HRL 10-Q
Hormel Foods Corp /De/ (HRL)
10-Q
2020-09-01
For: 2020-07-26
View Original
Added on
April 04, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended July 26, 2020
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of Principal Executive Office, including zip code)
(507 ) 437-5611
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||||
$0.01465 | par value | |||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at August 30, 2020 | |||||
Common Stock | $.01465 | par value | ||||
Common Stock Non-Voting | $.01 | par value | ||||
TABLE OF CONTENTS
2
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
In thousands, except share and per share amounts
July 26, 2020 | October 27, 2019 | ||||||
Unaudited | |||||||
Assets | |||||||
Current Assets | |||||||
Cash and Cash Equivalents | $ | $ | |||||
Short-term Marketable Securities | |||||||
Accounts Receivable | |||||||
Inventories | |||||||
Income Taxes Receivable | |||||||
Prepaid Expenses | |||||||
Other Current Assets | |||||||
Total Current Assets | |||||||
Goodwill | |||||||
Other Intangibles | |||||||
Pension Assets | |||||||
Investments In and Receivables From Affiliates | |||||||
Other Assets | |||||||
Property, Plant and Equipment | |||||||
Land | |||||||
Buildings | |||||||
Equipment | |||||||
Construction in Progress | |||||||
Less: Allowance for Depreciation | ( | ) | ( | ) | |||
Net Property, Plant and Equipment | |||||||
Total Assets | $ | $ | |||||
See Notes to Consolidated Financial Statements
3
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
In thousands, except share and per share amounts
July 26, 2020 | October 27, 2019 | ||||||
Unaudited | |||||||
Liabilities and Shareholders' Investment | |||||||
Current Liabilities | |||||||
Accounts Payable | $ | $ | |||||
Accrued Expenses | |||||||
Accrued Workers Compensation | |||||||
Accrued Marketing Expenses | |||||||
Employee Related Expenses | |||||||
Taxes Payable | |||||||
Interest and Dividends Payable | |||||||
Current Maturities of Long-term Debt | |||||||
Total Current Liabilities | |||||||
Long-term Debt - Less Current Maturities | |||||||
Pension and Post-retirement Benefits | |||||||
Other Long-term Liabilities | |||||||
Deferred Income Taxes | |||||||
Shareholders' Investment | |||||||
Preferred Stock, Par Value $.01 a Share– | |||||||
Authorized 160,000,000 Shares; Issued–None | |||||||
Common Stock, Non-voting, Par Value $.01 a Share– | |||||||
Authorized 400,000,000 Shares; Issued–None | |||||||
Common Stock, Par Value $.01465 a Share– | |||||||
Authorized 1,600,000,000 Shares; | |||||||
Shares Issued as of July 26, 2020: 539,387,013 | |||||||
Shares Issued as of October 27, 2019: 534,488,746 | |||||||
Additional Paid-in Capital | |||||||
Accumulated Other Comprehensive Loss | ( | ) | ( | ) | |||
Retained Earnings | |||||||
Hormel Foods Corporation Shareholders' Investment | |||||||
Noncontrolling Interest | |||||||
Total Shareholders' Investment | |||||||
Total Liabilities and Shareholders' Investment | $ | $ | |||||
See Notes to Consolidated Financial Statements
4
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts
Unaudited
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
July 26, 2020 | July 28, 2019 | July 26, 2020 | July 28, 2019 | ||||||||||||
Net Sales | $ | $ | $ | $ | |||||||||||
Cost of Products Sold | |||||||||||||||
Gross Profit | |||||||||||||||
Selling, General and Administrative | |||||||||||||||
Equity in Earnings of Affiliates | |||||||||||||||
Operating Income | |||||||||||||||
Other Income and Expense: | |||||||||||||||
Interest and Investment Income (Expense) | |||||||||||||||
Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Earnings Before Income Taxes | |||||||||||||||
Provision for Income Taxes | |||||||||||||||
Net Earnings | |||||||||||||||
Less: Net Earnings (Loss) Attributable to Noncontrolling Interest | ( | ) | |||||||||||||
Net Earnings Attributable to Hormel Foods Corporation | $ | $ | $ | $ | |||||||||||
Net Earnings Per Share | |||||||||||||||
Basic | $ | $ | $ | $ | |||||||||||
Diluted | $ | $ | $ | $ | |||||||||||
Weighted-average Shares Outstanding | |||||||||||||||
Basic | |||||||||||||||
Diluted | |||||||||||||||
See Notes to Consolidated Financial Statements
5
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
Unaudited
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
July 26, 2020 | July 28, 2019 | July 26, 2020 | July 28, 2019 | ||||||||||||
Net Earnings | $ | $ | $ | $ | |||||||||||
Other Comprehensive Income (Loss), Net of Tax: | |||||||||||||||
Foreign Currency Translation | ( | ) | ( | ) | ( | ) | |||||||||
Pension and Other Benefits | |||||||||||||||
Deferred Hedging | ( | ) | |||||||||||||
Total Other Comprehensive Income (Loss) | ( | ) | |||||||||||||
Comprehensive Income | |||||||||||||||
Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interest | ( | ) | |||||||||||||
Comprehensive Income Attributable to Hormel Foods Corporation | $ | $ | $ | $ | |||||||||||
See Notes to Consolidated Financial Statements
6
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT
In thousands, except per share amounts
Unaudited
Thirteen Weeks Ended July 28, 2019 | |||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||
Balance at April 28, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
Net Earnings | ( | ) | |||||||||||||||||||||||||||||||
Other Comprehensive Income (Loss) | ( | ) | |||||||||||||||||||||||||||||||
Purchases of Common Stock | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
Stock-based Compensation Expense | |||||||||||||||||||||||||||||||||
Exercise of Stock Options/Restricted Shares | |||||||||||||||||||||||||||||||||
Shares Retired | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
Declared Cash Dividends – $0.21 per Share | ( | ) | ( | ) | |||||||||||||||||||||||||||||
Balance at July 28, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
Thirteen Weeks Ended July 26, 2020 | |||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||
Balance at April 26, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
Net Earnings | — | ||||||||||||||||||||||||||||||||
Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||
Purchases of Common Stock | |||||||||||||||||||||||||||||||||
Stock-based Compensation Expense | |||||||||||||||||||||||||||||||||
Exercise of Stock Options/Restricted Shares | |||||||||||||||||||||||||||||||||
Shares Retired | |||||||||||||||||||||||||||||||||
Declared Cash Dividends – $0.2325 per Share | ( | ) | ( | ) | |||||||||||||||||||||||||||||
Balance at July 26, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
7
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT
In thousands, except per share amounts
Unaudited
Thirty-Nine Weeks Ended July 28, 2019 | |||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||
Balance at October 28, 2018 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
Net Earnings | |||||||||||||||||||||||||||||||||
Other Comprehensive Income (Loss) | ( | ) | |||||||||||||||||||||||||||||||
Purchases of Common Stock | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
Stock-based Compensation Expense | |||||||||||||||||||||||||||||||||
Exercise of Stock Options/Restricted Shares | |||||||||||||||||||||||||||||||||
Shares Retired | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
Cumulative Effect Adjustment from the Adoption of: | |||||||||||||||||||||||||||||||||
ASU 2016-16 | ( | ) | ( | ) | |||||||||||||||||||||||||||||
ASU 2017-12 | ( | ) | |||||||||||||||||||||||||||||||
ASU 2018-02 | ( | ) | ( | ) | |||||||||||||||||||||||||||||
Declared Cash Dividends – $0.63 per Share | ( | ) | ( | ) | |||||||||||||||||||||||||||||
Balance at July 28, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended July 26, 2020 | |||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||
Balance at October 27, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
Net Earnings | |||||||||||||||||||||||||||||||||
Other Comprehensive Income (Loss) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
Contribution from Noncontrolling Interest | |||||||||||||||||||||||||||||||||
Purchases of Common Stock | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
Stock-based Compensation Expense | |||||||||||||||||||||||||||||||||
Exercise of Stock Options/Restricted Shares | |||||||||||||||||||||||||||||||||
Shares Retired | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
Declared Cash Dividends – $0.6975 per Share | ( | ) | ( | ) | |||||||||||||||||||||||||||||
Balance at July 26, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
8
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Unaudited
Thirty-Nine Weeks Ended | |||||||
July 26, 2020 | July 28, 2019 | ||||||
Operating Activities | |||||||
Net Earnings | $ | $ | |||||
Adjustments to Reconcile to Net Cash Provided by Operating Activities: | |||||||
Depreciation | |||||||
Amortization | |||||||
Equity in Earnings of Affiliates | ( | ) | ( | ) | |||
Distribution from Equity Method Investees | |||||||
Provision for Deferred Income Taxes | ( | ) | ( | ) | |||
Loss (Gain) on Property/Equipment Sales and Plant Facilities | ( | ) | |||||
Gain on Sale of Business | ( | ) | |||||
Non-cash Investment Activities | ( | ) | ( | ) | |||
Stock-based Compensation Expense | |||||||
Changes in Operating Assets and Liabilities, Net of Acquisitions: | |||||||
Decrease (Increase) in Accounts Receivable | ( | ) | |||||
Decrease (Increase) in Inventories | ( | ) | |||||
Decrease (Increase) in Prepaid Expenses and Other Current Assets | ( | ) | ( | ) | |||
Increase (Decrease) in Pension and Post-retirement Benefits | |||||||
Increase (Decrease) in Accounts Payable and Accrued Expenses | ( | ) | ( | ) | |||
Increase (Decrease) in Net Income Taxes Payable | |||||||
Net Cash Provided by (Used in) Operating Activities | |||||||
Investing Activities | |||||||
Net (Purchase) Sale of Securities | ( | ) | ( | ) | |||
Proceeds from Sale of Business | |||||||
Acquisitions of Businesses/Intangibles | ( | ) | |||||
Purchases of Property/Equipment | ( | ) | ( | ) | |||
Proceeds from Sales of Property/Equipment | |||||||
Decrease (Increase) in Investments, Equity in Affiliates, and Other Assets | ( | ) | ( | ) | |||
Proceeds from Company-owned Life Insurance | |||||||
Net Cash (Used in) Provided by Investing Activities | ( | ) | |||||
Financing Activities | |||||||
Proceeds from Long-term Debt | |||||||
Repayments of Long-term Debt and Finance Leases | ( | ) | ( | ) | |||
Dividends Paid on Common Stock | ( | ) | ( | ) | |||
Share Repurchase | ( | ) | ( | ) | |||
Proceeds from Exercise of Stock Options | |||||||
Proceeds from Noncontrolling Interest | |||||||
Net Cash Provided by (Used in) Financing Activities | ( | ) | |||||
Effect of Exchange Rate Changes on Cash | ( | ) | |||||
Increase (Decrease) in Cash and Cash Equivalents | |||||||
Cash and Cash Equivalents at Beginning of Year | |||||||
Cash and Cash Equivalents at End of Quarter | $ | $ | |||||
See Notes to Consolidated Financial Statements
9
HORMEL FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
10
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.
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.
NOTE C - INVENTORIES
Principal components of inventories are:
(in thousands) | July 26, 2020 | October 27, 2019 | |||||
Finished Products | $ | $ | |||||
Raw Materials and Work-in-Process | |||||||
Operating Supplies | |||||||
Maintenance Materials and Parts | |||||||
Total | $ | $ | |||||
11
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 | $ | $ | $ | $ | $ | ||||||||||||||
Purchase Adjustments | ( | ) | ( | ) | |||||||||||||||
Foreign Currency Translation | ( | ) | ( | ) | |||||||||||||||
Balance at July 26, 2020 | $ | $ | $ | $ | $ | ||||||||||||||
(in thousands) | Grocery Products | Refrigerated Foods | Jennie-O Turkey Store | International & Other | Total | ||||||||||||||
Balance at October 27, 2019 | $ | $ | $ | $ | $ | ||||||||||||||
Goodwill Acquired | |||||||||||||||||||
Foreign Currency Translation | ( | ) | ( | ) | |||||||||||||||
Balance at July 26, 2020 | $ | $ | $ | $ | $ | ||||||||||||||
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 | $ | $ | |||||
Other Intangibles | |||||||
Foreign Currency Translation | ( | ) | ( | ) | |||
Total | $ | $ | |||||
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 | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Tradenames/Trademarks | ( | ) | ( | ) | |||||||||||
Other Intangibles | ( | ) | ( | ) | |||||||||||
Foreign Currency Translation | ( | ) | ( | ) | |||||||||||
Total | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
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 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
12
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 | $ | $ | ||||||
Senior Unsecured Notes, with Interest at 4.125%, Interest Due Semi-annually through April 2021 Maturity Date | ||||||||
Unamortized Discount on Senior Notes | ( | ) | ||||||
Unamortized Debt Issuance Costs | ( | ) | ||||||
Finance Lease Liabilities(1) | ||||||||
Other Financing Arrangements | ||||||||
Total | ||||||||
Less: Current Maturities of Long-term Debt | ||||||||
Long-term Debt - Less Current Maturities | $ | $ | ||||||
(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.
