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HORMEL FOODS CORP /DE/ - Quarter Report: 2017 April (Form 10-Q)

Table of Contents

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

[ X ]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2017

or

 

[    ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________________________________ to ________________________________________

 

Commission File Number: 1-2402

 

 

HORMEL FOODS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

41-0319970

(I.R.S. Employer Identification No.)

 

1 Hormel Place

Austin, Minnesota

(Address of principal executive offices)

 

 

 

55912-3680

(Zip Code)

 

(507) 437-5611

(Registrant’s telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

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.                                X   YES        ___ NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).     X   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.

 

Large accelerated filer  X 

 

 

Accelerated filer___

Non-accelerated filer      

(Do not check if a smaller reporting company)

 

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   X  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 June 4, 2017

Common Stock

 

$.01465 par value    528,550,346

Common Stock Non-Voting

 

$.01 par value                         -0-

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION 

 

Item 1.   Financial Statements 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION – April 30, 2017 and October 30, 2016 

CONSOLIDATED STATEMENTS OF OPERATIONS – Three and Six Months Ended April 30, 2017 and April 24, 2016 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – Three and Six Months Ended April 30, 2017 and April 24, 2016 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT – Twelve Months Ended October 30, 2016 and Six Months Ended April 30, 2017 

CONSOLIDATED STATEMENTS OF CASH FLOWS – Six Months Ended April 30, 2017 and April 24, 2016 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 

CRITICAL ACCOUNTING POLICIES 

RESULTS OF OPERATIONS 

Overview 

Consolidated Results 

Segment Results 

Related Party Transactions 

LIQUIDITY AND CAPITAL RESOURCES 

FORWARD-LOOKING STATEMENTS 

 

Item 3.      Quantitative and Qualitative Disclosures About Market Risk 

 

Item 4.      Controls and Procedures 

 

PART II - OTHER INFORMATION 

 

Item 1.       Legal Proceedings 

 

Item 1A.    Risk Factors 

 

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds 

 

Item 6.       Exhibits 

 

SIGNATURES 

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands, except share and per share amounts)

 

 

 

April 30,

 

October 30,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

548,901

 

$

415,143

 

Accounts receivable

 

525,322

 

591,310

 

Inventories

 

988,408

 

985,683

 

Income taxes receivable

 

42,026

 

18,282

 

Prepaid expenses

 

15,892

 

13,775

 

Other current assets

 

5,242

 

5,719

 

TOTAL CURRENT ASSETS

 

2,125,791

 

2,029,912

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

-

 

6,223

 

 

 

 

 

 

 

GOODWILL

 

1,822,671

 

1,834,497

 

 

 

 

 

 

 

OTHER INTANGIBLES

 

884,739

 

903,258

 

 

 

 

 

 

 

PENSION ASSETS

 

78,168

 

68,901

 

 

 

 

 

 

 

INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES

 

246,840

 

239,590

 

 

 

 

 

 

 

OTHER ASSETS

 

183,932

 

182,237

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

Land

 

46,608

 

67,557

 

Buildings

 

742,462

 

805,858

 

Equipment

 

1,616,733

 

1,675,549

 

Construction in progress

 

183,198

 

218,351

 

Less:  Allowance for depreciation

 

(1,545,435)

 

(1,661,866)

 

Net property, plant and equipment

 

1,043,566

 

1,105,449

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

6,385,707

 

$

6,370,067

 

 

 

See Notes to Consolidated Financial Statements

 

3



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands, except share and per share amounts)

 

 

 

April 30,

 

October 30,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

 

 

LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

 

$

372,361

 

$

481,826

 

Accrued expenses

 

57,137

 

82,145

 

Accrued workers compensation

 

24,796

 

36,612

 

Accrued marketing expenses

 

106,613

 

119,583

 

Employee related expenses

 

171,552

 

251,433

 

Taxes payable

 

1,666

 

4,331

 

Interest and dividends payable

 

90,462

 

77,266

 

TOTAL CURRENT LIABILITIES

 

824,587

 

1,053,196

 

 

 

 

 

 

 

LONG-TERM DEBT–less current maturities

 

250,000

 

250,000

 

 

 

 

 

 

 

PENSION AND POST-RETIREMENT BENEFITS

 

526,992

 

522,356

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

90,180

 

93,109

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

7,520

 

-

 

 

 

 

 

 

 

SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

Preferred stock, par value $.01 a share–

 

 

 

 

 

authorized 160,000,000 shares; issued–none

 

 

 

 

 

Common stock, non-voting, par value $.01

 

 

 

 

 

a share–authorized 400,000,000 shares; issued–none

 

 

 

 

 

Common stock, par value $.01465 a share–

 

7,743

 

7,742

 

authorized 1,600,000,000 shares;

 

 

 

 

 

issued 528,536,346 shares April 30, 2017

 

 

 

 

 

issued 528,483,868 shares October 30, 2016

 

 

 

 

 

Additional paid-in capital

 

-

 

-

 

Accumulated other comprehensive loss

 

(299,151)

 

(296,303)

 

Retained earnings

 

4,974,512

 

4,736,567

 

HORMEL FOODS CORPORATION SHAREHOLDERS’ INVESTMENT

 

4,683,104

 

4,448,006

 

NONCONTROLLING INTEREST

 

3,324

 

3,400

 

TOTAL SHAREHOLDERS’ INVESTMENT

 

4,686,428

 

4,451,406

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

$

6,385,707

 

$

6,370,067

 

 

 

See Notes to Consolidated Financial Statements

 

4



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24,
2016

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,187,309

 

$

2,300,235

 

$

4,467,536

 

$

4,592,907

 

Cost of products sold

 

1,700,389

 

1,773,876

 

3,428,336

 

3,508,537

 

GROSS PROFIT

 

486,920

 

526,359

 

1,039,200

 

1,084,370

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

181,009

 

211,144

 

391,226

 

421,092

 

Goodwill impairment charge

 

-

 

991

 

-

 

991

 

Equity in earnings of affiliates

 

10,121

 

9,593

 

23,420

 

21,068

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

316,032

 

323,817

 

671,394

 

683,355

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Interest and investment income

 

2,818

 

3,409

 

5,267

 

1,446

 

Interest expense

 

(3,023)

 

(3,029)

 

(6,049)

 

(6,436)

 

 

 

 

 

 

 

 

 

 

 

EARNINGS BEFORE INCOME TAXES

 

315,827

 

324,197

 

670,612

 

678,365

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

104,941

 

108,813

 

224,423

 

227,814

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

210,886

 

215,384

 

446,189

 

450,551

 

Less: Net (loss) earnings attributable to noncontrolling interest

 

(40)

 

(13)

 

116

 

93

 

NET EARNINGS ATTRIBUTABLE TO HORMEL FOODS CORPORATION

 

$

210,926

 

$

215,397

 

$

446,073

 

$

450,458

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

BASIC

 

$

0.40

 

$

0.41

 

$

0.84

 

$

0.85

 

DILUTED

 

$

0.39

 

$

0.40

 

$

0.83

 

$

0.83

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

BASIC

 

528,712

 

529,898

 

528,649

 

529,380

 

DILUTED

 

539,635

 

543,769

 

539,850

 

543,253

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE:

 

$

0.170

 

$

0.145

 

$

0.340

 

$

0.290

 

 

 

 

See Notes to Consolidated Financial Statements

 

5



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24,
2016

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

210,886

 

$

215,384

 

$

446,189

 

$

450,551

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

907

 

893

 

(7,180)

 

(1,722)

 

Pension and other benefits

 

3,314

 

1,774

 

6,647

 

3,540

 

Deferred hedging

 

(1,184)

 

(650)

 

(2,507)

 

(1,948)

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

 

3,037

 

2,017

 

(3,040)

 

(130)

 

COMPREHENSIVE INCOME

 

213,923

 

217,401

 

443,149

 

450,421

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

8

 

(69)

 

(76)

 

(39)

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO HORMEL FOODS CORPORATION

 

$

213,915

 

$

217,470

 

$

443,225

 

$

450,460

 

 

 

See Notes to Consolidated Financial Statements

 

6



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Hormel Foods Corporation Shareholders

 

 

 

 

 

 

Common
Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Non-
controlling
Interest

 

Total
Shareholders’
Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 25, 2015

 

$

7,741

 

$

-

 

$

-

 

$

4,216,125

 

$

(225,668

)

$

3,195

 

$

4,001,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

890,052

 

 

 

465

 

890,517

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(70,635

)

(260

)

(70,895

)

Purchases of common stock

 

 

 

(87,885

)

 

 

 

 

 

 

 

 

(87,885

)

Stock-based compensation expense

 

1

 

 

 

17,828

 

 

 

 

 

 

 

17,829

 

Exercise of stock options/nonvested shares

 

35

 

 

 

7,476

 

 

 

 

 

 

 

7,511

 

Shares retired

 

(35

)

87,885

 

(25,304

)

(62,546

)

 

 

 

 

-

 

Declared cash dividends – $0.58 per share

 

 

 

 

 

 

 

(307,064

)

 

 

 

 

(307,064

)

Balance at October 30, 2016

 

$

7,742

 

$

-

 

$

-

 

$

4,736,567

 

$

(296,303

)

$

3,400

 

$

4,451,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

446,073

 

 

 

116

 

446,189

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(2,848

)

(192

)

(3,040

)

Purchases of common stock

 

 

 

(49,583

)

 

 

 

 

 

 

 

 

(49,583

)

Stock-based compensation expense

 

1

 

 

 

11,860

 

 

 

 

 

 

 

11,861

 

Exercise of stock options/nonvested shares

 

21

 

 

 

9,276

 

 

 

 

 

 

 

9,297

 

Shares retired

 

(21

)

49,583

 

(21,136

)

(28,426

)

 

 

 

 

-

 

Declared cash dividends – $0.34 per share

 

 

 

 

 

 

 

(179,702

)

 

 

 

 

(179,702

)

Balance at April 30, 2017

 

$

7,743 

 

$

-

 

$

-

 

$

4,974,512

 

$

(299,151

)

$

3,324

 

$

4,686,428

 

 

 

See Notes to Consolidated Financial Statements

 

7



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

April 30,
2017

 

 

 

April 24,
2016

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net earnings

$

446,189

 

 

$

450,551

 

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

59,185

 

 

 

59,863

 

Amortization of intangibles

 

4,143

 

 

 

4,045

 

Goodwill impairment charge

 

-

 

 

 

991

 

Equity in earnings of affiliates, net of dividends

 

(10,898

)

 

 

(6,524

)

Provision for deferred income taxes

 

11,336

 

 

 

(2,397

)

Loss on property/equipment sales and plant facilities

 

1,285

 

 

 

88

 

Non-cash investment activities

 

(2,618

)

 

 

(375

)

Stock-based compensation expense

 

11,861

 

 

 

14,178

 

Excess tax benefit from stock-based compensation

 

(20,704

)

 

 

(36,456

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Decrease in accounts receivable

 

42,036

 

 

 

57,191

 

Increase in inventories

 

(47,792

)

 

 

(34,052

)

(Increase) decrease in prepaid expenses and other current assets

 

(21,790

)

 

 

2,781

 

Increase in pension and post-retirement benefits

 

6,468

 

 

 

2,346

 

Decrease in accounts payable and accrued expenses

 

(215,253

)

 

 

(146,397

)

(Decrease) increase in net income taxes payable

 

(2,292

)

 

 

43,302

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

261,156

 

 

 

409,135

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from sale of business

 

135,944

 

 

 

-

 

Purchases of property/equipment

 

(76,975

)

 

 

(99,852

)

Proceeds from sales of property/equipment

 

1,157

 

 

 

2,709

 

Decrease in investments, equity in affiliates, and other assets

 

2,669

 

 

 

12,178

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

62,795

 

 

 

(84,965

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Principal payments on short-term debt

 

-

 

 

 

(185,000

)

Dividends paid on common stock

 

(166,507

)

 

 

(142,878

)

Share repurchase

 

(49,583

)

 

 

(6,358

)

Proceeds from exercise of stock options

 

8,879

 

 

 

8,370

 

Excess tax benefit from stock-based compensation

 

20,704

 

 

 

36,456

 

NET CASH USED IN FINANCING ACTIVITIES

 

(186,507

)

 

 

(289,410

)

 

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

(3,686

)

 

 

(2,118

)

INCREASE IN CASH AND CASH EQUIVALENTS

 

133,758

 

 

 

32,642

 

Cash and cash equivalents at beginning of year

 

415,143

 

 

 

347,239

 

CASH AND CASH EQUIVALENTS AT END OF QUARTER

$

548,901

 

 

$

379,881

 

 

See Notes to Consolidated Financial Statements

 

8



Table of Contents

 

HORMEL FOODS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE A                                               GENERAL

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.  The balance sheet at October 30, 2016, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 30, 2016.  Fiscal 2017 is a 52-week year as compared with fiscal 2016, which was 53 weeks, with the additional week occurring in the fourth quarter.

