Hormel Foods Corp 10-Q for FY2021 Q3
Hormel Foods Corp (HRL)
10-Q
2021-09-03
For: 2021-07-25
View Original
Added on
April 04, 2026
About this 10-Q
Hormel Foods Corp filed this 10-Q on September 3, 2021, covering the quarter ended July 25, 2021 (FY2021 Q3).
Headline figures
Quarter ended July 25, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.86B
- up 20.2% from $2.38B a year earlier
- Net income
- $176.92M
- down 12.9% from net income of $203.12M a year earlier
- Diluted EPS
- $0.32
- down 13.5% from $0.37 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 July 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 August 29, 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
| July 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
| July 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 July 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 | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| July 25, 2021 | July 26, 2020 | July 25, 2021 | July 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 | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| July 25, 2021 | July 26, 2020 | July 25, 2021 | July 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 July 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 April 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 July 26, 2020 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Thirteen Weeks Ended July 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 April 25, 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 July 25, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
7
| Thirty-Nine Weeks Ended July 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 July 26, 2020 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Thirty-Nine Weeks Ended July 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 July 25, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
8
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Unaudited
| Thirty-Nine Weeks Ended | |||||||||||
| July 25, 2021 | July 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 | |||||||||||
| Proceeds from Long-term Debt | |||||||||||
| Repayments of Long-term Debt and Finance Leases | ( | ( | |||||||||
| Dividends Paid on Common Stock | ( | ( | |||||||||
| Share Repurchase | ( | ( | |||||||||
| Proceeds from Exercise of Stock Options | |||||||||||
| Proceeds from Noncontrolling Interest | |||||||||||
| Net Cash Provided by (Used in) Financing Activities | |||||||||||
| Effect of Exchange Rate Changes on Cash | |||||||||||
| Increase (Decrease) in Cash and Cash Equivalents | ( | ||||||||||
| Cash and Cash Equivalents at Beginning of Year | |||||||||||
| Cash and Cash Equivalents at End of Quarter | $ | $ | |||||||||
See Notes to Consolidated Financial Statements
9
HORMEL FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Rounding: Certain amounts in the Consolidated Financial Statements and associated notes may not foot due to rounding. All percentages have been calculated using unrounded amounts.
Accounting Changes and Recent Accounting Pronouncements:
New Accounting Pronouncements Adopted in Current Fiscal Year
In 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 the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Amendments in this guidance also require disclosure of transfers into and out of Level 3 of the fair value hierarchy, purchases and issues of Level 3 assets and liabilities, and clarify that the measurement uncertainty disclosure is 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.
10
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 amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company will adopt the provisions of this new accounting standard at the beginning of fiscal 2022 and does not expect adoption to have a material impact on its consolidated financial statements.
NOTE B - ACQUISITIONS AND DIVESTITURES
Acquisitions: On June 7, 2021, the Company acquired the Planters® snack nuts business from The Kraft Heinz Company. The acquisition includes the Planters®, NUT-rition®, Planters® Cheez Balls and Corn Nuts® brands. The preliminary purchase price is $3.4 billion, pending final purchase accounting and working capital adjustments. The transaction was funded with the Company’s cash on hand and from the issuance of long-term debt. See Note J - Long-term Debt and Other Borrowing Arrangements for additional details.
Planters® is an iconic snack brand and this acquisition significantly expands the Company's presence, and should broaden the scope for future acquisitions, in the growing snacking space. Operating results for this acquisition have been included in the Company's Consolidated Statements of Operations from the date of acquisition and reflected primarily in the Grocery Products segment. The acquisition contributed $141.3 million of net sales since the date of acquisition. As the acquisition has been integrated within the Company's existing operations, post-acquisition net income is not discernible. Acquisition-related costs were $27.5 million and $30.3 million for the thirteen and thirty-nine weeks ended July 25, 2021, respectively, which are reflected in the Consolidated Statements of Operations as Selling, General and Administrative. Additional one-time adjustments related the preliminary revaluation of acquired inventory of $12.9 40.4 million and $43.2 million for the thirteen and thirty-nine weeks ended July 25, 2021.
The acquisition was accounted for as a business combination using the acquisition method. The Company has estimated the acquisition date fair values of the assets acquired using independent appraisals. Preliminary allocations of the purchase price to acquired assets, including goodwill and intangibles assets, is presented in the table below. The Company expects to finalize purchase allocations as soon as practicable, but no later than one year from the acquisition date.
| (in thousands) | Preliminary Purchase Allocation | ||||
| Inventory | $ | ||||
| Property, Plant and Equipment | |||||
| Goodwill | |||||
| Other Intangibles | |||||
| Purchase Price | $ | ||||
Goodwill is calculated as the excess of the purchase price over the fair values of the net assets acquired and is expected to be deductible for tax purposes. The goodwill recorded as part of the acquisition primarily reflects the value of the potential to expand the Company's presence in the growing snacking space and serve as a platform for innovation.
The following unaudited pro forma financial information presents the combined results of operations as if the acquisition of the Planters® snack nuts business had occurred on October 27, 2019. These unaudited pro forma results do not necessarily reflect the actual results of operations that would have been achieved had the acquisition occurred on that date, nor are they necessarily indicative of future results of operations.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 26, 2020 | |||||||||||||||||||
| Pro Forma Net Sales | $ | $ | $ | $ | |||||||||||||||||||
| Pro Forma Net Earnings Attributable to Hormel Foods Corporation | |||||||||||||||||||||||
11
The pro forma results include charges for depreciation and amortization of acquired assets and interest expense on debt issued to finance the acquisition, as well as the related income taxes. The pro forma results for the thirty-nine weeks ended July 26, 2020 also include nonrecurring adjustments relating to the recognition of transaction costs incurred and revaluation of inventory acquired, along with the related income tax effects, which in the aggregate reduce pro forma net earnings by $41.1 million. The pro forma results for the thirteen and thirty-nine weeks ended July 25, 2021 include an adjustment to add back the transaction costs incurred and revaluation of inventory acquired in those periods, along with the related income tax effects, since those costs are reflected in the preceding fiscal year on a pro forma basis.
On March 2, 2020, the Company acquired the assets 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 thirty-nine weeks ended July 25, 2021, are:
| (in thousands) | Grocery Products | Refrigerated Foods | Jennie-O Turkey Store | International & Other | Total | ||||||||||||||||||||||||
Balance at April 25, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Goodwill Acquired(1) | |||||||||||||||||||||||||||||
| Foreign Currency Translation | |||||||||||||||||||||||||||||
Balance at July 25, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| (in thousands) | Grocery Products | Refrigerated Foods | Jennie-O Turkey Store | International & Other | Total | ||||||||||||||||||||||||
Balance at October 25, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Goodwill Acquired(1) | |||||||||||||||||||||||||||||
| Foreign Currency Translation | |||||||||||||||||||||||||||||
Balance at July 25, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Intangible Assets: The carrying amounts for indefinite-lived intangible assets are:
| (in thousands) | July 25, 2021 | October 25, 2020 | |||||||||
| Brands/Tradenames/Trademarks | $ | $ | |||||||||
| Other Intangibles | |||||||||||
| Foreign Currency Translation | ( | ( | |||||||||
| Total | $ | $ | |||||||||
The increase in Brands/Tradenames/Trademarks represents the estimated fair value of indefinite-lived assets acquired as part of the acquisition of the Planters® snack nuts business and is preliminary pending final purchase accounting adjustments. See Note B - Acquisitions and Divestitures.
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The gross carrying amount and accumulated amortization for definite-lived intangible assets are:
| July 25, 2021 | October 25, 2020 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Weighted Ave Life (In Years) | Gross Carrying Amount | Accumulated Amortization | Weighted Ave Life (In Years) | |||||||||||||||||||||||||||||
| Customer Lists/Relationships | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
| Other Intangibles | ( | ( | |||||||||||||||||||||||||||||||||
| Tradenames/Trademarks | ( | ( | |||||||||||||||||||||||||||||||||
| Foreign Currency Translation | ( | — | ( | — | |||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
The increase in Customer Lists/Relationships represents the estimated fair value of definite-lived assets acquired as part of the acquisition of the Planters® snack nuts business and is preliminary pending final purchase accounting adjustments. See Note B - Acquisitions and Divestitures.
Amortization expense was $4.4 million and $12.3 million for the thirteen and thirty-nine weeks ended July 25, 2021, respectively, compared to $4.1 million and $10.3 million for the thirteen and thirty-nine weeks ended July 26, 2020.
Estimated annual amortization expense for the five fiscal years after October 25, 2020, is as follows:
| (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 | July 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 | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (in thousands) | Segment | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 26, 2020 | ||||||||||||||||||||||||
| MegaMex Foods, LLC | Grocery Products | $ | $ | $ | $ | ||||||||||||||||||||||||
| Other Joint Ventures | International & Other | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||
For the thirteen and thirty-nine weeks ended July 25, 2021, $11.2 million and $33.7 million of dividends were received from affiliates, compared to $7.5 million and $27.5 million of dividends received for the thirteen and thirty-nine weeks ended July 26, 2020.
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NOTE E - INVENTORIES
Principal components of inventories are:
| (in thousands) | July 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 and options contracts to manage the Company’s exposure to price fluctuations in the markets. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Effectiveness testing is performed on a quarterly basis to ascertain a high level of effectiveness for cash flow and fair value hedging programs.
Cash Flow Commodity Hedges: The Company designates 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, the Company took strategic hedges to cover a significant portion of its expected grain purchases through fiscal 2022.
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: In the second quarter of fiscal 2021, the Company designated two separate interest rate locks as cash flow hedges to manage interest rate risk associated with the anticipated debt transactions required to fund the acquisition of the Planters® snack nuts business. The total notional amount of the Company's locks was $1,250 million. In the third quarter of fiscal 2021, the associated unsecured senior notes were issued with a tenor of and thirty years and both locks were lifted (See Note J - Long-term Debt and Other Borrowing Arrangements). Mark-to-market gains and losses on these instruments were deferred as a component of AOCL until lifted. The resulting gain in AOCL is reclassified to Interest Expense in the period when the hedged transactions affect earnings.