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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 | $ | $ | $ | $ | |||||||||||
Interest Cost | |||||||||||||||
Expected Return on Plan Assets | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Amortization of Prior Service Cost | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Recognized Actuarial Loss | |||||||||||||||
Curtailment Loss (Gain) | |||||||||||||||
Net Periodic Cost | $ | $ | $ | $ | |||||||||||
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 | $ | $ | $ | $ | |||||||||||
Interest Cost | |||||||||||||||
Amortization of Prior Service Cost | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Recognized Actuarial Loss | |||||||||||||||
Curtailment Loss (Gain) | ( | ) | |||||||||||||
Net Periodic Cost | $ | $ | $ | $ | |||||||||||
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
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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 | ||||
Lean Hogs | ||||
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 | $ | ( | ) | $ | |||||
(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 | $ | ( | ) | $ | ( | ) | ||
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 | $ | ( | ) | $ | Cost of Products Sold | $ | ( | ) | $ | |||||||||
Excluded Component (2) | ( | ) | ||||||||||||||||
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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 | $ | ( | ) | $ | Cost of Products Sold | $ | ( | ) | $ | ( | ) | |||||||
Excluded Component (2) | ||||||||||||||||||
(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 | $ | $ | $ | $ | ||||||||||||
Cash Flow Hedges - Commodity Contracts | ||||||||||||||||
Gain (Loss) Reclassified from AOCL | ( | ) | ( | ) | ( | ) | ||||||||||
Amortization of Excluded Component from Options | ( | ) | ( | ) | ||||||||||||
Fair Value Hedges - Commodity Contracts | ||||||||||||||||
Gain (Loss) on Commodity Futures (1) | ||||||||||||||||
Total Gain (Loss) Recognized in Earnings | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
(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 | $ | $ | ||||||||
Other Joint Ventures | International & Other | Various (20-40%) | |||||||||
Total | $ | $ | |||||||||
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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 | $ | $ | $ | $ | ||||||||||||
Other Joint Ventures | International & Other | ( | ) | ||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||
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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Unrecognized Gains (Losses) | |||||||||||||||||
Gross | ( | ) | ( | ) | ( | ) | |||||||||||
Tax Effect | |||||||||||||||||
Reclassification into Net Earnings | |||||||||||||||||
Gross | (1) | (2) | |||||||||||||||
Tax Effect | ( | ) | ( | ) | ( | ) | |||||||||||
Net of Tax Amount | ( | ) | |||||||||||||||
Balance at July 26, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
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 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||
Unrecognized Gains (Losses) | |||||||||||||||||
Gross | ( | ) | ( | ) | ( | ) | |||||||||||
Tax Effect | |||||||||||||||||
Reclassification into Net Earnings | |||||||||||||||||
Gross | (1) | (2) | |||||||||||||||
Tax Effect | ( | ) | ( | ) | ( | ) | |||||||||||
Net of Tax Amount | ( | ) | ( | ) | ( | ) | |||||||||||
Balance at July 26, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
(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. |
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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.
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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 | $ | |||||||||||
Granted | ||||||||||||
Exercised | ||||||||||||
Forfeited | ||||||||||||
Expired | ||||||||||||
Stock Options Outstanding at July 26, 2020 | $ | |||||||||||
Stock Options Exercisable at July 26, 2020 | $ | $ | ||||||||||
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) | $ | $ | $ | $ | |||||||||||
Intrinsic Value of Exercised Options | |||||||||||||||
(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 | % | % | % | % | |||||||
Dividend Yield | % | % | % | % | |||||||
Stock Price Volatility | % | % | % | % | |||||||
Expected Option Life | — | ||||||||||
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.
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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 | ||||||||||||
Vested | ||||||||||||
Restricted Stock Units Outstanding at July 26, 2020 | $ | $ | ||||||||||
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 | $ | $ | $ | $ | |||||||||||
Fair Value of Restricted Stock Units Granted | |||||||||||||||
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 | $ | |||||
Granted | ||||||
Vested | ||||||
Restricted Shares Outstanding at July 26, 2020 | $ | |||||
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 | $ | $ | |||||
Fair Value of Restricted Shares Granted | |||||||
Fair Value of Shares Vested | |||||||
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.
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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) | $ | $ | $ | $ | |||||||||||
Short-term Marketable Securities (2) | |||||||||||||||
Other Trading Securities (3) | |||||||||||||||
Commodity Derivatives (4) | |||||||||||||||
Total Assets at Fair Value | $ | $ | $ | $ | |||||||||||
Liabilities at Fair Value | |||||||||||||||
Deferred Compensation (3) | $ | $ | $ | $ | |||||||||||
Total Liabilities at Fair Value | $ | $ | $ | $ | |||||||||||
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) | $ | $ | $ | $ | |||||||||||
Short-term Marketable Securities (2) | |||||||||||||||
Other Trading Securities (3) | |||||||||||||||
Commodity Derivatives (4) | |||||||||||||||
Total Assets at Fair Value | $ | $ | $ | $ | |||||||||||
Liabilities at Fair Value | |||||||||||||||
Deferred Compensation (3) | $ | $ | $ | $ | |||||||||||
Total Liabilities at Fair Value | $ | $ | $ | $ | |||||||||||
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 |
21
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 $ |
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.
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.
22
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 | $ | |||
Finance | Net Property, Plant and Equipment | ||||
Total Right-of-Use Assets | $ | ||||
Liabilities | |||||
Current | |||||
Operating | Accrued Expenses | $ | |||
Finance | Current Maturities of Long-Term Debt | ||||
Noncurrent | |||||
Operating | Other Long-term Liabilities | ||||
Finance | Long-term Debt - Less Current Maturities | ||||
Total Lease Liabilities | $ | ||||
Lease expenses are:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||
(in thousands) | July 26, 2020 | July 26, 2020 | ||||||
Operating Lease Cost (1) | $ | $ | ||||||
Finance Lease Cost | ||||||||
Amortization of Right-of-Use Assets | ||||||||
Interest on Lease Liabilities | ||||||||
Variable Lease Cost (2) | ||||||||
Net Lease Cost | $ | $ | ||||||
(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 | |||
Finance Leases | |||
Weighted Average Discount Rate | |||
Operating Leases | % | ||
Finance Leases | % | ||
23
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 | $ | |||
Operating Cash Flows from Finance Leases | ||||
Financing Cash Flows from Finance Leases | ||||
Right-of-Use Assets obtained in exchange for new operating lease liabilities | ||||
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) | $ | $ | $ | ||||||||
2021 | |||||||||||
2022 | |||||||||||
2023 | |||||||||||
2024 | |||||||||||
2025 | |||||||||||
2026 and beyond | |||||||||||
Total Lease Payments | $ | $ | $ | ||||||||
Less: Imputed Interest | |||||||||||
Present Value of Lease Liabilities | $ | $ | $ | ||||||||
(1) |
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 | |||||||||||
Dilutive Potential Common Shares | |||||||||||
Diluted Weighted-Average Shares Outstanding | |||||||||||
Antidilutive Potential Common Shares | |||||||||||
24
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.
