NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year. The Consolidated Statement of Financial Position at October 27, 2019, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 27, 2019. The significant accounting policies used in preparing these Consolidated Financial Statements are consistent with those described in Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements in the Form 10-K with the exception of new requirements adopted in the first quarter of fiscal 2020. The Company has considered the impact of COVID-19 and determined there have been no material changes in the Company’s Significant Accounting Policies, including estimates and assumptions, as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 27, 2019.
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.
Accounting Changes and Recent Accounting Pronouncements:
New Accounting Pronouncements Adopted in Current Fiscal Year
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 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, including interim periods 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.
New Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 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 approach 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. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, and interim periods therein. The Company will adopt the provisions of this new accounting standard at the beginning of fiscal 2021 and does not expect adoption to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance requires entities to disclose 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 as 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. Early adoption is permitted for any removed or modified disclosures. The Company will adopt the provisions of this new accounting standard at the beginning of fiscal 2021 and is in the process of evaluating the impact.
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 is currently assessing the timing and impact of adopting the updated provisions.
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 clarifying and amending existing guidance. 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.
Recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not relevant to the Company.
NOTE B - ACQUISITIONS AND DIVESTITURES
Acquisition: On March 2, 2020, the Company acquired the assets comprising 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 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 has completed an allocation of the fair value of the assets acquired utilizing third-party valuation appraisals. See Note D - Goodwill and Intangible Assets for amounts assigned to goodwill and intangible assets.
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. Pro forma results are not material for inclusion.
Divestiture: On April 15, 2019, the Company completed the sale of CytoSport, Inc. (CytoSport), which included the Muscle Milk® and Evolve® brands, to PepsiCo, Inc., and received final proceeds of $479.8 million. The divestiture resulted in a pretax 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 Consolidated Statements of Operations and are reported within the Grocery Products and International & Other segments (See Note O - Segment Reporting).
NOTE C - INVENTORIES
Principal components of inventories are:
|
|
|
|
|
|
|
|
|
(in thousands)
|
July 26,
2020
|
|
October 27,
2019
|
Finished Products
|
$
|
506,814
|
|
|
$
|
604,035
|
|
Raw Materials and Work-in-Process
|
274,485
|
|
|
255,474
|
|
Operating Supplies
|
129,952
|
|
|
116,981
|
|
Maintenance Materials and Parts
|
71,104
|
|
|
65,872
|
|
Total
|
$
|
982,355
|
|
|
$
|
1,042,362
|
|
NOTE D - GOODWILL AND INTANGIBLE ASSETS
Goodwill: The changes in the carrying amounts of goodwill for the thirteen and thirty-nine weeks ended July 26, 2020, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Grocery
Products
|
|
Refrigerated
Foods
|
|
Jennie-O
Turkey Store
|
|
International
& Other
|
|
Total
|
Balance at April 26, 2020
|
$
|
632,301
|
|
|
$
|
1,671,563
|
|
|
$
|
176,628
|
|
|
$
|
202,347
|
|
|
$
|
2,682,839
|
|
Purchase Adjustments
|
—
|
|
|
(64,558
|
)
|
|
—
|
|
|
—
|
|
|
(64,558
|
)
|
Foreign Currency Translation
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,592
|
)
|
|
(2,592
|
)
|
Balance at July 26, 2020
|
$
|
632,301
|
|
|
$
|
1,607,005
|
|
|
$
|
176,628
|
|
|
$
|
199,756
|
|
|
$
|
2,615,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,269
|
)
|
|
(14,269
|
)
|
Balance at July 26, 2020
|
$
|
632,301
|
|
|
$
|
1,607,005
|
|
|
$
|
176,628
|
|
|
$
|
199,756
|
|
|
$
|
2,615,690
|
|
The increase to goodwill during the thirty-nine weeks ended July 26, 2020, is related to the acquisition of Sadler's. In the thirteen weeks ended July 26, 2020, an allocation from goodwill to the identifiable intangible assets was made based on a third-party valuation appraisal. See Note B - Acquisitions and Divestitures for additional information.
Intangible Assets: The carrying amounts for indefinite-lived intangible assets are:
|
|
|
|
|
|
|
|
|
(in thousands)
|
July 26,
2020
|
|
October 27,
2019
|
Brands/Tradenames/Trademarks
|
$
|
953,190
|
|
|
$
|
959,400
|
|
Other Intangibles
|
184
|
|
|
184
|
|
Foreign Currency Translation
|
(6,686
|
)
|
|
(3,803
|
)
|
Total
|
$
|
946,688
|
|
|
$
|
955,781
|
|
The gross carrying amount and accumulated amortization for definite-lived intangible assets are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 26, 2020
|
|
October 27, 2019
|
(in thousands)
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Customer Lists/Relationships
|
$
|
117,239
|
|
|
$
|
(43,692
|
)
|
|
$
|
113,739
|
|
|
$
|
(36,744
|
)
|
Tradenames/Trademarks
|
10,536
|
|
|
(2,982
|
)
|
|
4,326
|
|
|
(1,589
|
)
|
Other Intangibles
|
60,631
|
|
|
(3,185
|
)
|
|
2,631
|
|
|
(1,228
|
)
|
Foreign Currency Translation
|
—
|
|
|
(4,689
|
)
|
|
—
|
|
|
(3,054
|
)
|
Total
|
$
|
188,406
|
|
|
$
|
(54,548
|
)
|
|
$
|
120,696
|
|
|
$
|
(42,615
|
)
|
The increase to gross carrying amount of other intangibles during the thirty-nine weeks ended July 26, 2020, is related to the acquisition of Sadler's. Amortization expense was $4.1 million and $10.3 million for the thirteen and thirty-nine weeks ended July 26, 2020, respectively, compared to $2.6 million and $8.9 for the thirteen and thirty-nine weeks ended July 28, 2019.
