Hormel Foods Corp 10-Q for FY2021 Q2
Hormel Foods Corp (HRL)
10-Q
2021-06-01
For: 2021-04-25
View Original
Added on
April 04, 2026
About this 10-Q
Hormel Foods Corp filed this 10-Q on June 1, 2021, covering the quarter ended April 25, 2021 (FY2021 Q2).
Headline figures
Quarter ended April 25, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.61B
- up 7.6% from $2.42B a year earlier
- Net income
- $227.9M
- up 0.1% from net income of $227.73M a year earlier
- Diluted EPS
- $0.42
- unchanged from $0.42 a year earlier
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 April 25, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ___________________________________ to ________________________________________
Commission File Number: 1-2402
(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 ) 437-561 1
(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 May 30, 2021 | ||||||||||||||||
| 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
| April 25, 2021 | October 25, 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and Cash Equivalents | $ | $ | |||||||||
| Short-term Marketable Securities | |||||||||||
Accounts Receivable (Net of Allowance for Doubtful Accounts of $ | |||||||||||
| 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
| April 25, 2021 | October 25, 2020 | ||||||||||
| (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 $ | |||||||||||
Authorized | |||||||||||
Common Stock, Non-voting, Par Value $ | |||||||||||
Authorized | |||||||||||
Common Stock, Par Value $ | |||||||||||
Authorized | |||||||||||
Shares Issued as of April 25, 2021: | |||||||||||
Shares Issued as of October 25, 2020: | |||||||||||
| 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 | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | ||||||||||||||||||||||||||||||||
| 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 | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | ||||||||||||||||||||||||||||||||
| 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 April 26, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 26, 2020 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
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 – $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 26, 2020 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Thirteen Weeks Ended April 25, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 24, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
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 – $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 25, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
7
| Twenty-Six Weeks Ended April 26, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | 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 – $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 26, 2020 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Twenty-Six Weeks Ended April 25, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 25, 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 – $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 25, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
8
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Unaudited
| Twenty-Six Weeks Ended | |||||||||||
| April 25, 2021 | April 26, 2020 | ||||||||||
| Operating Activities | |||||||||||
| Net Earnings | $ | $ | |||||||||
| Adjustments to Reconcile to Net Cash Provided by Operating Activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Equity in Earnings of Affiliates | ( | ( | |||||||||
| Distributions Received from Equity Method Investees | |||||||||||
| Provision for Deferred Income Taxes | ( | ||||||||||
| Loss (Gain) on Property/Equipment Sales and Plant Facilities | |||||||||||
| 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 | ( | ( | |||||||||
| Acquisitions of Businesses/Intangibles | ( | ||||||||||
| Purchases of Property and Equipment | ( | ( | |||||||||
| Proceeds from Sales of Property and Equipment | |||||||||||
| Decrease (Increase) in Investments, Equity in Affiliates, and Other Assets | ( | ( | |||||||||
| Proceeds from Company-owned Life Insurance | |||||||||||
| Net Cash Provided by (Used in) Investing Activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| 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 June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2021. The adoption did not have a material impact on the Company's consolidated financial statements, thus no cumulative-effect adjustment to retained earnings was necessary.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance requires entities to disclose 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. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2021 and adoption did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans (Topic 715). The updated guidance requires additional disclosures of weighted-average interest crediting rates for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation. Amendments in the guidance also clarify the requirement to disclose the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets. The same disclosure is needed for the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The guidance removes certain previous disclosure requirements no longer considered cost beneficial. The amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2021. The adoption did not impact the Company's interim disclosure and is not anticipated to have a material impact on the annual disclosure.
New Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions in Topic 740 and clarifying and
10
NOTE B - ACQUISITIONS AND DIVESTITURES
Acquisitions: On February 10, 2021, the Company entered into a definitive agreement to acquire the Planters® snack nuts business from the Kraft Heinz Company. The proposed transaction is expected to close in June 2021. The acquisition includes the Planters®, NUT-rition®, Planters® Cheez Balls and Corn Nuts® brands. The purchase price is $3.35 billion, subject to customary adjustments. The transaction is expected to provide a tax benefit valued at approximately $560 million.
Planters® is an iconic snack brand and this acquisition will allow the Company to significantly expand its presence and broaden the scope for future acquisitions in the growing snacking space. Operating results for this acquisition will be included in the Company's Consolidated Statements of Operations from the date of acquisition and will be reflected primarily in the Grocery Products segment.
The transaction is expected to be funded from the Company’s cash on hand and a combination of long- and short-term debt. See Note J - Long-term Debt and Other Borrowing Arrangements for additional details.
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 completed an allocation of the fair value of the assets acquired utilizing third-party valuation appraisals during fiscal 2020.
Operating results for this acquisition have been included in the Company'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.
NOTE C - GOODWILL AND INTANGIBLE ASSETS
Goodwill: The changes in the carrying amounts of goodwill for the thirteen and twenty-six weeks ended April 25, 2021, are:
| (in thousands) | Grocery Products | Refrigerated Foods | Jennie-O Turkey Store | International & Other | Total | ||||||||||||||||||||||||
Balance at January 24, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Foreign Currency Translation | ( | ( | |||||||||||||||||||||||||||
Balance at April 25, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| (in thousands) | Grocery Products | Refrigerated Foods | Jennie-O Turkey Store | International & Other | Total | ||||||||||||||||||||||||
Balance at October 25, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Foreign Currency Translation | |||||||||||||||||||||||||||||
Balance at April 25, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Intangible Assets: The carrying amounts for indefinite-lived intangible assets are:
| (in thousands) | April 25, 2021 | October 25, 2020 | |||||||||
| Brands/Tradenames/Trademarks | $ | $ | |||||||||
| Other Intangibles | |||||||||||
| Foreign Currency Translation | ( | ( | |||||||||
| Total | $ | $ | |||||||||
11
The gross carrying amount and accumulated amortization for definite-lived intangible assets are:
| April 25, 2021 | October 25, 2020 | ||||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||
| Customer Lists/Relationships | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Other Intangibles | ( | ( | |||||||||||||||||||||
| Tradenames/Trademarks | ( | ( | |||||||||||||||||||||
| Foreign Currency Translation | ( | ( | |||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Amortization expense was $4.0 million and $7.9 million for the thirteen and twenty-six weeks ended April 25, 2021, respectively, compared to $3.4 million and $6.2 million for the thirteen and twenty-six weeks ended April 26, 2020.
Estimated annual amortization expense for the five fiscal years after October 25, 2020, excluding the impact from the pending acquisition of the Planters® snack nuts business, is:
| (in thousands) | |||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
NOTE D - 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 | April 25, 2021 | October 25, 2020 | |||||||||||||||||||
| MegaMex Foods, LLC | Grocery Products | $ | $ | ||||||||||||||||||||
| Other Joint Ventures | International & Other | Various ( | |||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
Equity in Earnings of Affiliates consists of:
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||
| (in thousands) | Segment | April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | ||||||||||||||||||||||||
| MegaMex Foods, LLC | Grocery Products | $ | $ | $ | $ | ||||||||||||||||||||||||
| Other Joint Ventures | International & Other | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||
For the thirteen and twenty-six weeks ended April 25, 2021, $11.2 million and $22.5 million of dividends were received from affiliates, compared to $10.0 million and $20.0 million of dividends received for the thirteen and twenty-six weeks ended April 26, 2020.
The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $11.5 million is remaining as of April 25, 2021. This difference is being amortized through Equity in Earnings of Affiliates.
