $21.2 million, $7.0 million, and $8.3 million for fiscal years 2021, 2020, and 2019, respectively.
(4) The Company’s policy iscommodity derivatives represent futures, swaps, and options contracts used in its hedging or other programs to grant optionsoffset price fluctuations associated with purchases of corn and hogs, and to minimize the exercise price equalrisk assumed when forward priced contracts are offered to the market price of the common stockCompany’s commodity suppliers. The Company’s futures contracts for corn are traded on the dateChicago Board of grant. Options typically vest over four yearsTrade, while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange. These are active markets with quoted prices available, and expire ten years afterthese contracts are classified as Level 1. Over-the-counter (OTC) derivative
instruments are valued using discounted cash flow models, observable and non-observable market inputs, and other mathematical pricing models. The Company’s corn futures options contracts are OTC instruments classified as Level 2 whose value is calculated using the dateBlack-Scholes pricing model, corn future prices quoted from the Chicago Board of Trade, and other adjustments to inputs that are observable in active markets. All derivatives are reviewed for potential credit risk and risk of nonperformance. The net balance for each program is included in Other Current Assets or Accounts Payable, as appropriate, in the grant.Consolidated Statements of Financial Position. As of October 31, 2021, the Company has recognized the obligation to return net cash collateral of $10.8 million from various counterparties (including cash of $45.6 million less $34.8 million of realized gain). As of October 25, 2020, the Company had recognized the right to reclaim net cash collateral of $12.3 million from various counterparties (including cash of $25.5 million less $13.2 million of realized loss ).
The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value. The Company recognizes stock-based compensation expense ratably over the shorterdoes not carry its long-term debt at fair value in its Consolidated Statements of the requisite service period or vesting period.Financial Position. The fair value of stock-based compensation granted to retirement-eligible individuals is expensed at the time of grant.
During the third quarter of fiscal 2018, the Company made a one-time grant of 200 stock options to each active, full-time employee and 100 stock options to each active, part-time employee of the Company on April 30, 2018. The options vest in five years and expire ten years after the grant date.
A reconciliation of the number of options outstanding and exercisable (in thousands)long-term debt, utilizing discounted cash flows (Level 2), was $3.3 billion as of October 28, 2018,31, 2021, and changes during$1.2 billion as of October 25, 2020. See Note L - Long Term Debt and Other Borrowing Arrangements for additional information.
In accordance with the provisions of ASC 820, the Company measures certain nonfinancial assets and liabilities at fair value, which are recognized or disclosed on a nonrecurring basis (e.g. goodwill, intangible assets, and property, plant, and equipment). See additional discussion regarding the Company’s goodwill and intangible assets in Note D - Goodwill and Intangible Assets. During fiscal year then ended,years 2021, 2020, and 2019, there were no other material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
Note J
Commitments and Contingencies
To ensure a steady supply of hogs and turkeys and keep the cost of products stable, the Company has entered into contracts with producers for the purchase of hogs and turkeys at formula-based prices over periods up to 10 years. The Company has also entered into grow-out contracts with independent farmers to raise turkeys for the Company for periods up to 25 years. Under these arrangements, the Company owns the livestock, feed, and other supplies while the independent farmers provide facilities and labor. In addition, the Company has contracted for the purchase of corn, soybean meal, feed ingredients, and other raw materials from independent suppliers for periods up to 4 years. Under these contracts, the Company is committed to make purchases, assuming current price levels, as follows:
| | | | | |
| (in thousands) | October 31, 2021 |
| 2022 | $ | 1,180,277 | |
| 2023 | 778,324 | |
| 2024 | 612,248 | |
| 2025 | 439,812 | |
| 2026 | 336,428 | |
| Later Years | 302,455 | |
| Total | $ | 3,649,544 | |
Purchases under these contracts for fiscal years 2021, 2020, and 2019 were $1.1 billion, $0.9 billion, and $1 billion, respectively.
As of October 31, 2021, the Company has $47.3 million of standby letters of credit issued on its behalf. The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs. However, that amount 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.
The Company is involved in litigation on an ongoing basis arising in the ordinary course of business. In the opinion of management, the outcome of litigation currently pending will not materially affect the Company’s results of operations, financial condition, or liquidity.
|
| | | | | | | | | | | | | |
| | | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| Outstanding at October 29, 2017 | | 30,685 |
| | $ | 18.08 |
| | | | |
| Granted | | 6,272 |
| | 36.39 |
| | | | |
| Exercised | | 6,991 |
| | 10.27 | | | | |
| Forfeited | | 427 |
| | 36.19 | | | | |
| Expired | | 3 |
| | 37.76 | | | | |
| Outstanding at October 28, 2018 | | 29,536 |
| | $ | 23.55 |
| | 5.4 | | $ | 520,424 |
|
| Exercisable at October 28, 2018 | | 20,121 |
| | $ | 18.06 |
| | 3.9 | | $ | 464,982 |
|
Note K
Leases
The Company has operating leases for manufacturing facilities, office space, warehouses, transportation equipment, and miscellaneous real estate and equipment contracts. Finance leases primarily include turkey growing facilities and an aircraft. The Company's lessor portfolio consists primarily of immaterial operating leases of farmland to third parties.
Lease information included in the Consolidated Statements of Financial Position are:
| | | | | | | | | | | | | | |
| (in thousands) | Location on Consolidated Statements of
Financial Position | | October 31, 2021 | October 25, 2020 |
| Right-of-Use Assets | | | | |
| Operating | Other Assets | | $ | 72,291 | | $ | 53,119 | |
| Finance | Net Property, Plant, and Equipment | | 53,433 | | 61,059 | |
| Total Right-of-Use Assets | | $ | 125,724 | | $ | 114,179 | |
| Liabilities | | | | |
| Current | | | | |
| Operating | Accrued Expenses | | $ | 18,331 | | $ | 12,025 | |
| Finance | Current Maturities of Long-term Debt | | 8,362 | | 8,308 | |
| Noncurrent | | | | |
| Operating | Other Long-term Liabilities | | 56,779 | | 43,126 | |
| Finance | Long-term Debt Less Current Maturities | | 44,637 | | 52,722 | |
| Total Lease Liabilities | | | $ | 128,109 | | $ | 116,182 | |
Lease expenses are:
| | | | | | | | | | | |
| | Fiscal Year Ended |
| (in thousands) | | October 31, 2021 | October 25, 2020 |
Operating Lease Cost (1) | | $ | 21,993 | | $ | 19,602 | |
| Finance Lease Cost | | | |
| Amortization of Right-of-Use Assets | | 8,104 | | 7,985 | |
| Interest on Lease Liabilities | | 2,019 | | 2,304 | |
Variable Lease Cost (2) | | 544,635 | | 424,955 | |
| Net Lease Cost | | $ | 576,751 | | $ | 454,846 | |
(1) Includes short-term lease costs, which are immaterial.
(2) ASC 842 - Leases requires disclosure of payments related to agreements with an embedded lease that are not otherwise reflected on the balance sheet. The Company's variable lease costs primarily include inventory related expenses, such as materials, labor, and overhead from manufacturing and service agreements that contain embedded leases. Variability of these costs is determined based on usage or output and may vary for other reasons such as changes in material prices.
The weighted-average grantremaining lease term and discount rate for lease liabilities included in the Consolidated Statements of Financial Position are:
| | | | | | | | |
| October 31, 2021 | October 25, 2020 |
| Weighted Average Remaining Lease Term | | |
| Operating Leases | 5.92 years | 7.31 years |
| Finance Leases | 7.18 years | 8.14 years |
| Weighted Average Discount Rate | | |
| Operating Leases | 1.76 | % | 2.28 | % |
| Finance Leases | 3.48 | % | 3.54 | % |
Supplemental cash flow and other information related to leases for the fiscal year-end are:
| | | | | | | | | | | |
| (in thousands) | | October 31, 2021 | October 25, 2020 |
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities | | | |
| Operating Cash Flows from Operating Leases | | $ | 20,305 | | $ | 15,412 | |
| Operating Cash Flows from Finance Leases | | 2,019 | | 2,304 | |
| Financing Cash Flows from Finance Leases | | 8,598 | | 8,189 | |
| | | |
| Right-of-Use Assets obtained in exchange for new operating lease liabilities | | 31,962 | | 5,210 | |
The maturity of the Company's lease liabilities as of October 31, 2021, are:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Operating Leases | | Finance Leases (1) | | Total |
| 2022 | | $ | 20,062 | | | $ | 10,025 | | | $ | 30,088 | |
| 2023 | | 17,334 | | | 9,827 | | | 27,161 | |
| 2024 | | 12,548 | | | 9,688 | | | 22,236 | |
| 2025 | | 9,557 | | | 8,134 | | | 17,690 | |
| 2026 | | 5,856 | | | 5,652 | | | 11,508 | |
| 2027 and beyond | | 16,516 | | | 15,540 | | | 32,056 | |
| Total Lease Payments | | $ | 81,872 | | | $ | 58,867 | | | $ | 140,738 | |
| Less: Imputed Interest | | 6,762 | | | 5,868 | | | 12,630 | |
| Present Value of Lease Liabilities | | $ | 75,110 | | | $ | 52,999 | | | $ | 128,109 | |
(1) Over the life of the lease contracts, finance lease payments include $8.7 million related to purchase options which are reasonably certain of being exercised.
Prior to the adoption of ASC 842 on October 28, 2019, rent expense under operating leases was $23.1 million in fiscal year 2019.
Note L
Long-term Debt and Other Borrowing Arrangements
Long-term Debt consists of:
| | | | | | | | |
| (in thousands) | October 31, 2021 | October 25, 2020 |
| | |
Senior Unsecured Notes, with Interest at 3.050%, Interest Due Semi-annually through June 2051 Maturity Date | $ | 600,000 | | $ | — | |
Senior Unsecured Notes, with Interest at 1.800%, Interest Due Semi-annually through June 2030 Maturity Date | 1,000,000 | | 1,000,000 | |
Senior Unsecured Notes, with Interest at 1.700%, Interest Due Semi-annually through June 2028 Maturity Date | 750,000 | | — | |
Senior Unsecured Notes, with Interest at 0.650%, Interest Due Semi-annually through June 2024 Maturity Date | 950,000 | | — | |
Senior Unsecured Notes, with Interest at 4.125%, Interest Due Semi-annually through April 2021 Maturity Date | — | | 250,000 | |
| Unamortized Discount on Senior Notes | (8,484) | | (2,630) | |
| Unamortized Debt Issuance Costs | (23,435) | | (7,979) | |
Finance Lease Liabilities(1) | 52,999 | | 61,030 | |
| Other Financing Arrangements | 2,823 | | 3,206 | |
| Total | 3,323,903 | | 1,303,627 | |
| Less: Current Maturities of Long-term Debt | 8,756 | | 258,691 | |
| Long-term Debt Less Current Maturities | $ | 3,315,147 | | $ | 1,044,936 | |
(1) See Note K - Leases for additional information
Senior Unsecured Notes: The Company repaid its $250.0 million senior unsecured notes upon maturity in April 2021.