25
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 | $ | $ | $ | $ | |||||||||||
Refrigerated Foods | |||||||||||||||
Jennie-O Turkey Store | |||||||||||||||
International & Other | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
Intersegment Sales | |||||||||||||||
Grocery Products | $ | $ | $ | $ | |||||||||||
Refrigerated Foods | |||||||||||||||
Jennie-O Turkey Store | |||||||||||||||
International & Other | |||||||||||||||
Total | |||||||||||||||
Intersegment Elimination | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total | $ | — | $ | — | $ | — | $ | — | |||||||
Net Sales | |||||||||||||||
Grocery Products | $ | $ | $ | $ | |||||||||||
Refrigerated Foods | |||||||||||||||
Jennie-O Turkey Store | |||||||||||||||
International & Other | |||||||||||||||
Intersegment Elimination | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total | $ | $ | $ | $ | |||||||||||
Segment Profit | |||||||||||||||
Grocery Products | $ | $ | $ | $ | |||||||||||
Refrigerated Foods | |||||||||||||||
Jennie-O Turkey Store | |||||||||||||||
International & Other | |||||||||||||||
Total Segment Profit | |||||||||||||||
Net Unallocated Expense | |||||||||||||||
Noncontrolling Interest | ( | ) | |||||||||||||
Earnings Before Income Taxes | $ | $ | $ | $ | |||||||||||
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 | $ | $ | $ | $ | |||||||||||
U.S. Foodservice | |||||||||||||||
U.S. Deli | |||||||||||||||
International | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
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.
26
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 | $ | $ | $ | $ | |||||||||||
Shelf-stable | |||||||||||||||
Poultry | |||||||||||||||
Miscellaneous | |||||||||||||||
Total | $ | $ | $ | ||||||||||||
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
The Company is a global manufacturer and marketer of branded food products. It operates in four reportable segments as described in Note O - Segment Reporting in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
The Company reported net earnings per diluted share of $0.37 for the third quarter of fiscal 2020, in line with the third quarter of fiscal 2019. Significant factors impacting the quarter were:
• | The Company continued to experience demand shifts from its foodservice business to its retail business due to the impact of the COVID-19 pandemic. Retail demand remained elevated during the quarter, while foodservice demand showed signs of recovery as shelter-in-place restrictions were eased and phased re-openings began. |
• | Grocery Products profit increased as improved sales and favorable product mix drove the significant increase in segment profit. |
• | International & Other profit increased due to improved results in China and the Company's partners in the Philippines, South Korea and Europe. |
• | Refrigerated Foods segment profit declined as a result of lower foodservice sales, incremental COVID-19 related costs and losses on strategic hog hedge positions. |
• | Jennie-O Turkey Store segment profit declined sharply primarily due to higher manufacturing and live production costs attributed to the impact of three plant pauses on the vertically integrated supply chain early in the quarter. Additionally, the business absorbed incremental COVID-19 related costs. |
• | Year-to-date cash flow from operations was $878.1 million, up 53 percent compared to last year as increased demand drove lower inventory levels. |
• | The Company issued a $1.0 billion, ten-year bond during the quarter at an annual interest rate of 1.8 percent. The proceeds from the offering will provide ample liquidity and allow the business to take advantage of strategic opportunities. |
Response to COVID-19
The Company is committed to making investments necessary to keep its team members safe. Enhanced safety procedures have been implemented across the Company's facilities, including providing personal protective equipment for all production team members, frequent disinfecting of high-touch areas, reconfiguration of common areas and workstations, temperature and wellness screenings, revised shift scheduling, reduced production line speeds, new guidelines on carpooling, more extensive social distancing measures throughout each facility and where possible, providing remote work opportunities and facilitating access to rapid testing for employees. The Company has also paid over $11 million in bonuses to full- and part-time plant production team members to date in fiscal 2020.
27
Consolidated Results
Volume, Net Sales, Earnings, and Diluted Earnings per Share
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||
(in thousands, except per share amounts) | July 26, 2020 | July 28, 2019 | % Change | July 26, 2020 | July 28, 2019 | % Change | |||||||||||||||
Volume (lbs.) | 1,165,214 | 1,123,504 | 3.7 | 3,585,273 | 3,500,404 | 2.4 | |||||||||||||||
Organic Volume (1) | 1,158,418 | 1,123,504 | 3.1 | 3,574,747 | 3,428,441 | 4.3 | |||||||||||||||
Net Sales | $ | 2,381,457 | $ | 2,290,705 | 4.0 | $ | 7,188,357 | $ | 6,995,804 | 2.8 | |||||||||||
Organic Net Sales (1) | 2,341,069 | 2,290,705 | 2.2 | 7,126,358 | 6,861,327 | 3.9 | |||||||||||||||
Earnings Before Income Taxes | 259,364 | 261,000 | (0.6 | ) | 836,014 | 886,021 | (5.6 | ) | |||||||||||||
Net Earnings Attributable to Hormel Foods Corporation | 203,119 | 199,449 | 1.8 | 673,726 | 723,303 | (6.9 | ) | ||||||||||||||
Diluted Earnings per Share | 0.37 | 0.37 | — | 1.23 | 1.33 | (7.5 | ) | ||||||||||||||
(1)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 Sadler's Smokehouse acquisition (March 2020) in the Refrigerated Foods segment and the CytoSport divestiture (April 2019) in the Grocery Products and International & Other segments.
The Company believes these non-GAAP financial measurements provide useful information to investors because they are the measurements used to evaluate performance on a comparable year-over-year basis. Non-GAAP measurements are not intended to be a substitute for U.S. GAAP measurements in analyzing financial performance. These non-GAAP measurements are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.
The tables below show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures.