12
NOTE E - INVENTORIES
Principal components of inventories are:
| (in thousands) | April 25, 2021 | October 25, 2020 | |||||||||
| Finished Products | $ | $ | |||||||||
| Raw Materials and Work-in-Process | |||||||||||
| Operating Supplies | |||||||||||
| Maintenance Materials and Parts | |||||||||||
| Total | $ | $ | |||||||||
NOTE F - DERIVATIVES AND HEDGING
The Company uses hedging programs to manage price risk associated with commodity purchases and interest rates. These programs utilize futures contracts to manage the Company’s exposure to price fluctuations in the markets. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Effectiveness testing is performed on a quarterly basis to ascertain a high level of effectiveness for cash flow and fair value hedging programs.
Cash Flow Commodity Hedges: The Company designates 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 upcoming fiscal years and its hog exposure beyond the next fiscal year. Due to extreme market volatility, subsequent to the end of the second quarter, the Company took strategic hedges to cover a significant portion of its expected grain purchases for the remainder of the fiscal year.
Fair Value Commodity 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.
Cash Flow Interest Rate Hedges: The Company is utilizing derivative instruments to manage interest rate risk associated with the anticipated debt transactions required to fund the acquisition of the Planters® snack nuts portfolio in the third quarter of fiscal 2021. The Company designated two separate interest rate locks as cash flow hedges. As of April 25, 2021, the total notional amount of the Company's locks was $1,250 million. The associated debt instruments are expected to have a tenor of and thirty years . Mark to market gains or losses on these instruments are deferred as a component of Accumulated Other Comprehensive Loss and will be reclassified to Interest Expense in the period when the hedged transactions affect earnings. On May 25, 2021, subsequent to the end of the second quarter, both interest rate locks were lifted in conjunction with the issuance of unsecured senior notes. For more detail on the notes issued, see Note J - Long-term Debt and Other Borrowing Arrangements.
Other Derivatives: The Company holds certain futures and options contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets. The Company has not applied hedge accounting to these positions. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.
Volume: The Company's outstanding commodity futures and options contracts related to its hedging programs include:
| Volume | ||||||||||||||
| Commodity Contracts | April 25, 2021 | October 25, 2020 | ||||||||||||
| Corn | ||||||||||||||
| Lean Hogs | ||||||||||||||
13
Fair Value of Derivatives: The fair values of the Company’s derivative instruments are:
| Gross Fair Value | ||||||||||||||||||||
| (in thousands) | Location on Consolidated Statements of Financial Position | April 25, 2021 | October 25, 2020 | |||||||||||||||||
| Derivatives Designated as Hedges: | ||||||||||||||||||||
Commodity Contracts(1) | Other Current Assets | $ | $ | ( | ||||||||||||||||
| Interest Rate Contracts | Other Current Assets | $ | $ | |||||||||||||||||
(1) Amounts represent the gross fair value of commodity derivative assets and liabilities. The Company nets the commodity 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 commodity derivative contract. The amount or timing of cash collateral balances may impact the classification of the commodity derivative in the Consolidated Statements of Financial Position. The gross asset position as of April 25, 2021 is offset by the obligation to return net cash collateral of $16.1 million contained within the master netting arrangement. The gross liability position as of October 25, 2020 is offset by the right to reclaim net cash collateral of $12.3 million. See Note I - Fair Value Measurements for a discussion of these net amounts as reported in the Consolidated Statements of Financial Position.
Fair Value Hedge - Assets (Liabilities): The carrying amounts of the Company's fair value hedge assets (liabilities) are:
Location on Consolidated Statements of Financial Position | Carrying Amount of the Hedged Assets/(Liabilities) | |||||||||||||
| (in thousands) | April 25, 2021 | October 25, 2020 | ||||||||||||
Accounts Payable(1) | $ | $ | ||||||||||||
(1) Amounts represent the carrying amount of fair value hedged assets and liabilities which are offset by other assets included in master netting arrangements described above.
Accumulated Other Comprehensive Loss Impact: As of April 25, 2021, the Company included in Accumulated Other Comprehensive Loss hedging gains (before tax) of $51.0 million on commodity contracts and $18.5 million related to interest rate positions. The Company expects to recognize the majority of the gains on commodity contracts over the next twelve months. Gains on interest rate contracts will offset the hedged interest payments over the tenor of the debt instruments.
The effect of Accumulated Other Comprehensive Loss for gains or losses (before tax) related to the Company's derivative instruments is as follows:
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) | April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | ||||||||||||||||||||||||||||
| Cash Flow Hedges: | ||||||||||||||||||||||||||||||||
| Commodity Contracts | $ | $ | ( | Cost of Products Sold | $ | $ | ( | |||||||||||||||||||||||||
| Interest Rate Contracts | $ | $ | Interest Expense | $ | $ | |||||||||||||||||||||||||||
Gain/(Loss) Recognized in AOCL (1) | Location on Consolidated Statements of Operations | Gain/(Loss) Reclassified from AOCL into Earnings (1) | ||||||||||||||||||||||||||||||
| Twenty-Six Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | ||||||||||||||||||||||||||||
| Cash Flow Hedges: | ||||||||||||||||||||||||||||||||
| Commodity Contracts | $ | $ | ( | Cost of Products Sold | $ | $ | ( | |||||||||||||||||||||||||
| Interest Rate Contracts | $ | $ | Interest Expense | $ | $ | |||||||||||||||||||||||||||
(1) See Note H - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on Net Earnings.
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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 is as follows:
| Cost of Products Sold | ||||||||||||||||||||||||||
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | ||||||||||||||||||||||
| Consolidated Statements of Operations | $ | $ | $ | $ | ||||||||||||||||||||||
| Cash Flow Hedges - Commodity Contracts | ||||||||||||||||||||||||||
| Gain (Loss) Reclassified from AOCL | ( | ( | ||||||||||||||||||||||||
| 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 twenty-six weeks ended April 25, 2021, and April 26, 2020, 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 G - 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 | Twenty-Six Weeks Ended | ||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | |||||||||||||||||||
| Service Cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest Cost | |||||||||||||||||||||||
| Expected Return on Plan Assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of Prior Service Cost | ( | ( | ( | ( | |||||||||||||||||||
| Recognized Actuarial Loss | |||||||||||||||||||||||
| Net Periodic Cost | $ | $ | $ | $ | |||||||||||||||||||
| Post-retirement Benefits | |||||||||||||||||||||||
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | |||||||||||||||||||
| Service Cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest Cost | |||||||||||||||||||||||
| Amortization of Prior Service Cost | ( | ( | ( | ( | |||||||||||||||||||
| Recognized Actuarial Loss | |||||||||||||||||||||||
| Net Periodic Cost | $ | $ | $ | $ | |||||||||||||||||||
15
NOTE H - ACCUMULATED OTHER COMPREHENSIVE LOSS
Components of Accumulated Other Comprehensive Loss are:
| (in thousands) | Foreign Currency Translation | Pension & Other Benefits | Hedging Deferred Gain (Loss) | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||
Balance at January 24, 2021 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||
| Unrecognized Gains (Losses) | |||||||||||||||||||||||||||||
| Gross | ( | ||||||||||||||||||||||||||||
| Tax Effect | ( | ( | |||||||||||||||||||||||||||
| Reclassification into Net Earnings | |||||||||||||||||||||||||||||
| Gross | (1) | ( | (2) | ||||||||||||||||||||||||||
| Tax Effect | ( | ( | |||||||||||||||||||||||||||
| Net of Tax Amount | ( | ||||||||||||||||||||||||||||
Balance at April 25, 2021 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||
Balance at October 25, 2020 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||
| Unrecognized Gains (Losses) | |||||||||||||||||||||||||||||
| Gross | |||||||||||||||||||||||||||||
| Tax Effect | ( | ( | |||||||||||||||||||||||||||
| Reclassification into Net Earnings | |||||||||||||||||||||||||||||
| Gross | (1) | ( | (2) | ||||||||||||||||||||||||||
| Tax Effect | ( | ( | |||||||||||||||||||||||||||
| Net of Tax Amount | |||||||||||||||||||||||||||||
Balance at April 25, 2021 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||
(1) Included in the computation of net periodic cost. See Note G - Pension and Other Post-Retirement Benefits for additional details.