On June 11, 2020, the Company issued senior notes in an aggregate principal amount of $1.0 billion, due June 11, 2030. The notes bear interest at a fixed rate of 1.800% per annum, with interest paid semi-annually in arrears on June 11 and December 11 of each year, commencing December 11, 2020. The notes may be redeemed in whole or in part at any time at the applicable redemption price set forth in the prospectus supplement. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date fair value of stock options granted,purchase.
On June 3, 2021, the Company issued $950.0 million aggregate principal amount of its 0.650% notes due 2024 (the "2024 Notes"), $750.0 million aggregate principal amount of its 1.700% notes due 2028 (the "2028 Notes"), and $600.0 million aggregate principal amount of its 3.050% notes due 2051 (the "2051 Notes"). Interest will accrue per annum at the stated rates with interest on the notes being paid semi-annually in arrears on June 3 and December 3 of each year, commencing December 3, 2021. Interest rate risk was hedged utilizing interest rate locks on the 2028 Notes and 2051 Notes. The Company lifted the hedges in conjunction with the issuance of these notes. See Note F - Derivatives and Hedging for additional details. The 2024 Notes may be redeemed in whole or in part one year after their issuance without penalty for early partial payments or full redemption. The 2028 Notes and 2051 Notes may be redeemed in whole or in part at any time at the applicable redemption price. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
Unsecured Revolving Credit Facility: On May 6, 2021, the Company entered into an unsecured revolving credit agreement with Wells Fargo Bank, National Association as administrative agent, swingline lender and issuing lender, U.S. Bank National Association, JPMorgan Chase Bank, N.A. and BofA Securities, Inc. as syndication agents and the total intrinsic valuelenders party thereto. In connection with entering the revolving credit agreement, the Company terminated its existing credit facility that was entered into on June 24, 2015. The revolving credit agreement provides for an unsecured revolving credit facility with an aggregate principal commitment amount at any time outstanding of options exercised (in thousands) during eachup to $750.0 million with an uncommitted increase option of an additional $375.0 million upon the pastsatisfaction of certain conditions. The unsecured revolving line of credit bears interest, at the Company’s election, at either a Base Rate plus margin of 0.0% to 0.150% or the Eurocurrency Rate plus margin of 0.575% to 1.150% and a variable fee of 0.050% to 0.100% is paid for the availability of this credit line. Extensions of credit under the facility may be made in the form of revolving loans, swingline loans and letters of credit. The lending commitments under the agreement 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 31, 2021, and October 25, 2020, the Company had no outstanding draws from these facilities.
Debt Covenants: The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of October 31, 2021, the Company was in compliance with all of these covenants.
Total interest paid in the last three fiscal years is as follows:
| | | | | | | | |
| (in millions) | | |
| 2021 | | $ | 25.1 | |
| 2020 | | 14.5 | |
| 2019 | | 19.0 | |
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 28, | | October 29, | | October 30, |
| | | 2018 | | 2017 | | 2016 |
| Weighted-average grant date fair value | | $ | 7.16 |
| | $ | 6.41 |
| | $ | 7.82 |
|
| Intrinsic value of exercised options | | 187,486 |
| | 87,543 |
| | 135,593 |
|
The fair value of each option award is calculated on the date of grant using the Black-Scholes valuation model utilizing the following weighted-average assumptions:
|
| | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 28, | | October 29, | | October 30, |
| | | 2018 | | 2017 | | 2016 |
| Risk-free interest rate | | 2.7 | % | | 2.4 | % | | 2.1 | % |
| Dividend yield | | 2.1 | % | | 2.0 | % | | 1.5 | % |
| Stock price volatility | | 19.0 | % | | 19.0 | % | | 19.0 | % |
| Expected option life | | 8 years |
| | 8 years |
| | 8 years |
|
As part of the annual valuation process, the Company reassesses the appropriateness of the inputs used in the valuation models. The Company establishes the risk-free interest rate using stripped U.S. Treasury yields as of the grant date where the remaining term is approximately the expected life of the option. The dividend yield is set based on the dividend rate
approved by the Company’s Board of Directors and the stock price on the grant date. The expected volatility assumption is set based primarily on historical volatility. As a reasonableness test, implied volatility from exchange traded options is also examined to validate the volatility range obtained from the historical analysis. The expected life assumption is set based on an analysis of past exercise behavior by option holders. In performing the valuations for option grants, the Company has not stratified option holders as exercise behavior has historically been consistent across all employee and non-employee director groups.
Restricted shares awarded on February 1 are subject to a restricted period which expires the date of the Company’s next annual
stockholders meeting. A reconciliation of the restricted shares (in thousands) as of October 28, 2018, and changes during the fiscal year then ended, is as follows:
|
| | | | | | | |
| | | Shares | | Weighted- Average Grant Date Fair Value |
| Restricted at October 29, 2017 | | 58 |
| | $ | 35.62 |
|
| Granted | | 52 |
| | 34.08 |
|
| Vested | | 57 |
| | 35.62 |
| Forfeited | | 1 |
| | 35.62 |
| Restricted at October 28, 2018 | | 52 |
| | $ | 34.08 |
|
The weighted-average grant date fair value of restricted shares granted, the total fair value (in thousands) of restricted shares granted, and the fair value (in thousands) of shares that have vested during each of the past three fiscal years is as follows:
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 28, | | October 29, | | October 30, |
| | | 2018 | | 2017 | | 2016 |
| Weighted-average grant date fair value | | $ | 34.08 |
| | $ | 35.62 |
| | $ | 41.01 |
|
| Fair value of restricted shares granted | | 1,760 |
| | 2,080 |
| | 1,920 |
|
| Fair value of shares vested | | $ | 2,053 |
| | $ | 1,920 |
| | $ | 1,920 |
|
Stock-based compensation expense, along with the related income tax benefit, for each of the past three fiscal years is presented in the table below:
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 28, | | October 29, | | October 30, |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Stock-based compensation expense recognized | | $ | 20,595 |
| | $ | 15,591 |
| | $ | 17,829 |
|
| Income tax benefit recognized | | (4,943 | ) | | (5,879 | ) | | (6,764 | ) |
| After-tax stock-based compensation expense | | $ | 15,652 |
| | $ | 9,712 |
| | $ | 11,065 |
|
At October 28, 2018, there was $34.2 million of total unrecognized compensation expense from stock-based compensation arrangements granted under the plans. This compensation is expected to be recognized over a weighted-average period of approximately 3.2 years. During fiscal years 2018, 2017, and 2016, cash received from stock option exercises was $71.8 million, $21.7 million, and $12.1 million, respectively.
Shares issued for option exercises and restricted shares may be either authorized but unissued shares, or shares of treasury stock acquired in the open market or otherwise. The number of shares available for future grants was 16.1 million at October 28, 2018, 46.7 million at October 29, 2017, and 48.1 million at October 30, 2016.
Note M
Fair Value Measurements
Pursuant to the provisions of ASC 820, the Company’s financial assets and liabilities carried at fair value on a recurring basis in the consolidated financial statements as of October 28, 2018,31, 2021, and October 29, 2017,25, 2020, and their level within the fair value hierarchy are presented in the table below.
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at October 28, 2018 |
| | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) | | | | |
| Assets at fair value | | | | | | | | |
Cash and cash equivalents(1) | | $ | 459,136 |
| | $ | 459,136 |
| | $ | — |
| | $ | — |
|
Other trading securities(2) | | 137,311 |
| | — |
| | 137,311 |
| | — |
|
Commodity derivatives(3) | | 4,611 |
| | 4,611 |
| | — |
| | — |
|
| Total assets at fair value | | $ | 601,058 |
| | $ | 463,747 |
| | $ | 137,311 |
| | $ | — |
|
| Liabilities at fair value | | | | | | | | |
Deferred compensation(2) | | $ | 60,181 |
| | $ | — |
| | $ | 60,181 |
| | $ | — |
|
| Total liabilities at fair value | | $ | 60,181 |
| | $ | — |
| | $ | 60,181 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at October 31, 2021 |
| | Total Fair
Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) | | | | |
| Assets at Fair Value | | | | | | | | |
Cash and Cash Equivalents(1) | | $ | 613,530 | | | $ | 611,111 | | | $ | 2,419 | | | $ | — | |
Short-term Marketable Securities(2) | | 21,162 | | | 8,790 | | | 12,372 | | | — | |
Other Trading Securities(3) | | 203,020 | | | — | | | 203,020 | | | — | |
Commodity Derivatives(4) | | 13,522 | | | 8,104 | | | 5,418 | | | — | |
| Total Assets at Fair Value | | $ | 851,234 | | | $ | 628,005 | | | $ | 223,229 | | | $ | — | |
| Liabilities at Fair Value | | | | | | | | |
Deferred Compensation(3) | | $ | 70,466 | | | $ | — | | | $ | 70,466 | | | $ | — | |
| Total Liabilities at Fair Value | | $ | 70,466 | | | $ | — | | | $ | 70,466 | | | $ | — | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at October 29, 2017 |
| | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) | | | | |
| Assets at fair value | | | | | | | | |
Cash and cash equivalents(1) | | $ | 444,122 |
| | $ | 444,122 |
| | $ | — |
| | $ | — |
|
Other trading securities(2) | | 128,530 |
| | — |
| | 128,530 |
| | — |
|
Commodity derivatives(3) | | 2,821 |
| | 2,821 |
| | — |
| | — |
|
| Total assets at fair value | | $ | 575,473 |
| | $ | 446,943 |
| | $ | 128,530 |
| | $ | — |
|
| Liabilities at fair value | | | | | | | | |
Deferred compensation(2) | | $ | 62,341 |
| | $ | — |
| | $ | 62,341 |
| | $ | — |
|
| Total liabilities at fair value | | $ | 62,341 |
| | $ | — |
| | $ | 62,341 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at October 25, 2020 |
| | Total Fair
Value | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) | | | | |
| Assets at Fair Value | | | | | | | | |
Cash and Cash Equivalents(1) | | $ | 1,714,309 | | | $ | 1,713,098 | | | $ | 1,211 | | | $ | — | |
Short-term Marketable Securities(2) | | 17,338 | | | 5,728 | | | 11,610 | | | — | |
Other Trading Securities(3) | | 173,114 | | | — | | | 173,114 | | | — | |
Commodity Derivatives(4) | | 10,950 | | | 10,950 | | | — | | | — | |
| Total Assets at Fair Value | | $ | 1,915,711 | | | $ | 1,729,776 | | | $ | 185,935 | | | $ | — | |
| Liabilities at Fair Value | | | | | | | | |
Deferred Compensation(3) | | $ | 65,154 | | | $ | — | | | $ | 65,154 | | | $ | — | |
| Total Liabilities at Fair Value | | $ | 65,154 | | | $ | — | | | $ | 65,154 | | | $ | — | |
The following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:
(1) The Company’s cash equivalents considered Level 1 consist primarily of bank deposits, money market funds rated AAA or other highly liquid investment accounts. As these investmentsaccounts and have a maturity date of three months or less,less. Cash equivalents considered Level 2 are funds holding agency bonds or securities booked at amortized cost.