Other Derivatives: The Company holds certain futures and options contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets. The Company has not applied hedge accounting to these positions. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.
Volume: The Company's outstanding commodity futures and options contracts related to its hedging programs include:
| Volume | ||||||||||||||
| Commodity Contracts | July 25, 2021 | October 25, 2020 | ||||||||||||
| Corn | ||||||||||||||
| Lean Hogs | ||||||||||||||
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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 | July 25, 2021 | October 25, 2020 | |||||||||||||||||
| Derivatives Designated as Hedges: | ||||||||||||||||||||
Commodity Contracts(1) | 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 July 25, 2021 is offset by the obligation to return net cash collateral of $17.1 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) | July 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 July 25, 2021, the Company included in Accumulated Other Comprehensive Loss hedging gains (before tax) of $43.4 million on commodity contracts and $14.7 million related to interest rate settled positions. The Company expects to recognize the majority of the gains on commodity contracts over the next twelve months. Gains on interest rate contracts offset the hedged interest payments over the tenor of the debt instruments.
The 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) | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 26, 2020 | ||||||||||||||||||||||||||||
| Cash Flow Hedges: | ||||||||||||||||||||||||||||||||
| Commodity Contracts | $ | $ | ( | Cost of Products Sold | $ | $ | ( | |||||||||||||||||||||||||
Excluded Component (2) | ||||||||||||||||||||||||||||||||
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) | ||||||||||||||||||||||||||||||
| Thirty-Nine Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 26, 2020 | ||||||||||||||||||||||||||||
| Cash Flow Hedges: | ||||||||||||||||||||||||||||||||
| Commodity Contracts | $ | $ | ( | Cost of Products Sold | $ | $ | ( | |||||||||||||||||||||||||
Excluded Component (2) | ||||||||||||||||||||||||||||||||
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.
(2) Represents the time value amount of corn options excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in AOCL.
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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:
| Consolidated Statements of Operations Impact | ||||||||||||||||||||||||||
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 26, 2020 | ||||||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | $ | $ | $ | $ | ||||||||||||||||||||||
| Cash Flow Hedges - Commodity Contracts | ||||||||||||||||||||||||||
| Gain (Loss) Reclassified from AOCL | ( | ( | ||||||||||||||||||||||||
| Amortization of Excluded Component from Options | ( | ( | ||||||||||||||||||||||||
| Fair Value Hedges - Commodity Contracts | ||||||||||||||||||||||||||
Gain (Loss) on Commodity Futures (1) | ( | ( | ||||||||||||||||||||||||
Total Gain (Loss) on Commodity Contracts (2) | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||
| Cash Flow Hedges - Interest Rate Locks | ||||||||||||||||||||||||||
| Amortization of Gain on Interest Rate Locks | ||||||||||||||||||||||||||
Total Gain on Interest Rate Locks (3) | $ | $ | $ | $ | ||||||||||||||||||||||
| Total Gain (Loss) Recognized in Earnings | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||
(1) Amounts represent gains or losses on commodity contracts designated as fair value hedges that were closed during the thirteen and thirty-nine weeks ended July 25, 2021, and July 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.
(2) Total Gain (Loss) on Commodity Contracts is recognized in earnings through Cost of Products Sold.
(3) Total Gain (Loss) on Interest Rate Locks is recognized in earnings through Interest Expense.
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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 | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 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 | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 26, 2020 | |||||||||||||||||||
| Service Cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest Cost | |||||||||||||||||||||||
| Amortization of Prior Service Cost | ( | ( | ( | ( | |||||||||||||||||||
| Recognized Actuarial Loss | |||||||||||||||||||||||
| Net Periodic Cost | $ | $ | $ | $ | |||||||||||||||||||
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NOTE H - ACCUMULATED OTHER COMPREHENSIVE LOSS
Components of Accumulated Other Comprehensive Loss are:
| (in thousands) | Foreign Currency Translation | Pension & Other Benefits | Derivatives & Hedging | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||
Balance at April 25, 2021 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||
| Unrecognized Gains (Losses) | |||||||||||||||||||||||||||||
| Gross | |||||||||||||||||||||||||||||
| Tax Effect | ( | ( | |||||||||||||||||||||||||||
| Reclassification into Net Earnings | |||||||||||||||||||||||||||||
| Gross | (1) | ( | (2) | ( | |||||||||||||||||||||||||
| Tax Effect | ( | ||||||||||||||||||||||||||||
| Net of Tax Amount | ( | ||||||||||||||||||||||||||||
Balance at July 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 July 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 and Interest Expense 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.
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The Company’s financial assets and liabilities carried at fair value on a recurring basis as of July 25, 2021, and October 25, 2020, and their level within the fair value hierarchy, are:
| Fair Value Measurements at July 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) | |||||||||||||||||||||||
| 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
19
third-party insurance policy, the values of which represent their cash surrender value based on the fair value of the underlying investments in the account and include equity securities, money market accounts, bond funds or other portfolios for which there is an active quoted market. Therefore, these policies are classified as Level 2. The Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based on a specified percentage of the I.R.S. applicable federal rates. These balances are also classified as Level 2. The funds held in the rabbi trust are included in Other Assets on the Consolidated Statements of Financial Position. The related deferred compensation liabilities are included in Other Long-term Liabilities on the Consolidated Statements of Financial Position with investment options generally mirroring those funds held by the rabbi trust. Therefore, 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 thirty-nine weeks ended July 25, 2021, securities held by the trust generated gains of $1.5 million and $18.6 million, respectively, compared to losses of $9.3 million and $2.6 million for the thirteen and thirty-nine weeks ended July 26, 2020, respectively.
(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. Over-the-counter (OTC) derivative instruments are valued using discounted cash flow models, observable and non-observable market inputs, and other mathematical pricing models. The Company’s corn futures option contracts are OTC instruments classified as Level 2 whose value is calculated using the Black-Scholes pricing model, corn future prices quoted from the Chicago Board of Trade, and other adjustments to inputs that are observable in active markets. All derivatives are reviewed for potential credit risk and risk of nonperformance. The net balance for each program is included in Other Current Assets or Accounts Payable, as appropriate, in the Consolidated Statements of Financial Position. As of July 25, 2021, the Company has recognized the obligation to return net cash collateral of $17.1 million from various counterparties (including $29.4 million of realized gains offset by cash owed of $46.5 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).
The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value. The Company does not carry its long-term debt at fair value in its Consolidated Statements of Financial Position. The fair value of long-term debt, utilizing discounted cash flows (Level 2), was $3,367.0 million as of July 25, 2021, and $1,238.8 million as of October 25, 2020.
20
NOTE J - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term Debt consists of:
| (in thousands) | July 25, 2021 | October 25, 2020 | ||||||||||||
Senior Unsecured Notes, with Interest at Semi-annually through June 2051 Maturity Date | $ | $ | ||||||||||||
Senior Unsecured Notes, with Interest at Semi-annually through June 2030 Maturity Date | ||||||||||||||
Senior Unsecured Notes, with Interest at Semi-annually through June 2028 Maturity Date | ||||||||||||||
Senior Unsecured Notes, with Interest at Semi-annually through June 2024 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 | $ | $ | ||||||||||||
Senior Unsecured Notes: The Company repaid its $250.0 million senior unsecured notes upon maturity in April 2021.
On June 11, 2020, the Company issued senior notes in an aggregate principal amount of $1.0 billion, due June 11, 2030. The notes bear interest at a fixed rate of 1.800 % per annum, with interest paid semi-annually in arrears on June 11 and December 11 of each year, commencing December 11, 2020. The notes may be redeemed in whole or in part at any time at the applicable redemption price set forth in the prospectus supplement. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to 101 % of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
On June 3, 2021, the Company issued $950.0 million aggregate principal amount of its 0.650 % notes due 2024 (the "2024 Notes"), $750.0 million aggregate principal amount of its 1.700 % notes due 2028 (the "2028 Notes") and $600.0 million aggregate principal amount of its 3.050 % notes due 2051 (the "2051 Notes"). Interest will accrue per annum at the stated rates with interest on the notes being paid semi-annually in arrears on June 3 and December 3 of each year, commencing December 3, 2021. Interest rate risk was hedged utilizing interest rate locks on the 2028 Notes and 2051 Notes. The Company lifted the hedges in conjunction with the issuance of these notes. See Note F - Derivatives and Hedging for additional details. The 2024 Notes may be redeemed in whole or in part one year after their issuance without penalty for early partial payments or full redemption. The 2028 Notes and 2051 Notes may be redeemed in whole or in part at any time at the applicable redemption price. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to 101
Unsecured Revolving Credit Facility: On May 6, 2021, the Company entered into an unsecured revolving credit agreement with Wells Fargo Bank, National Association as administrative agent, swingline lender and issuing lender, U.S. Bank National Association, JPMorgan Chase Bank, N.A. and BofA Securities, Inc. as syndication agents and the lenders party thereto. In connection with entering the revolving credit agreement, the Company terminated its existing credit facility that was entered into on June 24, 2015. The revolving credit agreement provides for an unsecured revolving credit facility with an aggregate principal commitment amount at any time outstanding of up to $750.0 million with an uncommitted increase option of an additional $375.0 million upon the satisfaction of certain conditions. Extensions of credit under the facility may be made in the form of revolving loans, swingline loans and letters of credit. The lending commitments under the agreement are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding. As of July 25, 2021, and October 25, 2020, the Company had no
Debt Covenants: The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of July 25, 2021, the Company was in compliance with all of these covenants.
21
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 thirty-nine weeks ended July 25, 2021, was 13.3 percent and 18.9 percent compared to 21.6 percent and 19.4 percent for the corresponding periods a year ago. The decrease in the effective tax rate for the thirteen weeks ended July 25, 2021 was primarily driven by an increased volume of stock option exercises and a one-time foreign tax benefit.
The amount of unrecognized tax benefits, including interest and penalties, is recorded in Other Long-term Liabilities. If recognized as of July 25, 2021, and July 26, 2020, $24.5 million and $24.7 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 thirty-nine weeks ended July 25, 2021, and July 26, 2020. The amount of accrued interest and penalties at July 25, 2021, and July 26, 2020, associated with unrecognized tax benefits was $7.5 million and $6.2 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 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 | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 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.