Estimated annual amortization expense for the five fiscal years after October 27, 2019, is:
|
|
|
|
|
(in thousands)
|
|
2020
|
$
|
14,572
|
|
2021
|
16,477
|
|
2022
|
16,037
|
|
2023
|
15,132
|
|
2024
|
13,314
|
|
NOTE E - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term Debt consists of:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
July 26,
2020
|
|
October 27,
2019
|
Senior Unsecured Notes, with Interest at 1.800%, Interest Due
Semi-annually through June 2030 Maturity Date
|
|
$
|
1,000,000
|
|
|
$
|
—
|
|
Senior Unsecured Notes, with Interest at 4.125%, Interest Due
Semi-annually through April 2021 Maturity Date
|
|
250,000
|
|
|
250,000
|
|
Unamortized Discount on Senior Notes
|
|
(2,698
|
)
|
|
—
|
|
Unamortized Debt Issuance Costs
|
|
(8,186
|
)
|
|
—
|
|
Finance Lease Liabilities(1)
|
|
63,091
|
|
|
—
|
|
Other Financing Arrangements
|
|
3,300
|
|
|
—
|
|
Total
|
|
1,305,508
|
|
|
250,000
|
|
Less: Current Maturities of Long-term Debt
|
|
258,688
|
|
|
—
|
|
Long-term Debt - Less Current Maturities
|
|
$
|
1,046,821
|
|
|
$
|
250,000
|
|
(1) See Note M - Leases for additional information
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 anytime 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. The net proceeds from the issuance of the notes will be used for general corporate purposes.
The Company has a $400.0 million unsecured revolving line of credit, which matures 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. As of July 26, 2020, and October 27, 2019, the Company had no outstanding draws from this line of credit.
The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of July 26, 2020, the Company was in compliance with all of these covenants.
NOTE F - PENSION AND OTHER POST-RETIREMENT BENEFITS
Net periodic benefit cost for pension and other post-retirement benefit plans consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(in thousands)
|
July 26,
2020
|
|
July 28,
2019
|
|
July 26,
2020
|
|
July 28,
2019
|
Service Cost
|
$
|
8,896
|
|
|
$
|
6,510
|
|
|
$
|
26,688
|
|
|
$
|
19,531
|
|
Interest Cost
|
13,411
|
|
|
15,097
|
|
|
40,232
|
|
|
45,289
|
|
Expected Return on Plan Assets
|
(25,321
|
)
|
|
(23,123
|
)
|
|
(75,963
|
)
|
|
(69,369
|
)
|
Amortization of Prior Service Cost
|
(542
|
)
|
|
(699
|
)
|
|
(1,626
|
)
|
|
(2,096
|
)
|
Recognized Actuarial Loss
|
5,595
|
|
|
3,702
|
|
|
16,787
|
|
|
11,104
|
|
Curtailment Loss (Gain)
|
—
|
|
|
—
|
|
|
—
|
|
|
2,825
|
|
Net Periodic Cost
|
$
|
2,039
|
|
|
$
|
1,487
|
|
|
$
|
6,118
|
|
|
$
|
7,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement Benefits
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(in thousands)
|
July 26,
2020
|
|
July 28,
2019
|
|
July 26,
2020
|
|
July 28,
2019
|
Service Cost
|
$
|
192
|
|
|
$
|
173
|
|
|
$
|
579
|
|
|
$
|
520
|
|
Interest Cost
|
2,322
|
|
|
3,007
|
|
|
7,111
|
|
|
9,181
|
|
Amortization of Prior Service Cost
|
(662
|
)
|
|
(669
|
)
|
|
(1,988
|
)
|
|
(2,007
|
)
|
Recognized Actuarial Loss
|
261
|
|
|
—
|
|
|
784
|
|
|
—
|
|
Curtailment Loss (Gain)
|
—
|
|
|
—
|
|
|
—
|
|
|
(620
|
)
|
Net Periodic Cost
|
$
|
2,113
|
|
|
$
|
2,511
|
|
|
$
|
6,486
|
|
|
$
|
7,074
|
|
Non-service cost components of net pension and postretirement benefit cost are presented within Interest and Investment Income on the Consolidated Statements of Operations.
Curtailments recognized in the first thirty-nine weeks of fiscal 2019 were due to the sale of the Fremont, Nebraska production facility.
NOTE G - DERIVATIVES AND HEDGING
The Company uses hedging programs to manage price risk associated with commodity purchases. These programs utilize futures and options 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. 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 Hedges: The Company designates corn and lean hog futures 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.
Fair Value Hedges: The Company designates the futures it uses to minimize the price risk assumed when fixed forward priced contracts are offered to the Company’s 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 loss on the hedged purchase commitment, are marked-to-market through earnings and 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.
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. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.