(2) The Company holds securities as part of a portfolio maintained to generate investment income and to provide cash for operations of the carryingCompany, if necessary. The portfolio is managed by a third party who is responsible for daily trading activities and all assets within the portfolio are highly liquid. The cash, U.S. government securities and exchange-traded funds held by the portfolio are classified as Level 1. The current investment portfolio also includes corporate bonds and other asset backed securities for which there is an active, quoted market. Market prices are obtained from a variety of industry providers, large financial institutions and other third-party sources to calculate a representative daily market value, approximates fair value.and therefore, these securities are classified as Level 2.
(2)(3) The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred compensation plans. A majority of the funds held in the rabbi trust relate to the supplemental executive retirement plans and have been invested in fixed income funds managed by a third party. The declared rate on these funds is set based on a formula using the yield of the general account investment portfolio supporting the fund as adjusted for expenses and other charges. The rate is guaranteed for one year at issue and may be reset annually on the policy anniversary, subject to a guaranteed minimum rate. As the value is based on adjusted market rates and the fixed rate is only reset on an annual basis, these funds are classified as Level 2. The funds held in
Under the rabbi trust are included in other assetsdeferred compensation plans, participants can defer certain types of compensation and elect to receive a return on the Consolidated Statementsdeferred amounts based on the changes in fair value of Financial Position. The remainingvarious investment options. These funds held are also managed by a third partythird-party insurance policy, the values of which represent their cash surrender value based on the fair value of the underlying investments in the account and include equity securities, money market accounts, bond funds or other portfolios for which there is an active quoted market. Therefore, these policies are also classified as Level 2. The related deferred compensation liabilities are included in other long-term liabilities on the Consolidated Statements of Financial Position with investment options generally mirroring those funds held by the rabbi trust. Therefore these investment balances are classified as Level 2. The Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based on a specified percentage of the United States Internal Revenue Service (I.R.S.) Applicable Federal Rates.I.R.S. applicable federal rates. These balances are also classified as Level 2. The funds held in the rabbi trust are included in Other Assets on the Consolidated Statements of Financial Position.
The related deferred compensation liabilities are included in Other Long-term Liabilities on the Consolidated Statements of Financial Position with investment options generally mirroring those funds held by the rabbi trust. Therefore, these investment balances are classified as Level 2. Securities held by the trust are classified as trading securities. Unrealized gains and losses associated with these investments are included in the Company's earnings. Securities held by the trust generated gains of $21.2 million, $7.0 million, and $8.3 million for fiscal years 2021, 2020, and 2019, respectively.
(3)(4) The Company’s commodity derivatives represent futures, swaps, and options contracts used in its hedging or other programs to offset price fluctuations associated with purchases of corn soybean meal, and hogs, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers. The Company’s futures contracts for corn and soybean meal are traded on the Chicago Board of Trade, while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange. These are active markets with quoted prices available, and these contracts are classified as Level 1. Over-the-counter (OTC) derivative
instruments are valued using discounted cash flow models, observable and non-observable market inputs, and other mathematical pricing models. The Company’s corn futures options contracts are OTC instruments classified as Level 2 whose value is calculated using the Black-Scholes pricing model, corn future prices quoted from the Chicago Board of Trade, and other adjustments to inputs that are observable in active markets. All derivatives are reviewed for potential credit risk and risk of nonperformance. The Company nets the derivative assets and liabilities for each of its hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The net balance for each program is included in other current assetsOther Current Assets or accounts payable,Accounts Payable, as appropriate, in the Consolidated Statements of Financial Position. As of October 28, 2018,31, 2021, the Company has recognized the rightobligation to reclaimreturn net cash collateral of $4.6$10.8 million from various counterparties (including cash of $4.7$45.6 million less $0.1$34.8 million of realized losses)gain). As of October 29, 2017,25, 2020, the Company had recognized the right to reclaim net cash collateral of $2.5$12.3 million from various counterparties (including $11.0cash of $25.5 million less $13.2 million of realized gains offset by cash owed of $8.5 million on closed positions).loss ).
The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value. The Company does not carry its long-term debt at fair value in its Consolidated Statements of Financial Position. Based on borrowing rates available to the Company for long-term financing with similar terms and average maturities, theThe fair value of long-term debt, utilizing discounted cash flows (Level 2), was $631.3 million$3.3 billion as of October 28, 2018,31, 2021, and $266.5 million$1.2 billion as of October 29, 2017.25, 2020. See Note L - Long Term Debt and Other Borrowing Arrangements for additional information.
In accordance with the provisions of ASC 820, the Company measures certain nonfinancial assets and liabilities at fair value, which are recognized or disclosed on a nonrecurring basis (e.g. goodwill, intangible assets, and property, plant, and equipment). During the fourth quarter of fiscal year 2018, a $17.3 million intangible asset impairment charge was recorded for a CytoSport trademark. See additional discussion regarding the Company’s goodwill and intangible assets in Note D.D - Goodwill and Intangible Assets. During fiscal years 2018, 2017,2021, 2020, and 2016,2019, there were no other material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
Note NJ
Commitments and Contingencies
In order toTo ensure a steady supply of hogs and turkeys and to keep the cost of products stable, the Company has entered into contracts with producers for the purchase of hogs and turkeys at formula-based prices over periods up to 10 years. The Company has also entered into grow-out contracts with independent farmers to raise turkeys for the Company for periods up to 25 years. Under these arrangements, the Company owns the livestock, feed, and other supplies while the independent farmers provide facilities and labor. TheIn addition, the Company has also contracted for the purchase of corn, soybean meal, feed ingredients, and other feed ingredientsraw materials from independent suppliers for periods up to three4 years. Under these contracts, the Company is committed at October 28, 2018, to make purchases, assuming current price levels, as follows:
| | | (in thousands) | |
| (in thousands) | October 31, 2021 |
| 2019 | $ | 1,147,784 |
| |
| 2020 | 697,347 |
| |
| 2021 | 408,855 |
| |
| 2022 | 195,638 |
| 2022 | $ | 1,180,277 | |
| 2023 | 111,037 |
| 2023 | 778,324 | |
| 2024 | | 2024 | 612,248 | |
| 2025 | | 2025 | 439,812 | |
| 2026 | | 2026 | 336,428 | |
| Later Years | 88,418 |
| Later Years | 302,455 | |
| Total | $ | 2,649,079 |
| Total | $ | 3,649,544 | |
Purchases under these contracts for fiscal years 2018, 2017,2021, 2020, and 20162019 were $1.3$1.1 billion, $1.4$0.9 billion, and $1.6$1 billion, respectively.
The Company has noncancelable operating lease commitments on facilities and equipment at October 28, 2018, as follows:
|
| | | |
| (in thousands) | |
|
| 2019 | $ | 12,886 |
|
| 2020 | 8,996 |
|
| 2021 | 6,988 |
|
| 2022 | 5,301 |
|
| 2023 | 4,453 |
|
| Later Years | 23,846 |
|
| Total | $ | 62,470 |
|
The Company expensed $22.9 million, $19.2 million, and $21.6 million for rent in fiscal years 2018, 2017, and 2016, respectively.
As of October 28, 2018,31, 2021, the Company has $45.5$47.3 million of standby letters of credit issued on its behalf. The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs. However, that amount includes revocable standby letters of credit totaling $2.4$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.
The Company is involved in litigation on an on-goingongoing basis arising in the ordinary course of business. In the opinion of management, the outcome of litigation currently pending will not materially affect the Company’s results of operations, financial condition, or liquidity.
Note K
Leases
The Company has operating leases for manufacturing facilities, office space, warehouses, transportation equipment, and miscellaneous real estate and equipment contracts. Finance leases primarily include turkey growing facilities and an aircraft. The Company's lessor portfolio consists primarily of immaterial operating leases of farmland to third parties.
Lease information included in the Consolidated Statements of Financial Position are:
| | | | | | | | | | | | | | |
| (in thousands) | Location on Consolidated Statements of
Financial Position | | October 31, 2021 | October 25, 2020 |
| Right-of-Use Assets | | | | |
| Operating | Other Assets | | $ | 72,291 | | $ | 53,119 | |
| Finance | Net Property, Plant, and Equipment | | 53,433 | | 61,059 | |
| Total Right-of-Use Assets | | $ | 125,724 | | $ | 114,179 | |
| Liabilities | | | | |
| Current | | | | |
| Operating | Accrued Expenses | | $ | 18,331 | | $ | 12,025 | |
| Finance | Current Maturities of Long-term Debt | | 8,362 | | 8,308 | |
| Noncurrent | | | | |
| Operating | Other Long-term Liabilities | | 56,779 | | 43,126 | |
| Finance | Long-term Debt Less Current Maturities | | 44,637 | | 52,722 | |
| Total Lease Liabilities | | | $ | 128,109 | | $ | 116,182 | |
Lease expenses are:
| | | | | | | | | | | |
| | Fiscal Year Ended |
| (in thousands) | | October 31, 2021 | October 25, 2020 |
Operating Lease Cost (1) | | $ | 21,993 | | $ | 19,602 | |
| Finance Lease Cost | | | |
| Amortization of Right-of-Use Assets | | 8,104 | | 7,985 | |
| Interest on Lease Liabilities | | 2,019 | | 2,304 | |
Variable Lease Cost (2) | | 544,635 | | 424,955 | |
| Net Lease Cost | | $ | 576,751 | | $ | 454,846 | |
(1) Includes short-term lease costs, which are immaterial.