(2) Included in Cost of Products Sold in the Consolidated Statements of Operations. See Note F - Derivatives and Hedging for additional details.
NOTE I - FAIR VALUE MEASUREMENTS
Pursuant to the provisions of ASC 820, Fair Value Measurements and Disclosures (ASC 820), the Company measures certain assets and liabilities at fair value or discloses the fair value of certain assets and liabilities recorded at cost in the consolidated financial statements. Fair value is calculated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). ASC 820 establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of three levels based on the inputs used in the valuation. The Company classifies assets and liabilities in their entirety based on the lowest level of input significant to the fair value measurement. The three levels are defined as follows:
Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Observable inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.
Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.
16
The Company’s financial assets and liabilities carried at fair value on a recurring basis as of April 25, 2021, and October 25, 2020, and their level within the fair value hierarchy, are:
| Fair Value Measurements at April 25, 2021 | |||||||||||||||||||||||
| (in thousands) | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets at Fair Value | |||||||||||||||||||||||
Cash and Cash Equivalents (1) | $ | $ | $ | $ | |||||||||||||||||||
Short-term Marketable Securities (2) | |||||||||||||||||||||||
Other Trading Securities (3) | |||||||||||||||||||||||
Commodity Derivatives (4) | |||||||||||||||||||||||
Interest Rate Derivatives (5) | |||||||||||||||||||||||
| Total Assets at Fair Value | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities at Fair Value | |||||||||||||||||||||||
Deferred Compensation (3) | $ | $ | $ | $ | |||||||||||||||||||
| Total Liabilities at Fair Value | $ | $ | $ | $ | |||||||||||||||||||
| Fair Value Measurements at October 25, 2020 | |||||||||||||||||||||||
| (in thousands) | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| 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. The funds held in the rabbi trust relate to the supplemental executive retirement plans and have been invested primarily 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. Under the deferred compensation plans, participants can defer certain types of compensation and elect to receive a return on the deferred amounts based on the changes in fair value of various investment options. These funds are managed by a third-party insurance policy, the values of which represent their cash surrender value based on the fair value of the underlying investments in the account and include equity securities, money market accounts, bond funds or
17
other portfolios for which there is an active quoted market. Therefore, these policies are classified as Level 2. The Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based on a specified percentage of the I.R.S. applicable federal rates. These balances are also classified as Level 2. The funds held in the rabbi trust are included in Other Assets on the Consolidated Statements of Financial Position. The related deferred compensation liabilities are included in Other Long-term Liabilities on the Consolidated Statements of Financial Position with investment options generally mirroring those funds held by the rabbi trust. Therefore, the investments are classified as Level 2. Securities held by the trust are classified as trading securities. Unrealized gains and losses associated with these investments are included in the Company's earnings. During the thirteen and twenty-six weeks ended April 25, 2021, securities held by the trust generated gains of $5.2 million and $17.0 million, respectively, compared to losses of $11.4 million and $6.7 million for the thirteen and twenty-six weeks ended April 26, 2020.
(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 April 25, 2021, the Company has recognized the obligation to return net cash collateral of $16.1 million from various counterparties (including $25.0 million of realized gains offset by cash owed of $41.1 million). As of October 25, 2020, the Company had recognized the right to reclaim net cash collateral of $12.3 million from various counterparties (including cash of $25.5 million less $13.2 million of realized loss).
(5) The fair value of the Company’s outstanding interest rate hedge agreements are based on similar exchange traded derivatives (market approach) and therefore classified as Level 2. The fair value was determined by comparing the locked rates against the benchmarked treasury rate.
The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value. The Company does not carry its long-term debt at fair value in its Consolidated Statements of Financial Position. The fair value of long-term debt, utilizing discounted cash flows (Level 2), was $977.8 million as of April 25, 2021, and $1,238.8 million as of October 25, 2020.
NOTE J - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term Debt consists of:
| (in thousands) | April 25, 2021 | October 25, 2020 | ||||||||||||
Senior Unsecured Notes, with Interest at Semi-annually through June 2030 Maturity Date | $ | $ | ||||||||||||
Senior Unsecured Notes, with Interest at Semi-annually through April 2021 Maturity Date | ||||||||||||||
| Unamortized Discount on Senior Notes | ( | ( | ||||||||||||
| Unamortized Debt Issuance Costs | ( | ( | ||||||||||||
| Finance Lease Liabilities | ||||||||||||||
| Other Financing Arrangements | ||||||||||||||
| Total | ||||||||||||||
| Less: Current Maturities of Long-term Debt | ||||||||||||||
| Long-term Debt - Less Current Maturities | $ | $ | ||||||||||||
The Company repaid its $250.0 million senior unsecured notes upon maturity in April 2021.
On June 11, 2020, the Company issued senior notes in an aggregate principal amount of $1.0 billion, due June 11, 2030. The notes bear interest at a fixed rate of 1.800 % per annum, with interest paid semi-annually in arrears on June 11 and December 11 of each year, commencing December 11, 2020. The notes may be redeemed in whole or in part at any time at the applicable redemption price set forth in the prospectus supplement. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to 101 % of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
18
As of April 25, 2021, the Company had a $400.0 million unsecured revolving line of credit, which was scheduled to mature in June 2021. As of April 25, 2021, and October 25, 2020, the Company had no
The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of April 25, 2021, the Company was in compliance with all of these covenants.
Activities Subsequent to the End of the Quarter: The Company entered several financing arrangements subsequent to the end of the second quarter. Proceeds are intended to be used to fund a portion of the pending acquisition of the Planters® snack nuts business and for general corporate purposes.
On May 6, 2021, the Company entered into an unsecured revolving credit agreement with Wells Fargo Bank, National Association as Administrative Agent, Swingline Lender and Issuing Lender, U.S. Bank National Association, JPMorgan Chase Bank, N.A. and BofA Securities, Inc. as Syndication Agents and the lenders party thereto. In connection with entering the revolving credit agreement, the Company terminated its existing credit facility that was entered into on June 24, 2015. The revolving credit agreement provides for an unsecured revolving credit facility with an aggregate principal commitment amount at any time outstanding of up to $750.0 million with an uncommitted increase option of an additional $375.0 million upon the satisfaction of certain conditions. Extensions of credit under the facility may be made in the form of revolving loans, swingline loans and letters of credit. The lending commitments under the agreement are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding.
On May 6, 2021, the Company also entered into an unsecured term loan agreement with Wells Fargo Bank, National Association as administrative agent and lender. This agreement provides for an unsecured term loan facility with a single term loan in a principal amount not to exceed $300.0 million. The lending commitments under the term loan agreement are scheduled to expire on May 5, 2022, at which time the Company will be required to pay in full all obligations then outstanding.