22
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. One-time acquisition-related costs and accounting adjustments associated with the purchase of the Planters® snack nuts business were also retained at the corporate level. Equity in 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 segment profit 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.
23
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 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 | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 26, 2020 | |||||||||||||||||||||||||||||||
| U.S. Retail | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| U.S. Foodservice | |||||||||||||||||||||||||||||||||||
| U.S. Deli | |||||||||||||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
The improvement demonstrated in U.S. Foodservice in the thirteen and thirty-nine weeks ended July 25, 2021, was driven by recovery of the foodservice industry following restrictions imposed by the COVID-19 pandemic in fiscal 2020.
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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 | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 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, snack nuts, and other items that do not require refrigeration. The Poultry category is composed primarily of Jennie-O Turkey Store products. The Miscellaneous category primarily consists of nutritional food products and supplements, dessert and drink mixes, and industrial gelatin products.
The asset values below reflect the preliminary purchase allocations associated with the acquisition of the Planters® snack nuts business.
| (in thousands) | July 25, 2021 | October 25, 2020 | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Grocery Products | $ | $ | ||||||||||||||||||
| Refrigerated Foods | ||||||||||||||||||||
| Jennie-O Turkey Store | ||||||||||||||||||||
| International & Other | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||
| Additions to Property, Plant, & Equipment | ||||||||||||||||||||
| Grocery Products | $ | $ | ||||||||||||||||||
| Refrigerated Foods | ||||||||||||||||||||
| Jennie-O Turkey Store | ||||||||||||||||||||
| International & Other | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||
25
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 $0.32 for the third quarter of fiscal 2021, down 14% compared to last year. Significant factors impacting the quarter were:
•Net sales for the third quarter were the highest in the Company's history, with growth from every segment and all four channels. Net sales benefited from the inclusion of the Planters® snack nuts business.
•Segment profit for the quarter increased 2 percent, due primarily from the contribution of the Planters® snack nuts business, strong growth from the Company's foodservice business in Refrigerated Foods, and growth from the International & Other segment. All four business segments absorbed higher input costs due to inflation on raw materials, freight, labor, and supplies.
•Earnings before income taxes for the quarter decreased 21 percent compared to the prior year. One-time acquisition costs and accounting adjustments related to the acquisition of the Planters® snack nuts business were approximately $40 million for the quarter.
•International & Other segment profit increased, driven by higher sales and improved branded and fresh pork export margins.
•Grocery Products segment profit increased due to strong results from the MegaMex joint venture and the contribution from the Planters® snack nuts business. These benefits were offset by higher input costs, and higher manufacturing and logistics costs.
•Refrigerated Foods segment profit was flat, as higher earnings from the foodservice business, numerous pricing actions, and increased commodity profits fully offset significantly higher raw material costs and increased freight expenses.
•Jennie-O Turkey Store segment profit was lower due to the impact of significantly higher feed costs and an increase in freight expenses.
•The Company acquired the Planters® snack nuts business for $3.4 billion in cash during the quarter. The acquisition included the Planters®, NUT-rition®, Planters® Cheez Balls and Corn Nuts® brands. The transaction closed on June 7, 2021.
Response to COVID-19
The Company is committed to making investments necessary to keep its team members safe. In the third quarter of fiscal 2021, the Company absorbed approximately $2 million ($21 million for the first nine 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 eventually decline as the pandemic subsides.
Consolidated Results
Volume, Net Sales, Earnings, and Diluted Earnings per Share
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands, except per share amounts) | July 25, 2021 | July 26, 2020 | % Change | July 25, 2021 | July 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 1,180,634 | 1,165,214 | 1.3 | 3,553,288 | 3,585,273 | (0.9) | |||||||||||||||||||||||||||||
Organic Volume (1) | 1,143,725 | 1,165,214 | (1.8) | 3,510,214 | 3,585,273 | (2.1) | |||||||||||||||||||||||||||||
| Net Sales | $ | 2,863,670 | $ | 2,381,457 | 20.2 | $ | 7,931,438 | $ | 7,188,357 | 10.3 | |||||||||||||||||||||||||
Organic Net Sales (1) | 2,722,330 | 2,381,457 | 14.3 | 7,755,075 | 7,188,357 | 7.9 | |||||||||||||||||||||||||||||
| Earnings Before Income Taxes | 204,238 | 259,364 | (21.3) | 773,940 | 836,014 | (7.4) | |||||||||||||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | 176,917 | 203,119 | (12.9) | 627,101 | 673,726 | (6.9) | |||||||||||||||||||||||||||||
| Diluted Earnings per Share | 0.32 | 0.37 | (13.5) | 1.15 | 1.23 | (6.5) | |||||||||||||||||||||||||||||
Adjusted Diluted Earnings Per Share (1) | 0.39 | 0.37 | 5.4 | 1.21 | 1.23 | (1.6) | |||||||||||||||||||||||||||||
26
(1) The non-GAAP adjusted financial measurements of organic net sales, organic volume and adjusted diluted earnings per share are presented to provide investors with additional information to facilitate the comparison of past and present operations. Organic net sales and organic volume are defined as net sales and volume, excluding the impact of acquisitions and divestitures. Organic net sales and organic volume exclude the impacts of the acquisition of the Planters® snack nuts business (June 2021) in the Grocery Products, Refrigerated Foods and International & Other segments and the Sadler's Smokehouse acquisition (March 2020) in the Refrigerated Foods segment. Adjusted diluted earnings per share excludes the impact of the acquisition-related expenses and accounting adjustments related to the acquisition of the Planters® snack nuts business. The tax impact was calculated using the effective tax rate for the quarter the expenses and accounting adjustments were incurred.
The Company believes these non-GAAP financial measurements provide useful information to investors because they are the measurements used to evaluate performance on a comparable year-over-year basis. Non-GAAP measurements are not intended to be a substitute for U.S. GAAP measurements in analyzing financial performance. These non-GAAP measurements are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.
The tables below show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures.
27
| RECONCILIATION OF NON-GAAP MEASURES | ||||||||||||||||||||||||||
| In thousands, except per share amounts | ||||||||||||||||||||||||||
| ADJUSTED DILUTED EARNINGS PER SHARE (NON-GAAP) | ||||||||||||||||||||||||||
| Thirteen Weeks Ended | ||||||||||||||||||||||||||
| July 25, 2021 | July 26, 2020 | |||||||||||||||||||||||||
| Reported GAAP | Acquisition Costs and Adjustments | Non-GAAP | Reported GAAP | Non-GAAP % Change | ||||||||||||||||||||||
| Net Sales | $ | 2,863,670 | $ | — | $ | 2,863,670 | $ | 2,381,457 | 20.2 | |||||||||||||||||
| Cost of Products Sold | 2,440,322 | (12,900) | 2,427,422 | 1,959,032 | 23.9 | |||||||||||||||||||||
| Gross Profit | 423,348 | 12,900 | 436,248 | 422,426 | 3.3 | |||||||||||||||||||||
| Selling, General and Administrative | 226,284 | (27,462) | 198,822 | 181,085 | 9.8 | |||||||||||||||||||||
| Equity in Earnings of Affiliates | 10,420 | — | 10,420 | 8,235 | 26.5 | |||||||||||||||||||||
| Operating Income | 207,484 | 40,362 | 247,846 | 249,576 | (0.7) | |||||||||||||||||||||
| Interest and Investment Income (Expense) | 8,457 | — | 8,457 | 15,513 | (45.5) | |||||||||||||||||||||
| Interest Expense | (11,703) | — | (11,703) | (5,724) | 104.5 | |||||||||||||||||||||
| Earnings Before Income Taxes | 204,238 | 40,362 | 244,600 | 259,364 | (5.7) | |||||||||||||||||||||
| Provision for Income Taxes | 27,164 | 5,368 | 32,532 | 56,103 | (42.0) | |||||||||||||||||||||
| Net Earnings | 177,074 | 34,994 | 212,068 | 203,260 | 4.3 | |||||||||||||||||||||
| Less: Net Earnings Attributable to Noncontrolling Interest | 157 | — | 157 | 141 | 11.3 | |||||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | $ | 176,917 | $ | 34,994 | $ | 211,911 | $ | 203,119 | 4.3 | |||||||||||||||||
| Diluted Net Earnings Per Share | $ | 0.32 | $ | 0.06 | $ | 0.39 | $ | 0.37 | 5.4 | |||||||||||||||||
| Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||
| July 25, 2021 | July 26, 2020 | |||||||||||||||||||||||||
| Reported GAAP | Acquisition Costs and Adjustments | Non-GAAP | Reported GAAP | Non-GAAP % Change | ||||||||||||||||||||||
| Net Sales | $ | 7,931,438 | $ | — | $ | 7,931,438 | $ | 7,188,357 | 10.3 | |||||||||||||||||
| Cost of Products Sold | 6,581,613 | (12,900) | 6,568,713 | 5,820,158 | 12.9 | |||||||||||||||||||||
| Gross Profit | 1,349,825 | 12,900 | 1,362,725 | 1,368,198 | (0.4) | |||||||||||||||||||||
| Selling, General and Administrative | 622,630 | (30,303) | 592,327 | 570,518 | 3.8 | |||||||||||||||||||||
| Equity in Earnings of Affiliates | 37,722 | — | 37,722 | 25,843 | 46.0 | |||||||||||||||||||||
| Operating Income | 764,917 | 43,203 | 808,120 | 823,523 | (1.9) | |||||||||||||||||||||
| Interest and Investment Income (Expense) | 36,740 | — | 36,740 | 25,289 | 45.3 | |||||||||||||||||||||
| Interest Expense | (27,718) | — | (27,718) | (12,798) | 116.6 | |||||||||||||||||||||
| Earnings Before Income Taxes | 773,940 | 43,203 | 817,143 | 836,014 | (2.3) | |||||||||||||||||||||
| Provision for Income Taxes | 146,549 | 5,975 | 152,524 | 162,186 | (6.0) | |||||||||||||||||||||
| Net Earnings | 627,390 | 37,228 | 664,618 | 673,828 | (1.4) | |||||||||||||||||||||
| Less: Net Earnings Attributable to Noncontrolling Interest | 290 | — | 290 | 103 | 181.6 | |||||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | $ | 627,101 | $ | 37,228 | $ | 664,329 | $ | 673,726 | (1.4) | |||||||||||||||||