 

Reclassifications

 

Certain reclassifications of previously reported amounts have been made to conform to the current year presentation.  The reclassifications had no impact on net earnings or operating cash flows as previously reported.

 

Assets Held for Sale

 

The Company classifies assets as held for sale when management approves and commits to a formal plan of sale with the expectation the sale will be completed within one year.  The net assets of the business held for sale are then recorded at the lower of their current carrying value or the fair market value, less costs to sell.  See additional discussion regarding the Company’s assets held for sale in Note E.

 

Investments

 

The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans.  Under the plans, the participants can defer certain types of compensation and elect to receive a return on the deferred amounts based on the changes in fair value of various investment options, primarily a variety of mutual funds.  The Company has corporate-owned life insurance policies on certain participants in the deferred compensation plans.  The cash surrender value of the policies is included in other assets on the Consolidated Statements of Financial Position.  The securities held by the trust are classified as trading securities.  Therefore, unrealized gains and losses associated with these investments are included in the Company’s earnings.  Securities held by the trust generated gains of $1.8 million and $3.3 million for the second quarter and six months ended April 30, 2017, respectively, compared to gains of $2.9 million and $1.2 million for the second quarter and six months ended April 24, 2016.

 

Supplemental Cash Flow Information

 

Non-cash investment activities presented on the Consolidated Statements of Cash Flows generally consist of unrealized gains or losses on the Company’s rabbi trust.  The noted investments are included in other assets on the Consolidated Statements of Financial Position.  Changes in the value of these investments are included in the Company’s net earnings and are presented in the Consolidated Statements of Operations as either interest and investment income (loss) or interest expense, as appropriate.

 

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Guarantees

 

The Company enters into various agreements guaranteeing specified obligations of affiliated parties.  The Company’s guarantees either terminate in one year or remain in place until such time as the Company revokes the agreement.  The Company currently provides revocable standby letters of credit totaling $4.0 million to guarantee obligations that may arise under workers compensation claims of an affiliated party.  This potential obligation is not reflected in the Company’s Consolidated Statements of Financial Position.

 

New Accounting Pronouncements

 

In May 2014, the FASB issued ASC 606, Revenue from Contracts with Customers.  This topic converges the guidance within U.S. generally accepted accounting principles (GAAP) and international financial reporting standards and supersedes ASC 605, Revenue Recognition.  The new standard requires companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services.  The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions which were not previously addressed comprehensively, and improve guidance for multiple-element arrangements.  On July 8, 2015, the FASB approved a one-year deferral of the effective date.  The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and early adoption is permitted for annual reporting periods beginning after December 15, 2016.  The updated guidance is to be applied either retrospectively or by using a cumulative effect adjustment.  Accordingly, the Company expects to adopt the provisions of this new accounting standard at the beginning of fiscal year 2019, and is currently assessing the impact on its consolidated financial statements with a focus on arrangements with customers.

 

In April 2015, the FASB updated the guidance within ASC 835, Interest.  The update provides guidance on simplifying the presentation of debt issuance costs.  The amendments require debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.  The updated guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted.  The Company retrospectively adopted the new provisions of this accounting standard at the beginning of fiscal year 2017, and adoption did not have a material impact on its consolidated financial statements.

 

In May 2015, the FASB updated the guidance within ASC 820, Fair Value Measurements and Disclosures.  The update provides guidance on the disclosures for investments in certain entities that calculate net asset value (NAV) per share (or its equivalent).  The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share (or its equivalent) as a practical expedient.  The updated guidance is to be applied retrospectively and is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted.  The Company adopted the new provisions of this accounting standard at the beginning of fiscal year 2017, and adoption did not have a material impact on its consolidated financial statements.

 

In February 2016, the FASB updated the guidance within ASC 842, Leases.  The update requires lessees to put most leases on their balance sheets while recognizing expenses on their income statements in a manner similar to current U.S. GAAP.  The guidance also eliminates current real estate-specific provisions for all entities.  For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases.  The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted and the modified retrospective method is to be applied.  Accordingly, the Company expects to adopt the provisions of this new accounting standard at the beginning of fiscal year 2020, and is currently assessing the impact on its consolidated financial statements.

 

In March 2016, the FASB updated the guidance within ASC 718, Compensation-Stock Compensation.  The update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  Early adoption is permitted in any interim or annual period, with adjustments reflected as of the beginning of the fiscal year.  Accordingly, the Company expects to adopt the provisions of this new

 

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accounting standard at the beginning of fiscal year 2018, and is currently assessing the impact on its consolidated financial statements.

 

In June 2016, the FASB updated the guidance within ASC 326, Financial Instruments - Credit Losses.  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 amendments replace the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The updated guidance is to be applied on a modified-retrospective approach and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, and interim periods therein.  The Company is currently assessing the timing and impact of adopting the updated provisions.

 

In August 2016, the FASB updated the guidance within ASC 230, Statement of Cash Flows.  The update makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows.  The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted provided all amendments are adopted in the same period.  The guidance requires application using a retrospective transition method.  The Company is currently assessing the timing and impact of adopting the updated provisions.

 

In October 2016, the FASB updated the guidance within ASC 740, Income Taxes.  The updated guidance requires the recognition of the income tax consequences of an intra-entity asset transfer, other than transfers of inventory, when the transfer occurs.  For intra-entity transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party.  The updated guidance is effective for reporting periods beginning after December 15, 2017, with early adoption permitted only within the first interim period of a fiscal year.  The guidance is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.  The Company is currently assessing the timing and impact of adopting the updated provisions.

 

In January 2017, the FASB updated the guidance within ASC 350, Intangibles—Goodwill and Other.  The updated guidance eliminates the second step of the two-step impairment test.  The updated guidance modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value.  An impairment charge should be made if a reporting unit’s carrying amount exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit.  The updated guidance is effective for fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The updated guidance is required to be adopted on a prospective basis.  The Company is currently assessing the timing and impact of adopting the updated provisions.

 

In March 2017, the FASB updated the guidance within ASC 715, Compensation – Retirement Benefits.  The updated guidance requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item or items as other compensation costs.  The updated guidance also requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside income from operations.  Additionally, only the service cost component is eligible for capitalization, when applicable.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.  The updated guidance should be applied retrospectively for the presentation of the service cost component and other components of net benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net benefit cost.  The Company is currently assessing the timing and impact of adopting the updated provisions.

 

NOTE B                                               ACQUISITIONS

 

On May 26, 2016, the Company acquired Justin’s, LLC (Justin’s) for a final purchase price of $280.9 million.  The transaction provides a cash flow benefit resulting from the amortization of the tax basis of assets, the net present value of which is approximately $70.0 million.  The purchase price was funded by the Company with cash on

 

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hand and by utilizing short-term financing.  Primary assets acquired include goodwill of $186.4 million and intangibles of $89.9 million.

 

Justin’s is a pioneer in nut butter-based snacking and this acquisition allows the Company to enhance its presence in the specialty natural and organic nut butter category, complementing the Company’s SKIPPY peanut butter products.

 

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 Grocery Products segment.

 

NOTE C                                               INVENTORIES

 

Principal components of inventories are:

 

(in thousands)

 

April 30,
2017

 

October 30,
2016

 

Finished products

 

$

562,847

 

$

553,634

 

Raw materials and work-in-process

 

262,774

 

253,662

 

Materials and supplies

 

162,787

 

178,387

 

Total

 

$

988,408

 

$

985,683

 

 

NOTE D                                               GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill for the six months ended April 30, 2017, is presented in the table below.  There were no changes to the carrying amount of goodwill in the second quarter of fiscal 2017.  The reduction during the first six months is due to the sale of Farmer John on January 3, 2017.  See additional discussion regarding the Company’s assets held for sale in Note E.

 

(in thousands)

 

Grocery
Products

 

Refrigerated
Foods

 

 

JOTS

 

Specialty
Foods

 

International
& Other

 

Total

 

 

Balance as of October 30, 2016

 

$

508,800

 

$

584,443

 

 

$

203,214

 

$

373,782

 

$

164,258

 

$

1,834,497

 

 

Goodwill sold

 

-

 

(11,826

)

 

-

 

-

 

-

 

(11,826

)

 

Balance as of April 30, 2017

 

$

508,800

 

$

572,617

 

 

$

203,214

 

$

373,782

 

$

164,258

 

$

1,822,671

 

 

 

The gross carrying amount and accumulated amortization for definite-lived intangible assets are presented in the table below.

 

 

 

April 30, 2017

 

October 30, 2016

 

(in thousands)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Customer lists/relationships

 

$

85,440

 

$

(22,163)

 

$

88,240

 

$

(20,737)

 

Formulas and recipes

 

1,950

 

(1,894)

 

1,950

 

(1,796)

 

Other intangibles

 

3,100

 

(1,713)

 

3,520

 

(1,677)

 

Total

 

$

90,490

 

$

(25,770)

 

$

93,710

 

$

(24,210)

 

 

Amortization expense was $2.0 million and $4.1 million for the second quarter and six months ended April 30, 2017, respectively, compared to $1.9 million and $4.0 million for the second quarter and six months ended April 24, 2016.

 

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Estimated annual amortization expense for the five fiscal years after October 30, 2016, is as follows:

 

(in millions)

 

 

 

2017

 

$ 8.1

 

2018

 

7.6

 

2019

 

7.4

 

2020

 

7.4

 

2021

 

7.4

 

 

The carrying amounts for indefinite-lived intangible assets are presented in the table below.

 

(in thousands)

 

April 30, 2017

 

October 30, 2016

 

Brands/tradenames/trademarks

 

$

819,835

 

$

825,774

 

Other intangibles

 

184

 

7,984

 

Total

 

$

820,019

 

$

833,758

 

 

NOTE E                                               ASSETS HELD FOR SALE

 

At the end of fiscal year 2016, the Company was actively marketing Clougherty Packing, LLC, parent company of Farmer John and Saag’s Specialty Meats, along with PFFJ, LLC, farm operations in California, Arizona, and Wyoming (Farmer John).  Through this process, the Company identified the specific assets and liabilities to be sold and allocated goodwill based on the relative fair values of the assets held for sale and the assets that would be retained by the Company.  In November 2016, the Company entered into an agreement for the sale and the transaction closed on January 3, 2017.  The purchase price was $145 million in cash, pending final working capital adjustments.  The assets held for sale were reported within the Company’s Refrigerated Foods segment.  The assets held for sale were not material to the Company’s annual net sales, net earnings, or earnings per share.