ORGANIC VOLUME AND NET SALES (NON-GAAP) | ||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||
July 26, 2020 | July 28, 2019 | |||||||||||||||||||||
(in thousands) | Reported GAAP | Acquisitions | Organic (Non-GAAP) | Reported GAAP | Divestitures | Organic (Non-GAAP) | Organic % Change | |||||||||||||||
Volume (lbs.) | ||||||||||||||||||||||
Grocery Products | 307,198 | — | 307,198 | 290,658 | — | 290,658 | 5.7 | |||||||||||||||
Refrigerated Foods | 605,546 | (6,795 | ) | 598,751 | 558,531 | — | 558,531 | 7.2 | ||||||||||||||
Jennie-O Turkey Store | 171,313 | — | 171,313 | 189,146 | — | 189,146 | (9.4 | ) | ||||||||||||||
International & Other | 81,156 | — | 81,156 | 85,169 | — | 85,169 | (4.7 | ) | ||||||||||||||
Total Volume | 1,165,214 | (6,795 | ) | 1,158,418 | 1,123,504 | — | 1,123,504 | 3.1 | ||||||||||||||
Net Sales | ||||||||||||||||||||||
Grocery Products | $ | 580,798 | $ | — | $ | 580,798 | $ | 543,088 | $ | — | $ | 543,088 | 6.9 | |||||||||
Refrigerated Foods | 1,363,092 | (40,388 | ) | 1,322,704 | 1,301,101 | — | 1,301,101 | 1.7 | ||||||||||||||
Jennie-O Turkey Store | 286,805 | — | 286,805 | 298,781 | — | 298,781 | (4.0 | ) | ||||||||||||||
International & Other | 150,762 | — | 150,762 | 147,735 | — | 147,735 | 2.0 | |||||||||||||||
Total Net Sales | $ | 2,381,457 | $ | (40,388 | ) | $ | 2,341,069 | $ | 2,290,705 | $ | — | $ | 2,290,705 | 2.2 | ||||||||
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Thirty-Nine Weeks Ended | |||||||||||||||||||||
July 26, 2020 | July 28, 2019 | ||||||||||||||||||||
(in thousands) | Reported GAAP | Acquisitions | Organic (Non-GAAP) | Reported GAAP | Divestitures | Organic (Non-GAAP) | Organic % Change | ||||||||||||||
Volume (lbs.) | |||||||||||||||||||||
Grocery Products | 963,819 | — | 963,819 | 970,003 | (69,910 | ) | 900,093 | 7.1 | |||||||||||||
Refrigerated Foods | 1,787,698 | (10,526 | ) | 1,777,172 | 1,726,682 | — | 1,726,682 | 2.9 | |||||||||||||
Jennie-O Turkey Store | 577,990 | — | 577,990 | 546,916 | — | 546,916 | 5.7 | ||||||||||||||
International & Other | 255,766 | — | 255,766 | 256,803 | (2,052 | ) | 254,751 | 0.4 | |||||||||||||
Total Volume | 3,585,273 | (10,526 | ) | 3,574,747 | 3,500,404 | (71,962 | ) | 3,428,441 | 4.3 | ||||||||||||
Net Sales | |||||||||||||||||||||
Grocery Products | $ | 1,804,674 | $ | — | $ | 1,804,674 | $ | 1,785,232 | $ | (130,588 | ) | $ | 1,654,644 | 9.1 | |||||||
Refrigerated Foods | 3,962,219 | (61,999 | ) | 3,900,220 | 3,837,732 | — | 3,837,732 | 1.6 | |||||||||||||
Jennie-O Turkey Store | 959,988 | — | 959,988 | 925,271 | — | 925,271 | 3.8 | ||||||||||||||
International & Other | 461,475 | — | 461,475 | 447,569 | (3,889 | ) | 443,680 | 4.0 | |||||||||||||
Total Net Sales | $ | 7,188,357 | $ | (61,999 | ) | $ | 7,126,358 | $ | 6,995,804 | $ | (134,477 | ) | $ | 6,861,327 | 3.9 | ||||||
Net Sales
For the third quarter of fiscal 2020, the increase in net sales was primarily related to higher value-added retail sales across the enterprise and higher sales of commodity items in Refrigerated Foods, partially offset by significantly lower foodservice sales. While foodservice sales rebounded during the quarter as shelter-in-place orders were lifted and many foodservice establishments reopened across the country, they remained well below prior year levels.
The increase in net sales for the first nine months of fiscal 2020 was attributed to higher branded retail sales from all business segments and higher commodity sales in Refrigerated Foods and Jennie-O Turkey Store. These increases more than offset lower foodservice sales in Refrigerated Foods and Jennie-O Turkey Store and the impact from the CytoSport divestiture last year.
Cost of Products Sold
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||
(in thousands) | July 26, 2020 | July 28, 2019 | % Change | July 26, 2020 | July 28, 2019 | % Change | |||||||||||||
Cost of Products Sold | $ | 1,959,032 | $ | 1,857,263 | 5.5 | $ | 5,820,158 | $ | 5,604,879 | 3.8 | |||||||||
Cost of products sold for the third quarter increased due to record sales and approximately $40 million (net of CARES Act credits) of higher operational costs related to the COVID-19 pandemic. These costs included lower production volumes, employee bonuses, and enhanced safety measures in the Company's facilities.
Cost of products sold for the first nine months of fiscal 2020 increased primarily due to higher sales. To-date incremental costs related to the COVID-19 pandemic were approximately $60 million.
The Company expects to absorb another $20-$40 million in COVID-19 related operational costs in the fourth quarter.
Gross Profit
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||
(in thousands) | July 26, 2020 | July 28, 2019 | % Change | July 26, 2020 | July 28, 2019 | % Change | ||||||||||||||||
Gross Profit | $ | 422,426 | $ | 433,442 | (2.5 | ) | $ | 1,368,198 | $ | 1,390,925 | (1.6 | ) | ||||||||||
Percentage of Net Sales | 17.7 | % | 18.9 | % | 19.0 | % | 19.9 | % | ||||||||||||||
For the third quarter and first nine months of 2020, gross profit as a percentage of net sales declined. The mix impact from lower enterprise-wide foodservice sales and higher operational costs related to the impact of the COVID-19 pandemic were the primary drivers of the decline. Strength from branded retail sales within the Grocery Products, Refrigerated Foods, and Jennie-O Turkey Store segments offset some of the decline.
29
Looking ahead to the fourth quarter of fiscal 2020, the Company expects similar dynamics to the third quarter, such as continued strength from the retail businesses, lower foodservice demand, and higher operating costs related to the COVID-19 pandemic.
Selling, General and Administrative (SG&A)
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||
(in thousands) | July 26, 2020 | July 28, 2019 | % Change | July 26, 2020 | July 28, 2019 | % Change | |||||||||||||
SG&A | $ | 181,085 | $ | 180,169 | 0.5 | $ | 570,518 | $ | 543,789 | 4.9 | |||||||||
Percentage of Net Sales | 7.6 | % | 7.9 | % | 7.9 | % | 7.8 | % | |||||||||||
SG&A expenses for the third quarter marginally increased as higher employee-related expenses were offset by lower advertising investments. For the first nine months of fiscal 2020, SG&A expenses increased as fiscal 2019 benefited from both the one-time gain from the divestiture of CytoSport and a legal settlement.
Advertising investments in the third quarter were $24 million, a decline of 23 percent. For the first nine months of 2020, advertising investments declined 10 percent due to lower investments in the third quarter and the divestiture of CytoSport.
Equity in Earnings of Affiliates
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||
(in thousands) | July 26, 2020 | July 28, 2019 | % Change | July 26, 2020 | July 28, 2019 | % Change | ||||||||||||||
Equity in Earnings of Affiliates | $ | 8,235 | $ | 3,384 | 143.4 | $ | 25,843 | $ | 28,133 | (8.1 | ) | |||||||||
Equity in earnings of affiliates for the third quarter increased due to stronger performance from the Company's joint venture in the Philippines and improved results for MegaMex.
For the first nine months of fiscal 2020, equity in earnings of affiliates declined due to lower earnings for MegaMex.
Effective Tax Rate
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||
July 26, 2020 | July 28, 2019 | July 26, 2020 | July 28, 2019 | ||||||||
Effective Tax Rate | 21.6 | % | 23.6 | % | 19.4 | % | 18.3 | % | |||
The lower effective tax rate in the third quarter of fiscal 2020 was driven by a higher volume of stock option exercises during the quarter. For further information, refer to Note J - Income Taxes.