| Diluted Net Earnings Per Share | $ | 1.15 | $ | 0.06 | $ | 1.21 | $ | 1.23 | (1.6) | |||||||||||||||||
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| ORGANIC VOLUME AND NET SALES (NON-GAAP) | |||||||||||||||||||||||||||||
| Thirteen Weeks Ended | |||||||||||||||||||||||||||||
| July 25, 2021 | July 26, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | Reported GAAP | Acquisitions | Organic (Non-GAAP) | Reported GAAP | Organic % Change | ||||||||||||||||||||||||
| Volume (lbs.) | |||||||||||||||||||||||||||||
| Grocery Products | 319,216 | (30,124) | 289,092 | 307,198 | (5.9) | ||||||||||||||||||||||||
| Refrigerated Foods | 591,143 | (5,784) | 585,359 | 605,546 | (3.3) | ||||||||||||||||||||||||
| Jennie-O Turkey Store | 187,220 | — | 187,220 | 171,313 | 9.3 | ||||||||||||||||||||||||
| International & Other | 83,055 | (1,001) | 82,054 | 81,156 | 1.1 | ||||||||||||||||||||||||
| Total Volume | 1,180,634 | (36,909) | 1,143,725 | 1,165,214 | (1.8) | ||||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||||||||
| Grocery Products | $ | 698,584 | $ | (117,681) | $ | 580,903 | $ | 580,798 | — | ||||||||||||||||||||
| Refrigerated Foods | 1,624,641 | (21,002) | 1,603,639 | 1,363,092 | 17.6 | ||||||||||||||||||||||||
| Jennie-O Turkey Store | 350,897 | — | 350,897 | 286,805 | 22.3 | ||||||||||||||||||||||||
| International & Other | 189,548 | (2,657) | 186,891 | 150,762 | 24.0 | ||||||||||||||||||||||||
| Total Net Sales | $ | 2,863,670 | $ | (141,340) | $ | 2,722,330 | $ | 2,381,457 | 14.3 | ||||||||||||||||||||
| Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||
| July 25, 2021 | July 26, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | Reported GAAP | Acquisitions | Organic (Non-GAAP) | Reported GAAP | Organic % Change | ||||||||||||||||||||||||
| Volume (lbs.) | |||||||||||||||||||||||||||||
| Grocery Products | 937,345 | (30,124) | 907,221 | 963,819 | (5.9) | ||||||||||||||||||||||||
| Refrigerated Foods | 1,779,729 | (11,950) | 1,767,779 | 1,787,698 | (1.1) | ||||||||||||||||||||||||
| Jennie-O Turkey Store | 583,413 | — | 583,413 | 577,990 | 0.9 | ||||||||||||||||||||||||
| International & Other | 252,801 | (1,001) | 251,800 | 255,766 | (1.6) | ||||||||||||||||||||||||
| Total Volume | 3,553,288 | (43,075) | 3,510,214 | 3,585,273 | (2.1) | ||||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||||||||
| Grocery Products | $ | 1,904,415 | $ | (117,681) | $ | 1,786,734 | $ | 1,804,674 | (1.0) | ||||||||||||||||||||
| Refrigerated Foods | 4,445,099 | (56,026) | 4,389,073 | 3,962,219 | 10.8 | ||||||||||||||||||||||||
| Jennie-O Turkey Store | 1,035,397 | — | 1,035,397 | 959,988 | 7.9 | ||||||||||||||||||||||||
| International & Other | 546,528 | (2,657) | 543,871 | 461,475 | 17.9 | ||||||||||||||||||||||||
| Total Net Sales | $ | 7,931,438 | $ | (176,364) | $ | 7,755,075 | $ | 7,188,357 | 7.9 | ||||||||||||||||||||
Net Sales
The Company delivered record quarterly net sales, with growth from all four segments and across all four channels. Strong results from the Company's foodservice businesses in Refrigerated Foods and Jennie-O Turkey Store, the inclusion of the Planters® snack nuts business, and increased commodity sales in Jennie-O Turkey Store were the primary drivers of record sales for the quarter. All segments benefited from higher net pricing during the quarter due to strategic actions taken to offset inflationary pressures.
The Company delivered record net sales for the first nine months of fiscal 2021. The increases are due primarily to strong growth from the retail, deli and foodservice businesses within Refrigerated Foods, the inclusion of the Planters® snack nuts business, continued strength within International & Other, and higher commodity sales in Jennie-O Turkey Store.
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Cost of Products Sold
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | % Change | July 25, 2021 | July 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Cost of Products Sold | $ | 2,440,322 | $ | 1,959,032 | 24.6 | $ | 6,581,613 | $ | 5,820,158 | 13.1 | |||||||||||||||||||||||||
Cost of products sold for the third quarter and first nine months of fiscal 2021 increased due to inflationary pressures stemming from raw materials, packaging, freight, labor and many other inputs. The inclusion of the Planters® snack nuts business during the third quarter also was a driver of higher costs.
Direct incremental supply chain costs related to the COVID-19 pandemic for the third quarter and first nine months of fiscal 2021 were approximately $2 million and $21 million, respectively. This compares to approximately $40 million and $60 million of higher operational costs related to the COVID-19 pandemic incurred in the third quarter and the first nine months of fiscal 2020.
The Company expects to operate in a high cost environment for the remainder of the year.
Gross Profit
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | % Change | July 25, 2021 | July 26, 2020 | % Change | ||||||||||||||||||||||||||||||||
| Gross Profit | $ | 423,348 | $ | 422,426 | 0.2 | $ | 1,349,825 | $ | 1,368,198 | (1.3) | ||||||||||||||||||||||||||||
| Percentage of Net Sales | 14.8 | % | 17.7 | % | 17.0 | % | 19.0 | % | ||||||||||||||||||||||||||||||
Gross profit as a percentage of net sales for the third quarter and first nine months of 2021 declined, driven primarily by broad-based inflationary pressures and a lag in mitigating pricing actions. Gross profit as a percentage of net sales declined for all four business segments during the third quarter and first nine months of fiscal 2021.
Looking ahead to the fourth quarter of fiscal 2021, the Company expects gross profit as a percentage of net sales to improve sequentially compared to the third quarter as additional pricing actions go into effect. An acceleration in input cost inflation poses the largest risk to this assumption.
Selling, General and Administrative (SG&A)
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | % Change | July 25, 2021 | July 26, 2020 | % Change | |||||||||||||||||||||||||||||
| SG&A | $ | 226,284 | $ | 181,085 | 25.0 | $ | 622,630 | $ | 570,518 | 9.1 | |||||||||||||||||||||||||
| Percentage of Net Sales | 7.9 | % | 7.6 | % | 7.9 | % | 7.9 | % | |||||||||||||||||||||||||||
For the third quarter and first nine months of fiscal 2021, SG&A expenses increased due to one-time acquisition-related costs related to the Planters® snack nuts business and higher employee-related expenses.
Advertising spend in the third quarter was $31 million, compared to $24 million last year. Advertising investments for the first nine months of fiscal 2021 were up 1 percent compared to last year. The Company plans to continue to invest in its leading brands.
Equity in Earnings of Affiliates
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | % Change | July 25, 2021 | July 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Equity in Earnings of Affiliates | $ | 10,420 | $ | 8,235 | 26.5 | $ | 37,722 | $ | 25,843 | 45.9 | |||||||||||||||||||||||||
Equity in earnings of affiliates for the third quarter and first nine months increased significantly due to continued strength at MegaMex and from the Company's joint venture in the Philippines.
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Effective Tax Rate
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| July 25, 2021 | July 26, 2020 | July 25, 2021 | July 26, 2020 | ||||||||||||||||||||
| Effective Tax Rate | 13.3 | % | 21.6 | % | 18.9 | % | 19.4 | % | |||||||||||||||
The lower effective tax rate in the current quarter was driven by a higher volume of stock option exercises and a one-time foreign tax benefit. The Company expects the effective tax rate in fiscal 2021 to be between 19.0 and 20.5 percent. For further information, refer to Note K - Income Taxes.
Segment Results
Net sales and segment profit 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 profit and other financial information shown below.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | % Change | July 25, 2021 | July 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||||||||||||||
Grocery Products | $ | 698,584 | $ | 580,798 | 20.3 | $ | 1,904,415 | $ | 1,804,674 | 5.5 | |||||||||||||||||||||||||
Refrigerated Foods | 1,624,641 | 1,363,092 | 19.2 | 4,445,099 | 3,962,219 | 12.2 | |||||||||||||||||||||||||||||
Jennie-O Turkey Store | 350,897 | 286,805 | 22.3 | 1,035,397 | 959,988 | 7.9 | |||||||||||||||||||||||||||||
International & Other | 189,548 | 150,762 | 25.7 | 546,528 | 461,475 | 18.4 | |||||||||||||||||||||||||||||
| Total | $ | 2,863,670 | $ | 2,381,457 | 20.2 | $ | 7,931,438 | $ | 7,188,357 | 10.3 | |||||||||||||||||||||||||
| Segment Profit | |||||||||||||||||||||||||||||||||||
Grocery Products | $ | 80,791 | $ | 80,169 | 0.8 | $ | 270,963 | $ | 276,367 | (2.0) | |||||||||||||||||||||||||
Refrigerated Foods | 153,216 | 152,822 | 0.3 | 467,740 | 451,596 | 3.6 | |||||||||||||||||||||||||||||
Jennie-O Turkey Store | 5,874 | 7,069 | (16.9) | 45,514 | 72,968 | (37.6) | |||||||||||||||||||||||||||||
International & Other | 27,915 | 23,620 | 18.2 | 84,600 | 66,735 | 26.8 | |||||||||||||||||||||||||||||
Total Segment Profit | 267,796 | 263,679 | 1.6 | 868,817 | 867,666 | 0.1 | |||||||||||||||||||||||||||||
Net Unallocated Expense | 63,715 | 4,457 | 1,329.6 | 95,166 | 31,754 | 199.7 | |||||||||||||||||||||||||||||
Noncontrolling Interest | 157 | 141 | 11.1 | 290 | 103 | 182.2 | |||||||||||||||||||||||||||||
Earnings Before Income Taxes | $ | 204,238 | $ | 259,364 | (21.3) | $ | 773,940 | $ | 836,014 | (7.4) | |||||||||||||||||||||||||
Grocery Products
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | % Change | July 25, 2021 | July 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 319,216 | 307,198 | 3.9 | 937,345 | 963,819 | (2.7) | |||||||||||||||||||||||||||||
| Net Sales | $ | 698,584 | $ | 580,798 | 20.3 | $ | 1,904,415 | $ | 1,804,674 | 5.5 | |||||||||||||||||||||||||
| Segment Profit | 80,791 | 80,169 | 0.8 | 270,963 | 276,367 | (2.0) | |||||||||||||||||||||||||||||
Volume and net sales for the third quarter increased due to the inclusion of the Planters® snack nuts business. On an organic basis, sales growth from brands such as SPAM®, Hormel® Compleats® and Wholly® overcame the impact of lower contract manufacturing sales. For the first nine months of fiscal 2021, net sales increased due to the contribution from the Planters® snack nuts business, offsetting the decline in many other product lines attributable to the extremely high levels of demand last year.