 

Amounts classified as assets and liabilities held for sale on October 30, 2016, were presented on the Company’s Consolidated Statement of Financial Position within their respective accounts, and include the following:

 

Assets held for sale (in thousands)

 

 

 

Current assets

 

$

80,861

 

Goodwill

 

12,703

 

Intangibles

 

14,321

 

Property, plant and equipment

 

74,812

 

Total assets held for sale

 

$

182,697

 

 

 

 

 

Liabilities held for sale (in thousands)

 

 

 

Total current liabilities held for sale

 

$

44,066

 

 

NOTE F                                                PENSION AND OTHER POST-RETIREMENT BENEFITS

 

Net periodic benefit cost for pension and other post-retirement benefit plans consists of the following:

 

 

 

Pension Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

 

April 30, 2017

 

April 24, 2016

 

April 30, 2017

 

April 24, 2016

 

Service cost

 

$

7,564

 

$

6,680

 

$

15,128

 

$

13,360

 

Interest cost

 

13,566

 

13,678

 

27,132

 

27,356

 

Expected return on plan assets

 

(22,734)

 

(21,678)

 

(45,468)

 

(43,355)

 

Amortization of prior service cost

 

(750)

 

(1,066)

 

(1,500)

 

(2,132)

 

Recognized actuarial loss

 

6,542

 

4,586

 

13,083

 

9,171

 

Net periodic cost

 

$

4,188

 

$

2,200

 

$

8,375

 

$

4,400

 

 

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Post-retirement Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

 

April 30, 2017

 

April 24, 2016

 

April 30, 2017

 

April 24, 2016

 

Service cost

 

$

274

 

$

317

 

$

549

 

$

633

 

Interest cost

 

2,871

 

3,236

 

5,742

 

6,472

 

Amortization of prior service cost

 

(1,069)

 

(1,051)

 

(2,137)

 

(2,101)

 

Recognized actuarial loss

 

599

 

392

 

1,227

 

784

 

Net periodic cost

 

$

2,675

 

$

2,894

 

$

5,381

 

$

5,788

 

 

NOTE G                                              DERIVATIVES AND HEDGING

 

The Company uses hedging programs to manage price risk associated with commodity purchases.  These programs utilize futures contracts and swaps to manage the Company’s exposure to price fluctuations in the commodities markets.  The Company has determined its programs which are designated as hedges are highly effective in offsetting the changes in fair value or cash flows generated by the items hedged.

 

Cash Flow Hedges:  The Company utilizes corn and lean hog futures to offset price fluctuation in the Company’s future direct grain and hog purchases.  The financial instruments are designated and accounted for as cash flow hedges, and the Company measures the effectiveness of the hedges at least quarterly.  Effective gains or losses related to these cash flow hedges are reported in accumulated other comprehensive loss (AOCL) and reclassified into earnings, through cost of products sold, in the period or periods in which the hedged transactions affect earnings.  Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold.  The Company typically does not hedge its grain exposure beyond the next two upcoming fiscal years and its hog exposure beyond the next fiscal year.  As of April 30, 2017, and October 30, 2016, the Company had the following outstanding commodity futures contracts that were entered into to hedge forecasted purchases:

 

 

 

Volume

 

Commodity

 

April 30, 2017

 

October 30, 2016

 

Corn

 

15.7 million bushels

 

22.4 million bushels

 

Lean hogs

 

0.1 million cwt

 

-

 

 

As of April 30, 2017, the Company has included in AOCL, hedging gains of $5.2 million (before tax) relating to these positions, compared to gains of $9.2 million (before tax) as of October 30, 2016.  The Company expects to recognize the majority of these gains over the next 12 months.

 

Fair Value Hedges:  The Company utilizes futures to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers.  The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery.  The futures contracts are designated and accounted for as fair value hedges, and the Company measures the effectiveness of the hedges at least quarterly.  Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and are recorded on the Consolidated Statements of Financial Position as a current asset and liability, respectively.  Effective gains or losses related to these fair value hedges are recognized through cost of products sold in the period or periods in which the hedged transactions affect earnings.  Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold.  As of April 30, 2017, and October 30, 2016, the Company had the following outstanding commodity futures contracts designated as fair value hedges:

 

 

 

Volume

 

Commodity

 

April 30, 2017

 

October 30, 2016

 

Corn

 

1.2 million bushels

 

3.6 million bushels

 

Lean hogs

 

0.1 million cwt

 

0.2 million cwt

 

 

Other Derivatives:  The Company holds certain futures and options contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets.  The Company has not applied hedge accounting to these positions.

 

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As of April 30, 2017, and October 30, 2016, the Company had the following outstanding futures related to these programs:

 

 

 

Volume

 

Commodity

 

April 30, 2017

 

October 30, 2016

 

Corn

 

0.3 million bushels

 

4.0 million bushels

 

Soybean meal

 

-

 

11,000 tons

 

 

Fair Values:  The fair values of the Company’s derivative instruments (in thousands) as of April 30, 2017, and October 30, 2016, were as follows:

 

 

 

 

 

Fair Value (1)

 

 

 

Location on Consolidated
Statements of Financial
Position

 

April 30,
2017

 

October 30,
2016

 

Asset Derivatives

 

 

 

 

 

 

 

Derivatives Designated as Hedges

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

(1,011)

 

$

(194)

 

 

 

 

 

 

 

 

 

Derivatives not Designated as Hedges

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

(5)

 

144

 

 

 

 

 

 

 

 

 

Total Asset Derivatives

 

 

 

$

(1,016)

 

$

(50)

 

 

(1)          Amounts represent the gross fair value of derivative assets and liabilities.  The Company nets the derivative assets and liabilities for each of its hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract.  The amount or timing of cash collateral balances may impact the classification of the derivative in the Consolidated Statements of Financial Position.  See Note L “Fair Value Measurements” for a discussion of these net amounts as reported in the Consolidated Statements of Financial Position.

 

Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the second quarter ended April 30, 2017, and April 24, 2016, were as follows:

 

 

 

Gain/(Loss)
Recognized in AOCL
(Effective Portion)
(1)

 

Location on

 

Gain/(Loss)
Reclassified from
AOCL into Earnings
(Effective Portion)
(1)

 

Gain/(Loss)
Recognized in
Earnings (Ineffective
Portion)
(2) (4)

 

 

Three Months Ended

 

Consolidated

 

Three Months Ended

 

Three Months Ended

Cash Flow Hedges

 

April 30,
2017

 

April 24,
2016

 

Statements
of Operations

 

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24,
2016

Commodity contracts

 

$

(141)

 

$

(1,620)

 

Cost of products sold

 

$

1,753

 

$

(577)

 

$

40

 

$

(29)

 

 

 

 

 

Location on

 

Gain/(Loss)
Recognized in
Earnings (Effective
Portion)
(3)

 

Gain/(Loss)
Recognized in
Earnings (Ineffective
Portion)
(2) (5)

 

 

 

 

Consolidated

 

Three Months Ended

 

Three Months Ended

Fair Value Hedges

 

 

 

 

 

Statements
of Operations

 

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24,
2016

Commodity contracts

 

 

 

 

 

Cost of products sold

 

$

(467)

 

$

664

 

$

1

 

$

13

 

 

 

 

 

Location on

 

Gain/(Loss)
Recognized
in Earnings

 

 

 

 

 

 

Consolidated

 

Three Months Ended

 

 

Derivatives not
Designated as Hedges

 

 

 

 

 

Statements
of Operations

 

April 30,
2017

 

April 24,
2016

 

 

 

 

Commodity contracts

 

 

 

 

 

Cost of products sold

 

$

(9)

 

$

50

 

 

 

 

 

 

 

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Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the six months ended April 30, 2017, and April 24, 2016, were as follows:

 

 

 

Gain/(Loss)
Recognized in AOCL
(Effective Portion)
(1)

 

Location on

 

Gain/(Loss)
Reclassified from
AOCL into Earnings
(Effective Portion)
(1)

 

Gain/(Loss)
Recognized in
Earnings (Ineffective
Portion)
(2) (4)

 

 

Six Months Ended

 

Consolidated

 

Six Months Ended

 

Six Months Ended

Cash Flow Hedges

 

April 30,
2017

 

April 24,
2016

 

Statements
of Operations

 

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24
2016

Commodity contracts

 

$

(787)

 

$

(4,468)

 

Cost of products sold

 

$

3,222

 

$

(1,344)

 

$

40

 

$

(28)

 

 

 

 

 

Location on

 

Gain/(Loss)
Recognized in
Earnings (Effective
Portion)
(3)

 

Gain/(Loss)
Recognized in
Earnings (Ineffective
Portion)
(2) (5)

 

 

 

 

Consolidated

 

Six Months Ended

 

Six Months Ended

Fair Value Hedges

 

 

 

 

 

Statements
of Operations

 

April 30, 2017

 

April 24, 2016

 

April 30,
2017

 

April 24,
2016

Commodity contracts

 

 

 

 

 

 

 

Cost of products sold

 

$

(591)

 

$

1,906

 

$

1

 

$

(239)

 

 

 

 

 

Location on

 

Gain/(Loss)
Recognized
in Earnings

 

 

 

 

 

 

Consolidated

 

Six Months Ended

 

 

Derivatives not
Designated as Hedges

 

 

 

 

 

Statements
of Operations

 

April 30,
2017

 

April 24,
2016

 

 

 

 

Commodity contracts

 

 

 

 

 

 

 

Cost of products sold

 

$

(237)

 

$

(430)

 

 

 

 

 

 

 

(1)     Amounts represent gains or losses in AOCL before tax.  See Note I “Accumulated Other Comprehensive Loss” or the Consolidated Statements of Comprehensive Income for the after-tax impact of these gains or losses on net earnings.

(2)     There were no gains or losses excluded from the assessment of hedge effectiveness during the second quarter or first six months.

(3)     Amounts represent losses on commodity contracts designated as fair value hedges that were closed during the second quarter or first six months, which were offset by a corresponding gain on the underlying hedged purchase commitment.  Additional gains or losses related to changes in the fair value of open commodity contracts, along with the offsetting gain or loss on the hedged purchase commitment, are also marked-to-market through earnings with no impact on a net basis.

(4)     There were no gains or losses resulting from the discontinuance of cash flow hedges during the second quarter or first six months.

(5)     There were no gains or losses recognized as a result of a hedged firm commitment no longer qualifying as a fair value hedge during the second quarter or first six months.

 

NOTE H                                              INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES

 

The Company accounts for its majority-owned operations under the consolidation method.  Investments in which the Company owns a minority interest, and for which there are no other indicators of control, are accounted for under the equity or cost method.  These investments, along with any related receivables from affiliates, are included in the Consolidated Statements of Financial Position as investments in and receivables from affiliates.

 

Investments in and receivables from affiliates consists of the following:

 

(in thousands)

 

Segment

 

% Owned

 

April 30,
2017

 

October 30,
2016

MegaMex Foods, LLC

 

Grocery Products

 

50%

 

$

184,379

 

$

180,437

Foreign Joint Ventures

 

International & Other

 

Various (26-40%)

 

62,461

 

59,153

Total

 

 

 

 

 

$

246,840

 

$

239,590

 

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Equity in earnings of affiliates consists of the following:

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

 

Segment

 

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24,
2016

 

MegaMex Foods, LLC

 

Grocery Products

 

$

9,116

 

$

8,568

 

$

18,187

 

$

15,773

 

Foreign Joint Ventures

 

International & Other

 

1,005

 

1,025

 

5,233

 

5,295

 

Total

 

 

 

$

10,121

 

$

9,593

 

$

23,420

 

$

21,068

 

 

Dividends received from affiliates for the second quarter and six months ended April 30, 2017, were $10.0 million and $12.5 million, respectively, compared to $9.5 million and $14.5 million, respectively, for the second quarter and six months ended April 24, 2016.

 

The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $14.9 million is remaining as of April 30, 2017.  This difference is being amortized through equity in earnings of affiliates.