On May 25, 2021, the Company entered into an underwriting agreement with several investment banks providing for the issuance and sale of securities as outlined below. The issuance and sale of the notes is scheduled to be completed on June 3, 2021, subject to customary closing conditions.
| Senior Unsecured Notes | |||||||||||||||||
| (in millions) | Aggregate Principal | Interest Rate | Interest Payments | ||||||||||||||
| Scheduled Maturity | |||||||||||||||||
2024 (1) | $ | % | Semi-annual | ||||||||||||||
2028 (2) (3) | % | Semi-annual | |||||||||||||||
2051 (2) (3) | % | Semi-annual | |||||||||||||||
| Total Issuance | $ | ||||||||||||||||
(1) Notes include the option to redeem in whole or in part one year after their issuance.
(2) Notes include the option to redeem in whole at any time or in part from time to time.
(3) Interest rate risk was hedged utilizing interest rate locks. The Company lifted the corresponding hedges in conjunction with the issuance of the notes. See Note F - Derivatives and Hedging for additional details.
NOTE K - 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.
The Company's effective tax rate for the thirteen and twenty-six weeks ended April 25, 2021, was 22.1 percent and 21.0 percent compared to 20.6 percent and 18.4 percent for the corresponding periods a year ago.
The amount of unrecognized tax benefits, including interest and penalties, is recorded in Other Long-term Liabilities. If recognized as of April 25, 2021, and April 26, 2020, $28.1 million and $24.0 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 the thirteen and twenty-six weeks ended April 25, 2021, and April 26, 2020. The amount of accrued interest and penalties at April 25, 2021, and April 26, 2020, associated with unrecognized tax benefits was $7.0 million and $6.1 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 2018 in the fourth quarter of fiscal 2020, and fiscal 2019 in the second quarter of fiscal 2021. The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years through 2022. The objective of CAP is to contemporaneously work with the I.R.S. to achieve federal tax compliance and resolve all or most of the
19
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 2015. While it is reasonably possible that one or more of these audits may be completed within the next 12 months and the related unrecognized tax benefits may change, based on the status of the examinations it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.
NOTE L - 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 | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | |||||||||||||||||||||||||||||||
| Basic Weighted-Average Shares Outstanding | |||||||||||||||||||||||||||||||||||
| Dilutive Potential Common Shares | |||||||||||||||||||||||||||||||||||
| Diluted Weighted-Average Shares Outstanding | |||||||||||||||||||||||||||||||||||
| Antidilutive Potential Common Shares | |||||||||||||||||||||||||||||||||||
NOTE M- 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 Foods, LLC joint venture.
The Refrigerated Foods segment consists primarily of the processing, marketing, and sale of branded and unbranded pork, beef, and poultry products for retail, foodservice, deli, 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 commercial customers.
The International & Other segment includes Hormel Foods International which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Company’s international joint ventures and royalty arrangements.
Intersegment sales are recorded at prices that approximate cost and are eliminated in the Consolidated Statements of Operations. The Company does not allocate deferred compensation, investment income, interest expense, 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.
20
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | |||||||||||||||||||||||||||||||
| 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 are:
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | |||||||||||||||||||||||||||||||
| U.S. Retail | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| U.S. Foodservice | |||||||||||||||||||||||||||||||||||
| U.S. Deli | |||||||||||||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
The improvement demonstrated in U.S. Foodservice in the thirteen weeks ended April 25, 2021, was driven by recovery of the foodservice industry following restrictions imposed by the COVID-19 pandemic in fiscal 2020.
21
The Company’s products primarily consist of meat and other food products. The amount of total revenues contributed by classes of similar products are:
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | |||||||||||||||||||||||||||||||
| Perishable | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Shelf-stable | |||||||||||||||||||||||||||||||||||
| Poultry | |||||||||||||||||||||||||||||||||||
| Miscellaneous | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Perishable includes fresh meats, frozen items, refrigerated meal solutions, sausages, hams, guacamole, and bacon (excluding Jennie-O Turkey Store products). Shelf-stable includes canned luncheon meats, nut butters, chilies, shelf-stable microwaveable meals, hash, stews, salsas, tortilla chips, and other items that do not require refrigeration. The Poultry category is composed primarily of Jennie-O Turkey Store products. The Miscellaneous category primarily consists of nutritional food products and supplements, dessert and drink mixes, and industrial gelatin products.
NOTE N - SUBSEQUENT EVENTS
The Company initiated several financing transactions subsequent to the end of the second quarter primarily in preparation for the pending acquisiton of the Planters® snack nuts business. See Note J - Long-term Debt and Other Borrowing Arrangements for additional details.
To mitigate the impact of extreme market volatility on feed costs, the Company hedged a significant portion of its grain exposure subsequent to the end of the second quarter. See Note F - Derivatives and Hedging for additional details.
22
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 M - 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 $0.42 for the second quarter of fiscal 2021, flat compared to last year. Significant factors impacting the quarter were:
•The Company delivered record sales for the second quarter. Foodservice sales exceeded pre-pandemic levels after steep declines last year caused by the effects of the pandemic. Along with the strong foodservice sales and improved supply chain performance, demand remained elevated in the retail, deli and international channels during the quarter.
•Segment profit for the quarter was flat, as increases in Refrigerated Foods and International & Other profits mostly offset lower earnings in Grocery Products and Jennie-O Turkey Store.
•Earnings before income taxes for the quarter increased 2 percent compared to the prior year.
•Refrigerated Foods segment profit improved, driven by foodservice growth, increased retail fresh pork profits and lower operational costs.
•International & Other segment profit increased due to growth in China and the Philippines, and higher fresh pork export margins.
•Grocery Products segment profit declined due to lower sales. For reference, the segment delivered exceptional growth in the second quarter of fiscal 2020 due to consumer stock-up during the onset of the pandemic.
•Jennie-O Turkey Store segment profit decreased due to the impact of a dramatic increase in feed costs during the quarter.
•Year-to-date cash flow from operations was $361 million, down 34 percent compared to last year. The primary driver of the decrease was due to the intentional increase in inventory to meet elevated demand.
•In February 2021, the Company entered into a definitive agreement to acquire the Planters® snack nuts business for $3.35 billion in cash in a transaction that is expected to provide a tax benefit valued at approximately $560 million, equating to an effective purchase price of $2.79 billion. The proposed transaction is expected to close in June 2021. The acquisition includes the Planters®, NUT-rition®, Planters® Cheez Balls and Corn Nuts® brands.
Response to COVID-19
The Company is committed to making investments necessary to keep its team members safe. In the second quarter of fiscal 2021, the Company absorbed approximately $6 million ($19 million for the first six months of fiscal 2021) in direct incremental supply chain costs primarily related to enhanced safety measures in its production facilities. The Company estimates most of the incremental supply chain costs are temporary and will continue to decline as the pandemic subsides.
Consolidated Results
Volume, Net Sales, Earnings, and Diluted Earnings per Share
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands, except per share amounts) | April 25, 2021 | April 26, 2020 | % Change | April 25, 2021 | April 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 1,192,948 | 1,233,072 | (3.3) | 2,372,654 | 2,420,059 | (2.0) | |||||||||||||||||||||||||||||
| Net Sales | $ | 2,606,621 | $ | 2,422,465 | 7.6 | $ | 5,067,768 | $ | 4,806,899 | 5.4 | |||||||||||||||||||||||||
| Earnings Before Income Taxes | 292,620 | 286,489 | 2.1 | 569,702 | 576,651 | (1.2) | |||||||||||||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | 227,901 | 227,734 | 0.1 | 450,184 | 470,606 | (4.3) | |||||||||||||||||||||||||||||
| Diluted Earnings per Share | 0.42 | 0.42 | — | 0.82 | 0.86 | (4.7) | |||||||||||||||||||||||||||||
Net Sales
The Company delivered record second quarter sales driven by a significant improvement in the foodservice businesses within Refrigerated Foods. Most foodservice categories exhibited growth, led by strong demand for pizza toppings, bacon and authentic Italian meats. Strength from Refrigerated Foods and International & Other more than offset the decline in Grocery Products. For reference, shelter-in-place orders and restaurant closures across the country during the second quarter of fiscal 2020 dramatically shifted consumer shopping patterns away from foodservice toward the retail channel.