For the third quarter, segment profit increased due to strong results from the MegaMex joint venture and the contribution from the Planters® snack nuts business. These benefits were mostly offset by higher input costs, and higher manufacturing and logistics
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costs. Segment profit declined for the first nine months of fiscal 2021 as the benefit of the Planters® snack nuts business in the third quarter was offset by lower organic net sales and higher input costs.
Specific to the third quarter, volume, net sales and segment profit were negatively impacted by production constraints due to labor shortages.
Grocery Products expects year-over-year volume, sales, and segment profit growth in the fourth quarter due to the impact from the Planters® snack nuts business and continued strength for the MegaMex joint venture. Risks to profitability include higher pork trim prices and labor shortages on key product lines.
Refrigerated Foods
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
(in thousands) | July 25, 2021 | July 26, 2020 | % Change | July 25, 2021 | July 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 591,143 | 605,546 | (2.4) | 1,779,729 | 1,787,698 | (0.4) | |||||||||||||||||||||||||||||
| Net Sales | $ | 1,624,641 | $ | 1,363,092 | 19.2 | $ | 4,445,099 | $ | 3,962,219 | 12.2 | |||||||||||||||||||||||||
| Segment Profit | 153,216 | 152,822 | 0.3 | 467,740 | 451,596 | 3.6 | |||||||||||||||||||||||||||||
Net sales for the third quarter increased due to strong results from the foodservice, retail and deli businesses, and elevated pricing across most categories. The recovery in foodservice continued to accelerate, with net sales exceeding both last year and pre-pandemic levels in almost every category. Retail and deli sales increased due primarily to growth from Hormel® Black Label® bacon, Columbus® grab-and-go items, Hormel® refrigerated entrees, and Hormel® Gatherings® party trays. The decline in volume was due to lower shipments of commodity pork. For the first nine months of fiscal 2021, net sales increased due to strong growth from the retail, deli, and foodservice businesses within Refrigerated Foods.
For the third quarter and first nine months of fiscal 2021, higher earnings from the foodservice business, numerous pricing actions, and increased commodity profits fully offset significantly higher raw material costs and increased freight expenses.
Specific to the third quarter, volume, net sales and segment profit were negatively impacted by production constraints due to labor shortages.
Led by the continued recovery in the foodservice business, Refrigerated Foods is expecting improved results in the fourth quarter in spite of higher input and logistics costs and the impact of labor shortages.
Jennie-O Turkey Store
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | % Change | July 25, 2021 | July 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 187,220 | 171,313 | 9.3 | 583,413 | 577,990 | 0.9 | |||||||||||||||||||||||||||||
| Net Sales | $ | 350,897 | $ | 286,805 | 22.3 | $ | 1,035,397 | $ | 959,988 | 7.9 | |||||||||||||||||||||||||
| Segment Profit | 5,874 | 7,069 | (16.9) | 45,514 | 72,968 | (37.6) | |||||||||||||||||||||||||||||
Volume and net sales increased in the third quarter of fiscal 2021 due to improved foodservice, whole bird, and commodity shipments. Sales of Jennie-O® lean ground turkey increased due to pricing actions implemented in prior quarters and remain meaningfully above pre-pandemic levels. For the first nine months, higher shipments and better pricing on commodity items, including whole birds, drove higher volume and sales for the segment.
Segment profit for the third quarter and first nine months of fiscal 2021 was lower due primarily to the impact of significantly higher feed costs.
Jennie-O Turkey Store expects improved results in the fourth quarter from both the value-added and commodity portfolios, which are expected to benefit from higher pricing, to be offset by the impact from dramatically higher grain costs.
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International & Other
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | % Change | July 25, 2021 | July 26, 2020 | % Change | |||||||||||||||||||||||||||||
| Volume (lbs.) | 83,055 | 81,156 | 2.3 | 252,801 | 255,766 | (1.2) | |||||||||||||||||||||||||||||
| Net Sales | $ | 189,548 | $ | 150,762 | 25.7 | $ | 546,528 | $ | 461,475 | 18.4 | |||||||||||||||||||||||||
| Segment Profit | 27,915 | 23,620 | 18.2 | 84,600 | 66,735 | 26.8 | |||||||||||||||||||||||||||||
Strong sales growth from SPAM® luncheon meat, a recovery in foodservice exports, continued strong results in China, and improved performance in Brazil led to record net sales during the third quarter. For the first nine months of fiscal 2021, net sales increased, driven by continued strong results in China and higher demand for branded exports.
In addition to higher sales, the improvement in segment profit for the third quarter was driven by higher branded and fresh pork export margins. For the first nine months of fiscal 2021, segment profit improved significantly, driven by gains from exports, higher income from the Company's partners in the Philippines, South Korea and Europe, and strong results in China.
International & Other expects strength from exports to continue, leading to improved results. 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 | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| (in thousands) | July 25, 2021 | July 26, 2020 | July 25, 2021 | July 26, 2020 | |||||||||||||||||||
| Net Unallocated Expense | $ | 63,715 | $ | 4,457 | $ | 95,166 | $ | 31,754 | |||||||||||||||
| Noncontrolling Interest | 157 | 141 | 290 | 103 | |||||||||||||||||||
For the third quarter and first nine months of fiscal 2021, net unallocated expense included $40 million and $43 million, respectively, of one-time acquisition costs and accounting adjustments related to the acquisition of the Planters® snack nuts business. Higher interest expense and employee related expenses also contributed to the increase from prior year.
Related Party Transactions
There has been no material change in the information regarding Related Party Transactions as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 25, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents were $291 million at the end of the first thirty-nine weeks of fiscal 2021 compared to $1,729 million at the end of the comparable fiscal 2020 period. The primary driver of the decrease is the use of cash to fund the acquisition of the Planters® snack nuts business the third quarter of fiscal 2021.
Cash provided by operating activities was $438 million in the first thirty-nine weeks of fiscal 2021 compared to $878 million in the same period of fiscal 2020. The decline was due to increased inventory driven by significantly higher raw material markets along with the additional accounts receivable and inventory activity for the Planters® snack nuts business since its acquisition. 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 $3,530 million in the first thirty-nine weeks of fiscal 2021 compared to $506 million in the same period of fiscal 2020. In the third quarter of fiscal 2021, the Company completed the acquisition of the Planters® snack nuts business for a preliminary purchase price of $3.4 billion. In the first thirty-nine weeks of 2020, the Company acquired Sadler's Smokehouse for $271 million. See Note B - Acquisitions and Divestitures for additional information on acquisitions.
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Capital expenditures in the first thirty-nine weeks of fiscal 2021 were $139 million compared to $227 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 Nebraska and other projects to support growth of branded products.
Cash provided by financing activities was $1,664 million in the first thirty-nine weeks of fiscal 2021 compared to $684 million in the same period of fiscal 2020. On June 3, 2021, the Company issued unsecured senior notes in an aggregate principal amount of $2.3 billion to fund the acquisition of the Planters® snack nuts business. The Company repaid $250 million of its 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. See Note J - Long-term Debt and Other Borrowing Arrangements for additional information on debt.
The Company used $10 million for common stock repurchases in the first thirty-nine 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 thirty-nine weeks of fiscal 2021 were $390 million compared to $362 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 372 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 July 25, 2021, the Company was in compliance with all of these debt covenants.
Contractual Obligations and Commercial Commitments
The Company records income taxes in accordance with the provisions of ASC 740, Income Taxes. The Company is unable to determine its contractual obligations by year related to this pronouncement, as the ultimate amount or timing of settlement of its reserves for income taxes cannot be reasonably estimated. The total liability for unrecognized tax benefits, including interest and penalties, at July 25, 2021, was $24 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 July 25, 2021, and October 25, 2020, the Company had $47 million 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 July 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 recent acquisition of the Planters® snack nuts business 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.
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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.
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 96 and 94 percent of the total hogs purchased by the Company during the first thirty-nine weeks of fiscal years 2021 and 2020, respectively. The majority of these contracts use market-based formulas based on hog futures, hog primal values, or industry reported hog markets. Other contracts use a formula based on the cost of production, which can fluctuate independently from hog markets. The Company’s value-added branded portfolio helps mitigate changes in hog and pork market prices. Therefore, a hypothetical 10 percent change in the cash hog market would have had an immaterial effect on the Company’s results of operations.
The Company utilizes a hedge program to reduce exposure and offset the fluctuations in the Company's future direct hog purchases. The program utilizes lean hog futures which are accounted for under cash flow hedge accounting. The fair value of the Company's open futures contracts in this program as of July 25, 2021 was $8.2 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 July 25, 2021, open lean hog contracts by $7.5 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.
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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 and options 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 and options as of July 25, 2021, was $22.0 million compared to $(0.1) million as of October 25, 2020. The Company measures its market risk exposure on its grain futures contracts and options using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for grain. A 10 percent decrease in the market price for grain would have negatively impacted the fair value of the Company’s July 25, 2021, open grain contracts by $11.9 million, which in turn would lower the Company’s future cost on purchased grain by a similar amount.