 

NOTE I                                                   ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Components of accumulated other comprehensive loss are as follows:

 

(in thousands)

 

Foreign
Currency
Translation

 

Pension &
Other
Benefits

 

Deferred
Gain (Loss) -
Hedging

 

Accumulated
Other
Comprehensive
Loss

 

Balance at January 29, 2017

 

$

(13,336)

 

$

(293,219)

 

$

4,415

 

$

(302,140)

 

 

 

 

 

 

 

 

 

 

 

Unrecognized gains (losses)

 

 

 

 

 

 

 

 

 

Gross

 

859

 

-

 

(141)

 

718

 

Tax effect

 

-

 

-

 

52

 

52

 

Reclassification into net earnings

 

 

 

 

 

 

 

 

 

Gross

 

-

 

5,321(1)

 

(1,753)(2)

 

3,568

 

Tax effect

 

-

 

(2,007)

 

658

 

(1,349)

 

Net of tax amount

 

859

 

3,314

 

(1,184)

 

2,989

 

Balance at April 30, 2017

 

$

(12,477)

 

$

(289,905)

 

$

3,231

 

$

(299,151)

 

 

(in thousands)

 

Foreign
Currency
Translation

 

Pension &
Other
Benefits

 

Deferred
Gain (Loss) -
Hedging

 

Accumulated
Other
Comprehensive
Loss

 

Balance at October 30, 2016

 

$

(5,489)

 

$

(296,552)

 

$

5,738

 

$

(296,303)

 

Unrecognized gains (losses)

 

 

 

 

 

 

 

 

 

Gross

 

(6,988)

 

-

 

(787)

 

(7,775)

 

Tax effect

 

-

 

-

 

294

 

294

 

Reclassification into net earnings

 

 

 

 

 

 

 

 

 

Gross

 

-

 

10,673(1)

 

(3,222)(2)

 

7,451

 

Tax effect

 

-

 

(4,026)

 

1,208

 

(2,818)

 

Net of tax amount

 

(6,988)

 

6,647

 

(2,507)

 

(2,848)

 

Balance at April 30, 2017

 

$

(12,477)

 

$

(289,905)

 

$

3,231

 

$

(299,151)

 

 

(1)                                  Included in the computation of net periodic cost (see Note F “Pension and Other Post-Retirement Benefits” for additional details).

(2)                                  Included in cost of products sold in the Consolidated Statements of Operations.

 

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NOTE J                                                 INCOME TAXES

 

The amount of unrecognized tax benefits, including interest and penalties, is recorded in other long-term liabilities.  If recognized as of April 30, 2017, and April 24, 2016, $19.8 million and $18.3 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 for the second quarter and first six months of fiscal 2017 was $(0.1) million and $0.1 million, respectively, compared to $0.7 million and $0.4 million for the comparable quarter and first six months of fiscal 2016.  The amount of accrued interest and penalties at April 30, 2017, and April 24, 2016, associated with unrecognized tax benefits was $2.7 million and $2.9 million, respectively.

 

The Company is regularly audited by federal and state taxing authorities.  The United States Internal Revenue Service (I.R.S.) concluded their examination of fiscal year 2015 in the first quarter of fiscal 2017.  The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years 2016 and 2017.  The objective of CAP is to contemporaneously work with the I.R.S. to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return.  The Company may elect to continue participating in CAP for future tax years; the Company may withdraw from the program at any time.

 

The Company is in various stages of audit by several state taxing authorities on a variety of fiscal years, as far back as 2011.  While it is reasonably possible that one or more of these audits may be completed within the next 12 months and the related unrecognized tax benefits may change based on the status of the examinations, it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.

 

 

NOTE K                                              STOCK-BASED COMPENSATION

 

The Company issues stock options and nonvested shares as part of its stock incentive plans for employees and non-employee directors.  The Company’s policy is to grant options with the exercise price equal to the market price of the common stock on the date of grant.  Options typically vest over four years and expire ten years after the date of the grant.  The Company recognizes stock-based compensation expense ratably over the shorter of the requisite service period or vesting period.  The fair value of stock-based compensation granted to retirement-eligible individuals is expensed at the time of grant.

 

A reconciliation of the number of options outstanding and exercisable (in thousands) as of April 30, 2017, and changes during the six months then ended, is as follows:

 

 

 

Shares

 

Weighted-
Average

Exercise Price

 

Weighted-
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic Value

 

Outstanding at October 30, 2016

 

31,998

 

$  16.05

 

 

 

 

 

Granted

 

2,360

 

33.58

 

 

 

 

 

Exercised

 

2,410

 

10.12

 

 

 

 

 

Forfeited

 

36

 

9.35

 

 

 

 

 

Outstanding at April 30, 2017

 

31,912

 

$  17.80

 

5.0 years

 

$ 558,326

 

Exercisable at April 30, 2017

 

25,753

 

$  14.46

 

4.1 years

 

$ 532,730

 

 

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The weighted-average grant date fair value of stock options granted and the total intrinsic value of options exercised (in thousands) during the second quarter and first six months of fiscal years 2017 and 2016, are as follows:

 

 

Three Months Ended

 

Six Months Ended

 

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24,
2016

Weighted-average grant date fair value

$

7.03

 

$

8.36

 

$

6.41

 

$

7.82

Intrinsic value of exercised options

$

9,070

 

$

45,081

 

$

61,088

 

$

103,216

 

The fair value of each option award is calculated on the date of grant using the Black-Scholes valuation model utilizing the following weighted-average assumptions:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24,
2016

 

Risk-free interest rate

 

2.5%

 

1.9%

 

2.4%

 

2.1%

 

Dividend yield

 

1.9%

 

1.4%

 

2.0%

 

1.5%

 

Stock price volatility

 

19.0%

 

19.0%

 

19.0%

 

19.0%

 

Expected option life

 

8 years

 

8 years

 

8 years

 

8 years

 

 

As part of the annual valuation process, the Company reassesses the appropriateness of the inputs used in the valuation models.  The Company establishes the risk-free interest rate using stripped U.S. Treasury yields as of the grant date where the remaining term is approximately the expected life of the option.  The dividend yield is set based on the dividend rate approved by the Company’s Board of Directors and the stock price on the grant date.  The expected volatility assumption is set based primarily on historical volatility.  As a reasonableness test, implied volatility from exchange traded options is also examined to validate the volatility range obtained from the historical analysis.  The expected life assumption is set based on an analysis of past exercise behavior by option holders.  In performing the valuations for option grants, the Company has not stratified option holders as exercise behavior has historically been consistent across all employee and non-employee director groups.

 

Nonvested shares vest on the earlier of the day before the Company’s next annual meeting date or one year. A reconciliation of the nonvested shares (in thousands) as of April 30, 2017, and changes during the six months then ended, is as follows:

 

 

 

Shares

 

Weighted-
Average Grant-
Date Fair Value

 

Nonvested at October 30, 2016

 

47

 

$  41.01

 

Granted

 

58

 

 

 

Vested

 

47

 

 

 

Nonvested at April 30, 2017

 

58

 

$  35.62

 

 

The weighted-average grant date fair value of nonvested shares granted, the total fair value (in thousands) of nonvested shares granted, and the fair value (in thousands) of shares that have vested during the first six months of fiscal years 2017 and 2016, are as follows:

 

 

 

Six Months Ended

 

 

 

April 30,
2017

 

April 24,
2016

 

Weighted-average grant date fair value

 

$  35.62

 

$  41.01

 

Fair value of nonvested shares granted

 

$  2,080

 

$  1,920

 

Fair value of shares vested

 

$  1,920

 

$  1,920

 

 

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Table of Contents

 

Stock-based compensation expense, along with the related income tax benefit, for the second quarter and first six months of fiscal years 2017 and 2016 is presented in the table below.

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24,
2016

Stock-based compensation expense recognized

$

4,621

 

$

7,016

 

$

11,861

 

$

14,178

Income tax benefit recognized

(1,753)

 

(2,662)

 

(4,500)

 

(5,379)

After-tax stock-based compensation expense

$

2,868

 

$

4,354

 

$

7,361

 

$

8,799

 

At April 30, 2017, there was $15.2 million of total unrecognized compensation expense from stock-based compensation arrangements granted under the plans.  This compensation is expected to be recognized over a weighted-average period of approximately 2.5 years.  During the second quarter and six months ended April 30, 2017, cash received from stock option exercises was $1.5 million and $8.9 million, respectively, compared to $4.9 million and $8.4 million for the second quarter and six months ended April 24, 2016.  The total tax benefit to be realized for tax deductions from these option exercises for the second quarter and six months ended April 30, 2017, was $3.4 million and $23.0 million, respectively, compared to $17.2 million and $39.2 million in the comparable periods of fiscal 2016.

 

Shares issued for option exercises and nonvested shares may be either authorized but unissued shares, or shares of treasury stock acquired in the open market or otherwise.

 

NOTE L                                               FAIR VALUE MEASUREMENTS

 

Pursuant to the provisions of ASC 820, Fair Value Measurements and Disclosures (ASC 820), the Company measures certain assets and liabilities at fair value or discloses the fair value of certain assets and liabilities recorded at cost in the consolidated financial statements.  Fair value is calculated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  ASC 820 establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of three levels based on the inputs used in the valuation.  Assets and liabilities are classified 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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Table of Contents

 

The Company’s financial assets and liabilities are measured at fair value on a recurring basis as of April 30, 2017, and October 30, 2016, and their level within the fair value hierarchy, are presented in the tables below.

 

 

 

Fair Value Measurements at April 30, 2017

 

(in thousands)

 

Fair Value at
April 30,
2017

 

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)

 

$

548,901

 

$

548,901

 

$

-

 

$

-

 

Other trading securities (2)

 

125,602

 

-

 

125,602

 

-

 

Commodity derivatives (3)

 

2,606

 

2,606

 

-

 

-

 

Total Assets at Fair Value

 

$

677,109

 

$

551,507

 

$

125,602

 

$

-

 

 

 

 

 

 

 

 

 

 

 

Liabilities at Fair Value

 

 

 

 

 

 

 

 

 

Deferred compensation (2)

 

$

62,145

 

$

-

 

$

62,145

 

$

-

 

Total Liabilities at Fair Value

 

$

62,145

 

$

-

 

$

62,145

 

$

-

 

 

 

 

Fair Value Measurements at October 30, 2016

 

(in thousands)

 

Fair Value at
October 30,
2016

 

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)

 

$

 415,143

 

$

 415,143

 

$

 -

 

$

 -

 

Other trading securities (2)

 

122,305

 

-

 

122,305

 

-

 

Commodity derivatives (3)

 

3,094

 

3,094

 

-

 

-

 

Total Assets at Fair Value

 

$

 540,542

 

$

 418,237

 

$

 122,305

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

Liabilities at Fair Value

 

 

 

 

 

 

 

 

 

Deferred compensation (2)

 

$

 60,949

 

$

 -

 

$

 60,949

 

$

 -

 

Total Liabilities at Fair Value

 

$

 60,949

 

$

 -

 

$

 60,949

 

$

 -

 

 

 

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 consist primarily of bank deposits, money market funds rated AAA, or other highly liquid investment accounts.  As these investments have a maturity date of three months or less, the carrying value approximates fair value.

(2)                                  A majority of the funds held in the rabbi trust relate to the supplemental executive retirement plans and have been invested in fixed income funds managed by a third party.  The declared rate on these funds is set based on a formula using the yield of the general account investment portfolio supporting the fund, adjusted for expenses and other charges.  The rate is guaranteed for one year at issue, and may be reset annually on the policy anniversary, subject to a guaranteed minimum rate.  As the value is based on adjusted market rates, and the fixed rate is only reset on an annual basis, these funds are classified as Level 2.  The remaining funds held are also managed by a third party insurance policy, the values of which represent their cash surrender value based on the fair value of the underlying investments in the account and include equity securities, money market accounts, bond funds, or other portfolios for which there is an active quoted market.  Therefore these policies are also classified as Level 2.  The related deferred compensation liabilities are included in other long-term liabilities on the Consolidated Statements of Financial Position with investment options generally mirroring those funds held by the rabbi trust.  Therefore these investment balances are classified as Level 2.  The Company also offers a fixed rate investment option to participants.  The rate earned on these investments is adjusted annually based on a specified percentage of the United States Internal Revenue Service (I.R.S.) Applicable Federal Rates.  These balances are classified as Level 2.