Volume: As of July 26, 2020, and October 27, 2019, the Company had the following outstanding commodity futures and options contracts related to its hedging programs:
|
|
|
|
|
|
|
|
Volume
|
Commodity Contracts
|
|
July 26, 2020
|
|
October 27, 2019
|
Corn
|
|
19.1 million bushels
|
|
30.4 million bushels
|
Lean Hogs
|
|
162.6 million pounds
|
|
187.3 million pounds
|
Fair Value of Derivatives: The fair values of the Company’s derivative instruments as of July 26, 2020, and October 27, 2019, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value (1)
|
(in thousands)
|
|
Location on Consolidated Statements
of Financial Position
|
|
July 26,
2020
|
|
October 27,
2019
|
Derivatives Designated as Hedges:
|
|
|
|
|
|
|
Commodity Contracts
|
|
Other Current Assets
|
|
$
|
(19,016
|
)
|
|
$
|
6,405
|
|
(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. The gross liability position as of July 26, 2020 is offset by cash collateral of $40.1 million contained within the master netting arrangement. The gross asset position as of October 27, 2019 is offset by cash owed of $4.0 million. See Note L - 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) as of July 26, 2020, and October 27, 2019, are:
|
|
|
|
|
|
|
|
|
|
Location on Consolidated Statements
of Financial Position
|
|
Carrying Amount of the Hedged
Assets/(Liabilities)
|
(in thousands)
|
|
July 26,
2020
|
|
October 27, 2019
|
Accounts Payable
|
|
$
|
(1,847
|
)
|
|
$
|
(2,805
|
)
|
Accumulated Other Comprehensive Loss Impact: As of July 26, 2020, the Company included in Accumulated Other Comprehensive Loss hedging losses of $28.4 million (before tax) relating to its positions. The Company expects to recognize the majority of these losses over the next twelve months.
The effect of Accumulated Other Comprehensive Loss for gains or losses (before tax) related to the Company's derivative instruments for the thirteen weeks ended July 26, 2020, and July 28, 2019, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss)
Recognized
in AOCL (1)
|
|
Location on
Consolidated
Statements
of Operations
|
|
Gain/(Loss)
Reclassified from
AOCL into Earnings (1)
|
|
|
Thirteen Weeks Ended
|
|
|
Thirteen Weeks Ended
|
(in thousands)
|
|
July 26, 2020
|
|
July 28, 2019
|
|
|
July 26, 2020
|
|
July 28, 2019
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
Commodity Contracts
|
|
$
|
(943
|
)
|
|
$
|
9,883
|
|
|
Cost of Products Sold
|
|
$
|
(18,645
|
)
|
|
$
|
940
|
|
Excluded Component (2)
|
|
—
|
|
|
(4,742
|
)
|
|
|
|
|
|
|
The effect of Accumulated Other Comprehensive Loss for gains or losses (before tax) related to the Company's derivative instruments for the thirty-nine weeks ended July 26, 2020 and July 28, 2019, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss)
Recognized
in AOCL (1)
|
|
Location on
Consolidated
Statements
of Operations
|
|
Gain/(Loss)
Reclassified from
AOCL into Earnings (1)
|
|
|
Thirty-Nine Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
(in thousands)
|
|
July 26, 2020
|
|
July 28, 2019
|
|
|
July 26, 2020
|
|
July 28, 2019
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
Commodity Contracts
|
|
$
|
(57,514
|
)
|
|
$
|
9,546
|
|
|
Cost of Products Sold
|
|
$
|
(25,997
|
)
|
|
$
|
(835
|
)
|
Excluded Component (2)
|
|
—
|
|
|
501
|
|
|
|
|
|
|
|
|
|
(1)
|
See Note I - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on Net Earnings.
|
|
|
(2)
|
Represents the time value amount of lean hog options excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in AOCL.
|
Consolidated Statements of Operations Impact: The effect on the Consolidated Statements of Operations for gains or losses (before tax) related to the Company's derivative instruments for the thirteen and thirty-nine weeks ended July 26, 2020, and July 28, 2019, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Products Sold
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(in thousands)
|
|
July 26, 2020
|
|
July 28, 2019
|
|
July 26, 2020
|
|
July 28, 2019
|
Consolidated Statements of Operations
|
|
$
|
1,959,032
|
|
|
$
|
1,857,263
|
|
|
$
|
5,820,158
|
|
|
$
|
5,604,879
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges - Commodity Contracts
|
|
|
|
|
|
|
|
|
Gain (Loss) Reclassified from AOCL
|
|
(18,645
|
)
|
|
940
|
|
|
(25,997
|
)
|
|
(835
|
)
|
Amortization of Excluded Component from Options
|
|
—
|
|
|
(313
|
)
|
|
—
|
|
|
(2,781
|
)
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges - Commodity Contracts
|
|
|
|
|
|
|
|
|
Gain (Loss) on Commodity Futures (1)
|
|
4,341
|
|
|
656
|
|
|
13,487
|
|
|
2,293
|
|
Total Gain (Loss) Recognized in Earnings
|
|
$
|
(14,304
|
)
|
|
$
|
1,283
|
|
|
$
|
(12,510
|
)
|
|
$
|
(1,323
|
)
|
|
|
(1)
|
Amounts represent gains or losses on commodity contracts designated as fair value hedges that were closed during the thirteen and thirty-nine weeks ended July 26, 2020, and July 28, 2019, which were offset by a corresponding gain or loss 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.