Other Input Costs: The costs of other raw materials such as beef, nuts, and, chicken, packaging materials, freight, fuel, and energy may cause the Company's results to fluctuate significantly. To manage input cost volatility, the Company pursues cost saving measures, forward pricing, derivatives, and pricing actions when necessary.
Investments: The Company has corporate-owned life insurance policies classified as trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. As of July 25, 2021, the balance of these securities totaled $200.3 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 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 July 25, 2021 was $639.4 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 July 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 $41.0 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 $33.5 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 $13.3 million pretax. A 10 percent weakening in the value of the Brazilian real relative to the U.S. dollar would result in other comprehensive loss of approximately $10.9 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. On June 7, 2021, the Company completed its acquisition of the Planters® snack nuts business. In conducting
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its assessment of the effectiveness of the Company’s internal control over financial reporting at fiscal year-end, management intends to exclude Planters® from that assessment, as permitted under Securities and Exchange Commission rules.
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 third 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.
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.
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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.
•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.
•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 variants of the virus appear to have increased transmissibility, which could complicate treatment and vaccination programs. The COVID-19 pandemic is an unprecedented situation and the Company's understanding of and response to its impacts is changing and evolving. The
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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 increased significantly to fund the purchase of the Planters® snack nuts business and may continue to increase to fund future acquisitions. Higher levels of debt may among other things, impact the Company's liquidity and increase the Company's exposure to negative fluctuations in interest rates.
The Company is subject to disruption of operations at co-manufacturers, suppliers, 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.
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 may be adversely impacted if the Company is unable to protect information technology systems against, or effectively respond to, cyber-attacks or security breaches. Information technology systems are an important part of the Company’s business operations. In addition, the Company increasingly relies upon third-party service providers for a variety of business functions, including cloud-based services. Cyber-attacks 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 July 25, 2021, the Company had over 20,000 employees worldwide, of which approximately 20 percent 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 and skilled labor availability challenges could continue to have an adverse effect on the Company's business.
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INDUSTRY RISKS
The Company’s operations are subject to the general risks of the food industry. The food products manufacturing industry is subject to the risks posed by:
▪food spoilage;
▪food contamination caused by disease-producing organisms or pathogens, such as Listeria monocytogenes, Salmonella, and pathogenic E coli.;
▪food allergens;
▪nutritional and health-related concerns;
▪federal, state, and local food processing controls;
▪consumer product liability claims;
▪product tampering; and
▪the possible unavailability and/or expense of liability insurance.
The pathogens that may cause food contamination are found generally in livestock and in the environment and thus may be present in our products. These pathogens can also be introduced to our products as a result of improper handling by customers or consumers. We do not have control over handling procedures once our products have been shipped for distribution. If one or more of these risks were to materialize, the Company’s brand and business reputation could be negatively impacted. In addition, revenues could decrease, costs of doing business could increase, and the Company’s operating results could be adversely affected.
Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins.
The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including African swine fever (ASF), Bovine Spongiform Encephalopathy (BSE), pneumo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease (FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI). The outbreak of such diseases could adversely affect the Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins. Additionally, the outbreak of disease may hinder the Company’s ability to market and sell products both domestically and internationally.
In recent years, the outbreak of ASF has impacted hog herds in China, Asia, Europe, and the Caribbean. If an outbreak of ASF were to occur in the United States, the Company's supply of hogs and pork could be materially impacted.
The Company has developed business continuity plans for various disease scenarios and will continue to update these plans as necessary. There can be no assurance given, however, that these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
Fluctuations in commodity prices and availability of raw materials and other inputs could harm the Company’s earnings. The Company’s results of operations and financial condition are largely dependent upon the cost and supply of pork, poultry, beef, feed grains, avocados, peanuts and tree nuts as well as supplies, energy, and other inputs and the selling prices for many of our products, which are determined by constantly changing market forces of supply and demand.
The live hog industry has 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 and pork 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.
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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 to a government furlough could also cause disruption to the Company’s manufacturing facilities. Additionally, the Company is subject to new or modified laws, regulations, and accounting standards. The Company’s failure or inability to comply with such requirements could subject the Company to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions. A recent federal district court ruling has had a negative impact on harvest capacity and labor costs. Harvest facilities the Company uses are negotiating to resolve the situation and expect to reach a solution, but harvest capacity and labor costs will continue to be negatively impacted until a solution is reached. There can be no assurance a solution will be reached, in which case the negative impacts of the ruling would continue.
The Company is subject to stringent environmental regulation and potentially subject to environmental litigation, proceedings, and investigations. The Company’s past and present business operations and ownership and operation of real property are subject to stringent federal, state, and local environmental laws and regulations pertaining to the discharge of materials into the environment and the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment. Compliance with these laws and regulations, 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.
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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no issuer purchases of equity securities in the thirteen weeks ended July 25, 2021. The maximum number of shares that may yet be purchased under the plans or programs as of July 25, 2021 is 4,239,594. On January 29, 2013, the Company's Board of Directors authorized the repurchase of 10,000,000 shares of its common stock with no expiration date. On January 26, 2016, the Board of Directors approved a two-for-one split of the Company’s common stock to be effective January 27, 2016. As part of the stock split resolution, the number of shares remaining to be repurchased was adjusted proportionately.
Item 6. EXHIBITS
First Amendment to the Asset Purchase Agreement dated as of June 7, 2021, by and between The Kraft Heinz Company and Hormel Foods Corporation. Exhibits and schedules identified in the agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be furnished to the Securities and Exchange Commission upon request. | |||||
| 101 | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended July 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 July 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: September 3, 2021 | By | /s/ JAMES N. SHEEHAN | ||||||
| JAMES N. SHEEHAN | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| Date: September 3, 2021 | By | /s/ JANA L. HAYNES | ||||||
| JANA L. HAYNES | ||||||||
| Vice President and Controller | ||||||||
| (Principal Accounting Officer) | ||||||||
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Exhibit 2.1
FIRST AMENDMENT
TO
ASSET PURCHASE AGREEMENT
TO
ASSET PURCHASE AGREEMENT
This FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT (this “Amendment”), dated as of June 7, 2021, by and between The Kraft Heinz Company, a Delaware corporation (the “Seller Parent”), and Hormel Foods Corporation, a Delaware corporation (the “Buyer”), amends that certain Asset Purchase Agreement, dated as of February 10, 2021, by and between the Seller Parent and the Buyer (as amended, unless context indicates otherwise, the “Purchase Agreement”). Capitalized terms used herein but not otherwise defined herein shall have the respective meanings assigned to such terms in the Purchase Agreement.
WITNESSETH:
WHEREAS, the Seller Parent and the Buyer have previously executed and delivered the Purchase Agreement;
WHEREAS, pursuant to Section 9.2 of the Purchase Agreement, the Purchase Agreement may be amended, modified or supplemented only by an instrument in writing signed on behalf of the Seller Parent and the Buyer; and
WHEREAS, the Seller Parent and the Buyer desire to amend the Purchase Agreement in the manner set forth herein.
NOW, THEREFORE, in connection with the Purchase Agreement, the transaction contemplated thereunder and the terms hereof, and in accordance with Section 9.2 of the Purchase Agreement, the Seller Parent and the Buyer agree as follows:
ARTICLE I
AMENDMENTS
AMENDMENTS
Section 1.1“Exhibit E – Form of Virginia Deed” on page (iv) of the Table of Contents to the Purchase Agreement is hereby amended and restated in its entirety as follows:
Exhibit E-1 – Form of Virginia Special Warranty Deed
Exhibit E-2 – Form of Virginia Quitclaim Deed
Section 1.2The defined term “Restricted Business” in Section 1.1 of the Purchase Agreement is hereby amended and restated in its entirety as follows:
“Restricted Business” means manufacturing, marketing, selling or distributing, anywhere in the world in any channel, Snack Nut Products, cheese-flavored snacks similar to Cheez Curls and Cheez Balls products sold in the snack category, peanut oil, or any packaged food product containing a combination of nuts, seeds, and other food (e.g., cheese, crackers, dried fruit or meat) that contains 50% or greater nuts and/or seeds, measured by weight, intended to be sold in the snack category. Notwithstanding the foregoing, the Restricted Business does not include (i) any P3
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Portable Protein Packs sold and distributed by the Seller Parent and its Affiliates within the last three years as described on Section 1.1(d) of the Disclosure Schedules (the “P3 Excluded Products”), or any future extensions of the Seller Parent’s P3 platform that contain less than 50% nuts and/or seeds by weight, (ii) any plant-based product that includes nuts or seeds as an ingredient so long as such product does not otherwise constitute a Snack Nut Product or cheese-flavored snack similar to Cheez Curls and Cheez Balls products sold in the snack category, (iii) any spreadable product that includes nuts or seeds, including peanut butter, other nut butters and similar products, (iv) the sale of seeds (e.g. tomato seeds or cucumber seeds) that are not intended for consumption in seed form and (v) the licensing of certain trademarks, service marks and other Intellectual Property of the Retained Business for use by third parties pursuant to the arrangements set forth on Section 1.1(f) of the Disclosure Schedules.
Section 1.3Section 1.1 of the Purchase Agreement is hereby amended to insert the following defined term in the appropriate alphabetical order:
“Specified Shared Contracts” means that portion (but only that portion) of the Shared Contracts set forth on Section 1.1(e) of the Disclosure Schedules related or applicable to the Business.
Section 1.4The defined term “Virginia Deed” in Section 1.1 of the Purchase Agreement is hereby amended and restated in its entirety as follows:
“Virginia Deed” means, collectively, (1) a special warranty deed conveying title in the Owned Real Property located in Virginia (other than those certain parcels described in the quitclaim deed detailed in the following clause (2)), subject to Permitted Encumbrances, substantially in the form of Exhibit E-1, and (2) a quitclaim deed substantially in the form of Exhibit E-2 conveying the right, title, and interest of Seller, if any, and without representation or warranty of any kind, in those certain parcels of real property located in Virginia and more particularly described therein, subject to Permitted Encumbrances.