(2) ASC 842 - Leases requires disclosure of payments related to agreements with an embedded lease that are not otherwise reflected on the balance sheet. The Company's variable lease costs primarily include inventory related expenses, such as materials, labor, and overhead from manufacturing and service agreements that contain embedded leases. Variability of these costs is determined based on usage or output and may vary for other reasons such as changes in material prices.
The weighted-average remaining lease term and discount rate for lease liabilities included in the Consolidated Statements of Financial Position are:
| | | | | | | | |
| October 31, 2021 | October 25, 2020 |
| Weighted Average Remaining Lease Term | | |
| Operating Leases | 5.92 years | 7.31 years |
| Finance Leases | 7.18 years | 8.14 years |
| Weighted Average Discount Rate | | |
| Operating Leases | 1.76 | % | 2.28 | % |
| Finance Leases | 3.48 | % | 3.54 | % |
Supplemental cash flow and other information related to leases for the fiscal year-end are:
| | | | | | | | | | | |
| (in thousands) | | October 31, 2021 | October 25, 2020 |
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities | | | |
| Operating Cash Flows from Operating Leases | | $ | 20,305 | | $ | 15,412 | |
| Operating Cash Flows from Finance Leases | | 2,019 | | 2,304 | |
| Financing Cash Flows from Finance Leases | | 8,598 | | 8,189 | |
| | | |
| Right-of-Use Assets obtained in exchange for new operating lease liabilities | | 31,962 | | 5,210 | |
The maturity of the Company's lease liabilities as of October 31, 2021, are:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Operating Leases | | Finance Leases (1) | | Total |
| 2022 | | $ | 20,062 | | | $ | 10,025 | | | $ | 30,088 | |
| 2023 | | 17,334 | | | 9,827 | | | 27,161 | |
| 2024 | | 12,548 | | | 9,688 | | | 22,236 | |
| 2025 | | 9,557 | | | 8,134 | | | 17,690 | |
| 2026 | | 5,856 | | | 5,652 | | | 11,508 | |
| 2027 and beyond | | 16,516 | | | 15,540 | | | 32,056 | |
| Total Lease Payments | | $ | 81,872 | | | $ | 58,867 | | | $ | 140,738 | |
| Less: Imputed Interest | | 6,762 | | | 5,868 | | | 12,630 | |
| Present Value of Lease Liabilities | | $ | 75,110 | | | $ | 52,999 | | | $ | 128,109 | |
(1) Over the life of the lease contracts, finance lease payments include $8.7 million related to purchase options which are reasonably certain of being exercised.
Prior to the adoption of ASC 842 on October 28, 2019, rent expense under operating leases was $23.1 million in fiscal year 2019.
Note L
Long-term Debt and Other Borrowing Arrangements
Long-term Debt consists of:
| | | | | | | | |
| (in thousands) | October 31, 2021 | October 25, 2020 |
| | |
Senior Unsecured Notes, with Interest at 3.050%, Interest Due Semi-annually through June 2051 Maturity Date | $ | 600,000 | | $ | — | |
Senior Unsecured Notes, with Interest at 1.800%, Interest Due Semi-annually through June 2030 Maturity Date | 1,000,000 | | 1,000,000 | |
Senior Unsecured Notes, with Interest at 1.700%, Interest Due Semi-annually through June 2028 Maturity Date | 750,000 | | — | |
Senior Unsecured Notes, with Interest at 0.650%, Interest Due Semi-annually through June 2024 Maturity Date | 950,000 | | — | |
Senior Unsecured Notes, with Interest at 4.125%, Interest Due Semi-annually through April 2021 Maturity Date | — | | 250,000 | |
| Unamortized Discount on Senior Notes | (8,484) | | (2,630) | |
| Unamortized Debt Issuance Costs | (23,435) | | (7,979) | |
Finance Lease Liabilities(1) | 52,999 | | 61,030 | |
| Other Financing Arrangements | 2,823 | | 3,206 | |
| Total | 3,323,903 | | 1,303,627 | |
| Less: Current Maturities of Long-term Debt | 8,756 | | 258,691 | |
| Long-term Debt Less Current Maturities | $ | 3,315,147 | | $ | 1,044,936 | |
(1) See Note K - Leases for additional information
Senior Unsecured Notes: The Company repaid its $250.0 million senior unsecured notes upon maturity in April 2021.
On June 11, 2020, the Company issued senior notes in an aggregate principal amount of $1.0 billion, due June 11, 2030. The notes bear interest at a fixed rate of 1.800% per annum, with interest paid semi-annually in arrears on June 11 and December 11 of each year, commencing December 11, 2020. The notes may be redeemed in whole or in part at any time at the applicable redemption price set forth in the prospectus supplement. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
On June 3, 2021, the Company issued $950.0 million aggregate principal amount of its 0.650% notes due 2024 (the "2024 Notes"), $750.0 million aggregate principal amount of its 1.700% notes due 2028 (the "2028 Notes"), and $600.0 million aggregate principal amount of its 3.050% notes due 2051 (the "2051 Notes"). Interest will accrue per annum at the stated rates with interest on the notes being paid semi-annually in arrears on June 3 and December 3 of each year, commencing December 3, 2021. Interest rate risk was hedged utilizing interest rate locks on the 2028 Notes and 2051 Notes. The Company lifted the hedges in conjunction with the issuance of these notes. See Note F - Derivatives and Hedging for additional details. The 2024 Notes may be redeemed in whole or in part one year after their issuance without penalty for early partial payments or full redemption. The 2028 Notes and 2051 Notes may be redeemed in whole or in part at any time at the applicable redemption price. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
Unsecured Revolving Credit Facility: On May 6, 2021, the Company entered into an unsecured revolving credit agreement with Wells Fargo Bank, National Association as administrative agent, swingline lender and issuing lender, U.S. Bank National Association, JPMorgan Chase Bank, N.A. and BofA Securities, Inc. as syndication agents and the lenders party thereto. In connection with entering the revolving credit agreement, the Company terminated its existing credit facility that was entered into on June 24, 2015. The revolving credit agreement provides for an unsecured revolving credit facility with an aggregate principal commitment amount at any time outstanding of up to $750.0 million with an uncommitted increase option of an additional $375.0 million upon the satisfaction of certain conditions. The unsecured revolving line of credit bears interest, at the Company’s election, at either a Base Rate plus margin of 0.0% to 0.150% or the Eurocurrency Rate plus margin of 0.575% to 1.150% and a variable fee of 0.050% to 0.100% is paid for the availability of this credit line. Extensions of credit under the facility may be made in the form of revolving loans, swingline loans and letters of credit. The lending commitments under the agreement 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 31, 2021, and October 25, 2020, the Company had no outstanding draws from these facilities.
Debt Covenants: The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of October 31, 2021, the Company was in compliance with all of these covenants.
Total interest paid in the last three fiscal years is as follows:
| | | | | | | | |
| (in millions) | | |
| 2021 | | $ | 25.1 | |
| 2020 | | 14.5 | |
| 2019 | | 19.0 | |
Note M
Stock-Based Compensation
The Company issues stock options, restricted stock units, and restricted shares as part of its stock incentive plans for employees and non-employee directors. Stock-based compensation expense for fiscal years 2021, 2020, and 2019, was $24.7 million, $22.5 million, and $19.7 million, respectively. The Company recognizes stock-based compensation expense ratably over the vesting period or the individual's retirement eligibility date.
At October 31, 2021, there was $19.3 million of total unrecognized compensation expense from stock-based compensation arrangements granted under the plans. This compensation is expected to be recognized over a weighted-average period of approximately 1.4 years. During fiscal years 2021, 2020, and 2019, cash received from stock option exercises was $45.9 million, $81.8 million, and $59.9 million, respectively.
Shares issued for option exercises, restricted stock units, and restricted shares may be either authorized but unissued shares or shares of treasury stock. The number of shares available for future grants was 12.5 million at October 31, 2021, 13.7 million at October 25, 2020, and 14.9 million at October 27, 2019.
Stock Options: The Company’s policy is to grant options with the exercise price equal to the market price of the common stock on the date of grant. Options typically vest over four years and expire ten years after the date of the grant.
Effective with fiscal 2020 grants, the Company has determined the equity award value for eligible employees will be delivered 50 percent in stock options as described above and 50 percent in restricted stock units with a three-year cliff vesting period.
A reconciliation of the number of options outstanding and exercisable as of October 31, 2021, is:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares
(in thousands) | | Weighted-Average
Exercise Price | | Weighted-Average
Remaining Contractual
Term (Years) | | Aggregate
Intrinsic Value
(in thousands) |
| Stock Options Outstanding at October 25, 2020 | | 21,073 | | | $ | 30.39 | | | | | |
| Granted | | 1,277 | | | 47.45 | | | | | |
| Exercised | | (3,050) | | | 17.61 | | | | | |
| Forfeited | | (277) | | | 37.23 | | | | | |
| Expired | | (1) | | | 36.25 | | | | | |
| Stock Options Outstanding at October 31, 2021 | | 19,022 | | | $ | 33.49 | | | 4.9 | | $ | 182,432 | |
| Stock Options Exercisable at October 31, 2021 | | 13,047 | | | $ | 29.91 | | | 3.8 | | $ | 164,766 | |
The weighted-average grant date fair value of stock options granted and the total intrinsic value of options exercised during each of the past three fiscal years, are:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 31, | | October 25, | | October 27, |
| (in thousands, except per share amounts) | | 2021 | | 2020 | | 2019 |
| Weighted-average Grant Date Fair Value | | $ | 7.52 | | | $ | 7.71 | | | $ | 9.24 | |
| Intrinsic Value of Exercised Options | | 94,108 | | | 182,821 | | | 138,282 | |
The fair value of each option award is calculated on the date of grant using the Black-Scholes valuation model utilizing the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 31, | | October 25, | | October 27, |
| | | 2021 | | 2020 | | 2019 |
| Risk-free Interest Rate | | 1.0 | % | | 1.7 | % | | 2.8 | % |
| Dividend Yield | | 2.1 | % | | 2.0 | % | | 1.9 | % |
| Stock Price Volatility | | 20.0 | % | | 19.0 | % | | 19.0 | % |
| Expected Option Life | | 7.4 years | | 7.5 years | | 8.0 years |
As part of the annual valuation process, the Company reassesses the appropriateness of the inputs used in the valuation models. The Company establishes the risk-free interest rate using U.S. Treasury yields as of the grant date. The dividend yield is based on the dividend rate approved by the Company’s Board of Directors and the stock price on the grant date. The expected volatility assumption is based primarily on historical volatility. The expected life assumption is based on an analysis of past exercise behavior by option holders. In performing the valuations for option grants, the Company has not stratified option holders as exercise behavior has historically been consistent across all employees.