23
For the first six months of fiscal 2021, the Company delivered record sales. Net sales growth from the retail, deli and foodservice businesses within Refrigerated Foods and continued strength within International & Other, driven by China, overcame a slight decline in Grocery Products sales.
Cost of Products Sold
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | % Change | April 25, 2021 | April 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Cost of Products Sold | $ | 2,130,314 | $ | 1,945,113 | 9.5 | $ | 4,141,291 | $ | 3,861,127 | 7.3 | |||||||||||||||||||||||||
Cost of products sold for the second quarter and first six months of fiscal 2021 increased due to record net sales and higher raw material input costs. Direct incremental supply chain costs related to the COVID-19 pandemic for the second quarter and first six months of fiscal 2021 were approximately $6 million and $19 million, respectively. This compares to approximately $20 million of higher operational costs related to the COVID-19 pandemic incurred in the second quarter of fiscal 2020.
The Company expects to operate in a high cost environment for the remainder of the year, impacted by higher hog and pork markets, increased feed costs at Jennie-O Turkey Store and inflationary pressures. Incremental COVID-related costs are expected to decrease as the pandemic subsides.
Gross Profit
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | % Change | April 25, 2021 | April 26, 2020 | % Change | ||||||||||||||||||||||||||||||||
| Gross Profit | $ | 476,307 | $ | 477,352 | (0.2) | $ | 926,477 | $ | 945,773 | (2.0) | ||||||||||||||||||||||||||||
| Percentage of Net Sales | 18.3 | % | 19.7 | % | 18.3 | % | 19.7 | % | ||||||||||||||||||||||||||||||
Gross profit as a percentage of sales for the second quarter and first six months of 2021 declined. Record sales were more than offset by higher pork raw material costs and higher feed costs at Jennie-O Turkey Store. Refrigerated Foods margins in the second quarter improved slightly compared to the prior year, while gross profit as a percentage of sales for all four segments declined for the first half of fiscal 2021.
Looking ahead to the third quarter of fiscal 2021, the Company expects to benefit from continued foodservice strength and from the impact of pricing actions across the portfolio. These factors may help offset some of the inflationary pressures to margin, including higher pork raw material input costs and increased feed costs at Jennie-O Turkey Store. Due to extreme market volatility, subsequent to the end of the second quarter, the Company took strategic hedges to cover a significant portion of expected grain purchases for the remainder of the fiscal year.
Selling, General and Administrative (SG&A)
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | % Change | April 25, 2021 | April 26, 2020 | % Change | |||||||||||||||||||||||||||||
| SG&A | $ | 199,966 | $ | 193,912 | 3.1 | $ | 396,346 | $ | 389,433 | 1.8 | |||||||||||||||||||||||||
| Percentage of Net Sales | 7.7 | % | 8.0 | % | 7.8 | % | 8.1 | % | |||||||||||||||||||||||||||
For the second quarter and first six months of fiscal 2021, SG&A expenses increased compared to the prior year due to higher employee-related expenses.
Advertising spend in the second quarter was $31 million, compared to $35 million last year. Advertising investments for the first half of fiscal 2021 were down 7.2 percent compared to last year. The Company plans to continue to invest behind its leading brands.
Equity in Earnings of Affiliates
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | % Change | April 25, 2021 | April 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Equity in Earnings of Affiliates | $ | 13,074 | $ | 10,021 | 30.5 | $ | 27,302 | $ | 17,608 | 55.0 | |||||||||||||||||||||||||
24
Equity in earnings of affiliates for the second quarter and first six months increased significantly due to stronger performances at MegaMex and from the Company's joint venture in the Philippines.
Effective Tax Rate
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||
| April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | ||||||||||||||||||||
| Effective Tax Rate | 22.1 | % | 20.6 | % | 21.0 | % | 18.4 | % | |||||||||||||||
The lower effective tax rate in the prior year was driven by a higher volume of stock option exercises. For further information, refer to Note K - Income Taxes.
Excluding the estimated impact from the pending acquisition of the Planters® snack nuts business, the Company expects the effective tax rate in fiscal 2021 to be between 20.0 and 21.5 percent.
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 | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | % Change | April 25, 2021 | April 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||||||||||||||
Grocery Products | $ | 628,232 | $ | 683,250 | (8.1) | $ | 1,205,831 | $ | 1,223,876 | (1.5) | |||||||||||||||||||||||||
Refrigerated Foods | 1,453,380 | 1,247,336 | 16.5 | 2,820,457 | 2,599,127 | 8.5 | |||||||||||||||||||||||||||||
Jennie-O Turkey Store | 351,179 | 343,056 | 2.4 | 684,500 | 673,183 | 1.7 | |||||||||||||||||||||||||||||
International & Other | 173,830 | 148,823 | 16.8 | 356,980 | 310,714 | 14.9 | |||||||||||||||||||||||||||||
| Total | $ | 2,606,621 | $ | 2,422,465 | 7.6 | $ | 5,067,768 | $ | 4,806,899 | 5.4 | |||||||||||||||||||||||||
| Segment Profit | |||||||||||||||||||||||||||||||||||
Grocery Products | $ | 97,970 | $ | 127,763 | (23.3) | $ | 190,172 | $ | 196,198 | (3.1) | |||||||||||||||||||||||||
Refrigerated Foods | 173,352 | 131,431 | 31.9 | 314,524 | 298,775 | 5.3 | |||||||||||||||||||||||||||||
Jennie-O Turkey Store | 12,700 | 27,348 | (53.6) | 39,640 | 65,899 | (39.8) | |||||||||||||||||||||||||||||
International & Other | 24,481 | 23,164 | 5.7 | 56,685 | 43,115 | 31.5 | |||||||||||||||||||||||||||||
Total Segment Profit | 308,503 | 309,706 | (0.4) | 601,020 | 603,986 | (0.5) | |||||||||||||||||||||||||||||
Net Unallocated Expense | 15,904 | 23,098 | (31.1) | 31,451 | 27,297 | 15.2 | |||||||||||||||||||||||||||||
Noncontrolling Interest | 21 | (119) | 117.4 | 133 | (39) | 444.1 | |||||||||||||||||||||||||||||
Earnings Before Income Taxes | $ | 292,620 | $ | 286,489 | 2.1 | $ | 569,702 | $ | 576,651 | (1.2) | |||||||||||||||||||||||||
Grocery Products
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | % Change | April 25, 2021 | April 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 313,795 | 363,703 | (13.7) | 618,129 | 656,621 | (5.9) | |||||||||||||||||||||||||||||
| Net Sales | $ | 628,232 | $ | 683,250 | (8.1) | $ | 1,205,831 | $ | 1,223,876 | (1.5) | |||||||||||||||||||||||||
| Segment Profit | 97,970 | 127,763 | (23.3) | 190,172 | 196,198 | (3.1) | |||||||||||||||||||||||||||||
Volume and sales for the second quarter and first half of fiscal 2021 declined due to the extremely high levels of demand last year, especially in the second quarter of fiscal 2020. Demand for branded retail products remained elevated compared to pre-pandemic levels, led by growth in the second quarter from Wholly® guacamole and Herdez® salsas and sauces.