Section 1.5Section 1.1(d) of the Disclosure Schedules is hereby amended and restated in its entirety in the form attached hereto as Exhibit A.
Section 1.6The Purchase Agreement is hereby amended to include Section 1.1(e) of the Disclosure Schedules in the form attached hereto as Exhibit B.
Section 1.7The Purchase Agreement is hereby amended to include Section 1.1(f) of the Disclosure Schedules in the form attached hereto as Exhibit C.
Section 1.8Section 1.2 of the Purchase Agreement is amended to insert the following in the appropriate alphabetical order:
Additional Buyer Licensed Marks……………………………5.9(e)
Delayed Separation Date…………………..……….….….…..5.5(l)
Delayed Transfer Period……………………………………...2.5(b)
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Seller License Term…………………………………..………5.9(c)
Specified Business Employee………………………..……….5.5(l)
Specified Transferred Asset………………………..…………2.5(b)
Section 1.9Section 2.1(a) of the Purchase Agreement is hereby amended and restated in its entirety as follows:
all Material Contracts listed in Section 3.15(a) of the Disclosure Schedules and all other Contracts to which any Seller is a party or by which any of them is bound, in each case, that relate exclusively to the Business and the Specified Shared Contracts, but, notwithstanding the foregoing, excluding (i) the Labor Agreements and any other labor or collective bargaining agreement, Contract or understanding with any labor union or bargaining representative of Business Employees, (ii) any Contract that was (x) not made available to the Buyer and (y) not disclosed in Section 3.15(a)(iii) or Section 3.15(a)(iv) of the Disclosure Schedules if such non-disclosure constitutes a breach of Section 3.15(a)(iii) or Section 3.15(a)(iv), unless (1) the Buyer gives written notice to the Seller Parent that it deems such undisclosed Contract to constitute a Transferred Contract or (2) the Buyer continues to operate under, and assume the benefits and obligations of, such Contract following the Closing and does not give the Seller Parent written notice within 90 days of the Closing that such Contract shall constitute an Excluded Asset, and (iii) the Shared Contracts (other than the Specified Shared Contracts) (the “Transferred Contracts”);
Section 1.10Section 2.2(p) of the Purchase Agreement is hereby amended and restated in its entirety as follows:
all Contracts other than the Transferred Contracts, including (i) the Labor Agreements and any other labor or collective bargaining agreement, Contract or understanding with any labor union or bargaining representative of Business Employees, (ii) any Contract that was (x) not made available to the Buyer and (y) not disclosed in Section 3.15(a)(iii) or Section 3.15(a)(iv) of the Disclosure Schedules if such non-disclosure constitutes a breach of Section 3.15(a)(iii) or Section 3.15(a)(iv), unless (1) the Buyer gives written notice to the Seller Parent that it deems such undisclosed Contract to constitute a Transferred Contract or (2) the Buyer continues to operate under, and assume the benefits and obligations of, such Contract following the Closing and does not give the Seller Parent written notice within 90 days of the Closing that such Contract shall constitute an Excluded Asset, and (iii) the Shared Contracts (other than the Specified Shared Contracts); and
Section 1.11Section 2.3(a) of the Purchase Agreement is hereby amended and restated in its entirety as follows:
except for the Liabilities expressly allocated to any Seller or its Affiliates in Section 2.4 or Section 5.5 or as otherwise expressly allocated to any Seller or its Affiliates hereunder, all Liabilities to the extent arising out of or in connection with any act,
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omission or circumstance with respect to the Business or the ownership or use of the Transferred Assets occurring or arising at any time prior to, on or after the Closing, and all Liabilities which relate to the Buyer’s conduct of the Business and ownership and use of the Transferred Assets from and after the Closing, including all Liabilities under any Transferred Contract (including all Specified Shared Contracts and all accounts payable pursuant to any open purchase order for any raw materials, work-in-progress, finished goods, ingredients, packaging materials, labels or other inventories to be delivered following the Closing that constitutes a Transferred Contract);
Section 1.12The penultimate sentence of the paragraph in Section 2.5(a) of the Purchase Agreement is hereby amended such that the word “its” immediately preceding “terms thereof” is deleted.
Section 1.13Section 2.5(b) of the Purchase Agreement is hereby amended and restated in its entirety as follows:
The Parties acknowledge and agree that, notwithstanding anything to the contrary, the Seller Parent shall provide certain Transitional Services (as defined in the Transition Services Agreement) to the Buyer with respect to the distribution of Products in Japan for a specified period of time following the Closing (such period of time until such services are terminated or expire in accordance with the terms of the Transition Services Agreement, the “Delayed Transfer Period”) in accordance with, and pursuant to, the terms of the Transition Services Agreement. Accordingly, notwithstanding anything to the contrary contained in this Agreement, unless and until the end of the Delayed Transfer Period, Section 2.1 shall not be effective with respect to the Transferred Contract set forth on Section 2.5(b) of the Disclosure Schedules (the “Specified Transferred Asset”). Upon the end of the Delayed Transfer Period, (i) Section 2.1 shall be effective with respect to the Specified Transferred Asset and (ii) the Specified Transferred Asset shall be included in the Transferred Assets effective as of the Closing.
Section 1.14Section 2.5(b) of the Disclosure Schedules is hereby amended and restated in its entirety in the form attached hereto as Exhibit D.
Section 1.15Section 2.6 of the Purchase Agreement is hereby amended and restated in its entirety as follows:
In consideration for the sale, assignment, transfer, conveyance and delivery of the Transferred Assets and the Assumed Liabilities to the Buyer, at the Closing, the Buyer shall (i) pay to the Sellers, by wire transfer to one or more bank accounts designated in writing by the Seller Parent to the Buyer at least two Business Days prior to the Closing Date, an amount equal to $3,350,000,000 in the aggregate in immediately available funds in United States dollars and (ii) assume the Assumed Liabilities (the “Purchase Price”).
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Section 1.16Section 2.8 of the Disclosure Schedules is hereby amended and restated in its entirety in the form attached hereto as Exhibit E.
Section 1.17Section 2.8(c) of the Purchase Agreement is hereby added and shall read as follows:
Notwithstanding anything to the contrary, the parties acknowledge and agree that (i) any Inventory physically located in Costa Rica as of the Closing Date will not be included in the Transferred Assets and instead will be retained by the Seller Parent and its Affiliates, (ii) the Seller Parent and its Affiliates may sell, donate, write off or otherwise dispose of such Inventory in their sole discretion and (iii) the Buyer hereby consents to the transitional use of the trademarks and service marks included in the Business Intellectual Property solely to permit the Seller Parent and its Affiliates to sell, donate or otherwise dispose of such Inventory post-Closing to the extent applicable.
Section 1.18Annex-1 3.12(a) of Section 3.12(a) of the Disclosure Schedules is hereby amended to include (in addition to the other items already set forth on Annex-1 3.12(a) of Section 3.12(a) of the Disclosure Schedules) the items set forth in Exhibit F attached hereto.
Section 1.19Section 3.15(a) of the Purchase Agreement is hereby amended and restated in its entirety as follows:
Section 3.15(a) of the Disclosure Schedules contains a list, as of the date hereof, of all of the following Contracts to which any Seller is a party or by which any Seller is bound, to which any Transferred Asset is subject, or pursuant to which any Seller receives any benefit or incurs any Liability, in each case, that relate exclusively to the Business, and each such Contract is listed under a heading in such Disclosure Schedule that corresponds with each applicable clause among the following to which such Contract relates, but, for the avoidance of doubt, excluding any Excluded Assets and any Shared Contracts (and any Specified Shared Contracts) (such Contracts required to be listed on Section 3.15(a) of the Disclosure Schedule being “Material Contracts”):
Section 1.20The penultimate sentence of the paragraph in Section 5.5(a) of the Purchase Agreement is hereby amended such that the reference to “county” shall be replaced with “country”.
Section 1.21The penultimate sentence of the paragraph in Section 5.5(b) of the Purchase Agreement is hereby amended such that the reference to “2020” shall be replaced with “2021”.
Section 1.22Section 5.5(l) of the Purchase Agreement is hereby added and shall read as follows:
The Parties acknowledge and agree that, notwithstanding anything to the contrary, (i) the Business Employee set forth on Section 5.5(l) of the Disclosure Schedules (the “Specified Business Employee”) shall continue to remain an employee of the Seller Parent or its Affiliates through August 16, 2021 (the “Delayed Separation Date”) unless such Specified Business Employee resigns, is terminated for cause,
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dies or becomes totally and permanently disabled, (ii) the Buyer shall offer employment to the Specified Business Employee effective as of the day after the Delayed Separation Date in accordance with Section 5.5(a); provided, that the Specified Business Employee remains employed with Seller Parent or its Affiliates through the Delayed Separation Date, (iii) with respect to annual incentive arrangements covering the Specified Business Employee for fiscal year 2021, the Sellers shall pay any amounts due under such plans with respect to the period through the Delayed Separation Date at the level determined by Sellers in accordance with past practices, and the Buyer shall assume such arrangements with respect to the period during fiscal year 2021 after the Delayed Separation Date and make payments to the extent due thereunder in accordance with their terms, and (iv) the Specified Business Employee and his eligible dependents shall cease participation in the Employee Plans effective as of the Delayed Separation Date. For avoidance of doubt, the Specified Business Employee will not become a Transferred Employee until the day after the Delayed Separation Date, and subject to the Specified Business Employee otherwise satisfying the requirements to become a Transferred Employee as identified in Section 5.5(a).
Section 1.23The Purchase Agreement is hereby amended to include Section 5.5(l) of the Disclosure Schedules in the form attached hereto as Exhibit G.
Section 1.24The second sentence of the paragraph in Section 5.9(a) of the Purchase Agreement is hereby amended such that the reference to “180 day period” shall be replaced with “12-month period”.