30
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.
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||
(in thousands) | July 26, 2020 | July 28, 2019 | % Change | July 26, 2020 | July 28, 2019 | % Change | |||||||||||||||
Net Sales | |||||||||||||||||||||
Grocery Products | $ | 580,798 | $ | 543,088 | 6.9 | $ | 1,804,674 | $ | 1,785,232 | 1.1 | |||||||||||
Refrigerated Foods | 1,363,092 | 1,301,101 | 4.8 | 3,962,219 | 3,837,732 | 3.2 | |||||||||||||||
Jennie-O Turkey Store | 286,805 | 298,781 | (4.0 | ) | 959,988 | 925,271 | 3.8 | ||||||||||||||
International & Other | 150,762 | 147,735 | 2.0 | 461,475 | 447,569 | 3.1 | |||||||||||||||
Total | $ | 2,381,457 | $ | 2,290,705 | 4.0 | $ | 7,188,357 | $ | 6,995,804 | 2.8 | |||||||||||
Segment Profit | |||||||||||||||||||||
Grocery Products | $ | 80,169 | $ | 58,778 | 36.4 | $ | 276,367 | $ | 258,574 | 6.9 | |||||||||||
Refrigerated Foods | 152,822 | 171,795 | (11.0 | ) | 451,596 | 492,476 | (8.3 | ) | |||||||||||||
Jennie-O Turkey Store | 7,069 | 21,278 | (66.8 | ) | 72,968 | 76,931 | (5.2 | ) | |||||||||||||
International & Other | 23,620 | 18,755 | 25.9 | 66,735 | 58,058 | 14.9 | |||||||||||||||
Total Segment Profit | 263,679 | 270,606 | (2.6 | ) | 867,666 | 886,039 | (2.1 | ) | |||||||||||||
Net Unallocated Expense | 4,457 | 9,584 | (53.5 | ) | 31,754 | 297 | 10,570.7 | ||||||||||||||
Noncontrolling Interest | 141 | (22 | ) | (744.6 | ) | 103 | 279 | (63.3 | ) | ||||||||||||
Earnings Before Income Taxes | $ | 259,364 | $ | 261,000 | (0.6 | ) | $ | 836,014 | $ | 886,021 | (5.6 | ) | |||||||||
Grocery Products
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||
(in thousands) | July 26, 2020 | July 28, 2019 | % Change | July 26, 2020 | July 28, 2019 | % Change | ||||||||||||||
Volume (lbs.) | 307,198 | 290,658 | 5.7 | 963,819 | 970,003 | (0.6 | ) | |||||||||||||
Net Sales | $ | 580,798 | $ | 543,088 | 6.9 | $ | 1,804,674 | $ | 1,785,232 | 1.1 | ||||||||||
Segment Profit | 80,169 | 58,778 | 36.4 | 276,367 | 258,574 | 6.9 | ||||||||||||||
Volume and sales increased for the third quarter due to strong consumer demand across center store brands, including SPAM®, Skippy®, Herdez®, Hormel® Compleats® and Dinty Moore®. For the first nine months of fiscal 2020, net sales increased as growth from many center store brands more than offset the impact from the CytoSport divestiture last year.
For the third quarter and first nine months of fiscal 2020, segment profit increased as improved sales and favorable
product mix more than overcame the divestiture of CytoSport and the benefit from a legal settlement in fiscal 2019.
In the fourth quarter, Grocery Products expects strong demand for its branded retail items to continue.
Refrigerated Foods
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||
(in thousands) | July 26, 2020 | July 28, 2019 | % Change | July 26, 2020 | July 28, 2019 | % Change | |||||||||||||||
Volume (lbs.) | 605,546 | 558,531 | 8.4 | 1,787,698 | 1,726,682 | 3.5 | |||||||||||||||
Net Sales | $ | 1,363,092 | $ | 1,301,101 | 4.8 | $ | 3,962,219 | $ | 3,837,732 | 3.2 | |||||||||||
Segment Profit | 152,822 | 171,795 | (11.0 | ) | 451,596 | 492,476 | (8.3 | ) | |||||||||||||
Third quarter volume and sales increased as strong demand for branded retail and deli products, higher fresh pork commodity sales and the impact from the Sadler’s Smokehouse acquisition more than offset a significant decline in foodservice sales. Improved sales results were driven by value-added brands such as Applegate®, Hormel® Black Label® and Columbus®. For the
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first nine months of fiscal 2020, net sales increases from branded retail products, commodity sales and the Sadler's Smokehouse acquisition while foodservice declined.
For the third quarter, Refrigerated Foods segment profit declined as a result of lower foodservice sales, incremental COVID-19 related costs and losses on strategic hog hedge positions. The segment profit decline for the first nine months of fiscal 2020 was primarily due to lower foodservice results.
Refrigerated Foods is expecting lower foodservice demand and higher operating costs in the fourth quarter compared to the prior year. Strength from the retail businesses is expected to continue, though factors such as limited labor availability, production inefficiencies due to COVID-19 safety measures and unseasonably low levels of inventory may limit the Company's ability to supply product in key categories to meet robust demand.
Jennie-O Turkey Store
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||
(in thousands) | July 26, 2020 | July 28, 2019 | % Change | July 26, 2020 | July 28, 2019 | % Change | |||||||||||||||
Volume (lbs.) | 171,313 | 189,146 | (9.4 | ) | 577,990 | 546,916 | 5.7 | ||||||||||||||
Net Sales | $ | 286,805 | $ | 298,781 | (4.0 | ) | $ | 959,988 | $ | 925,271 | 3.8 | ||||||||||
Segment Profit | 7,069 | 21,278 | (66.8 | ) | 72,968 | 76,931 | (5.2 | ) | |||||||||||||
Sales declined for the third quarter as higher retail sales, led by Jennie-O® lean ground products, did not offset declines in foodservice, commodity and whole-bird sales. For the first nine months of fiscal 2020, improved retail, commodity and whole-bird sales more than offset a decline in foodservice sales.
The sharp decline in segment profit for the third quarter was primarily due to higher manufacturing and live production costs attributed to the impact of three plant pauses on the vertically integrated supply chain early in the quarter. Additionally, the business absorbed incremental COVID-19 related costs. Segment profit for the first nine months of 2020 declined primarily due to COVID-19 impacts on manufacturing and live production costs and lower foodservice sales.
In the fourth quarter, Jennie-O Turkey Store expects strong demand across the retail portfolio to continue as lower foodservice volumes and incremental COVID-19 related costs negatively impact operational performance.