25
For the second quarter and first six months of fiscal 2021, segment profit declined due to lower sales. For reference, the segment delivered exceptional growth in the second quarter of fiscal 2020 due to consumer stock-up during the onset of the pandemic.
Grocery Products expects strong demand for its branded retail items to continue in the third quarter. Inventory levels across the portfolio are expected to improve sequentially. Profits may be impacted by higher pork trim prices.
Refrigerated Foods
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
(in thousands) | April 25, 2021 | April 26, 2020 | % Change | April 25, 2021 | April 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 593,271 | 576,543 | 2.9 | 1,188,586 | 1,182,152 | 0.5 | |||||||||||||||||||||||||||||
| Net Sales | $ | 1,453,380 | $ | 1,247,336 | 16.5 | $ | 2,820,457 | $ | 2,599,127 | 8.5 | |||||||||||||||||||||||||
| Segment Profit | 173,352 | 131,431 | 31.9 | 314,524 | 298,775 | 5.3 | |||||||||||||||||||||||||||||
Strong sales growth in the second quarter of fiscal 2021 was led by a significant recovery in foodservice, growth from retail and deli brands, and higher commodity sales. Nearly every foodservice category experienced growth, led by pizza toppings and brands such as Fontanini® and Hormel® Bacon 1™. Retail and deli growth was driven by numerous brands, including Hormel® Black Label®, Hormel® Gatherings®, Sadlers® and Applegate®. For the first six months of fiscal 2021, net sales increases were driven by a recovery in foodservice and higher sales of value-added retail and deli products.
For the second quarter, Refrigerated Foods segment profit improved driven by foodservice growth, increased retail fresh pork profits and lower operational costs. Segment profit increased for the first half of fiscal 2021 due to higher value-added profits.
Refrigerated Foods is expecting improved results in the third quarter due to higher foodservice demand as the industry continues to recover.
Jennie-O Turkey Store
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | % Change | April 25, 2021 | April 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 202,624 | 209,477 | (3.3) | 396,193 | 406,676 | (2.6) | |||||||||||||||||||||||||||||
| Net Sales | $ | 351,179 | $ | 343,056 | 2.4 | $ | 684,500 | $ | 673,183 | 1.7 | |||||||||||||||||||||||||
| Segment Profit | 12,700 | 27,348 | (53.6) | 39,640 | 65,899 | (39.8) | |||||||||||||||||||||||||||||
Sales increased for the second quarter due to a recovery in foodservice and higher whole bird shipments. Retail sales declined but remain elevated compared to pre-pandemic levels. For the first six months of 2021, sales increased due to higher retail and whole bird sales.
Segment profit for the second quarter decreased due to the impact of a dramatic increase in feed costs during the quarter. The decline in segment profit for the first half of fiscal 2021 was due primarily to higher feeds costs and a decline in foodservice sales.
In the third quarter, Jennie-O Turkey Store expects the impact from dramatically higher grain costs to be partially offset by pricing actions across the portfolio.
International & Other
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | % Change | April 25, 2021 | April 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 83,257 | 83,350 | (0.1) | 169,746 | 174,610 | (2.8) | |||||||||||||||||||||||||||||
| Net Sales | $ | 173,830 | $ | 148,823 | 16.8 | $ | 356,980 | $ | 310,714 | 14.9 | |||||||||||||||||||||||||
| Segment Profit | 24,481 | 23,164 | 5.7 | 56,685 | 43,115 | 31.5 | |||||||||||||||||||||||||||||
For the second quarter and first six months of fiscal 2021, sales increased, driven by continued strong results in China and higher sales of branded exports.
The increase in segment profit for the quarter was due to growth in China and the Philippines, and higher fresh pork export margins. The significant increase in segment profit for the first half was due to improved results for branded exports, strong results in China and higher income from the Company's partners in the Philippines, South Korea and Europe.
26
International & Other expects improved results in the third quarter from branded and fresh pork exports. International shipping interruptions pose a risk to export sales and profit growth.
Unallocated Income and Expenses
The Company does not allocate deferred compensation, investment income, interest expense or interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at the corporate level. Equity in earnings of affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included in the segment table for the purpose of reconciling segment results to earnings before income taxes.
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||||||||
| (in thousands) | April 25, 2021 | April 26, 2020 | April 25, 2021 | April 26, 2020 | |||||||||||||||||||
| Net Unallocated Expense | $ | 15,904 | $ | 23,098 | $ | 31,451 | $ | 27,297 | |||||||||||||||
| Noncontrolling Interest | 21 | (119) | 133 | (39) | |||||||||||||||||||
For the second quarter, net unallocated expense decreased as higher investment income partially offset the additional interest expense from the bond issuance in the prior year. For the first six months of fiscal 2021, net unallocated expense increased as higher investment income was more than offset by higher interest expense and expenses related to tax settlements and deal fees.
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 25, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents were $1,485 million at the end of the first twenty-six weeks of fiscal 2021 compared to $606 million at the end of the comparable fiscal 2020 period. The primary driver of the increased cash is the issuance of $1 billion in debt in the third quarter of fiscal 2020.
Cash provided by operating activities was $361 million in the first twenty-six weeks of fiscal 2021 compared to $548 million in the same period of fiscal 2020. The decline was primarily due to the strategic increase in inventory. Cash flows from operating activities continue to provide a consistent source of liquidity. The Company believes its balanced business model and strong balance sheet make it well-positioned to continue to weather the effects of the COVID-19 pandemic.
Cash used in investing activities was $87 million in the first twenty-six weeks of fiscal 2021 compared to $423 million in the same period of fiscal 2020. In the second quarter of 2020, the Company acquired Sadler's Smokehouse for $269 million. Capital expenditures in the first twenty-six weeks of fiscal 2021 were $86 million compared to $139 million in the same period of fiscal 2020. The Company estimates its fiscal 2021 capital expenditures to be approximately $260 million. Key projects for the full year include expansion of the Company’s dry sausage operations in Papillion, Nebraska; Project Orion; and other projects to support growth of branded products.
Cash used in financing activities was $508 million in the first twenty-six weeks of fiscal 2021 compared to $189 million in the same period of fiscal 2020. The Company repaid $250 million of its senior unsecured notes upon maturity in April 2021. The Company also used $10 million for common stock repurchases in the first twenty-six weeks of fiscal 2021 compared to $12 million repurchased during the same period of the prior year. 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 twenty-six weeks of fiscal 2021 were $258 million compared to $237 million in the comparable period of fiscal 2020. For fiscal 2021, the annual dividend rate was increased to $0.98 per share, representing the 55th consecutive annual dividend increase. The Company has paid dividends for 371 consecutive quarters.
The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of April 25, 2021, the Company was in compliance with all of these debt covenants.
Subsequent to the end of the quarter, the Company entered into an underwriting agreement with several investment banks providing for the issuance and sale of senior unsecured notes. The proceeds of these notes, along with short-term debt and cash on hand, will be used to fund the acquisition of the Planters® snack nuts business and for general corporate purposes. Details regarding these financing activities can be found in Note J - Long-term Debt and Other Borrowing Arrangements. The Company expects the pending Planters® acquisition will responsibly leverage its balance sheet without compromising its disciplined capital allocation policy. The Company remains confident in its ability to meet its current and future cash flow needs and is dedicated to
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returning cash to shareholders through dividend payments. Other top priorities include reinvestments to ensure employee and food safety, capital expenditures to enhance and expand operations, and growing the business through innovation. The Company continues to evaluate opportunities for strategic acquisitions.