Restricted Stock Units: Restricted stock units are valued equal to the market price of the common stock on the date of the grant and generally vest after three years. These awards accumulate dividend equivalents, which are provided as additional units and are subject to the same vesting requirements as the underlying grant. A reconciliation of the restricted stock units as of October 31, 2021, is:
| | | | | | | | | | | | | | | | | | | | |
| | Shares
(in thousands) | | Weighted-
Average
Grant Date
Fair Value | Weighted-Average
Remaining Contractual
Term (Years) | Aggregate
Intrinsic Value
(in thousands) |
| Restricted Stock Units Outstanding at October 25, 2020 | | 188 | | | $ | 45.91 | | | |
| Granted | | 225 | | | 47.52 | | | |
| Dividend Equivalents | | 6 | | | 46.62 | | | |
| Vested | | (31) | | | 46.56 | | | |
| Forfeited | | (3) | | | 46.52 | | | |
| Restricted Stock Units Outstanding at October 31, 2021 | | 385 | | | $ | 46.81 | | 1.7 | $ | 16,277 | |
The weighted-average grant date fair value of restricted stock units granted and the total fair value of restricted stock units granted during each of the past three fiscal years, are:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 31, | | October 25, | | October 27, |
| (in thousands, except per share amounts) | | 2021 | | 2020 | | 2019 |
| Weighted-average Grant Date Fair Value | | $ | 47.52 | | | $ | 45.88 | | | $ | — | |
| Fair Value of Restricted Stock Units Granted | | 10,699 | | | 9,383 | | | — | |
| Fair Value of Restricted Stock Units Vested | | $ | 1,460 | | | $ | 839 | | | $ | — | |
Restricted Shares: Restricted shares awarded to non-employee directors annually on February 1 are subject to a restricted period which expires the date of the Company’s next annual stockholders meeting. Newly elected directors receive a prorated award of restricted shares of the Company's common stock, which expires on the date of the Company's second succeeding annual stockholders meeting. A reconciliation of the restricted shares as of October 31, 2021, is:
| | | | | | | | | | | | | | |
| (in thousands, except per share amounts) | | Shares | | Weighted-
Average
Grant Date
Fair Value |
| Restricted Shares Outstanding at October 25, 2020 | | 45 | | | $ | 47.03 | |
| Granted | | 38 | | | 46.92 | |
| Vested | | (45) | | | 47.03 | |
| | | | |
| Restricted Shares Outstanding at October 31, 2021 | | 38 | | | $ | 46.92 | |
The weighted-average grant date fair value of restricted shares granted, the total fair value of restricted shares granted, and the fair value of shares that have vested during each of the past three fiscal years are:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 31, | | October 25, | | October 27, |
| (in thousands, except per share amounts) | | 2021 | | 2020 | | 2019 |
| Weighted-average Grant Date Fair Value | | $ | 46.92 | | | $ | 47.29 | | | $ | 42.23 | |
| Fair Value of Restricted Shares Granted | | 1,760 | | | 1,973 | | | 2,134 | |
| Fair Value of Restricted Shares Vested | | $ | 2,133 | | | $ | 1,974 | | | $ | 1,760 | |
Note N
Income Taxes
The components of the Provision for Income Taxes are as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Current | | | | | | |
| U.S. Federal | | $ | 171,732 | | | $ | 142,708 | | | $ | 161,233 | |
| State | | 7,541 | | | 13,353 | | | 30,774 | |
| Foreign | | 9,079 | | | 18,293 | | | 9,919 | |
| Total Current | | 188,352 | | | 174,354 | | | 201,926 | |
| Deferred | | | | | | |
| U.S. Federal | | 23,507 | | | 34,408 | | | 27,817 | |
| State | | 2,220 | | | 4,937 | | | 1,473 | |
| Foreign | | 2,950 | | | (7,306) | | | (649) | |
| Total Deferred | | 28,677 | | | 32,039 | | | 28,641 | |
| Total Provision for Income Taxes | | $ | 217,029 | | | $ | 206,393 | | | $ | 230,567 | |
The Company has elected to treat global intangible low taxed income (GILTI) as a period cost.
Deferred Income Taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred income tax liabilities and assets are as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | October 31, 2021 | | October 25, 2020 |
| Deferred Tax Liabilities | | | | |
| Goodwill and Intangible Assets | | $ | (322,822) | | | $ | (269,218) | |
| Tax over Book Depreciation and Basis Differences | | (143,891) | | | (164,911) | |
| Other, net | | (21,967) | | | (24,316) | |
| Deferred Tax Assets | | | | |
| Pension and Other Post-retirement Benefits | | 71,190 | | | 97,129 | |
| Employee Compensation Related Liabilities | | 68,133 | | | 65,024 | |
| Marketing and Promotional Accruals | | 22,916 | | | 20,783 | |
| Other, net | | 50,767 | | | 62,302 | |
| Net Deferred Tax (Liabilities) Assets | | $ | (275,674) | | | $ | (213,207) | |
Reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| U.S. Statutory Rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State Taxes on Income, Net of Federal Tax Benefit | | 0.8 | | | 1.6 | | | 2.5 | |
| | | | | | |
| Divestitures | | — | | | — | | | (1.4) | |
| | | | | | |
| Stock-based Compensation | | (1.6) | | | (3.1) | | | (2.2) | |
| All Other, net | | (0.9) | | | (1.0) | | | (0.8) | |
| Effective Tax Rate | | 19.3 | % | | 18.5 | % | | 19.1 | % |
In fiscal 2019, the Company recorded a net tax benefit of $17.5 million related to the divestiture of CytoSport.
As of October 31, 2021, the Company had $221.4 million of undistributed earnings from non-U.S. subsidiaries. The Company maintains all earnings are permanently reinvested. Accordingly, no additional income taxes have been provided for withholding tax, state tax, or other taxes.
Total income taxes paid during fiscal years 2021, 2020, and 2019 were $167.0 million, $169.7 million, and $221.4 million, respectively.
The following table sets forth changes in the unrecognized tax benefits, excluding interest and penalties, for fiscal years 2021 and 2020.
| | | | | | | | |
| (in thousands) | | |
| Balance as of October 27, 2019 | | $ | 27,826 | |
| Tax Positions Related to the Current Period | | |
| Increases | | 3,177 | |
| Tax Positions Related to Prior Periods | | |
| Increases | | 8,299 | |
| Decreases | | (2,549) | |
| Settlements | | (1,107) | |
| Decreases Related to a Lapse of Applicable Statute of Limitations | | (2,404) | |
| Balance as of October 25, 2020 | | $ | 33,242 | |
| Tax Positions Related to the Current Period | | |
| Increases | | 4,003 | |
| Tax Positions Related to Prior Periods | | |
| Increases | | 2,117 | |
| Decreases | | (4,170) | |
| Settlements | | (8,934) | |
| Decreases Related to a Lapse of Applicable Statute of Limitations | | (4,166) | |
| Balance as of October 31, 2021 | | $ | 22,092 | |
The amount of unrecognized tax benefits, including interest and penalties, is recorded in Other Long-term Liabilities. If recognized as of October 31, 2021, and October 25, 2020, $19.6 million, and $29.1 million, respectively, would impact the Company’s effective tax rate. The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense, with losses of $0.9 million and $1.9 million included in expense for fiscal 2021 and 2020, respectively. The amount of accrued interest and penalties at October 31, 2021, and October 25, 2020, associated with unrecognized tax benefits was $5.0 million and $7.2 million, respectively.
The Company is regularly audited by federal and state taxing authorities. The U.S. Internal Revenue Service (I.R.S.) concluded their examinations of fiscal 2018 in the fourth quarter of fiscal 2020, and fiscal 2019 in the second quarter of fiscal 2021. The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years through 2022. The objective of CAP is to contemporaneously work with the I.R.S. to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return. The Company may elect to continue participating in CAP for future tax years; the Company may withdraw from the program at any time.
The Company is in various stages of audit by several state taxing authorities on a variety of fiscal years, as far back as 2015. While it is reasonably possible that one or more of these audits may be completed within the next 12 months and the related unrecognized tax benefits may change based on the status of the examinations, it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.
Note O
Earnings Per Share Data
The reported net earnings attributable to the Company were used when computing basic and diluted earnings per share for all years presented. A reconciliation ofshare. The following table sets forth the shares used inas the computation is as follows:denominator for those computations:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Basic Weighted-Average Shares Outstanding | | 541,114 | | | 538,007 | | | 534,578 | |
| Dilutive Potential Common Shares | | 6,466 | | | 8,585 | | | 10,654 | |
| Diluted Weighted-Average Shares Outstanding | | 547,580 | | | 546,592 | | | 545,232 | |
| | | | | | |
| Antidilutive Potential Common Shares | | 2,839 | | | 1,822 | | | 2,801 | |
|
| | | | | | | | | |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Basic weighted-average shares outstanding | | 530,742 |
| | 528,363 |
| | 529,290 |
|
| Dilutive potential common shares | | 13,127 |
| | 10,753 |
| | 13,183 |
|
| Diluted weighted-average shares outstanding | | 543,869 |
| | 539,116 |
| | 542,473 |
|
For fiscal years 2018, 2017, and 2016, a total of 7.3 million, 3.7 million, and 1.1 million weighted-average outstanding stock options, respectively, were not included in the computation of dilutive potential common shares since their inclusion would have had an antidilutive effect on earnings per share.
Note P
Segment Reporting
The Company develops, processes, and distributes a wide array of food products in a variety of markets. The Company reports its results in the following four4 segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. As a result of a business realignment at the beginning of fiscal 2018, the former Specialty Foods segment results are now reported as part of the Grocery Products segment. Periods presented herein have been recast to reflect this change.