(3)                                  The Company’s commodity derivatives represent futures contracts used in its hedging or other programs to offset price fluctuations associated with purchases of corn, soybean meal, and hogs, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers.  The Company’s futures contracts

 

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Table of Contents

 

for corn and soybean meal are traded on the Chicago Board of Trade, while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange.  These are active markets with quoted prices available and these contracts are classified as Level 1.  All derivatives are reviewed for potential credit risk and risk of nonperformance.  The Company nets the derivative assets and liabilities for each of its hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract.  The net balance for each program is included in other current assets or accounts payable, as appropriate, in the Consolidated Statements of Financial Position.  As of April 30, 2017, the Company has recognized the right to reclaim net cash collateral of $3.6 million from various counterparties (including $12.3 million of realized gains offset by cash owed of $8.7 million on closed positions).  As of October 30, 2016, the Company had recognized the right to reclaim net cash collateral of $3.1 million from various counterparties (including $7.1 million of realized gains offset by cash owed of $4.0 million on closed positions).

 

The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value.  The Company does not carry its long-term debt at fair value in its Consolidated Statements of Financial Position.  Based on borrowing rates available to the Company for long-term financing with similar terms and average maturities, the fair value of long-term debt, utilizing discounted cash flows (Level 2), was $269.2 million as of April 30, 2017, and $274.9 million as of October 30, 2016.

 

In accordance with the provisions of ASC 820, the Company measures certain nonfinancial assets and liabilities at fair value, which are recognized or disclosed on a nonrecurring basis (e.g. goodwill, intangible assets, and property, plant and equipment).  During the second quarter of fiscal year 2016, a $1.0 million goodwill impairment charge was recorded for the portion of DCB assets held for sale which was based on the valuation of these assets as implied by the agreed-upon sales price.  See additional discussion regarding the Company’s assets held for sale in Note E.  During the six months ended April 30, 2017, there were no material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

 

NOTE M                                            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:

 

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

 

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24,
2016

 

Basic weighted-average shares outstanding

 

528,712

 

529,898

 

528,649

 

529,380

 

Dilutive potential common shares

 

10,923

 

13,871

 

11,201

 

13,873

 

Diluted weighted-average shares outstanding

 

539,635

 

543,769

 

539,850

 

543,253

 

 

For the second quarter and six months ended April 30, 2017, 4.5 million and 3.9 million, respectively, weighted-average stock options were not included in the computation of dilutive potential common shares since their inclusion would have had an antidilutive effect on earnings per share, compared to none and 0.5 million, respectively, for the second quarter and six months ended April 24, 2016.

 

NOTE N                                               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 five segments:  Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, 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.  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, chicken, and turkey products products for retail, foodservice, and fresh product customers.

 

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Table of Contents

 

The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers.

 

The Specialty Foods segment consists of the processing, marketing, and sale of nutritional and private label shelf-stable products to retail, foodservice, and industrial 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.

 

Intersegment sales are recorded at approximate cost and are eliminated in the Consolidated Statements of Operations.  The Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance.  The Company also retains various other income and unallocated expenses at corporate.  Equity in earnings of affiliates is included in segment operating profit; however, earnings attributable to the Company’s noncontrolling interests are excluded.  These items are included below as net interest and investment expense (income), general corporate expense, and noncontrolling interest when reconciling to earnings before income taxes.

 

Sales and operating profits for each of the Company’s reportable segments and reconciliation to earnings before income taxes are set forth below.  The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets.  Therefore, the Company does not represent these segments, if operated independently, would report the operating profit and other financial information shown below.

 

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Table of Contents

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24,
2016

Sales to Unaffiliated Customers

 

 

 

 

 

 

 

 

 

 

 

   Grocery Products

$

432,205

 

$

401,472

 

$

849,950

 

$

793,690

   Refrigerated Foods

 

1,027,486

 

 

1,092,479

 

 

2,150,525

 

 

2,254,600

   Jennie-O Turkey Store

 

388,237

 

 

423,540

 

 

809,226

 

 

795,606

   Specialty Foods

 

208,214

 

 

272,484

 

 

400,843

 

 

510,263

   International & Other

 

131,167

 

 

110,260

 

 

256,992

 

 

238,748

Total

$

2,187,309

 

$

2,300,235

 

$

4,467,536

 

$

4,592,907

 

 

 

 

 

 

 

 

 

 

 

 

Intersegment Sales

 

 

 

 

 

 

 

 

 

 

 

   Grocery Products

$

-

 

$

-

 

$

-

 

$

-

   Refrigerated Foods

 

1,677

 

 

3,657

 

 

3,816

 

 

5,987

   Jennie-O Turkey Store

 

27,560

 

 

30,280

 

 

55,816

 

 

60,683

   Specialty Foods

 

10

 

 

9

 

 

15

 

 

9

   International & Other

 

-

 

 

-

 

 

-

 

 

-

Total

 

29,247

 

 

33,946

 

 

59,647

 

 

66,679

   Intersegment elimination

 

(29,247)

 

 

(33,946)

 

 

(59,647)

 

 

(66,679)

Total

$

-

 

$

-

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

   Grocery Products

$

432,205

 

$

401,472

 

$

849,950

 

$

793,690

   Refrigerated Foods

 

1,029,163

 

 

1,096,136

 

 

2,154,341

 

 

2,260,587

   Jennie-O Turkey Store

 

415,797

 

 

453,820

 

 

865,042

 

 

856,289

   Specialty Foods

 

208,224

 

 

272,493

 

 

400,858

 

 

510,272

   International & Other

 

131,167

 

 

110,260

 

 

256,991

 

 

238,748

   Intersegment elimination

 

(29,247)

 

 

(33,946)

 

 

(59,647)

 

 

(66,679)

Total

$

2,187,309

 

$

2,300,235

 

$

4,467,536

 

$

4,592,907

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Profit

 

 

 

 

 

 

 

 

 

 

 

   Grocery Products

$

77,487

 

$

67,110

 

$

143,114

 

$

132,383

   Refrigerated Foods

 

130,194

 

 

130,002

 

 

304,002

 

 

296,910

   Jennie-O Turkey Store

 

63,786

 

 

89,678

 

 

131,966

 

 

180,981

   Specialty Foods

 

30,810

 

 

36,853

 

 

57,559

 

 

63,646

   International & Other

 

19,617

 

 

14,244

 

 

45,080

 

 

38,531

Total segment operating profit

 

321,894

 

 

337,887

 

 

681,721

 

 

712,451

 

 

 

 

 

 

 

 

 

 

 

 

   Net interest and investment expense (income)

 

205

 

 

(380)

 

 

782

 

 

4,990

   General corporate expense

 

5,822

 

 

14,057

 

 

10,443

 

 

29,189

   Less:  Noncontrolling interest

 

(40)

 

 

(13)

 

 

116

 

 

93

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

$

315,827

 

$

324,197

 

$

670,612

 

$

678,365

 

24



Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

CRITICAL ACCOUNTING POLICIES

 

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 30, 2016.

 

RESULTS OF OPERATIONS

 

Overview

 

The Company is a processor of branded and unbranded food products for retail, foodservice, and fresh product customers.  It operates in five reportable segments as described in Note N in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

 

The Company reported net earnings per diluted share of $0.39 for the second quarter of fiscal 2017, compared to $0.40 per diluted share in the second quarter of fiscal 2016.  Significant factors impacting the quarter were:

 

·                  Grocery Products segment profit benefitted from the addition of Justin’s and strong value-added product sales.

·                  International & Other (International) segment profit increased due to strong pork and SPAM exports.

·                  Refrigerated Foods segment profit was flat primarily due to the divestiture of Farmer John in January 2017.

·                  Specialty Foods segment profit was down primarily due to the divestiture of Diamond Crystal Brands (DCB) in May 2016.

·                  Jennie-O Turkey Store (JOTS) profits decreased during the quarter due to lower turkey commodity prices, pricing pressure from competing proteins, and increased operating expenses.

 

Consolidated Results

 

Net earnings and diluted earnings per share

 

 

Three Months Ended

 

Six Months Ended

(in thousands, except per
share amounts)

April 30,
2017

 

April 24,
2016

 

%
Change

 

April 30,
2017

 

April 24,
2016

 

%
Change

Net earnings

$

210,926

 

$

215,397

 

(2.1)

 

$

446,073

 

$

450,458

 

(1.0)

Diluted earnings per share

 

0.39

 

 

0.40

 

(2.5)

 

 

0.83

 

 

0.83

 

 - 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 30,
2017

 

April 24,
2016

 

%
Change

 

April 30,
2017

 

April 24,
2016

 

%
Change

Net sales

$

2,187,309

 

$

2,300,235

 

(4.9)

 

$

4,467,536

 

$

4,592,907

 

(2.7)

Adjusted(1) net sales

 

2,166,177

 

 

2,119,842

 

2.2 

 

 

4,332,838

 

 

4,216,697

 

2.8 

Tonnage (lbs.)

 

1,138,242

 

 

1,281,451

 

(11.2)

 

 

2,383,151

 

 

2,550,606

 

(6.6)

Adjusted(1) tonnage

 

1,135,222

 

 

1,128,716

 

0.6 

 

 

2,297,381

 

 

2,236,063

 

2.7 

 

(1) The non-GAAP adjusted financial measurements are presented to provide investors additional information to facilitate the comparison of past and present operations. The Company believes these non-GAAP adjusted 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.

 

Adjusted net sales and volume excludes the impact from the Justin’s, LLC acquisition in May 2016, and the divestitures of the DCB business in May 2016, and the Farmer John business in January 2017. The tables below

 

25



Table of Contents

 

show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in second quarter and second quarter year-to-date of fiscal 2017 and fiscal 2016.

 

2nd Quarter

Net Sales

 

(in thousands)

2017
Net Sales

Justin’s
Acquisition

2017 
Non-GAAP
Net Sales 

2016
Net Sales

DCB
Divestiture

Farmer
John
Divestiture

2016
Non-GAAP
Net Sales 

Non-GAAP
% Change

Grocery Products

$    432,205

$      (21,132)

$   411,073

$    401,472

$                   - 

$                  -

$    401,472

2.4%

Refrigerated Foods

1,027,486

 

1,027,486

1,092,479

 

(116,397)

976,082

5.3%

Jennie-O Turkey Store

388,237

 

388,237

423,540

 

 

423,540

(8.3%)

Specialty Foods

208,214

 

208,214

272,484

(63,996)

 

208,488

(0.1%)

International & Other

131,167

 

131,167

110,260

 

 

110,260

19.0%

Total Net Sales

$2,187,309

$      (21,132)

$2,166,177

$2,300,235

$   (63,996)

$ (116,397)

$2,119,842

2.2%

 

 

 

 

 

 

 

 

 

 

Tonnage (lbs.)

 

(in thousands)

2017
Tonnage

Justin’s
Acquisition

2017
Non-GAAP
Tonnage

2016
Tonnage

DCB
Divestiture

Farmer
John
Divestiture

2016
Non-GAAP
Tonnage

Non-GAAP
% Change

Grocery Products

222,451

(3,020)

219,431

218,674

 

 

218,674

0.3%

Refrigerated Foods

515,490

 

515,490

602,811

 

(91,733)

511,078

0.9%

Jennie-O Turkey Store

203,557

 

203,557

216,764

 

 

216,764

(6.1%)

Specialty Foods

116,432

 

116,432

174,282

(61,002)

 

113,280

2.8%

International & Other

80,312

 

80,312

68,920

 

 

68,920

16.5%

Total Tonnage

1,138,242

(3,020)

1,135,222

1,281,451

(61,002)

(91,733)

1,128,716

0.6%

 

 

 

 

 

 

 

 

 

 

Year-to-Date

 

Net Sales

 

(in thousands)

2017
Net Sales

Justin’s
Acquisition

Farmer
John
Divestiture

2017
Non-GAAP
Net Sales

2016
Net Sales

DCB
Divestiture

Farmer
John
Divestiture

2016
Non-GAAP
Net Sales

Non-GAAP
% Change

Grocery Products

$     849,950

$     (34,467)

$                 - 

$      815,483

$      793,690

$                  - 

$                   -

$    793,690

2.7%

Refrigerated Foods

2,150,525

 

(100,231)

2,050,294

2,254,600

 

(249,297)

2,005,303

2.2%

Jennie-O Turkey Store

809,226

 

 

809,226

795,606

 

 

795,606

1.7%

Specialty Foods

400,843

 

 

400,843

510,263

(126,913)

 

383,350

4.6%

International & Other

256,992

 

 

256,992

238,748

 

 

238,748

7.6%

Total Net Sales

$4,467,536

$     (34,467)

$  (100,231)

$4,332,838

$4,592,907

$  (126,913)

$  (249,297)

$4,216,697

2.8%

 

 

 

 

 

 

 

 

 

 

 

Tonnage (lbs.)