|
NOTE H - 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 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Segment
|
|
% Owned
|
|
July 26,
2020
|
|
October 27,
2019
|
MegaMex Foods, LLC
|
Grocery Products
|
|
50%
|
|
$
|
213,397
|
|
|
$
|
218,592
|
|
Other Joint Ventures
|
International & Other
|
|
Various (20-40%)
|
|
85,241
|
|
|
70,565
|
|
Total
|
|
|
|
|
$
|
298,638
|
|
|
$
|
289,157
|
|
Equity in Earnings of Affiliates consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(in thousands)
|
Segment
|
|
July 26,
2020
|
|
July 28,
2019
|
|
July 26,
2020
|
|
July 28,
2019
|
MegaMex Foods, LLC
|
Grocery Products
|
|
$
|
5,799
|
|
|
$
|
3,418
|
|
|
$
|
22,939
|
|
|
$
|
27,399
|
|
Other Joint Ventures
|
International & Other
|
|
2,435
|
|
|
(34
|
)
|
|
2,904
|
|
|
734
|
|
Total
|
|
|
$
|
8,235
|
|
|
$
|
3,384
|
|
|
$
|
25,843
|
|
|
$
|
28,133
|
|
For the thirteen and thirty-nine weeks ended July 26, 2020, $7.5 million and $27.5 million of dividends were received from affiliates, compared to $10.0 million and $20.0 million of dividends received for the thirteen and thirty-nine weeks ended July 28, 2019.
The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $12.1 million is remaining as of July 26, 2020. This difference is being amortized through Equity in Earnings of Affiliates.
NOTE I - ACCUMULATED OTHER COMPREHENSIVE LOSS
Components of Accumulated Other Comprehensive Loss are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended July 26, 2020
|
(in thousands)
|
Foreign
Currency
Translation
|
|
Pension &
Other
Benefits
|
|
Hedging
Deferred
Gain (Loss)
|
|
Accumulated
Other
Comprehensive
Loss
|
Balance at April 26, 2020
|
$
|
(71,292
|
)
|
|
$
|
(341,783
|
)
|
|
|
$
|
(34,833
|
)
|
|
|
$
|
(447,908
|
)
|
Unrecognized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
Gross
|
(875
|
)
|
|
13
|
|
|
|
(943
|
)
|
|
|
(1,805
|
)
|
Tax Effect
|
—
|
|
|
—
|
|
|
|
231
|
|
|
|
231
|
|
Reclassification into Net Earnings
|
|
|
|
|
|
|
|
|
|
Gross
|
—
|
|
|
4,652
|
|
(1)
|
|
18,645
|
|
(2)
|
|
23,297
|
|
Tax Effect
|
—
|
|
|
(1,140
|
)
|
|
|
(4,557
|
)
|
|
|
(5,697
|
)
|
Net of Tax Amount
|
(875
|
)
|
|
3,526
|
|
|
|
13,376
|
|
|
|
16,026
|
|
Balance at July 26, 2020
|
$
|
(72,168
|
)
|
|
$
|
(338,257
|
)
|
|
|
$
|
(21,458
|
)
|
|
|
$
|
(431,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended July 26, 2020
|
(in thousands)
|
Foreign
Currency
Translation
|
|
Pension &
Other
Benefits
|
|
Hedging
Deferred
Gain (Loss)
|
|
Accumulated
Other
Comprehensive
Loss
|
Balance at October 27, 2019
|
$
|
(52,996
|
)
|
|
$
|
(348,877
|
)
|
|
|
$
|
2,373
|
|
|
|
$
|
(399,500
|
)
|
Unrecognized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
Gross
|
(19,171
|
)
|
|
81
|
|
|
|
(57,514
|
)
|
|
|
(76,604
|
)
|
Tax Effect
|
—
|
|
|
—
|
|
|
|
14,038
|
|
|
|
14,038
|
|
Reclassification into Net Earnings
|
|
|
|
|
|
|
|
|
|
Gross
|
—
|
|
|
13,957
|
|
(1)
|
|
25,997
|
|
(2)
|
|
39,954
|
|
Tax Effect
|
—
|
|
|
(3,419
|
)
|
|
|
(6,352
|
)
|
|
|
(9,771
|
)
|
Net of Tax Amount
|
(19,171
|
)
|
|
10,619
|
|
|
|
(23,830
|
)
|
|
|
(32,382
|
)
|
Balance at July 26, 2020
|
$
|
(72,168
|
)
|
|
$
|
(338,257
|
)
|
|
|
$
|
(21,458
|
)
|
|
|
$
|
(431,882
|
)
|
|
|
(1)
|
Included in the computation of net periodic cost. See Note F - Pension and Other Post-Retirement Benefits for additional details.
|
|
|
(2)
|
Included in Cost of Products Sold in the Consolidated Statements of Operations.
|
NOTE J - INCOME TAXES
The Company's tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter. The effects of tax legislation are recognized in the period in which the law is enacted. The deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years the related temporary differences are anticipated to reverse.
On December 22, 2017, the United States (U.S.) enacted comprehensive tax legislation into law, H.R. 1, commonly referred to as the Tax Act. Except for certain provisions, the Tax Act is effective for tax years beginning on or after January 1, 2018. As a fiscal year U.S. taxpayer, the majority of the provisions, such as eliminating the domestic manufacturing deduction, creating new taxes on certain foreign sourced income, and introducing new limitations on certain business deductions, applied to the Company in fiscal 2019. For fiscal 2019 and future periods, the U.S. federal corporate income tax rate is 21.0 percent.