International & Other
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||
(in thousands) | July 26, 2020 | July 28, 2019 | % Change | July 26, 2020 | July 28, 2019 | % Change | |||||||||||||||
Volume (lbs.) | 81,156 | 85,169 | (4.7 | ) | 255,766 | 256,803 | (0.4 | ) | |||||||||||||
Net Sales | $ | 150,762 | $ | 147,735 | 2.0 | $ | 461,475 | $ | 447,569 | 3.1 | |||||||||||
Segment Profit | 23,620 | 18,755 | 25.9 | 66,735 | 58,058 | 14.9 | |||||||||||||||
For the third quarter, sales increases in China and branded exports offset lower fresh pork export results. Worldwide demand for
Skippy® peanut butter and SPAM® luncheon meat was exceptionally strong. For the first nine months of fiscal 2020, the increase in net sales was driven by improved results in China and higher branded export volume.
Segment profit increased due to improved results in China and higher income from the Company's partners in the Philippines, South Korea and Europe. For the first nine months of fiscal 2020, segment profit increased due primarily to higher income from affiliates and stronger results from branded exports.
International & Other anticipates the strong demand for branded exports and year-over-year improvement in China to continue. Higher input costs pose a risk to business results in China and Brazil.
Unallocated Income and Expenses
The Company does not allocate investment income, interest expense or interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at the corporate level. Equity in earnings of affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included in the segment table for the purpose of reconciling segment results to earnings before income taxes.
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Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
(in thousands) | July 26, 2020 | July 28, 2019 | July 26, 2020 | July 28, 2019 | |||||||||||
Net Unallocated Expense | $ | 4,457 | $ | 9,584 | $ | 31,754 | $ | 297 | |||||||
Net Earnings (Loss) Attributable to Noncontrolling Interest | 141 | (22 | ) | 103 | 279 | ||||||||||
For the third quarter, net unallocated expense declined due to higher investment results. For the first nine months of 2020, net unallocated expense increased significantly due primarily to the one-time gain from the CytoSport divestiture last year.
Related Party Transactions
There has been no material change in the information regarding Related Party Transactions as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 27, 2019.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents were $1,729.4 million at the end of the first thirty-nine weeks of fiscal 2020 compared to $560.2 million at the end of the comparable fiscal 2019 period.
Cash provided by operating activities was $878.1 million in the first thirty-nine weeks of fiscal 2020 compared to $572.9 million in the same period of fiscal 2019. Lower overall inventory levels drove the majority of the increase. Cash flows from operating activities provide a consistent source of liquidity. The COVID-19 pandemic has caused supply chain disruptions, market volatility and a shift in consumer behavior. The Company believes its balanced business model and strong balance sheet makes it well-positioned to weather the pandemic.
Cash used in investing activities was $506.0 million in the first thirty-nine weeks of fiscal 2020 compared to cash provided by investing activities of $354.9 million in the same period of fiscal 2019. In the first thirty-nine weeks of fiscal 2020, the Company acquired Sadler's Smokehouse for a final purchase price of $270.8 million. In fiscal 2019, the Company received proceeds of $473.9 million for the sale of CytoSport. Capital expenditures in the first thirty-nine weeks of fiscal 2020 increased to $226.8 million from $154.2 million in the comparable period of fiscal 2019. The Company estimates its fiscal 2020 capital expenditures to be approximately $350.0 million. Key projects for the year include an expansion of the Company's Burke Corporation pizza-toppings facility in Nevada, Iowa; a new dry sausage production facility in Omaha, Nebraska; Project Orion; and other projects to support growth of branded products.
Cash provided by financing activities was $684.0 million in the first thirty-nine weeks of fiscal 2020 compared to cash used in financing activities of $826.0 million in the same period of fiscal 2019. On June 11, 2020, the Company issued ten-year senior notes in an aggregate principal amount of $1.0 billion. The Company repurchased $12.4 million of its common stock in the first thirty-nine weeks of fiscal 2020 compared to $174.2 million repurchased during the same period of the prior year. In the first thirty-nine weeks of fiscal 2019, the Company repaid $374.8 million of debt related to the purchase of Columbus. 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.
Cash dividends paid to the Company’s shareholders continue to be an ongoing financing activity for the Company. Dividends paid in the first thirty-nine weeks of fiscal 2020 were $362.0 million compared to $325.0 million in the comparable period of fiscal 2019. For fiscal 2020, the annual dividend rate was increased to $0.93 per share, representing the 54th consecutive annual dividend increase. The Company has paid dividends for 368 consecutive quarters and expects to continue doing so.
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 debt covenants.
Despite the COVID-19 pandemic, the Company remains confident in its ability to meet its cash flow needs and remains dedicated to returning excess cash flow to shareholders through dividend payments. Top priorities for the Company include reinvestments to ensure employee and food safety, growing the business through innovation, and evaluating opportunities for strategic acquisitions. Capital spending to enhance and expand current operations will also be a significant cash outflow for fiscal 2020.
Contractual Obligations and Commercial Commitments
The Company records income taxes in accordance with the provisions of ASC 740, Income Taxes. The Company is unable to determine its contractual obligations by year related to this pronouncement, as the ultimate amount or timing of settlement of its reserves for income taxes cannot be reasonably estimated. The total liability for unrecognized tax benefits, including interest and penalties, at July 26, 2020, was $24.7 million.
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There have been no other material changes to the information regarding the Company’s future contractual financial obligations previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 27, 2019.
Off-Balance Sheet Arrangements
As of July 26, 2020, and October 27, 2019, the Company had $46.8 million and $44.8 million, respectively, of standby letters of credit issued on its behalf. The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs. This amount includes $3.1 million and $2.7 million as of July 26, 2020, and October 27, 2019, respectively, of revocable standby letters of credit 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 to the Company’s brands or products in italics within this report represent valuable trademarks owned or licensed by Hormel Foods, LLC or other subsidiaries of Hormel Foods Corporation.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful impact on the reporting of consolidated financial statements. Critical accounting policies are defined as those reflective of significant judgments, estimates, and uncertainties, which may result in materially different results under different assumptions and conditions. The Company has considered the impact of COVID-19 and determined there have been no material changes in the Company’s Critical Accounting Policies as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 27, 2019. As conditions resulting from the COVID-19 pandemic evolve, the Company expects these judgments and estimates may be subject to change, which could materially impact future periods.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking” information within the meaning of the federal 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.
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. The Company is filing this cautionary statement in connection with the Reform Act. When used in this Quarterly Report on Form 10-Q, the Company’s Annual Report to Stockholders, other filings by the Company with the Securities and Exchange Commission (the 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 Reform 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 “safe harbor” provisions 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 discussion of risk factors in Part II, Item 1A of this Quarterly Report on Form 10-Q contains certain cautionary statements regarding the Company’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 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 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, and laws and regulations affecting the Company and its markets.
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Item 3. 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. Hogs purchased under contract accounted for 94 percent of the total hogs purchased by the Company during the first thirty-nine weeks of fiscal years 2020 and 2019. 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.
The Company utilizes a hedge program to reduce exposure and offset the fluctuations in the Company's future direct hog purchases. The program utilizes lean hog futures which are accounted for under cash flow hedge accounting. The fair value of the Company's open futures contracts in this program as of July 26, 2020 was $(11.0) million (before tax) compared to $5.8 million (before tax) as of October 27, 2019. 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 July 26, 2020, open lean hog contracts by $8.7 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.