 

(in thousands)

2017 Tonnage

Justin’s Acquisition

 Farmer John Divestiture

2017
Non-GAAP Tonnage

2016 Tonnage

DCB Divestiture

 Farmer John Divestiture

2016
Non-GAAP Tonnage

Non-GAAP % Change

Grocery Products

448,414

(5,316)

 

443,098

436,939

 

 

436,939

1.4%

Refrigerated Foods

1,129,915

 

(80,454)

1,049,461

1,238,463

 

(192,507)

1,045,956

0.3%

Jennie-O Turkey Store

420,200

 

 

420,200

395,039

 

 

395,039

6.4%

Specialty Foods

229,261

 

 

229,261

335,727

(122,036)

 

213,691

7.3%

International & Other

155,361

 

 

155,361

144,438

 

 

144,438

7.6%

Total Tonnage

2,383,151

(5,316)

(80,454)

2,297,381

2,550,606

(122,036)

(192,507)

2,236,063

2.7%

 

 

 

 

 

 

 

 

 

 

 

26



Table of Contents

 

The decline in net sales for both the second quarter and first six months of fiscal 2017 was primarily related to the divestitures of the DCB business on May 9, 2016, and Farmer John business on January 3, 2017.

 

Cost of products sold

 

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 30,
2017

 

April 24,
2016

 

%
Change

 

April 30,
2017

 

April 24,
2016

 

%
Change

Cost of products sold

$

1,700,389

 

$

1,773,876

 

(4.1)

 

$

3,428,336

 

$

3,508,537

 

(2.3)

 

Cost of products sold was down for both the second quarter and first six months of fiscal 2017 compared to the prior year with mixed input costs.  The reduction was primarily due to the loss of the Farmer John business.

 

Gross profit

 

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 30,
2017

 

April 24,
2016

 

%
Change

 

April 30,
2017

 

April 24,
2016

 

%
Change

Gross profit

$

486,920   

 

$

526,359   

 

(7.5)

 

$

1,039,200   

 

$

1,084,370  

 

(4.2)

Percentage of net sales

 

22.3%

 

 

22.9%

 

 

 

 

23.3%

 

 

23.6%

 

 

 

Higher margins from the Grocery Products and International segments in the second quarter of fiscal 2017 were unable to offset lower margin results in the JOTS, Specialty Foods, and Refrigerated Foods segments.  The lower commodity markets at JOTS were the primary reason for the lower margin percentage results for the second quarter.  Strong value-added sales provided a benefit to margins across the Company’s segments.

 

The Company expects continued growth in many value-added retail and foodservice products within Refrigerated Foods, such as Hormel Black Label bacon, Hormel Natural Choice meats, Hormel Bacon 1 fully-cooked bacon, and Hormel Fire Braised meats.  Grocery Products is expected to build upon momentum, especially in the second half of the fiscal year, aided by growth in products lines such as Wholly Guacamole dips, Herdez salsas, and SKIPPY peanut butter.  Specialty Foods will lap the divestiture of DCB in May.  Strong exports of branded and fresh pork products are expected for the International segment.  While Jennie-O branded products continue to show positive demand trends, JOTS expects to see sustained pressure from the commodity markets and competitive price compression.

 

Selling, general and administrative (SG&A)

 

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 30,
2017

 

April 24,
2016

 

%
Change

 

April 30,
2017

 

April 24,
2016

 

%
Change

SG&A

$

181,009   

 

$

211,144   

 

(14.3)

 

$

391,226   

 

$

421,092   

 

(7.1)

Percentage of net sales

 

8.3%

 

 

9.2%

 

 

 

 

8.8%

 

 

9.2%

 

 

 

The decrease in SG&A for both the second quarter and first six months of fiscal 2017 largely represents advertising reductions made in the second quarter.  The Company also experienced lower employee-related expenses in fiscal 2017, including the loss of the Farmer John business sold.  While committed to growing brands such as Jennie-O, SPAM, and SKIPPY, the Company is being proactive given the market conditions impacting JOTS.  To efficiently maintain advertising and promotional spend, some advertising dollars were shifted to in-store promotions.

 

Equity in earnings of affiliates

 

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 30,
2017

 

April 24,
2016

 

%
Change

 

April 30,
2017

 

April 24,
2016

 

%
Change

Equity in earnings of affiliates

$

10,121

 

$

9,593

 

5.5

 

$

23,420

 

$

21,068

 

11.2

 

The improved results for both the second quarter and first six months of fiscal 2017 reflect strong results from the Wholly Guacamole and Herdez brands within the Company’s MegaMex Foods, LLC joint venture.

 

27



Table of Contents

 

Effective tax rate

 

 

Three Months Ended

 

Six Months Ended

 

April 30,
2017

 

April 24,
2016

 

April 30,
2017

 

April 24,
2016

Effective tax rate

33.2%

 

33.6%

 

33.5%

 

33.6%

 

The lower rate in the second quarter of fiscal 2017 is due to the resolution of net favorable adjustments and settlements with various state tax jurisdictions, relative to 2016.  The Company expects a full-year effective tax rate between 33.0 and 33.5 percent for fiscal 2017.

 

Segment Results

 

Net sales and operating profits for each of the Company’s reportable segments are set forth below.  The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets.  Therefore, the Company does not represent these segments, if operated independently, would report the operating profit and other financial information shown below.  Additional segment financial information can be found in Note N of the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

(in thousands)

 

April 30,
2017

 

April 24,
2016

 

%
Change

 

 

April 30,
2017

 

April 24,
2016

 

%
Change

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

   Grocery Products

$

432,205

 

$

401,472

 

7.7

 

$

849,950

 

$

793,690

 

7.1

   Refrigerated Foods

 

1,027,486

 

 

1,092,479

 

(5.9)

 

 

2,150,525

 

 

2,254,600

 

(4.6)

   Jennie-O Turkey Store

 

388,237

 

 

423,540

 

(8.3)

 

 

809,226

 

 

795,606

 

1.7

   Specialty Foods

 

208,214

 

 

272,484

 

(23.6)

 

 

400,843

 

 

510,263

 

(21.4)

   International & Other

 

131,167

 

 

110,260

 

19.0

 

 

256,992

 

 

238,748

 

7.6

Total

$

2,187,309

 

$

2,300,235

 

(4.9)

 

$

4,467,536

 

$

4,592,907

 

(2.7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Grocery Products

$

77,487

 

$

67,110

 

15.5

 

$

143,114

 

$

132,383

 

8.1

   Refrigerated Foods

 

130,194

 

 

130,002

 

0.1

 

 

304,002

 

 

296,910

 

2.4

   Jennie-O Turkey Store

 

63,786

 

 

89,678

 

(28.9)

 

 

131,966

 

 

180,981

 

(27.1)

   Specialty Foods

 

30,810

 

 

36,853

 

(16.4)

 

 

57,559

 

 

63,646

 

(9.6)

   International & Other

 

19,617

 

 

14,244

 

37.7

 

 

45,080

 

 

38,531

 

17.0

Total segment operating profit

$

321,894

 

$

337,887

 

(4.7)

 

$

681,721

 

$

712,451

 

(4.3)

   Net interest and investment

expense (income)

 

205

 

 

(380)

 

153.9

 

 

782

 

 

4,990

 

(84.3)

   General corporate expense

 

5,822

 

 

14,057

 

(58.6)

 

 

10,443

 

 

29,189

 

(64.2)

   Less:  Noncontrolling interest

 

(40)

 

 

(13)

 

(207.7)

 

 

116

 

 

93

 

24.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

$

315,827

 

$

324,197

 

(2.6)

 

$

670,612

 

$

678,365

 

(1.1)

 

Grocery Products

 

Results for the Grocery Products segment compared to the prior year are as follows:

 

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 30,
2017

 

April 24,
2016

 

%
Change

 

April 30,
2017

 

April 24,
2016

 

%
Change

Net sales

$

432,205

 

$

401,472

 

7.7

 

$

849,950

 

$

793,690

 

7.1

Tonnage (lbs.)

 

222,451

 

 

218,674

 

1.7

 

 

448,414

 

 

436,939

 

2.6

Segment profit

$

77,487

 

$

67,110

 

15.5

 

$

143,114

 

$

132,383

 

8.1

 

28



Table of Contents

 

The comparative results for the second quarter and first six months of fiscal 2017 reflect the addition of Justin’s acquired on May 26, 2016.  Increased sales of Wholly Guacamole dips and SPAM luncheon meat contributed to the improved sales results in the second quarter.  SKIPPY peanut butter and Herdez salsas and foods contributed to improved sales results for the first six months of fiscal 2017.

 

Segment profit results benefitted from the addition of Justin’s specialty nut butters and from the increased sales of the categories listed above for both the second quarter and first six months of fiscal 2017.

 

The Company anticipates continued sales and segment profit growth in the third quarter due to  positive sales trends for key product lines including Wholly Guacamole dips, Justin’s specialty nut butters, Herdez salsas, and SKIPPY peanut butter.

 

Refrigerated Foods

 

Results for the Refrigerated Foods segment compared to the prior year are as follows:

 

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 30,
2017

 

April 24,
2016

 

%
Change

 

April 30,
2017

 

April 24,
2016

 

%
Change

Net sales

$

1,027,486

 

$

1,092,479

 

(5.9)

 

$

2,150,525

 

$

2,254,600

 

(4.6)

Tonnage (lbs.)

 

515,490

 

 

602,811

 

(14.5)

 

 

1,129,915

 

 

1,238,463

 

(8.8)

Segment profit

$

130,194

 

$

130,002

 

0.1 

 

$

304,002

 

$

296,910

 

2.4 

 

The divestiture of Farmer John during the first quarter was the primary contributor to the lower net sales in fiscal 2017.   Many of the Company’s retail and foodservice value-added products enjoyed strong sales growth during the quarter.  In foodservice, items such as Hormel Bacon 1 fully-cooked bacon and Hormel pepperoni delivered excellent growth during the quarter.  In retail, sales gains were led by Hormel Black Label bacon and Hormel Natural Choice meats.

 

Refrigerated Foods segment profit for the second quarter was even with the prior year’s strong results with solid value-added profit growth of both retail and foodservice products, offset by the loss of the Farmer John business.

 

Looking forward, the Company expects sales growth to be muted by the divestiture of the Farmer John business.  Input costs are expected to generally trend higher than fiscal 2016 levels, but continued strong results are expected in the Company’s value-added businesses.

 

Jennie-O Turkey Store

 

Results for the JOTS segment compared to the prior year are as follows:

 

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 30,
2017

 

April 24,
2016

 

%
Change

 

April 30,
2017

 

April 24,
2016

 

%
Change

Net sales

$

388,237

 

$

423,540

 

(8.3)

 

$

809,226

 

$

795,606

 

1.7 

Tonnage (lbs.)

 

203,557

 

 

216,764

 

(6.1)

 

 

420,200

 

 

395,039

 

6.4 

Segment profit

$

63,786

 

$

89,678

 

(28.9)

 

$

131,966

 

$

180,981

 

(27.1)

 

The majority of the decline in net sales and tonnage for the second quarter of fiscal 2017 is linked to lower commodity and whole turkey markets along with reduced harvest tonnage levels.  Despite the market conditions and operating challenges, value-added volumes grew for the second quarter of fiscal 2017 on items such as Jennie-O lean ground turkey and retail bacon.

 

Segment profit for the second quarter dropped significantly versus last year due to lower turkey commodity prices, pricing pressure from competing proteins, and increased operating expenses.