In March 2018, the FASB issued ASU 2018-05, Income Taxes: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (Topic 740), allowing a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. As of January 27, 2019, the Company completed the accounting for the tax effects of the Tax Act.
During fiscal 2018, the Company provisionally recorded the transition tax on its foreign earnings. Those foreign earnings 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.
The Company's effective tax rate for the thirteen and thirty-nine weeks ended July 26, 2020, was 21.6 percent and 19.4 percent, respectively, compared to 23.6 percent and 18.3 percent for the thirteen and thirty-nine weeks ended July 28, 2019.
The amount of unrecognized tax benefits, including interest and penalties, is recorded in Other Long-term Liabilities. If recognized as of July 26, 2020, and July 28, 2019, $24.7 million and $28.5 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. Interest and penalties included in income tax expense was immaterial for both the thirteen and thirty-nine weeks ended July 26, 2020, and July 28, 2019. The amount of accrued interest and penalties at July 26, 2020, and July 28, 2019, associated with unrecognized tax benefits was $6.2 million and $6.8 million, respectively.
The Company is regularly audited by federal and state taxing authorities. The United States Internal Revenue Service (I.R.S.) concluded its examination of fiscal 2017 in the second quarter of fiscal 2019. The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years 2018 through 2021. 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, dating back to 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.
NOTE K - 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. During the thirteen and thirty-nine weeks ended July 26, 2020, stock-based compensation expense was $3.7 million and $19.2 million, respectively, compared to $3.2 million and $16.7 million for the thirteen and thirty-nine weeks ended July 28, 2019. The Company recognizes stock-based compensation expense ratably over the shorter of the vesting period or the individual's retirement eligibility date. The fair value of stock-based compensation granted to retirement-eligible individuals is expensed at the time of grant.
At July 26, 2020, there was $27.4 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 2.2 years. During the thirteen and thirty-nine weeks ended July 26, 2020, cash received from stock option exercises was $7.7 million and $72.1 million, respectively, compared to $3.8 million and $48.1 million for the thirteen and thirty-nine weeks ended July 28, 2019.
Shares issued for option exercises, restricted stock units, and restricted shares may be either authorized but unissued shares or shares of treasury stock.
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 fifty percent in stock options as described above and fifty percent in time-vested restricted stock units with a three-year cliff vesting.
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) as of July 26, 2020 is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic Value
|
Stock Options Outstanding at October 27, 2019
|
25,994
|
|
|
$
|
26.49
|
|
|
|
|
|
Granted
|
1,218
|
|
|
45.88
|
|
|
|
|
|
Exercised
|
5,362
|
|
|
15.62
|
|
|
|
|
|
Forfeited
|
185
|
|
|
36.35
|
|
|
|
|
|
Expired
|
1
|
|
|
36.25
|
|
|
|
|
|
Stock Options Outstanding at July 26, 2020
|
21,664
|
|
|
30.18
|
|
|
5.4
|
|
$
|
435,137
|
|
Stock Options Exercisable at July 26, 2020
|
14,707
|
|
|
$
|
25.85
|
|
|
4.1
|
|
$
|
359,098
|
|
The weighted-average grant date fair value of stock options granted and the total intrinsic value of options exercised (in thousands) during the thirteen and thirty-nine weeks ended July 26, 2020, and July 28, 2019, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
July 26,
2020
|
|
July 28,
2019
|
|
July 26,
2020
|
|
July 28,
2019
|
Weighted-average Grant Date Fair Value (1)
|
$
|
7.22
|
|
|
$
|
—
|
|
|
$
|
7.71
|
|
|
$
|
9.24
|
|
Intrinsic Value of Exercised Options
|
13,254
|
|
|
7,308
|
|
|
167,148
|
|
|
115,094
|
|
(1) There were no stock options granted during the thirteen weeks ended July 28, 2019.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
July 26,
2020
|
|
July 28,
2019
|
|
July 26,
2020
|
|
July 28,
2019
|
Risk-free Interest Rate
|
0.7
|
%
|
|
—
|
%
|
|
1.7
|
%
|
|
2.8
|
%
|
Dividend Yield
|
1.9
|
%
|
|
—
|
%
|
|
2.0
|
%
|
|
1.9
|
%
|
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 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. 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 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 grant and 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 (in thousands) as of July 26, 2020 is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic Value
|
Restricted Stock Units Outstanding at October 27, 2019
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Granted
|
205
|
|
|
45.88
|
|
|
|
|
|
Vested
|
14
|
|
|
45.54
|
|
|
|
|
|
Restricted Stock Units Outstanding at July 26, 2020
|
191
|
|
|
$
|
45.90
|
|
|
2.4
|
|
$
|
9,599
|
|
The weighted-average grant date fair value of restricted stock units granted and the total fair value (in thousands) of restricted stock units granted during the thirteen and thirty-nine weeks ended July 26, 2020, and July 28, 2019, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
July 26,
2020
|
|
July 28,
2019
|
|
July 26,
2020
|
|
July 28,
2019
|
Weighted-average Grant Date Fair Value
|
$
|
48.76
|
|
|
$
|
—
|
|
|
$
|
45.88
|
|
|
$
|
—
|
|
Fair Value of Restricted Stock Units Granted
|
63
|
|
|
—
|
|
|
9,383
|
|
|
—
|
|
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 (in thousands) as of July 26, 2020 is:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
Restricted Shares Outstanding at October 27, 2019
|
51
|
|
|
$
|
42.23
|
|
Granted
|
41
|
|
|
47.29
|
|
Vested
|
47
|
|
|
42.08
|
|
Restricted Shares Outstanding at July 26, 2020
|
45
|
|
|
$
|
47.03
|
|
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 the thirty-nine weeks ended July 26, 2020, and July 28, 2019, are:
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
July 26,
2020
|
|
July 28,
2019
|
Weighted-average Grant Date Fair Value
|
$
|
47.29
|
|
|
$
|
42.23
|
|
Fair Value of Restricted Shares Granted
|
1,973
|
|
|
2,134
|
|
Fair Value of Shares Vested
|
1,974
|
|
|
1,760
|
|
NOTE L - FAIR VALUE MEASUREMENTS
Pursuant to the provisions of 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.