The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market, along with the sale of nutritional and private label shelf-stable products to retail, foodservice, and industrial customers. This segment also includes the results from the Company’s MegaMex Foods, LLC joint venture.
The Refrigerated Foods segment consists primarily of the processing, marketing, and sale of branded and unbranded pork, beef, and poultry products for retail, foodservice, deli, convenience store, and commercial customers.
The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh productcommercial customers.
The International & Other segment includes Hormel Foods International which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Company’s international joint ventures and royalty arrangements.
Intersegment sales are recorded at prices that approximate cost and are eliminated in the Consolidated Statements of Operations. The Company does not allocate deferred compensation, investment income, interest expense, andor interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at corporate.the corporate level. One-time acquisition-related costs and accounting adjustments associated with the purchase of the Planters® snack nuts business were also retained at the corporate level. Equity in earningsEarnings of affiliatesAffiliates is included in segment operating profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included below as net interestNet Unallocated Expense and investment expense (income), general corporate expense, and noncontrolling interestNoncontrolling Interest when reconciling to earnings before income taxes.Earnings Before Income Taxes.
Sales and operating profitssegment profit for each of the Company’s reportable segments and reconciliation to earnings before income taxesEarnings Before Income Taxes are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the operating profit and other financial information shown below.
| | | | | | | | | | Fiscal Year |
| (in thousands) | | 2018 | | 2017 | | 2016 | (in thousands) | | 2021 | | 2020 | | 2019 |
Net Sales (to unaffiliated customers) | | | | | | | |
| Sales to Unaffiliated Customers | | Sales to Unaffiliated Customers | | | | | | |
| Grocery Products | | $ | 2,521,992 |
| | $ | 2,555,613 |
| | $ | 2,623,890 |
| Grocery Products | | $ | 2,809,445 | | | $ | 2,385,291 | | | $ | 2,369,317 | |
| Refrigerated Foods | | 4,771,836 |
| | 4,403,732 |
| | 4,647,173 |
| Refrigerated Foods | | 6,333,410 | | | 5,271,061 | | | 5,210,741 | |
| Jennie-O Turkey Store | | 1,627,433 |
| | 1,663,160 |
| | 1,740,968 |
| Jennie-O Turkey Store | | 1,495,151 | | | 1,333,459 | | | 1,323,783 | |
| International & Other | | 624,439 |
| | 545,014 |
| | 511,193 |
| International & Other | | 748,183 | | | 618,650 | | | 593,476 | |
| Total | | $ | 9,545,700 |
| | $ | 9,167,519 |
| | $ | 9,523,224 |
| Total | | $ | 11,386,189 | | | $ | 9,608,462 | | | $ | 9,497,317 | |
| Intersegment Sales | | | | | | | Intersegment Sales | | | | | | |
| Grocery Products | | $ | 38 |
| | $ | 32 |
| | $ | 26 |
| Grocery Products | | $ | — | | | $ | 13 | | | $ | 41 | |
| Refrigerated Foods | | 8,591 |
| | 7,832 |
| | 11,341 |
| Refrigerated Foods | | 28,019 | | | 21,067 | | | 16,351 | |
| Jennie-O Turkey Store | | 110,753 |
| | 113,384 |
| | 120,742 |
| Jennie-O Turkey Store | | 134,563 | | | 108,276 | | | 123,712 | |
| International & Other | | $ | — |
| | — |
| | — |
| International & Other | | — | | | — | | | — | |
| Total | | 119,382 |
| | 121,248 |
| | 132,109 |
| Total | | 162,582 | | | 129,356 | | | 140,104 | |
| Intersegment elimination | | (119,382 | ) | | (121,248 | ) | | (132,109 | ) | |
| Intersegment Elimination | | Intersegment Elimination | | (162,582) | | | (129,356) | | | (140,104) | |
| Total | | $ | — |
| | $ | — |
| | $ | — |
| Total | | $ | — | | | $ | — | | | $ | — | |
| Segment Net Sales | | | | | | | |
| Net Sales | | Net Sales | | | | | | |
| Grocery Products | | $ | 2,522,030 |
| | $ | 2,555,645 |
| | $ | 2,623,916 |
| Grocery Products | | $ | 2,809,445 | | | $ | 2,385,304 | | | $ | 2,369,358 | |
| Refrigerated Foods | | 4,780,427 |
| | 4,411,564 |
| | 4,658,514 |
| Refrigerated Foods | | 6,361,429 | | | 5,292,128 | | | 5,227,092 | |
| Jennie-O Turkey Store | | 1,738,186 |
| | 1,776,544 |
| | 1,861,710 |
| Jennie-O Turkey Store | | 1,629,714 | | | 1,441,735 | | | 1,447,495 | |
| International & Other | | 624,439 |
| | 545,014 |
| | 511,193 |
| International & Other | | 748,183 | | | 618,650 | | | 593,476 | |
| Intersegment elimination | | (119,382 | ) | | (121,248 | ) | | (132,109 | ) | |
| Intersegment Elimination | | Intersegment Elimination | | (162,582) | | | (129,356) | | | (140,104) | |
| Total | | $ | 9,545,700 |
| | $ | 9,167,519 |
| | $ | 9,523,224 |
| Total | | $ | 11,386,189 | | | $ | 9,608,462 | | | $ | 9,497,317 | |
| Segment Operating Profit | | | | | | | |
| Segment Profit | | Segment Profit | | | | | | |
| Grocery Products | | $ | 362,750 |
| | $ | 387,637 |
| | $ | 379,378 |
| Grocery Products | | $ | 382,197 | | | $ | 358,008 | | | $ | 339,497 | |
| Refrigerated Foods | | 617,626 |
| | 587,929 |
| | 585,652 |
| Refrigerated Foods | | 664,558 | | | 609,406 | | | 681,763 | |
| Jennie-O Turkey Store | | 175,684 |
| | 247,322 |
| | 329,427 |
| Jennie-O Turkey Store | | 76,006 | | | 105,585 | | | 117,962 | |
| International & Other | | 88,953 |
| | 85,304 |
| | 78,409 |
| International & Other | | 115,943 | | | 93,782 | | | 75,513 | |
| Total segment operating profit | | 1,245,013 |
| | $ | 1,308,192 |
| | $ | 1,372,866 |
| |
| Net interest and investment expense (income) | | 17,637 |
| | 1,824 |
| | 6,680 |
| |
| General corporate expense | | 46,534 |
| | 28,091 |
| | 49,436 |
| |
| Noncontrolling interest | | 442 |
| | 368 |
| | 465 |
| |
| Total Segment Profit | | Total Segment Profit | | $ | 1,238,704 | | | $ | 1,166,782 | | | $ | 1,214,735 | |
| Net Unallocated Expense | | Net Unallocated Expense | | 112,836 | | | 52,307 | | | 5,362 | |
| Noncontrolling Interest | | Noncontrolling Interest | | 301 | | | 272 | | | 342 | |
| Earnings Before Income Taxes | | $ | 1,181,284 |
| | $ | 1,278,645 |
| | $ | 1,317,215 |
| Earnings Before Income Taxes | | $ | 1,126,170 | | | $ | 1,114,747 | | | $ | 1,209,715 | |
| Assets | | |
| | |
| | |
| Assets | | | | | | |
| Grocery Products | | $ | 2,205,396 |
| | $ | 2,215,154 |
| | $ | 2,277,913 |
| Grocery Products | | $ | 4,711,475 | | | $ | 1,713,883 | | | $ | 1,774,235 | |
| Refrigerated Foods | | 3,379,612 |
| | 2,324,749 |
| | 1,999,821 |
| Refrigerated Foods | | 4,900,427 | | | 4,188,250 | | | 3,583,639 | |
| Jennie-O Turkey Store | | 1,048,716 |
| | 942,369 |
| | 882,812 |
| Jennie-O Turkey Store | | 1,073,249 | | | 1,111,318 | | | 1,023,787 | |
| International & Other | | 679,003 |
| | 675,878 |
| | 510,904 |
| International & Other | | 800,828 | | | 721,729 | | | 692,310 | |
| Corporate | | 829,565 |
| | 817,758 |
| | 698,617 |
| Corporate | | 1,210,351 | | | 2,173,101 | | | 1,035,033 | |
| Total | | $ | 8,142,292 |
| | $ | 6,975,908 |
| | $ | 6,370,067 |
| Total | | $ | 12,696,329 | | | $ | 9,908,282 | | | $ | 8,109,004 | |
| Additions to Property, Plant & Equipment | | | | | | | |
| Additions to Property, Plant, & Equipment | | Additions to Property, Plant, & Equipment | | | | | | |
| Grocery Products | | $ | 13,042 |
| | $ | 16,443 |
| | $ | 21,202 |
| Grocery Products | | $ | 19,911 | | | $ | 34,409 | | | $ | 37,892 | |
| Refrigerated Foods | | 220,499 |
| | 79,836 |
| | 93,430 |
| Refrigerated Foods | | 159,380 | | | 249,441 | | | 174,506 | |
| Jennie-O Turkey Store | | 131,946 |
| | 88,063 |
| | 61,340 |
| Jennie-O Turkey Store | | 14,606 | | | 42,042 | | | 31,607 | |
| International & Other | | 16,513 |
| | 33,124 |
| | 44,407 |
| International & Other | | 8,626 | | | 3,737 | | | 9,248 | |
| Corporate | | 7,607 |
| | 3,820 |
| | 35,145 |
| Corporate | | 29,894 | | | 37,872 | | | 40,585 | |
| Total | | $ | 389,607 |
| | $ | 221,286 |
| | $ | 255,524 |
| Total | | $ | 232,416 | | | $ | 367,501 | | | $ | 293,838 | |
| Depreciation and Amortization | | | | | | | Depreciation and Amortization | | | | | | |
| Grocery Products | | $ | 35,217 |
| | $ | 37,096 |
| | $ | 34,890 |
| Grocery Products | | $ | 34,645 | | | $ | 32,148 | | | $ | 31,406 | |
| Refrigerated Foods | | 70,564 |
| | 45,911 |
| | 53,229 |
| Refrigerated Foods | | 116,206 | | | 97,317 | | | 77,100 | |
| Jennie-O Turkey Store | | 33,324 |
| | 31,611 |
| | 29,225 |
| Jennie-O Turkey Store | | 47,669 | | | 46,322 | | | 34,696 | |
| International & Other | | 10,755 |
| | 4,042 |
| | 3,969 |
| International & Other | | 15,244 | | | 16,226 | | | 10,666 | |
| Corporate | | 11,998 |
| | 12,317 |
| | 10,655 |
| Corporate | | 14,643 | | | 13,767 | | | 11,342 | |
| Total | | $ | 161,858 |
| | $ | 130,977 |
| | $ | 131,968 |
| Total | | $ | 228,406 | | | $ | 205,781 | | | $ | 165,210 | |
Revenue has been disaggregated into the categories below to show how sales channels affect the nature, amount, timing, and uncertainty of revenue and cash flows. The amounts of total revenues contributed by sales channel for the last three fiscal years are:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| (in thousands) | | October 31, 2021 | | October 25, 2020 | | October 27, 2019 |
| U.S. Retail | | $ | 6,196,761 | | | $ | 5,441,412 | | | $ | 4,947,398 | |
| U.S. Foodservice | | 3,239,424 | | | 2,489,644 | | | 2,943,352 | |
| U.S. Deli | | 1,087,081 | | | 970,327 | | | 939,069 | |
| International | | 862,923 | | | 707,078 | | | 667,498 | |
| Total | | $ | 11,386,189 | | | $ | 9,608,462 | | | $ | 9,497,317 | |
The Company’s products primarily consist of meat and other food products. The amounts of total revenues contributed by classes of similar products for the last three fiscal years are:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| (in thousands) | | October 31, 2021 | | October 25, 2020 | | October 27, 2019 |
| Perishable | | $ | 6,271,164 | | | $ | 5,328,738 | | | $ | 5,370,409 | |
| Shelf-stable | | 2,661,194 | | | 2,092,551 | | | 1,829,138 | |
| Poultry | | 2,100,356 | | | 1,886,367 | | | 1,849,294 | |
| Miscellaneous | | 353,475 | | | 300,806 | | | 448,476 | |
| Total | | $ | 11,386,189 | | | $ | 9,608,462 | | | $ | 9,497,317 | |
Perishable includes fresh meats, frozen items, refrigerated meal solutions, sausages, hams, guacamole, and bacon (excluding JOTSJennie-O Turkey Store products). Shelf-stable includes canned luncheon meats, peanut butter, chilies,nut butters, snack nuts, chili, shelf-stable microwaveable meals, hash, stews, meat spreads, flour and corn tortillas, salsas, tortilla chips, and other items that do not require refrigeration. The Poultry category is composed primarily of JOTSJennie-O Turkey Store products. The Miscellaneous category primarily consists of nutritional food products and supplements, dessert and drink mixes, and industrial gelatin products. The percentagesdivestiture of total revenues contributed by classes of similar products forCytoSport in fiscal 2019 led to the last threereduction in the Miscellaneous category as compared to fiscal years are as follows: 2021 and 2020.