 

Looking forward, challenging commodity turkey prices, along with competitive pressures from other proteins are expected to continue to pressure year over year comparisons for the third quarter in tonnage, net sales and segment profit.

 

29



Table of Contents

 

Specialty Foods

 

Results for the Specialty Foods segment compared to the prior year are as follows:

 

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 30,
2017

 

April 24,
2016

 

%
Change

 

April 30
2017

 

April 24,
2016

 

%
Change

Net sales

$

208,214

 

$

272,484

 

(23.6)

 

$

400,843

 

$

510,263

 

(21.4)

Tonnage (lbs.)

 

116,432

 

 

174,282

 

(33.2)

 

 

229,261

 

 

335,727

 

(31.7)

Segment profit

$

30,810

 

$

36,853

 

(16.4)

 

$

57,559

 

$

63,646

 

(9.6)

 

The comparative results for the second quarter and first six months of fiscal 2017 reflect the divestiture of the DCB business, which was the primary contributor to sales and profit declines.  Second quarter results were also negatively impacted by lower contract manufacturing sales.

 

For the first six months of fiscal 2017, increased distribution of Muscle Milk and CytoSport aided sales, but segment profits were partially offset by increased advertising investment for Muscle Milk.

 

The Company expects the Specialty Foods segment to deliver sales and profit increases through the growth of Muscle Milk protein nutrition products in the second half of fiscal 2017.

 

International & Other

 

Results for the International segment compared to the prior year are as follows:

 

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 30,
2017

 

April 24,
2016

 

%
Change

 

April 30,
2017

 

April 24,
2016

 

%
Change

Net sales

$

131,167

 

$

110,260

 

19.0

 

$

256,992

 

$

238,748

 

7.6

Tonnage (lbs.)

 

80,312

 

 

68,920

 

16.5

 

 

155,361

 

 

144,438

 

7.6

Segment profit

$

19,617

 

$

14,244

 

37.7

 

$

45,080

 

$

38,531

 

17.0

 

Pork exports remained very favorable throughout the second quarter of fiscal 2017, driving significant tonnage and net sales gains over last year.  Branded exports improved, primarily due to the timing of shipments into key markets, which shifted volume from the first quarter into the second quarter this year.  The Company’s meat and SKIPPY businesses in China also showed net sales improvement for the quarter.

 

Segment profit results for the second quarter of fiscal 2017 were driven by the strong pork and branded export sales noted above, with margins well above the prior year.  Despite the improved top-line results for China, margins for the business declined due to higher pork costs versus last year.

 

Entering the third quarter, the Company expects pork exports to moderate but remain above prior year levels.  Branded exports will continue to drive growth in the second half.  The Company has seen a recent decline in China hog costs, and expect them to be below last year for the third quarter.  However, start-up costs related to the new plant in Jiaxing, China will result in lower profit levels for the China business overall.

 

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Unallocated Income and Expenses

 

The Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance.  The Company retains various other income and unallocated expenses at corporate.  Equity in earnings of affiliates is included in segment operating profit; however, earnings attributable to the Company’s noncontrolling interests are excluded.  These items are included in the segment table for the purpose of reconciling segment results to earnings before income taxes.

 

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

 

 

April 30,
 2017

 

 

April 24,
2016

 

 

April 30,
 2017

 

 

April 24,
2016

 

 

Net interest and investment expense (income)

 

 

$

205 

 

 

  $

(380)

 

 

  $

782

 

 

  $

4,990

 

 

Interest expense

 

 

3,023 

 

 

3,029 

 

 

6,049

 

 

6,436

 

 

General corporate expense

 

 

5,822 

 

 

14,057 

 

 

10,443

 

 

29,189

 

 

Noncontrolling interest (loss) earnings

 

 

(40)

 

 

(13)

 

 

116

 

 

93

 

 

 

General Corporate Expense for both the second quarter and first six months of fiscal 2017 was lower than the prior year due to lower salary and legal related expenses.

 

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 30, 2016.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $548.9 million at the end of the second quarter of fiscal year 2017 compared to $379.9 million at the end of the comparable fiscal 2016 period.

 

Cash provided by operating activities was $261.2 million in the first six months of fiscal 2017 compared to $409.1 million in the same period of fiscal 2016.  Higher working capital in the first six months of fiscal 2017 led to the decrease.

 

Cash provided by investing activities was $62.8 million in the first six months of fiscal 2017 compared to cash used in investing activities of $85.0 million in fiscal 2016.  In the first quarter of fiscal 2017, the Company received $135.9 million for the sale of Farmer John.  Capital expenditures in the first six months of fiscal 2017 was $77.0 million compared to $99.9 million in the comparable six months of fiscal 2016.  The Company currently estimates its fiscal 2017 capital expenditures will be approximately $190.0 million.  Projects include completion of the Company’s plant in Jiaxing, China, a new JOTS production facility in Melrose, MN, capacity expansions for value-added product lines, and ongoing investments for food and employee safety.

 

Cash used in financing activities was $186.5 million in the first six months of fiscal 2017 compared to $289.4 million in the same period of fiscal 2016.  The outstanding $185.0 million of debt was paid down in the first quarter of fiscal 2016.  The Company repurchased $49.6 million of its common stock in the first six months of fiscal 2017 compared to $6.4 million  repurchased in the first six months 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 six months of fiscal 2017 were $166.5 million compared to $142.9 million in the comparable period of fiscal 2016.  For fiscal 2017, the annual dividend rate has been increased to $0.68 per share, representing the 51st consecutive annual dividend increase.  The Company has paid dividends for 355 consecutive quarters and expects to continue doing so.

The Company is required, by certain covenants in its debt agreements, to maintain specified levels of financial ratios and financial position.  At the end of the second quarter of fiscal 2017, the Company was in compliance with all of these debt covenants.

 

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Cash flows from operating activities continue to provide the Company with its principal source of liquidity.  The Company does not anticipate a significant risk to cash flows from this source in the foreseeable future because the Company operates in a relatively stable industry and has strong brands across many product lines.

 

The Company remains dedicated to returning excess cash flow to shareholders through dividend payments.  Growing the business through innovation and evaluating opportunities for strategic acquisitions remains a focus for the Company.  Reinvestments in the business to ensure employee and food safety remain a top priority for the Company.  Capital spending to enhance and expand current operations will also be a significant cash outflow for fiscal 2017.

 

Contractual Obligations and Commercial Commitments

 

The Company records income taxes in accordance with the provisions of ASC 740, Income Taxes.  The Company is unable to determine its contractual obligations by year related to this pronouncement, as the ultimate amount or timing of settlement of its reserves for income taxes cannot be reasonably estimated.  The total liability for unrecognized tax benefits, including interest and penalties, at April 30, 2017, was $19.8 million.

 

There have been no other material changes to the information regarding the Company’s future contractual financial obligations as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 30, 2016.

 

Off-Balance Sheet Arrangements

 

As of April 30, 2017, and October 30, 2016, the Company had $48.7 million and $44.4 million, respectively, of standby letters of credit issued on its behalf.  The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs.  However, this includes $4.0 million 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.

 

FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking” information within the meaning of the federal securities laws.  The “forward-looking” information may include statements concerning the Company’s outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts.

 

The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. The Company is filing this cautionary statement in connection with the Reform Act.  When used in this Quarterly Report on Form 10-Q, the Company’s Annual Report to Stockholders, other filings by the Company with the Securities and Exchange Commission (the Commission), the Company’s press releases, and oral statements made by the Company’s representatives, the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify forward-looking statements within the meaning of the Reform Act.  Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected.

 

In connection with the “safe harbor” provisions of the Reform Act, the Company is identifying risk factors that could affect financial performance and cause the Company’s actual results to differ materially from opinions or statements expressed with respect to future periods.  The discussion of risk factors in Part II, Item 1A of this Quarterly Report on Form 10-Q contains certain cautionary statements regarding the Company’s business, which

 

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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, economic conditions, political developments, 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.  Purchased hogs under contract accounted for 95 percent and 93 percent of the total hogs purchased by the Company during the first six months of fiscal 2017 and 2016, respectively.  The majority of these contracts use market-based formulas based on hog futures, hog primal values, or industry reported hog markets.  Other contracts use a formula based on the cost of production, which can fluctuate independently from hog markets.  The Company’s value-added branded portfolio helps mitigate changes in hog and pork market prices.  Therefore, a hypothetical 10 percent change in the cash hog market would have had an immaterial effect on the Company’s results of operations.

 

In the second quarter of 2017, the Company initiated a hedge program to offset the fluctuation in the Company’s future direct hog purchases.  This program currently utilizes lean hog futures, and these contracts are accounted for under cash flow hedge accounting.  The fair value of the Company’s open futures contracts in this hedging program as of April 30, 2017 was $0.4 million, before tax.  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 grain.  A 10 percent decrease in the market price for lean hogs would have negatively impacted the fair value of the Company’s April 30, 2017, open lean hog contracts by $0.9 million, which in turn would lower the Company’s future cost on purchased hogs by a similar amount.

 

Certain procurement contracts allow for future hog deliveries (firm commitments) to be forward priced.  The Company generally hedges these firm commitments by using hog futures contracts.  These futures contracts are designated and accounted for as fair value hedges.  The change in the market value of such futures contracts is highly effective at offsetting changes in price movements of the hedged item, and the Company evaluates the effectiveness of the contracts at least quarterly.  Changes in the fair value of the futures contracts, along with the gain or loss on the firm commitment, are marked-to-market through earnings and are recorded on the Consolidated Statements of Financial Position as a current asset and liability, respectively.  The fair value of the Company’s open futures contracts as of April 30, 2017, was $0.2 million compared to $1.4 million as of October 30, 2016.  The Company measures its market risk exposure on its hog futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in market prices.  A 10 percent increase in market prices would have negatively impacted the fair value of the Company’s April 30, 2017, open contracts by $0.9 million, which in turn would lower the Company’s future cost of purchased hogs by a similar amount.

 

Turkey and Hog Production Costs:  The Company raises or contracts for live turkeys and hogs to meet some of its raw material supply requirements.  Production costs in raising turkeys and hogs are subject primarily to

 

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fluctuations in feed prices, and to a lesser extent, fuel costs.  Under normal, long-term market conditions, changes in the cost to produce turkeys and hogs are offset by proportional changes in their respective markets.

 

To reduce the Company’s exposure to changes in grain prices, the Company utilizes a hedge program to offset the fluctuation in the Company’s future direct grain purchases.  This program currently utilizes corn futures for JOTS, and these contracts are accounted for under cash flow hedge accounting.  The fair value of the Company’s open futures contracts as of April 30, 2017, was $(1.7) million compared to $(3.2) million, before tax, as of October 30, 2016.  The Company measures its market risk exposure on its grain futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for grain.  A 10 percent decrease in the market price for grain would have negatively impacted the fair value of the Company’s April 30, 2017, open grain contracts by $6.1 million, which in turn would lower the Company’s future cost on purchased grain by a similar amount.

 

Long-Term Debt:  A principal market risk affecting the Company is the exposure to changes in interest rates on the Company’s fixed-rate, long-term debt.  Market risk for fixed-rate, long-term debt is estimated as the potential increase in fair value, resulting from a hypothetical 10 percent decrease in interest rates, and amounts to approximately $2.1 million.  The fair value of the Company’s long-term debt was estimated using discounted future cash flows based on the Company’s incremental borrowing rate for similar types of borrowing arrangements.

 

Investments:  The Company has corporate-owned life insurance policies classified as trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans.  As of April 30, 2017, the balance of these securities totaled $125.6 million compared to $122.3 million as of October 30, 2016.  A majority of these securities represent fixed income funds.  The Company is subject to market risk due to fluctuations in the value of the remaining investments, as unrealized gains and losses associated with these securities are included in the Company’s net earnings on a mark-to-market basis.  A 10 percent decline in the value of the investments not held in fixed income funds would have a direct negative impact to the Company’s pretax earnings of approximately $4.2 million, while a 10 percent increase in value would have a positive impact of the same amount.