The Company’s financial assets and liabilities carried at fair value on a recurring basis as of July 26, 2020, and October 27, 2019, and their level within the fair value hierarchy, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at July 26, 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)
|
Assets at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents (1)
|
$
|
1,729,368
|
|
|
$
|
1,728,438
|
|
|
$
|
930
|
|
|
$
|
—
|
|
Short-term Marketable Securities (2)
|
17,564
|
|
|
7,031
|
|
|
10,533
|
|
|
—
|
|
Other Trading Securities (3)
|
168,519
|
|
|
—
|
|
|
168,519
|
|
|
—
|
|
Commodity Derivatives (4)
|
12,747
|
|
|
12,747
|
|
|
—
|
|
|
—
|
|
Total Assets at Fair Value
|
$
|
1,928,198
|
|
|
$
|
1,748,216
|
|
|
$
|
179,982
|
|
|
$
|
—
|
|
Liabilities at Fair Value
|
|
|
|
|
|
|
|
Deferred Compensation (3)
|
$
|
60,908
|
|
|
$
|
—
|
|
|
$
|
60,908
|
|
|
$
|
—
|
|
Total Liabilities at Fair Value
|
$
|
60,908
|
|
|
$
|
—
|
|
|
$
|
60,908
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at October 27, 2019
|
(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)
|
Assets at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents (1)
|
$
|
672,901
|
|
|
$
|
672,458
|
|
|
$
|
443
|
|
|
$
|
—
|
|
Short-term Marketable Securities (2)
|
14,736
|
|
|
5,186
|
|
|
9,550
|
|
|
—
|
|
Other Trading Securities (3)
|
157,526
|
|
|
—
|
|
|
157,526
|
|
|
—
|
|
Commodity Derivatives (4)
|
12,882
|
|
|
12,882
|
|
|
—
|
|
|
—
|
|
Total Assets at Fair Value
|
$
|
858,045
|
|
|
$
|
690,526
|
|
|
$
|
167,519
|
|
|
$
|
—
|
|
Liabilities at Fair Value
|
|
|
|
|
|
|
|
Deferred Compensation (3)
|
$
|
62,373
|
|
|
$
|
—
|
|
|
$
|
62,373
|
|
|
$
|
—
|
|
Total Liabilities at Fair Value
|
$
|
62,373
|
|
|
$
|
—
|
|
|
$
|
62,373
|
|
|
$
|
—
|
|
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 recognized 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 money market funds rated AAA 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. 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 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, 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 remaining funds held are also 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 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. These 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 I.R.S. applicable federal rates. These balances are classified as Level 2. Securities held by the trust are classified as trading securities. Therefore, unrealized gains and losses associated with these investments are included in the Company's earnings. During the thirteen and thirty-nine weeks ended July 26, 2020, securities held by the trust generated gains of $9.3 million and $2.6 million, respectively, compared to gains of $1.7 million and $7.9 million for the thirteen and thirty-nine weeks ended July 28, 2019.
|
|
(4)
|
The Company’s commodity derivatives represent futures contracts and options 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. 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 July 26, 2020, the Company has recognized the right to reclaim net cash collateral of $31.8 million from various counterparties (including cash of $40.1 million less $8.3 million of realized losses). As of October 27, 2019, the Company had recognized the right to reclaim net cash collateral of $6.5 million from various counterparties (including $10.5 million of realized gains on closed positions offset by cash owed of $4.0 million).
|
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, the fair value of long-term debt, utilizing discounted cash flows (Level 2), was $1,266.0 million as of July 26, 2020, and $257.7 million as of October 27, 2019. See Note E - 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 thirty-nine weeks ended July 26, 2020, and July 28, 2019, there were no material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
NOTE M - 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 farm land to third parties.
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 one 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 one 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. For the initial implementation of ASU 2016-02, Leases (Topic 842) the incremental borrowing rate on October 28, 2019, was used to determine the present value of existing operating right-of-use assets and lease liabilities.