|
| | | | | | | | | |
| | | Fiscal Year Ended |
| | | October 28, 2018 | | October 29, 2017 | | October 30, 2016 |
| Perishable | | 55.9 | % | | 53.7 | % | | 53.1 | % |
| Poultry | | 19.3 | % | | 19.1 | % | | 20.5 | % |
| Shelf-stable | | 18.5 | % | | 20.2 | % | | 18.2 | % |
| Miscellaneous | | 6.3 | % | | 7.0 | % | | 8.2 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Revenues from external customers are classified as domestic or foreign based on the destination where title passes. No individual foreign country is material to the consolidated results. Additionally, the Company’s long-lived assets located in foreign countries are not significant. Total revenues attributed to the U.S. and all foreign countries in total for the last three fiscal years are as follows:are:
| | | | | Fiscal Year Ended | | Fiscal Year Ended |
| (in thousands) | | October 28, 2018 | | October 29, 2017 | | October 30, 2016 | (in thousands) | | October 31, 2021 | | October 25, 2020 | | October 27, 2019 |
| United States | | $ | 8,957,305 |
| | $ | 8,631,325 |
| | $ | 9,012,797 |
| United States | | $ | 10,653,088 | | | $ | 9,006,007 | | | $ | 8,934,911 | |
| Foreign | | 588,395 |
| | 536,194 |
| | 510,427 |
| Foreign | | 733,101 | | | 602,454 | | | 562,406 | |
| Total | | $ | 9,545,700 |
| | $ | 9,167,519 |
| | $ | 9,523,224 |
| Total | | $ | 11,386,189 | | | $ | 9,608,462 | | | $ | 9,497,317 | |
In fiscal 2018,2021, sales to Walmart Inc. (Walmart) represented $1.4$1.9 billion or 13.6% percent15.2% of the Company’s consolidated revenues (measured as gross sales less returns and allowances). In fiscal 2017, salesallowances compared to Walmart represented $1.5 billion or 14.4% percent of the Company’s consolidated revenues.14.6% in fiscal 2020. Walmart is a customer for all four4 segments of the Company.
Note Q
Quarterly Results of Operations (Unaudited)
The following tabulations reflect the unaudited quarterly results of operations for the years ended October 28, 2018, and October 29, 2017.
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| | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share data) | | Net Sales | | Gross Profit | | Net Earnings | | Net Earnings Attributable to Hormel Foods Corporation(1) | | Basic Earnings Per Share | | Diluted Earnings Per Share(2) |
| 2018 | | |
| | |
| | |
| | |
| | |
| | |
|
| First quarter | | $ | 2,331,293 |
| | $ | 502,179 |
| | $ | 303,211 |
| | $ | 303,107 |
| | $ | 0.57 |
| | $ | 0.56 |
|
| Second quarter | | 2,330,568 |
| | 496,686 |
| | 237,522 |
| | 237,384 |
| | 0.45 |
| | 0.44 |
|
| Third quarter | | 2,359,142 |
| | 459,172 |
| | 210,353 |
| | 210,243 |
| | 0.40 |
| | 0.39 |
|
| Fourth quarter | | 2,524,697 |
| | 537,396 |
| | 261,496 |
| | 261,406 |
| | 0.49 |
| | 0.48 |
|
| 2017 | | | | | | | | | | | | |
| First quarter | | $ | 2,280,227 |
| | $ | 552,280 |
| | $ | 235,303 |
| | $ | 235,147 |
| | $ | 0.44 |
| | $ | 0.44 |
|
| Second quarter | | 2,187,309 |
| | 486,920 |
| | 210,886 |
| | 210,926 |
| | 0.40 |
| | 0.39 |
|
| Third quarter | | 2,207,375 |
| | 452,409 |
| | 182,551 |
| | 182,508 |
| | 0.35 |
| | 0.34 |
|
| Fourth quarter | | 2,492,608 |
| | 511,554 |
| | 218,363 |
| | 218,154 |
| | 0.41 |
| | 0.41 |
|
(1) Excludes net earnings attributable to the Company’s noncontrolling interests.
(2) Quarterly amounts are independently computed and may not add to the annual amounts.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). In designing and evaluating the disclosure controls and procedures, management recognized any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance the information we are required to disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Management's report on the Company's internal control over financial reporting is included on page 30 of this report. The report of the Company's independent registered public accounting firm related to their assessment of the effectiveness of internal control over financial reporting is included on page 31 of this report.
During the fourth quarter of fiscal year 2018, there has been
There were no changechanges in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) through the fourth quarter of fiscal 2021 that hashave materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information under “Item 1 – Election of Directors”, “Board Independence”, and information under “Board of Director and Committee Meetings” in the definitive proxy statement for the Annual Meeting of Stockholders to be held January 29, 2019,25, 2022, is incorporated herein by reference.
Information concerning Executive Officers is set forth in Part I Item 1(f) of this Annual Report on Form 10-K, pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K.
Information under “Section 16(a) Beneficial Ownership Reporting Compliance,” in the definitive proxy statement for the Annual Meeting of Stockholders to be held January 29, 2019, is incorporated herein by reference.
The Company has adopted a Code of Ethical Business Conduct in compliance with applicable rules of the Securities and Exchange Commission that applies to its principal executive officer, its principal financial officer, and its principal accounting officer or controller, or persons performing similar functions. A copy of the Code of Ethical Business Conduct is available on the Company’s Web sitewebsite at www.hormelfoods.com, free of charge, under the caption, “Investors –Governance– Governance – Governance Documents.” The Company intends to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Ethical Business Conduct by posting such information on the Company’s Web sitewebsite at the address and location specified above.
Item 11. EXECUTIVE COMPENSATION
Information commencing with “Executive Compensation” through "CEO Pay Ratio Disclosure”, and information under “Compensation of Directors” in the definitive proxy statement for the Annual Meeting of Stockholders to be held January 29, 2019,25, 2022, is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS
Information regarding the Company's equity compensation plans as of October 28, 2018,31, 2021, is shownpresented below: | | | Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | Plan Category | | Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) |
| | | (a) | | (b) | | (c) | | (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders | | 29,535,582 | | $23.55 | | 16,064,059 | |
| Equity compensation plans not approved by security holders | | — | | — | | - | |
Equity Compensation Plans Approved by
Security Holders | | Equity Compensation Plans Approved by
Security Holders | | 19,022,070 | | $33.49 | | 12,472,467 |
Equity Compensation Plans Not Approved by
Security Holders | | Equity Compensation Plans Not Approved by
Security Holders | | — | | — | | — |
| Total | | 29,535.582 | | $23.55 | | 16,064,059 | Total | | 19,022,070 | | $33.49 | | 12,472,467 |
Information under “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management” in the definitive proxy statement for the Annual Meeting of Stockholders to be held January 29, 2019,25, 2022, is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information under “Related Party Transactions” and “Board Independence” in the definitive proxy statement for the Annual Meeting of Stockholders to be held January 29, 2019,25, 2022, is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information under “Independent Registered Public Accounting Firm Fees” and “Audit Committee Preapproval Policies and Procedures” in the definitive proxy statement for the Annual Meeting of Stockholders to be held January 29, 2019,25, 2022, is incorporated herein by reference.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Hormel Foods Corporation for the fiscal year ended October 28, 2018,31, 2021, are filed as part of this report:
Consolidated Statements of Financial Position–October 28, 2018,31, 2021, and October 29, 2017.25, 2020.
Consolidated Statements of Operations–Fiscal Years Ended October 28, 2018,31, 2021, October 29, 2017,25, 2020, and October 30, 2016.27, 2019.