 

International:  While the Company does have international operations and operates in international markets, it considers its market risk in such activities to be immaterial.

 

 

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 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, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance the information the Company is required to disclose in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Commission rules and forms, and 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.

During the second quarter of fiscal 2017, there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The Company is a party to various legal proceedings related to the on-going operation of its business, including claims both by and against the Company.  At any time, such proceedings typically involve claims related to product liability, contract disputes, wage and hour laws, employment practices, or other actions brought by employees, consumers, competitors, or suppliers.  The Company establishes accruals for its potential exposure, as appropriate, for claims against the Company when losses become probable and reasonably estimable.  However, future developments or settlements are uncertain and may require the Company to change such accruals as proceedings progress.  Resolution of any currently known matters, either individually or in the aggregate, is not expected to have a material effect on the Company’s financial condition, results of operations, or liquidity.

 

Item 1A.  Risk Factors

 

The Company’s operations are subject to the general risks of the food industry.

 

The food products manufacturing industry is subject to the risks posed by:

 

                  food 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 which may cause food contamination are found generally in livestock and in the environment and thus may be present in our products as a result of food processing.  These pathogens can be introduced to our products as a result of improper handling by customers or consumers.  We do not have control over handling procedures once our products have been shipped for distribution.  If one or more of these risks were to materialize, the Company’s brand and business reputation could be negatively impacted.  In addition, revenues could decrease, costs of doing business could increase, and the Company’s operating results could be adversely affected.

 

Deterioration of economic conditions could harm the Company’s business.

 

The Company’s business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, availability of capital, energy availability and costs (including fuel surcharges), and the effects of governmental initiatives to manage economic conditions.  Decreases in consumer spending rates and shifts in consumer product preferences could also negatively impact the Company.

 

Volatility in financial markets and the deterioration of national and global economic conditions could impact the Company’s operations as follows:

 

                  The financial stability of our customers and suppliers may be compromised, which could result in additional bad debts for the Company or non-performance by suppliers; and

                  The value of our investments in debt and equity securities may decline, including most significantly the Company’s trading securities held as part of a rabbi trust to fund supplemental executive retirement plans and deferred income plans, and the Company’s assets held in pension plans.

 

The Company utilizes hedging programs to manage its exposure to various commodity market risks, which qualify for hedge accounting for financial reporting purposes.  Volatile fluctuations in market conditions could cause these instruments to become ineffective, which could require any gains or losses associated with these instruments to be reported in the Company’s earnings each period.  These instruments may limit the Company’s ability to benefit from market gains if commodity prices become more favorable than those secured under the Company’s hedging programs.  Most recently, due to market volatility the Company temporarily suspended the use of the special

 

35



Table of Contents

 

hedge accounting exemption for its JOTS corn futures contracts in the third quarter of fiscal 2016.  During the time of suspension, all gains or losses related to these contracts were recognized as ineffectiveness in earnings as incurred.

 

Additionally, if a highly pathogenic 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.

 

Fluctuations in commodity prices and availability of pork, poultry, beef, feed grains, avocados, peanuts, energy, and whey could harm the Company’s earnings.

 

The Company’s results of operations and financial condition are largely dependent upon the cost and supply of pork, poultry, beef, feed grains, avocados, peanuts, and whey as well as energy costs and the selling prices for many of our products, which are determined by constantly changing market forces of supply and demand.

 

The live hog industry has evolved to large, vertically-integrated operations using long-term supply agreements.  This has resulted in fewer hogs being available on the cash spot market.  Consequently, the Company uses long-term supply contracts based on market-based formulas or the cost of production to 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 costs for live hogs that are higher than 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.

 

JOTS raises turkeys and contracts with turkey growers to meet its raw material requirements for whole birds and processed turkey products.  Results in these operations are affected by the cost and supply of feed grains, which fluctuate due to climate conditions, production forecasts, and supply and demand conditions at local, regional, national, and worldwide levels.  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 supply of natural and organic proteins may impact the Company’s ability to ensure a continuing supply of these products.  To mitigate this risk, the Company partners with multiple long-term suppliers.

 

International trade barriers and other restrictions could result in less foreign demand and increased domestic supply of proteins which could lower prices.  The Company occasionally utilizes in-country production to limit this exposure.

 

Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins.

 

The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including Bovine Spongiform Encephalopathy (BSE), pneumo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease (FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI).  The outbreak of disease could adversely affect the Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins.  Additionally, the outbreak of disease may hinder the Company’s ability to market and sell products both domestically and internationally.  Most recently, HPAI impacted the Company’s  operations and several of the Company’s independent turkey suppliers.  The impact of HPAI in the industry reduced volume through the Company’s turkey facilities through the first part of fiscal 2016.  The Company has developed business continuity plans for various disease scenarios and will continue to update these plans as necessary.  There can be no assurance given, however, these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.

 

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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, peanut butter, and whey.  The bases 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 and 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 bases in the future.

 

The Company’s operations are subject to the general risks associated with acquisitions.

 

The Company has made several acquisitions in recent years, most recently the acquisitions of Justin’s and Applegate, and regularly reviews opportunities for strategic growth through acquisitions.  Potential risks associated with acquisitions include the inability to integrate new operations successfully, the diversion of management’s attention from other business concerns, the potential loss of key employees and customers of the acquired companies, the possible assumption of unknown liabilities, potential disputes with the sellers, potential impairment charges if purchase assumptions are not achieved or market conditions decline, and the inherent risks in entering markets or lines of business in which the Company has limited or no prior experience.  Any or all of these risks could impact the Company’s financial results and business reputation.  In addition, acquisitions outside the United States may present unique challenges and increase the Company’s exposure to the risks associated with foreign operations.

 

The Company is subject to disruption of operations at co-packers or other suppliers.

 

Disruption of operations at co-packers or other suppliers may impact the Company’s product or raw material supply, which could have an adverse effect on the Company’s financial results.  Additionally, actions taken to mitigate the impact of any potential disruption, including increasing inventory in anticipation of a potential production or supply interruption, may adversely affect the Company’s financial results.

 

The Company’s operations are subject to the general risks of litigation.

 

The Company is involved on an ongoing basis in litigation arising in the ordinary course of business.  Trends in litigation may include class actions involving employees, consumers, competitors, suppliers, shareholders, or injured persons, and claims relating to product liability, contract disputes, intellectual property, advertising, labeling, wage and hour laws, employment practices, or environmental matters.  Litigation trends and the outcome of litigation cannot be predicted with certainty and adverse litigation trends and outcomes could adversely affect the Company’s financial results.

 

The Company is subject to the loss of a material contract.

 

The Company is a party to several supply, distribution, contract packaging, and other material contracts.  The loss of a material contract could adversely affect the Company’s financial results.

 

Government regulation, present and future, exposes the Company to potential sanctions and compliance costs that could adversely affect the Company’s business.

 

The Company’s operations are subject to extensive regulation by the U.S. Department of Homeland Security, the U.S. Department of Agriculture, the U.S. Food and Drug Administration, federal and state taxing authorities, and other state and local authorities who oversee workforce immigration laws, tax regulations, animal welfare, food safety standards, and the processing, packaging, storage, distribution, advertising, and labeling of the Company’s

 

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products.  The Company’s manufacturing facilities and products are subject to continuous inspection by federal, state, and local authorities.  Claims or enforcement proceedings could be brought against the Company in the future.  The availability of government inspectors due to a government furlough could also cause disruption to the Company’s manufacturing facilities.  Additionally, the Company is subject to new or modified laws, regulations, and accounting standards.  The Company’s failure or inability to comply with such requirements could subject the Company to civil remedies, including fines, injunctions, recalls, or seizures, as well as potential criminal sanctions.

 

The Company is subject to stringent environmental regulation and potentially subject to environmental litigation, proceedings, and investigations.

 

The Company’s past and present business operations and ownership and operation of real property are subject to stringent federal, state, and local environmental laws and regulations pertaining to the discharge of materials into the environment and the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment.  Compliance with these laws and regulations, and the ability to comply with any modifications to these laws and regulations, is material to the Company’s business.  New matters or sites may be identified in the future requiring additional investigation, assessment, or expenditures.  In addition, 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.  The occurrence of any of these events, the implementation of new laws and regulations, or stricter interpretation of existing laws or regulations could adversely affect the Company’s financial results.

 

The Company’s foreign operations pose additional risks to the Company’s business.

 

The Company operates its business and markets its products internationally.  The Company’s foreign operations are subject to the risks described above, as well as risks related to fluctuations in currency values, foreign currency exchange controls, compliance with foreign laws, compliance with applicable U.S. laws, including the Foreign Corrupt Practices Act, and other economic or political uncertainties.  International sales are subject to risks related to general economic conditions, imposition of tariffs, quotas, trade barriers and other restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws, and other economic and political uncertainties.  All of these risks could result in increased costs or decreased revenues, which could adversely affect the Company’s financial results.

 

The Company may be adversely impacted if the Company is unable to protect information technology systems against, or effectively respond to, cyber-attacks or security breaches.

 

Information technology systems are an important part of the Company’s business operations. Attempted 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 an attempt to mitigate this risk, the Company has implemented and continues to evaluate security initiatives and business continuity plans.

 

Deterioration of labor relations or increases in labor costs could harm the Company’s business.

 

As of April 30, 2017, the Company had approximately 19,200 employees worldwide, of which approximately 4,400 were represented by labor unions, principally the United Food and Commercial Workers Union.  A significant increase in labor costs or a deterioration of labor relations at any of the Company’s facilities or contracted hog processing facilities resulting in work slowdowns or stoppages could harm the Company’s financial results.  Union contracts at the Company’s facilities in Eldridge, Iowa, and Lathrop, California, covering a combined total of approximately 150 employees, were successfully negotiated in the second quarter of fiscal 2017.

 

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Table of Contents

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities in the Second Quarter of Fiscal 2017

 

 

Period

 

Total
Number of
 Shares
 Purchased
1

 

Average
 Price Paid
 Per Share

 

Total Number of
Shares Purchased as
 Part of Publicly
 Announced Plans
 or Programs
1

 

Maximum Number
of Shares that May
Yet Be Purchased
 Under the Plans or
 Programs
1

 

January 30, 2017 –
March 5, 2017

 

-

 

-    

 

-

 

12,320,999

 

March 6, 2017 –
April 2, 2017

 

531,762

 

$

 34.71

 

531,762

 

11,789,237

 

April 3, 2017 –
April 30, 2017

 

15,600

 

34.35

 

15,600

 

11,773,637

 

Total

 

547,362

 

$

34.70

 

547,362

 

 

 

 

1On January 31, 2013, the Company announced its Board of Directors had authorized the repurchase of 10,000,000 shares of its common stock with no expiration date.  The repurchase program was authorized at a meeting of the Company’s Board of Directors on January 29, 2013.  On November 23, 2015, the Board of Directors authorized a two-for-one split of the Company’s voting common stock.  As part of the resolution to approve the stock split, the number of shares remaining to be repurchased was adjusted proportionately.  The stock split was subsequently approved by shareholders at the Company’s Annual Meeting on January 26, 2016, and effected January 27, 2016.  All numbers in the table above reflect the impact of this stock split.

 

Item 6.  Exhibits

 

31.1                                                Certification Required Under Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2                                                Certification Required Under Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1                                                Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS                           XBRL Instance Document

 

101.SCH                      XBRL Taxonomy Extension Schema Document

 

101.CAL                      XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF                        XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB                      XBRL Taxonomy Extension Labels Linkbase Document

 

101.PRE                        XBRL Taxonomy Extension Presentation Linkbase Document

 

39



Table of Contents

 

SIGNATURES

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

HORMEL FOODS CORPORATION

 

 

(Registrant)

 

 

 

 

 

 

Date:  June 9, 2017

By

/s/ JAMES N. SHEEHAN

 

 

JAMES N. SHEEHAN

 

 

Senior Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

 

Date:  June 9, 2017

By

/s/ JANA L. HAYNES

 

 

JANA L. HAYNES

 

 

Vice President and Controller

 

 

(Principal Accounting Officer)

 

40