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 April 25, 2021, was $28 million.
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 25, 2020.
Off-Balance Sheet Arrangements
As of April 25, 2021, and October 25, 2020, the Company had $47 million and $47 million, respectively, of standby letters of credit issued on its behalf. The standby letters of credit are related primarily to the Company’s self-insured workers compensation programs. This amount includes $3 million as of April 25, 2021, and October 25, 2020 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. See Note A - Summary of Significant Accounting Policies for a discussion of significant accounting policies.
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 25, 2020. 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 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.
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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.
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 twenty-six weeks of fiscal years 2021 and 2020. 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 April 25, 2021 was $12.2 million compared to $3.1 million as of October 25, 2020. The Company measures its market risk exposure on its lean hog futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for lean hogs. A 10 percent decrease in the market price for lean hogs would have negatively impacted the fair value of the Company's April 25, 2021, open lean hog contracts by $7.7 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 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 April 25, 2021, was $27.3 million compared to $(0.1) million as of October 25, 2020. The Company measures its market risk exposure on its grain futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for grain. A 10 percent decrease in the market price for grain would have negatively impacted the fair value of the Company’s April 25, 2021, open grain contracts by $10.9 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.
Interest Rates: The Company is exposed to interest rate risk with regards to the expected issuance of long-term debt to acquire the Planters® snack nuts portfolio from the Kraft Heinz Company. To mitigate this risk, in the second quarter of fiscal 2021, the Company entered interest rate locks, which are accounted for under cash flow hedge accounting. The fair value of the Company's interest rate risk hedges was $18.5 million as of April 25, 2021. The Company measures its market risk exposure on interest rate contracts using sensitivity analysis, which considers a hypothetical change of 25 basis points in the underlying benchmark rate. A decrease of 25 basis points in the rate would have negatively impacted the fair value of the Company's interest rate contracts by $39.7 million, while an increase of 25 basis points would have a positive impact of $36.1 million.
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 April 25, 2021, the balance of these securities totaled $197.9 million compared to $173.1 million as of October 25, 2020. The rabbi trust is invested primarily in fixed income funds. The Company is subject to market risk due to fluctuations in the value of the remaining investments as unrealized gains and losses associated with these securities are included in the Company’s net earnings on a mark-to-market basis. A 10 percent decline in the value of the investments not held in fixed income funds would have a negative impact to the Company’s
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pretax earnings of approximately $9.8 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 April 25, 2021 was $601.4 million, compared to $541.2 million as of October 25, 2020, with most of the exposure existing in Chinese yuan and Brazilian real. Changes in currency exchange rates impact the fair values of the Company assets either currently through the Consolidated Statements of Operations 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 April 25, 2021. A 10 percent strengthening in the value of the Chinese yuan relative to the U.S. dollar would result in other comprehensive income of approximately $39.7 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 $32.5 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 $11.1 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 $9.1 million pretax.
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 the Securities and Exchange 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. Components supporting human resources, payroll, and finance were implemented in fiscal 2020. There have been no material implementations in fiscal 2021. Additional phases will continue over the next several years. Emphasis has been on the maintenance of internal controls and assessment of the design and operating effectiveness of key control activities throughout development and deployment of each phase.
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the second quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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, contracts, antitrust regulations, intellectual property, competition laws, employment practices, or other actions brought by employees, customers, consumers, competitors or suppliers. The Company establishes accruals for its potential exposure, as appropriate, for claims against the Company when losses become probable and reasonably estimable. However, future developments or settlements are uncertain and may require the Company to change such accruals as proceedings progress. 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.
The Company is a defendant in three sets of antitrust lawsuits broadly targeting the pork and turkey industries. None of these cases involve allegations of bid rigging or other criminal conduct. The Company has not established reserves as it does not believe it will have liability in any of these cases.
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Item 1A. RISK FACTORS
BUSINESS AND OPERATIONAL RISKS
Deterioration of economic conditions could harm the Company’s business. The Company's business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, tax rates, availability of capital, energy availability and costs (including fuel surcharges), political developments, civil unrest, and the effects of governmental initiatives to manage economic conditions. Decreases in consumer spending rates and shifts in consumer product preferences could also negatively impact the Company.
Volatility in financial markets and the deterioration of national and global economic conditions could impact the Company’s operations as follows:
▪The financial stability of our customers and suppliers may be compromised, which could result in additional bad debts for the Company or non-performance by suppliers.
▪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 depends on stable, liquid and well-functioning capital and credit markets to fund operations. There can be no assurance that future volatility or disruption in the capital and credit markets will not impair the Company's liquidity or increase costs of borrowing.
▪The Company may be required to redirect cash flow from operations or explore alternative strategies, such as disposing of assets, to the payment of principal and interest on its indebtedness.
The Company may utilize hedging programs to manage its exposure to various market risks, such as commodity prices and interest rates, which qualify for hedge accounting for financial reporting purposes. Volatile fluctuations in market conditions could cause these instruments to become ineffective, which could require any gains or losses associated with these instruments to be reported in the Company’s earnings each period. These instruments may limit the Company’s ability to benefit from market gains if commodity prices or interest rates become more favorable than those secured under the Company’s hedging programs.
The Company's goodwill and indefinite lived intangible assets are initially recorded at fair value and are not amortized, but are reviewed for impairment annually or more frequently if impairment indicators arise. Impairment testing requires judgement around estimates and assumptions and is impacted by factors such as revenue growth rates, operating margins, tax rates, royalty rates, and discount rates. An unfavorable change in these factors may lead to the impairment of goodwill and/or intangible assets.
Additionally, if a highly pathogenic human disease outbreak developed in the United States, it may negatively impact the national economy, demand for Company products, and/or the Company’s workforce availability, and the Company’s financial results could suffer. The Company has developed contingency plans to address infectious disease scenarios and the potential impact on its operations, and will continue to update these plans as necessary. There can be no assurance given, however, these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
The uncertain and rapidly changing COVID-19 pandemic could adversely affect the Company’s business, financial condition and results of operations. The ongoing COVID-19 global pandemic has had, and will likely continue to have, negative impacts across many of the Company's business units and facilities. The Company's operations and business have been impacted directly and indirectly by various government actions taken to stop or slow the spread of COVID-19, including travel restrictions, border shutdowns, stay-at-home and shelter-in-place orders, shutdowns of non-essential businesses, and emergency declarations.
The near- and long-term impacts of COVID-19 are unknown and impossible to predict with any level of certainty. The following risk factors arising from COVID-19 pandemic have had and/or may continue to have one or more of the following impacts on the Company's operations:
•One or more of the Company's manufacturing facilities may be shut down or have their operations significantly impacted due to employee illnesses, increased absenteeism, and/or actions by government agencies. Capital projects may be delayed as additional capacity is no longer currently needed. The Company's co-manufacturers and material suppliers may face similar impacts.
•Regulatory restrictions and measures taken at the Company's facilities to prevent or slow down the spread of COVID-19 may impact facilities’ efficiency.
•Operating costs may increase as measures are put in place to prevent or slow down the spread of COVID-19, such as facility improvements, employee testing, short-term disability policies, and manufacturing employee bonus payments.
•Any new or additional measures required by national, state or local governments to combat COVID-19 may similarly add additional operational costs.