Lease information included in the Consolidated Statements of Financial Position are:
|
|
|
|
|
|
|
(in thousands)
|
Location on Consolidated Statements of Financial Position
|
|
July 26, 2020
|
Right-of-Use Assets
|
|
|
|
|
Operating
|
Other Assets
|
|
$
|
55,761
|
|
Finance
|
Net Property, Plant and Equipment
|
|
63,049
|
|
Total Right-of-Use Assets
|
|
$
|
118,810
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating
|
Accrued Expenses
|
|
$
|
12,760
|
|
Finance
|
Current Maturities of Long-Term Debt
|
|
8,307
|
|
Noncurrent
|
|
|
|
Operating
|
Other Long-term Liabilities
|
|
45,042
|
|
Finance
|
Long-term Debt - Less Current Maturities
|
|
54,784
|
|
Total Lease Liabilities
|
|
|
$
|
120,893
|
|
Lease expenses are:
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(in thousands)
|
|
July 26, 2020
|
|
July 26, 2020
|
Operating Lease Cost (1)
|
|
$
|
4,625
|
|
|
$
|
15,115
|
|
Finance Lease Cost
|
|
|
|
|
|
Amortization of Right-of-Use Assets
|
|
2,000
|
|
|
6,000
|
|
Interest on Lease Liabilities
|
|
566
|
|
|
1,758
|
|
Variable Lease Cost (2)
|
|
104,450
|
|
|
313,983
|
|
Net Lease Cost
|
|
$
|
111,640
|
|
|
$
|
336,856
|
|
|
|
(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:
|
|
|
|
|
|
|
July 26, 2020
|
Weighted Average Remaining Lease Term
|
|
|
Operating Leases
|
|
7.35 years
|
|
Finance Leases
|
|
8.36 years
|
|
Weighted Average Discount Rate
|
|
|
Operating Leases
|
|
2.30
|
%
|
Finance Leases
|
|
3.56
|
%
|
Supplemental cash flow and other information related to leases for the thirty-nine weeks ended July 26, 2020, are:
|
|
|
|
|
|
(in thousands)
|
|
July 26, 2020
|
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
|
|
|
|
Operating Cash Flows from Operating Leases
|
|
$
|
11,113
|
|
Operating Cash Flows from Finance Leases
|
|
1,758
|
|
Financing Cash Flows from Finance Leases
|
|
6,129
|
|
|
|
|
Right-of-Use Assets obtained in exchange for new operating lease liabilities
|
|
4,190
|
|
The maturity of the Company's lease liabilities as of July 26, 2020, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Operating Leases
|
|
Finance Leases (1)
|
|
Total
|
2020 (thirteen weeks remaining)
|
$
|
4,655
|
|
|
$
|
2,613
|
|
|
$
|
7,267
|
|
2021
|
12,839
|
|
|
10,322
|
|
|
23,160
|
|
2022
|
10,176
|
|
|
9,934
|
|
|
20,109
|
|
2023
|
8,512
|
|
|
9,738
|
|
|
18,250
|
|
2024
|
5,648
|
|
|
9,612
|
|
|
15,260
|
|
2025
|
3,458
|
|
|
8,117
|
|
|
11,575
|
|
2026 and beyond
|
18,644
|
|
|
21,192
|
|
|
39,836
|
|
Total Lease Payments
|
$
|
63,932
|
|
|
$
|
71,527
|
|
|
$
|
135,459
|
|
Less: Imputed Interest
|
6,130
|
|
|
8,436
|
|
|
14,566
|
|
Present Value of Lease Liabilities
|
$
|
57,802
|
|
|
$
|
63,091
|
|
|
$
|
120,893
|
|
|
|
(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.
|
NOTE N - EARNINGS PER SHARE DATA
The reported net earnings attributable to the Company were used when computing basic and diluted earnings per share. The following table sets forth the shares used as the denominator for those computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(in thousands)
|
July 26,
2020
|
|
July 28,
2019
|
|
July 26,
2020
|
|
July 28,
2019
|
Basic Weighted-Average Shares Outstanding
|
539,108
|
|
|
534,188
|
|
|
537,434
|
|
|
534,721
|
|
Dilutive Potential Common Shares
|
8,041
|
|
|
9,490
|
|
|
8,678
|
|
|
10,988
|
|
Diluted Weighted-Average Shares Outstanding
|
547,149
|
|
|
543,678
|
|
|
546,112
|
|
|
545,709
|
|
|
|
|
|
|
|
|
|
Antidilutive Potential Common Shares
|
1,626
|
|
|
5,883
|
|
|
2,178
|
|
|
3,033
|
|
NOTE O - 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 four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other.
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 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, 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 product 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 investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and expenses at the corporate level. Equity in earnings of affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included below as Net Unallocated Expense and Noncontrolling Interest when reconciling to Earnings Before Income Taxes.