Section 1.25Section 5.9(c) of the Purchase Agreement is hereby amended and restated in its entirety as follows:
Effective as of the Closing, the Buyer hereby grants to the Seller Parent and its Affiliates, and the Seller Parent hereby accepts, on behalf of itself and its Affiliates, a transitional, non-exclusive, worldwide, royalty-free, fully paid-up, sublicensable (but only to any Affiliates, manufacturers, packagers, distributors, and other third parties reasonably necessary to produce and distribute the P3 protein and snacking products that contain nuts), non-transferable, non-assignable, right and license to use the trademarks, service marks and UPC Codes and Prefixes set forth on Section 5.9(c) of the Disclosure Schedules (the “Buyer Licensed Marks”) for a term of two years with respect to such trademarks and service marks and three years with respect to such UPC Codes and Prefixes (each, a “Seller License Term”) solely in connection with the manufacture, labeling, distribution, marketing and sale of the P3 protein and snacking products that contain nuts after the Closing substantially in the manner such products were manufactured, labeled, distributed, marketed and sold as of the Closing (including with respect to the style, appearance and quality of such products) and (i) Seller Parent shall not use the Buyer Licensed Marks in a manner detrimental to Buyer’s rights in the Buyer Licensed Marks or the goodwill associated therewith, and (ii) Buyer shall, upon reasonable notice to Seller Parent, have the right to inspect the quality of such products and the use of the Buyer Licensed Marks; provided, that, during the applicable Seller License Term, the
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Seller Parent (x) shall transition from, and thereafter shall cease all use of, the Buyer Licensed Marks on the P3 products, and P3 products bearing the Buyer Licensed Marks remaining in the possession or control of the Seller Parent and its Affiliates upon the expiration of the applicable Seller License Term shall be destroyed by the Seller Parent and its Affiliates or otherwise disposed of as directed by the Buyer and (y) shall not use the family codes 000, 600 or 630 within the 29000 GTIN prefix. Except for the license granted in this Section 5.9(c), all rights in the Buyer Licensed Marks are reserved by Buyer and all goodwill arising from Seller Parent’s use of the Buyer Licensed Marks inures to the benefit of Buyer.
Section 1.26Section 5.9(c) of the Disclosure Schedules is hereby amended and restated in its entirety in the form attached hereto as Exhibit H.
Section 1.27Section 5.9(e) of the Purchase Agreement is hereby added and shall read as follows:
Effective as of the Closing, the Buyer hereby grants to the Seller Parent and its Affiliates, and the Seller Parent hereby accepts, on behalf of itself and its Affiliates, a transitional, non-exclusive, worldwide, royalty-free, fully paid-up, sublicensable (but only to any Affiliates, manufacturers, packagers, distributors, and other third parties reasonably necessary to use promotional videos, marketing materials, recipes and other promotional content in the manner such promotional videos, marketing materials, recipes and other promotional content were used as of the Closing (including to produce, distribute, market or sell the products of the Retained Business in the manner such products were produced, distributed, marketed or sold by the Seller Parent and its Affiliates as of the Closing)), non-transferable, non-assignable, right and license to use the trademarks and service marks included in the Business Intellectual Property (the “Additional Buyer Licensed Marks”) during the License Term solely in connection with (x) the manufacture, labeling, distribution, marketing and sale of the products produced, distributed, marketed or sold by the Seller Parent and its Affiliates as part of the Retained Business that use the Additional Buyer Licensed Marks in certain recipes (including recipes on the packaging of such products, advertising on websites or in marketing videos for such products) after the Closing substantially in the manner such products were manufactured, labeled, distributed, marketed or sold by the Seller Parent and its Affiliates as of the Closing (including with respect to the style, appearance and quality of such products) or (y) the use by the Seller Parent and its Affiliates of promotional videos, marketing materials, recipes and other promotional content for the Retained Business that use the Additional Buyer Licensed Marks in certain recipes (including recipes on the packaging of such products, advertising on websites or in marketing videos for such products) after the Closing substantially in the manner such promotional videos, marketing materials, recipes and other promotional content were used by the Seller Parent and its Affiliates for the Retained Business as of the Closing. During the License Term, the Seller Parent shall transition from, and thereafter shall cease all use of, the Additional Buyer Licensed Marks on such products and in any marketing materials or other promotional content, and such products, marketing materials or other
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promotional content bearing the Additional Buyer Licensed Marks remaining in the possession or control of the Seller Parent and its Affiliates upon the expiration of the License Term shall be destroyed by the Seller Parent and its Affiliates or otherwise disposed of as directed by the Buyer. The Seller Parent shall not use the Additional Buyer Licensed Marks in a manner detrimental to the Buyer’s rights in the Additional Buyer Licensed Marks or the goodwill associated therewith, and the Buyer shall, upon reasonable notice to the Seller Parent, have the right to inspect the quality of such products and the use of the Additional Buyer Licensed Marks. Except for the license granted in this Section 5.9(e), all rights in the Additional Buyer Licensed Marks are reserved by the Buyer and all goodwill arising from the Seller Parent’s use of the Additional Buyer Licensed Marks inures to the benefit of the Buyer.
Section 1.28Section 5.9(f) of the Purchase Agreement is hereby added and shall read as follows:
Following the Closing, at the sole cost and expense of the Buyer, the Seller Parent agrees to use commercially reasonable efforts to renew any registered trademarks included in the Business Intellectual Property that are due to expire or lapse, or otherwise have non-extendable maintenance deadlines coming due, between the Closing and August 8, 2021 (inclusive of August 8, 2021). The Buyer shall promptly reimburse the Seller Parent for any out-of-pocket costs and expenses incurred in connection with such renewal or directly pay the Seller Parent’s renewal agent for the related costs and expenses, as applicable.
Section 1.29Section 5.15(e) of the Purchase Agreement is hereby added and shall read as follows:
Following the Closing, to the extent requested by the Seller Parent, the Buyer shall use commercially reasonable efforts (including taking into consideration the advice of the Buyer’s local counsel) to cooperate with the Sellers to allocate a portion of the Purchase Price to the Transferred Assets located in South Korea as required by or advisable under applicable Law, including, for example, by permitting the Seller Parent and its Affiliates to retain physical possession of and sell any Inventory located in South Korea to the distributors of the Business located in South Korea following the Closing (with such transaction to be for the benefit of the Buyer).
Section 1.30The first sentence of Section 5.17 of the Purchase Agreement is hereby amended and restated in its entirety as follows:
As soon as practicable following the date hereof (and, in any event, no later than May 28, 2021), the Seller Parent shall deliver to the Buyer the audited combined balance sheets of the Business as of December 26, 2020 and December 28, 2019, and the related combined statements of income, comprehensive income, cash flows and changes in net parent investment for the years then ended (the “Audited Financial Statements”).
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Section 1.31Section 5.25 of the Purchase Agreement is hereby added and shall read as follows:
At the Closing, the Buyer shall reimburse the Seller Parent, by wire transfer to one or more bank accounts designated in writing by the Seller Parent to the Buyer at least two Business Days prior to the Closing Date, for certain real property surveys conducted prior to the Closing in an amount equal to $86,500 in immediately available funds in United States dollars.
Section 1.32Section 5.26 of the Purchase Agreement is hereby added and shall read as follows:
The parties shall cooperate and negotiate in good faith to finalize and execute a letter agreement regarding the supply of certain nut ingredients by the Buyer from the Suffolk, VA plant for use in production of the Seller Parent’s P3 protein and snacking products no later than one day following the Closing Date (in the event such letter agreement is not executed in advance of the Closing Date).
Article II
MISCELLANEOUS
MISCELLANEOUS
Section 2.1References. Each reference in the Purchase Agreement shall, unless the context otherwise requires, mean the Purchase Agreement as amended by this Amendment.
Section 2.2No Other Amendments; Continuing Effect. The amendments set forth herein are limited precisely as written and will not be deemed to be an amendment of any other term or condition of the Purchase Agreement or any of the documents referred to therein. Except as expressly amended hereby, the terms and conditions of the Purchase Agreement shall continue in full force and effect.
Section 2.3Constructions, Etc. This Amendment shall be governed by all provisions of the Purchase Agreement, unless the context otherwise requires, including all provisions concerning amendment, construction, enforcement, notices, governing law and jurisdiction.
Section 2.4Successors. This Amendment shall be binding upon and shall inure to the benefit of the parties to the Purchase Agreement and their respective successors and permitted assigns.
Section 2.5Counterparts. This Amendment may be executed in two or more counterparts, all of which shall be considered one and the same instrument and, when one or more counterparts have been signed by each of the parties hereto and delivered to the other parties hereto, this Amendment shall be deemed effective as of the date of the Purchase Agreement.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above by their respective officers thereunto duly authorized.
THE KRAFT HEINZ COMPANY
By: /s/ Paulo Basilio__________________
Name: Paulo Basilio
Title: Chief Financial Officer
Title: Chief Financial Officer
[Signature Page to First Amendment to Asset Purchase Agreement]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above by their respective officers thereunto duly authorized.
HORMEL FOODS CORPORATION
By: /s/ Fred Halvin_______________________
By: /s/ Fred Halvin_______________________
Name: Fred Halvin
Title: Vice President, Corporate Development
Title: Vice President, Corporate Development
[Signature Page to First Amendment to Asset Purchase Agreement]
EXHIBIT 31.1
CERTIFICATION REQUIRED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James P. Snee, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Hormel Foods Corporation for the period ended July 25, 2021;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Dated: September 3, 2021 | Signed: | /s/ JAMES P. SNEE | ||||||
| JAMES P. SNEE | ||||||||
| Chairman of the Board, President and Chief Executive Officer | ||||||||
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EXHIBIT 31.2
CERTIFICATION REQUIRED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James N. Sheehan, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Hormel Foods Corporation for the period ended July 25, 2021;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Dated: September 3, 2021 | Signed: | /s/ JAMES N. SHEEHAN | ||||||
| JAMES N. SHEEHAN | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hormel Foods Corporation (the “Company”) on Form 10-Q for the period ended July 25, 2021, as filed with the Securities and Exchange Commission (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: September 3, 2021 | /s/ JAMES P. SNEE | ||||
| JAMES P. SNEE | |||||
| Chairman of the Board, President and Chief Executive Officer | |||||
| Dated: September 3, 2021 | /s/ JAMES N. SHEEHAN | ||||
| JAMES N. SHEEHAN | |||||
| Executive Vice President and Chief Financial Officer | |||||
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