Consolidated Statements of Comprehensive Income–Fiscal Years Ended October 28, 2018,31, 2021, October 29, 2017,25, 2020, and October 30, 2016.27, 2019.
Consolidated Statements of Changes in Shareholders’ Investment–Fiscal Years Ended October 28, 2018,31, 2021, October 29, 2017,25, 2020, and October 30, 2016.27, 2019.
Consolidated Statements of Cash Flows–Fiscal Years Ended October 28, 2018,31, 2021, October 29, 2017,25, 2020, and October 30, 2016.27, 2019.
Notes to Consolidated Financial Statements
Report of Management
Report of Independent Registered Public Accounting Firm
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of Hormel Foods Corporation required is submitted herewith:
Schedule II – Valuation and Qualifying Accounts and Reserves–Fiscal Years Ended October 28, 2018,31, 2021, October 29, 2017,25, 2020, and October 30, 2016.27, 2019.
FINANCIAL STATEMENTS AND SCHEDULES OMITTED
All other financial statements and schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
HORMEL FOODS CORPORATION
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
HORMEL FOODS CORPORATION(in thousands)
(In Thousands)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Additions/(Benefits) | | | | |
| Classification | | Balance at Beginning of Period | | Charged to Cost and Expenses | | Charged to Other Accounts Describe | | Deductions- Describe | | Balance at End of Period |
| Valuation reserve deduction from assets account: | | |
| | |
| | |
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|
Fiscal year ended October 28, 2018 Allowance for doubtful accounts receivable | | | | | | $ | 10 |
| (1) | | $ | 65 |
| (4) | | |
| | $ | 4,246 |
| | $ | 79 |
| | (262 | ) | (3) | | (43 | ) | (5) | | $ | 4,051 |
|
Fiscal year ended October 29, 2017 Allowance for doubtful accounts receivable | | | | | | | | | $ | 677 |
| (4) | | |
| | $ | 4,045 |
| | $ | 561 |
| | $ | 261 |
| (2) | | (56 | ) | (5) | | $ | 4,246 |
|
Fiscal year ended October 30, 2016 Allowance for doubtful accounts receivable | | | | | | | | | | | | |
| | $ | 4,086 |
| | $ | 611 |
| | $ | — |
| | | $ | 652 |
| (4) | | $ | 4,045 |
|
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| | | | Additions/(Benefits) | | | | |
| Classification | | Balance at
Beginning
of Period | | Charged to Cost and Expenses | | Charged to Other Accounts Describe | | Deductions-
Describe | | Balance at
End of Period |
| Valuation reserve deduction from assets account: | | | | | | | | | | | | |
Fiscal year ended October 31, 2021
Allowance for doubtful accounts receivable | | | | | | | | | $ | 138 | | (1) | | |
| $ | 4,012 | | | $ | 146 | | | $ | (12) | | (3) | | (25) | | (2) | | $ | 4,033 | |
Fiscal year ended October 25, 2020
Allowance for doubtful accounts receivable | | | | | | $ | (63) | | (4) | | $ | 452 | | (1) | | |
| $ | 4,063 | | | $ | 339 | | | 12 | | (5) | | (113) | | (2) | | $ | 4,012 | |
Fiscal year ended October 27, 2019
Allowance for doubtful accounts receivable | | | | | | | | | $ | 121 | | (1) | | |
| $ | 4,051 | | | $ | (382) | | | | | | (515) | | (2) | | $ | 4,063 | |
(1) Uncollectible accounts written off.
(2) Recoveries on accounts previously written off.
(3) Consolidation of the Sadler's reserve.
(4) Consolidation of the Applegate reserve.
(5)Increase in the reserve due to the inclusion of ColumbusSadler's accounts receivable.
(2) Increase in the reserve due to the inclusion of Fontanini accounts receivable.
(3) Consolidation of the Fontanini and Columbus reserves.
(4) Uncollectible accounts written off.
(5) Recoveries on accounts previously written off.
LIST OF EXHIBITS
HORMEL FOODS CORPORATION
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| LIST OF EXHIBITS |
| HORMEL FOODS CORPORATION |
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| NUMBER | DESCRIPTION OF DOCUMENT |
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NUMBER | | DESCRIPTION OF DOCUMENT |
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4.34.4(1) | | Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining the rights of holders of certain long-term debt are not filed. Hormel agrees to furnish copies thereof to the Securities and Exchange Commission upon request. |
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| | Hormel Foods Corporation Operators’ Shares Incentive Compensation Plan. |
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| NUMBER | DESCRIPTION OF DOCUMENT |
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| | Underwriting Agreement, dated as of April 4, 2011, by and between the Company and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner, & Smith Incorporated as representatives of the several underwriters named in Schedule 1 thereto. (Incorporated by reference to Exhibit 1.1 to Hormel’s Current Report on Form 8-K dated April 11, 2011, File No. 001-02402.) |
| | |
10.14 (1)(3)
| | Hormel Foods Corporation 2018 Incentive Compensation Plan. (Incorporated by reference to Appendix A to Hormel's Definitive Proxy Statement filed on December 20, 2017, File No. 001-02402.) |
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| | U.S. $750,000,000 Credit Agreement, dated as of May 6, 2021, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender, and the lenders identified on the signature pages thereof. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 6, 2021, File No. 001- 02402.) |
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NUMBER | | DESCRIPTION OF DOCUMENT |
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99.3(1)101(2)
| | U.S. $700,000,000 Amended and Restated Credit Agreement, dated as of June 24, 2015, betweenThe following financial statements from the Company, Wells Fargo Bank, National Association, as Administrative Agent, and the lenders identified on the signature pages thereof. (Incorporated by reference to Exhibit 99 to Hormel’s CurrentCompany's Annual Report on Form 8-K dated June 24, 2015, File No. 001-02402.)10-K for the fiscal year ended October 31, 2021, formatted in Inline XBRL: (i) Consolidated Statements of Financial Position, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Investment, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. |
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101.INS104(2)
| | The cover page from the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021, formatted in Inline XBRL Instance Document(included as Exhibit 101). |
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101.SCH(2)
| | XBRL Taxonomy Extension Schema Document |
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101.CAL(2)
| | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF(2)
| | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB(2)
| | XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE(2)
| | XBRL Taxonomy Extension Presentation Linkbase Document |
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| (1) | | Document has previously been filed with the Securities and Exchange Commission and is incorporated herein by reference. |
| (2) | | These exhibits transmitted via EDGAR. |
| (3) | | Management contract or compensatory plan or arrangement. |
Item 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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| HORMEL FOODS CORPORATION | | |
| | | |
| By: | /s/ JAMES P. SNEE | December 7, 201810, 2021 | |
| | JAMES P. SNEE, Chairman of the Board, | Date | |
| | President and Chief Executive Officer and Director | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | | | | | | | | | | | | | |
| Name | | Date | | Title |
| /s/ JAMES P. SNEE | | 12/10/2021 | | Chairman of the Board, President and Chief Executive |
| JAMES P. SNEE | | | | Officer |
| | | | (Principal Executive Officer) |
| | | | |
| /s/ JAMES N. SHEEHAN | | 12/10/2021 | | Executive Vice President and Chief Financial Officer |
| JAMES N. SHEEHAN | | | | (Principal Financial Officer) |
| | | | |
| /s/ JANA L. HAYNES | | 12/10/2021 | | Vice President and Controller |
| JANA L. HAYNES | | | | (Principal Accounting Officer) |
| | | | |
| /s/ PRAMA BHATT* | | 12/10/2021 | | Director |
| PRAMA BHATT | | | | |
| | | | |
Name | | Date | | Title |
/s/ JAMES P. SNEE | | 11/7/2018 | | Chairman of the Board, President, Chief Executive |
JAMES P. SNEE | | | | Officer, and Director |
| | | | (Principal Executive Officer) |
| | | | |
/s/ JAMES N. SHEEHAN | | 11/7/2018 | | Senior Vice President and Chief Financial Officer |
JAMES N. SHEEHAN | | | | (Principal Financial Officer) |
| | | | |
/s/ JANA L. HAYNES | | 11/7/2018 | | Vice President and Controller |
JANA L. HAYNES | | | | (Principal Accounting Officer) |
| | | | |
| /s/ GARY C. BHOJWANI* | | 11/7/201812/10/2021 | | Director |
| GARY C. BHOJWANI | | | | |
| | | | |
| /s/ TERRELL K. CREWS* | | 11/7201812/10/2021 | | Director |
| TERRELL K. CREWS | | | | |
| | | | |
/s/ GLENN S. FORBES* | | 11/7/2018 | | Director |
GLENN S. FORBES | | | | |
| | | | |
| /s/ STEPHEN M. LACY* | | 11/7/201812/10/2021 | | Director |
| STEPHEN M. LACY | | | | |
| | | | |
| /s/ ELSA A. MURANO* | | 11/7/201812/10/2021 | | Director |
| ELSA A. MURANO | | | | |
| | | | |
/s/ ROBERT C. NAKASONE* | | 11/7/2018 | | Director |
ROBERT C. NAKASONE | | | | |
| | | | |
| /s/ SUSAN K. NESTEGARD* | | 11/7/201812/10/2021 | | Director |
| SUSAN K. NESTEGARD | | | | |
| | | | |
| /s/ WILLIAM A. NEWLANDS* | | 11/7/201812/10/2021 | | Director |
WILLIAM A. NEWLANDS
| | | | |
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/s/ DAKOTA A. PIPPINS* | | 11/7/2018 | | Director |
DAKOTA A. PIPPINS | | | | |
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| /s/ CHRISTOPHER J. POLICINSKI* | | 11/7/201812/10/2021 | | Director |
| CHRISTOPHER J. POLICINSKI | | | | |
| | | | |
| /s/ JOSE L. PRADO* | | 12/10/2021 | | Director |
| JOSE L. PRADO | | | | |
| | | | |
| /s/ SALLY J. SMITH* | | 11/7/201812/10/2021 | | Director |
| SALLY J. SMITH | | | | |
| | | | |
| /s/ STEVEN A. WHITE* | | 11/7/201812/10/2021 | | Director |
| STEVEN A. WHITE | | | | |
| | | | |
| *By: /s/ JANA L. HAYNES | | 11/7/201812/10/2021 | | |
| JANA L. HAYNES | | | | |
| as Attorney-In-Fact | | | | |