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•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 also may 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 extent of the impact on the Company’s business, financial condition, and results of operations is dependent on the length and severity of the pandemic. Vaccines to prevent COVID-19 were approved by health agencies in the U.S. and other countries in which the Company operates, which began to be administered near the end of calendar year 2020. New strains of the virus appear to have increased transmissibility, which could complicate treatment and vaccination programs. The COVID-19 pandemic is an unprecedented situation and the Company's understanding of and response to its impacts is changing and evolving. The additional risk factors identified here are based upon information known at this time. The COVID-19 pandemic may adversely impact the Company's operations in one or more ways not identified to date.
The Company’s operations are subject to the general risks associated with acquisitions and divestitures. The Company has made several acquisitions and divestitures in recent years that align with the Company’s strategic initiative of delivering long-term value to shareholders. The Company regularly reviews strategic opportunities to grow through acquisitions and to divest non-strategic assets. Potential risks associated with these transactions include the inability to consummate a transaction timely or on favorable terms, diversion of management's attention from other business concerns, potential loss of key employees and customers of current or acquired companies, inability to integrate or divest operations successfully, possible assumption of unknown liabilities, potential disputes with buyers or sellers, inability to obtain favorable financing terms, potential impairment charges if purchase assumptions are not achieved, and the inherent risks in entering markets or lines of business in which the Company has limited or no prior experience. Any or all of these risks could impact the Company’s financial results and business reputation. In addition, acquisitions outside the United States may present unique challenges and increase the Company's exposure to the risks associated with foreign operations. The Company's level of indebtedness may increase significantly to fund future acquisitions, such as the definitive agreement to acquire the Planters® snack nuts business. Additional levels of debt may among other things, impact the Company's liquidity and increase the Company's exposure to negative fluctuations in interest rates.
The Company is subject to disruption of operations at co-manufacturers, suppliers, customers, or other third-party service providers. Disruption of operations at co‑manufacturers 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.
Disruptions related to significant customers or sales channels could result in a reduction in sales or change in the mix of products sold, which could adversely affect the Company's results of operations.
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The Company regularly engages third-party service providers to support various business functions such as benefit plan administration, payroll processing, information technology, and cloud computing services. A disruption in services from these partners could have an adverse effect on the Company's business.
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. The Company currently sources approximately 30% of its pork raw materials from Wholestone Farms, LLC (Wholestone) under a supply agreement expiring in December 2021. The Company is in negotiations with Wholestone as well as evaluating alternative procurement options.
The Company may be adversely impacted if the Company is unable to protect information technology systems against, or effectively respond to, cyber-attacks or security breaches. Information technology systems are an important part of the Company’s business operations. In addition, the Company increasingly relies upon third-party service providers for a variety of business functions, including cloud-based services. 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, labor availability or increases in labor costs could harm the Company’s Business. As of April 25, 2021, the Company had approximately 19,800 employees worldwide, of which approximately 3,600 of the Company's employees were represented by labor unions, principally the United Food and Commercial Workers Union. A significant increase in labor costs or a deterioration of labor relations at any of the Company’s facilities or co-manufacturing facilities resulting in work slowdowns or stoppages could harm the Company’s financial results. Labor availability challenges could have an adverse effect on the Company's business.
INDUSTRY RISKS
The Company’s operations are subject to the general risks of the food industry. The food products manufacturing industry is subject to the risks posed by:
▪food spoilage;
▪food contamination caused by disease-producing organisms or pathogens, such as Listeria monocytogenes, Salmonella, and pathogenic E coli.;
▪food allergens;
▪nutritional and health-related concerns;
▪federal, state, and local food processing controls;
▪consumer product liability claims;
▪product tampering; and
▪the possible unavailability and/or expense of liability insurance.
The pathogens that may cause food contamination are found generally in livestock and in the environment and thus may be present in our products. These pathogens can also be introduced to our products as a result of improper handling by customers or consumers. We do not have control over handling procedures once our products have been shipped for distribution. If one or more of these risks were to materialize, the Company’s brand and business reputation could be negatively impacted. In addition, revenues could decrease, costs of doing business could increase, and the Company’s operating results could be adversely affected.
Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins.
The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including African swine fever (ASF), Bovine Spongiform Encephalopathy (BSE), pneumo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease (FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI). The outbreak of such diseases could adversely affect the Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins. Additionally, the outbreak of disease may hinder the Company’s ability to market and sell products both domestically and internationally.
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In recent years, the outbreak of ASF has impacted hog herds in China, 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, tree nuts and energy 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 tree nuts 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 priced 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 fluctuates 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 and disruptions could result in decreased 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 producers of alternative meats and protein sources, including pork, beef, turkey, chicken, fish, 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.
LEGAL AND REGULATORY RISKS
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 others, and claims relating to product liability, contract disputes, antitrust regulations, intellectual property, advertising, labeling, wage and hour laws, employment practices or environmental matters. Neither litigation trends nor the outcomes of litigation can be predicted with certainty and adverse litigation trends and outcomes could negatively 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 which oversee workforce immigration, taxation, animal welfare, food safety, and the processing, packaging, storage, distribution, advertising, and labeling of the Company’s products. The Company’s manufacturing facilities and products are subject to ongoing 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
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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. There is current uncertainty around a recent federal district court ruling which could reduce harvest capacity or increase labor costs.
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 stricter interpretation of existing laws or regulations could adversely affect the Company’s financial results.
The Company’s foreign operations pose additional risks to the Company’s business. The Company operates its business and markets its products internationally. The Company’s foreign operations are subject to the risks described above, as well as risks related to fluctuations in currency values, foreign currency exchange controls, compliance with foreign laws, compliance with applicable U.S. laws, including the Foreign Corrupt Practices Act, and other economic or political uncertainties. International sales are subject to risks related to general economic conditions, imposition of tariffs, quotas, trade barriers and other restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws, and other economic and political uncertainties. All of these risks could result in increased costs or decreased revenues, which could adversely affect the Company’s financial results.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| Issuer Purchases of Equity Securities | |||||||||||||||||||||||
Thirteen Weeks Ended April 25, 2021 | |||||||||||||||||||||||
| Period | Total Number of Shares Purchased1 | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs1 | |||||||||||||||||||
| January 25, 2021- February 28, 2021 | 18,001 | $ | 45.33 | 18,001 | 4,239,594 | ||||||||||||||||||
| March 1, 2021 - March 28, 2021 | — | — | — | 4,239,594 | |||||||||||||||||||
| March 29, 2021 - April 25, 2021 | — | — | — | 4,239,594 | |||||||||||||||||||
| Total | 18,001 | $ | 45.33 | 18,001 | |||||||||||||||||||
1On 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
Underwriting Agreement dated May 25, 2021, among the Company and BofA Securities, Inc., J.P. Morgan Securities LLC, U.S. Bancorp Investments, Inc. and Wells Fargo Securities, LLC, as representatives of the several underwriters listed in Schedule 1 thereto. (Incorporated by reference to Exhibit 1.1 to the Company's Current Report on Form 8-K filed on May 26, 2021, File No. 001- 02402.) | |||||
| 101 | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended April 25, 2021, formatted in Inline XBRL: (i) Consolidated Statements of Financial Position, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders' Investment, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | ||||
| 104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended April 25, 2021, 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: June 1, 2021 | By | /s/ JAMES N. SHEEHAN | ||||||
| JAMES N. SHEEHAN | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| Date: June 1, 2021 | By | /s/ JANA L. HAYNES | ||||||
| JANA L. HAYNES | ||||||||
| Vice President and Controller | ||||||||
| (Principal Accounting Officer) | ||||||||
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