Sales and operating profits for each of the Company’s reportable segments and reconciliation to Earnings 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 profit and other financial information shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(in thousands)
|
July 26,
2020
|
|
July 28,
2019
|
|
July 26, 2020
|
|
July 28,
2019
|
Sales to Unaffiliated Customers
|
|
|
|
|
|
|
|
|
|
Grocery Products
|
$
|
580,798
|
|
|
$
|
543,088
|
|
|
$
|
1,804,674
|
|
|
$
|
1,785,232
|
|
Refrigerated Foods
|
1,363,092
|
|
|
1,301,101
|
|
|
3,962,219
|
|
|
3,837,732
|
|
Jennie-O Turkey Store
|
286,805
|
|
|
298,781
|
|
|
959,988
|
|
|
925,271
|
|
International & Other
|
150,762
|
|
|
147,735
|
|
|
461,475
|
|
|
447,569
|
|
Total
|
$
|
2,381,457
|
|
|
$
|
2,290,705
|
|
|
$
|
7,188,357
|
|
|
$
|
6,995,804
|
|
|
|
|
|
|
|
|
|
Intersegment Sales
|
|
|
|
|
|
|
|
Grocery Products
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
13
|
|
|
$
|
32
|
|
Refrigerated Foods
|
5,092
|
|
|
5,282
|
|
|
16,143
|
|
|
10,733
|
|
Jennie-O Turkey Store
|
25,361
|
|
|
31,804
|
|
|
82,082
|
|
|
90,665
|
|
International & Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
30,454
|
|
|
37,096
|
|
|
98,237
|
|
|
101,430
|
|
Intersegment Elimination
|
(30,454
|
)
|
|
(37,096
|
)
|
|
(98,237
|
)
|
|
(101,430
|
)
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
Grocery Products
|
$
|
580,798
|
|
|
$
|
543,098
|
|
|
$
|
1,804,687
|
|
|
$
|
1,785,264
|
|
Refrigerated Foods
|
1,368,185
|
|
|
1,306,383
|
|
|
3,978,362
|
|
|
3,848,465
|
|
Jennie-O Turkey Store
|
312,166
|
|
|
330,585
|
|
|
1,042,070
|
|
|
1,015,936
|
|
International & Other
|
150,762
|
|
|
147,735
|
|
|
461,475
|
|
|
447,569
|
|
Intersegment Elimination
|
(30,454
|
)
|
|
(37,096
|
)
|
|
(98,237
|
)
|
|
(101,430
|
)
|
Total
|
$
|
2,381,457
|
|
|
$
|
2,290,705
|
|
|
$
|
7,188,357
|
|
|
$
|
6,995,804
|
|
|
|
|
|
|
|
|
|
Segment Profit
|
|
|
|
|
|
|
|
Grocery Products
|
$
|
80,169
|
|
|
$
|
58,778
|
|
|
$
|
276,367
|
|
|
$
|
258,574
|
|
Refrigerated Foods
|
152,822
|
|
|
171,795
|
|
|
451,596
|
|
|
492,476
|
|
Jennie-O Turkey Store
|
7,069
|
|
|
21,278
|
|
|
72,968
|
|
|
76,931
|
|
International & Other
|
23,620
|
|
|
18,755
|
|
|
66,735
|
|
|
58,058
|
|
Total Segment Profit
|
263,679
|
|
|
270,606
|
|
|
867,666
|
|
|
886,039
|
|
Net Unallocated Expense
|
4,457
|
|
|
9,584
|
|
|
31,754
|
|
|
297
|
|
Noncontrolling Interest
|
141
|
|
|
(22
|
)
|
|
103
|
|
|
279
|
|
Earnings Before Income Taxes
|
$
|
259,364
|
|
|
$
|
261,000
|
|
|
$
|
836,014
|
|
|
$
|
886,021
|
|
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 amount of total revenues contributed by sales channel for the thirteen and thirty-nine weeks ended July 26, 2020, and July 28, 2019, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(in thousands)
|
July 26,
2020
|
|
July 28,
2019
|
|
July 26,
2020
|
|
July 28,
2019
|
U.S. Retail
|
$
|
1,390,075
|
|
|
$
|
1,163,367
|
|
|
$
|
4,072,156
|
|
|
$
|
3,672,189
|
|
U.S. Foodservice
|
588,130
|
|
|
729,321
|
|
|
1,864,050
|
|
|
2,135,633
|
|
U.S. Deli
|
238,076
|
|
|
229,386
|
|
|
721,748
|
|
|
693,377
|
|
International
|
165,177
|
|
|
168,631
|
|
|
530,402
|
|
|
494,605
|
|
Total
|
$
|
2,381,457
|
|
|
$
|
2,290,705
|
|
|
$
|
7,188,357
|
|
|
$
|
6,995,804
|
|
The shift in revenues from the U.S. Foodservice to U.S. Retail channel in the thirteen and thirty-nine weeks ended July 26, 2020, was driven by the COVID-19 pandemic and subsequent shelter-in-place restrictions.
The Company’s products primarily consist of meat and other food products. The amount of total revenues contributed by classes of similar products for the thirteen and thirty-nine weeks ended July 26, 2020, and July 28, 2019, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(in thousands)
|
July 26,
2020
|
|
July 28,
2019
|
|
July 26,
2020
|
|
July 28,
2019
|
Perishable
|
$
|
1,365,741
|
|
|
$
|
1,355,765
|
|
|
$
|
4,016,266
|
|
|
$
|
4,014,372
|
|
Shelf-stable
|
511,732
|
|
|
417,535
|
|
|
1,581,789
|
|
|
1,299,263
|
|
Poultry
|
426,345
|
|
|
427,622
|
|
|
1,368,386
|
|
|
1,296,677
|
|
Miscellaneous
|
77,640
|
|
|
89,783
|
|
|
221,915
|
|
|
385,492
|
|
Total
|
2,381,457
|
|
|
$
|
2,290,705
|
|
|
$
|
7,188,357
|
|
|
$
|
6,995,804
|
|
Perishable includes fresh meats, frozen items, refrigerated meal solutions, sausages, hams, guacamole, and bacon (excluding Jennie-O Turkey Store products). Shelf-stable includes canned luncheon meats, peanut butter, chilies, 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 Jennie-O Turkey Store products. The Miscellaneous category primarily consists of nutritional food products and supplements, dessert and drink mixes, and industrial gelatin products. The reduction in the Miscellaneous category during fiscal 2020 reflects the divestiture of CytoSport on April 15, 2019.