The Company’s utilizes a hedge program to reduce exposure and offset the fluctuation in the Company's future direct grain purchases. This program utilizes corn futures for Jennie-O Turkey Store, and these contracts are accounted for under cash flow hedge accounting. The fair value of the Company’s open futures contracts as of July 26, 2020, was $(9.8) million (before tax) compared to $(2.2) million (before tax) as of October 27, 2019. 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 July 26, 2020, open grain contracts by $6.0 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.
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 July 26, 2020, the balance of these securities totaled $168.5 million compared to $157.5 million as of October 27, 2019. A majority of these securities represent 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 negative impact to the Company’s pretax earnings of approximately $8.0 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 July 26, 2020 was $571.7 million, compared to $543.8 million as of October 27, 2019, 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 within Interest and Investment Income or 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 Brazilian real, as of July 26, 2020. 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 $37.4 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 $30.6 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 $10.9 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 $8.9 million pretax.
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Item 4. CONTROLS AND PROCEDURES
(a) | 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 its 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 that 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, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information the Company is required to disclose in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) | Internal Controls. |
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. 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 completed the implementation of the finance phase. Additional phases will continue to be implemented over the next several years. Emphasis has been on the maintenance of effective internal controls and assessment of the design and operating effectiveness of key control activities throughout development and deployment of each phase.
With the exception of the finance phase implementation described, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) through the third quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company will continue to evaluate as additional phases are deployed.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings related to the ongoing operation of its business, including claims both by and against the Company. At any time, such proceedings typically involve claims related to product liability, labeling, contract disputes, intellectual property, competition 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. However, future developments or settlements are uncertain and may require the Company to change such accruals as proceedings progress. Resolutions of any currently known matters, either individually or in the aggregate, are not expected to have a material effect on the Company’s financial condition, results of operations, or liquidity.
Item 1A. RISK FACTORS
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 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 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, 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 |
▪ | 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 Company utilizes hedging programs to manage its exposure to various commodity market risks, 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 become more favorable than those secured under the Company’s hedging programs.
Additionally, if a highly pathogenic human disease outbreak developed in the United States or internationally, it may negatively impact the national or global economy, demand for Company products, supplies to the Company, the Company's production processes, 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
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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.
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. At this time, the following potential risk factors arising from COVID-19 pandemic, have had and/or may continue to cause one or more of the following impacts on the Company's operations:
• | One or more of the Company's manufacturing facilities may be shutdown 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. 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 slowdown the spread of COVID-19 may impact facilities’ efficiency. |
• | Operating costs may increase as measures are put in place to prevent or slowdown 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 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 foodservice volume, lower volume in premium brands, and potential loss of business to private label. |
• | 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 may also face operational challenges if government quarantine orders restrict movement of employees. |
• | It is possible that the COVID-19 pandemic could negatively affect the Company's labor availability, relations, or labor costs. |
• | In accordance with recommendations to reduce large gatherings and increase social distancing, many of the Company's office-based employees are working remotely, 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 Company has already seen many of these risks materialize. 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. The COVID-19 pandemic is an unprecedented situation and the Company's understanding of its impacts are changing and evolving on a weekly if not daily basis. 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.
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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.
According to the Ministry of Agriculture and Rural Affairs of the People's Republic of China, as of November 2019, the outbreak of ASF in China has eliminated over 40 percent of the country's hog herd compared to the prior year. The disease has also spread to additional countries in Asia and Europe. 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, and whey 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 whey as well as energy costs 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 evolved to large, vertically-integrated operations using long-term supply agreements. Typically, this results 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 ensure a stable supply of raw materials while minimizing extreme fluctuations in costs over the long-term. This may result, in the short-term, in higher live hog costs compared to the cash spot market depending on the relationship of the cash spot market to contract prices. 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.
Jennie-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 fluctuate due to climate conditions, production forecasts, and supply and demand conditions at local, regional, national, and worldwide 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 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 could result in less foreign demand and increased domestic supply of proteins, thereby potentially lowering prices. The Company occasionally utilizes in-country production to limit this exposure.
Market demand for the Company’s products may fluctuate.
The Company faces competition from other producers of proteins such as pork, beef, turkey, chicken, and fish, as well as providers of alternative proteins such as nut butters, whey, and plant-based proteins. The factors on which the Company competes include:
▪ | 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 factors in the future.
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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, most recently the acquisition of Sadler's Smokehouse, that align with the Company’s strategic initiative to deliver 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 on favorable terms, the diversion of management's attention from other business concerns, the potential loss of key employees and customers of current or acquired companies, the inability to integrate or divest operations successfully, the possible assumption of unknown liabilities, potential disputes with buyers or 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.
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, and claims relating to product liability, contract disputes, intellectual property, advertising, labeling, wage and hour laws, employment practices, or environmental matters. Litigation trends and the outcome of litigation cannot be predicted with certainty and adverse litigation trends and outcomes could negatively 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 who oversee workforce immigration laws, laws regulating the protection of personal information, cyber-security regulations, tax regulations, 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 continuous 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.
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, as well as any modifications, is material to the Company’s business. Some 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 related to additional investigation, assessment or other requirements. The occurrence of any of these events, the implementation of new laws and regulations, or updated interpretation of existing laws or regulations could adversely affect the Company’s financial results.
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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 of the Company’s business operations. Attempted cyber-attack and other cyber incidents are occurring more frequently and are being made by groups and individuals with a wide range of motives and expertise.
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 or increases in labor costs could harm the Company’s business.
As of July 26, 2020, the Company had approximately 18,700 employees worldwide, of which approximately 3,270 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-owned facilities or contracted hog processing facilities resulting in work slowdowns or stoppages could harm the Company’s financial results.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no issuer purchases of equity securities in the thirteen weeks ended July 26, 2020. The maximum number of shares that may yet be purchased under the plans or programs as of July 26, 2020 is 4,456,320. On January 29, 2013, the Company's Board of Directors authorized the repurchase of 10,000,000 shares of its common stock with no expiration date. On January 26, 2016, the Board of Directors approved a two-for-one split of the Company’s common stock to be effective January 27, 2016. As part of the stock split resolution, the number of shares remaining to be repurchased was adjusted proportionately.
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Item 6. EXHIBITS
101 | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended July 26, 2020, 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. |
104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended July 26, 2020, formatted in Inline XBRL (included as Exhibit 101). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HORMEL FOODS CORPORATION | ||
(Registrant) | ||
Date: September 1, 2020 | By | /s/ JAMES N. SHEEHAN |
JAMES N. SHEEHAN | ||
Executive Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
Date: September 1, 2020 | By | /s/ JANA L. HAYNES |
JANA L. HAYNES | ||
Vice President and Controller | ||
(Principal Accounting Officer) | ||
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