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3: EX-31.2 Certification -- §302 - SOA'02 HTML 26K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
10: R1 Cover HTML 77K
11: R2 Consolidated Statements of Operations HTML 110K
12: R3 Consolidated Statements of Comprehensive Income HTML 60K
13: R4 Consolidated Condensed Statements of Financial HTML 160K
Position
14: R5 Consolidated Condensed Statements of Financial HTML 39K
Position (Parenthetical)
15: R6 Consolidated Statements of Changes in HTML 102K
Shareholders' Investment
16: R7 Consolidated Statements of Changes in HTML 23K
Shareholders' Investment (Parenthetical)
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18: R9 Summary of Significant Accounting Policies HTML 29K
19: R10 Acquisitions and Divestitures HTML 35K
20: R11 Goodwill and Intangible Assets HTML 65K
21: R12 Investments in and Receivables From Affiliates HTML 44K
22: R13 Inventories HTML 30K
23: R14 Derivatives and Hedging HTML 107K
24: R15 Pension and Other Post-Retirement Benefits HTML 58K
25: R16 Accumulated Other Comprehensive Loss HTML 61K
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28: R19 Income Taxes HTML 29K
29: R20 Earnings Per Share Data HTML 34K
30: R21 Segment Reporting HTML 120K
31: R22 Summary of Significant Accounting Policies HTML 45K
(Policies)
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33: R24 Goodwill and Intangible Assets (Tables) HTML 73K
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43: R34 ACQUISITIONS AND DIVESTITURES - Narrative HTML 35K
(Details)
44: R35 ACQUISITIONS AND DIVESTITURES - Unaudited Pro HTML 27K
Forma Financial Information (Details)
45: R36 GOODWILL AND INTANGIBLE ASSETS - Changes in HTML 37K
Carrying Amounts of Goodwill (Details)
46: R37 GOODWILL AND INTANGIBLE ASSETS - Indefinite Lived HTML 30K
Intangible Assets (Details)
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Intangibles Assets (Details)
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Amortization Expense (Details)
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Schedule of Investments and Equity Information
(Details)
50: R41 INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES - HTML 30K
Schedule of Equity in Earnings of Affiliates
(Details)
51: R42 INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES - HTML 29K
Narrative (Details)
52: R43 INVENTORIES - Schedule of Principal Components of HTML 34K
Inventories (Details)
53: R44 DERIVATIVES AND HEDGING - Narrative (Details) HTML 52K
54: R45 DERIVATIVES AND HEDGING - Outstanding Commodity HTML 29K
Future Contracts (Details)
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Derivatives (Details)
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Other Comprehensive Gains and Losses (Before Tax)
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Statements of Operations Impact of Gains or Losses
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Liabilities Carried at Fair Value on Recurring
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62: R53 FAIR VALUE MEASUREMENTS - Narrative (Details) HTML 23K
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(Address of Principal Executive Office, including zip code)
(i507)
i437-5611
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol
Name of each exchange on which registered
iCommon Stock
$0.01465
par value
iHRL
iNew
York Stock Exchange
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. ☒iYes☐ No
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒iYes☐ 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
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). i☐ Yes ☒ No
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
NOTE A - iSUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
iBasis of Presentation: The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with accounting principles generally accepted in the United States 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 certain information and footnotes required by U.S. generally accepted accounting principles (GAAP) for comprehensive 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 and cash flows for the interim period are not necessarily indicative of the results that may be expected for the full year.
These statements should be reviewed in conjunction with the consolidated financial statements and associated notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021. The significant accounting policies used in preparing these interim consolidated financial statements are consistent with
those described in Note A - Summary of Significant Accounting Policies to the consolidated financial statements in the Form 10-K with the exception of new requirements adopted in the first quarter of fiscal 2022. The Company has determined there have been no material changes in the Company’s significant accounting policies, including estimates and assumptions, as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
iFiscal
Year:The Company’s fiscal year ends on the last Sunday in October. Fiscal 2022 consists of 52 weeks. Fiscal 2021 consisted of 53 weeks with the additional week occurring in the fourth quarter.
Rounding: Certain amounts in the Consolidated Financial Statements and associated notes may not foot due to rounding. All percentages have been calculated using unrounded amounts.
iReclassifications: Certain
reclassifications of previously reported amounts have been made to conform to the current year presentation.
i
Accounting Changes and Recent Accounting Pronouncements:
New Accounting Pronouncements Adopted in Current Fiscal Year
In December 2019, the Financial Accounting Standards Board (FASB) issued ASU 2019-12, Income Taxes - Simplifying
the Accounting for Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions in Topic 740 and clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2022 and adoption did not have a material impact on its consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial
Reporting (Topic 848). The guidance provides optional expedients and exceptions to account for contracts, hedging relationships, and other transactions that reference London Interbank Referenced Rate (LIBOR) or another reference rate expected to be discontinued. The optional guidance can be applied from March 12, 2020 through December 31, 2022. The Company currently holds an interest rate swap which uses LIBOR as the benchmark interest rate. When LIBOR ceases to be published in June 2023, the benchmark interest rate of the swap will change to Secured Overnight Financing Rate (SOFR) plus a spread adjustment. The
Company does not expect adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.
Recently issued accounting standards or pronouncements not disclosed have been excluded as they are currently not relevant to the Company.
NOTE B - iACQUISITIONS
AND DIVESTITURES
Acquisitions: On June 7, 2021, the Company acquired the Planters®snack nuts business from The Kraft Heinz Company. The acquisition includes the Planters®, NUT-rition®, and Corn Nuts®brands. The final purchase price, including working capital adjustments, was $i3.4
billion. The transaction was funded with the Company’s cash on hand and from the issuance of long-term debt.
Planters®is an iconic snack brand and this acquisition significantly expands the Company's presence, and should broaden the scope for future acquisitions, in the growing snacking space. Operating results for this acquisition have been included in the
Company's Consolidated Statements of Operations from the date of acquisition and are reflected in the Grocery Products, Refrigerated Foods, and International & Other segments. The acquisition contributed $i243.1 million and $i753.9 million
of net sales during the third quarter and nine months of fiscal 2022, respectively. The acquisition contributed $ii141.3/ million
of net sales during the comparable periods of fiscal 2021. As the acquisition has been integrated within the Company's existing operations, post-acquisition net earnings are not discernible.
Acquisition-related costs were $i27.5 million and $i30.3
million for the third quarter and nine months ended July 25, 2021, respectively, which are reflected in the Consolidated Statements of Operations as Selling, General and Administrative. Additional one-time adjustments related to the revaluation of acquired inventory of $ii12.9/
million were recognized in the Consolidated Statements of Operations as Cost of Products Sold for the third quarter and nine months ended July 25, 2021. The combined impact of these one-time acquisition costs and accounting adjustments were $i40.4 million and $i43.2
million for the third quarter and nine months ended July 25, 2021, respectively.
The acquisition was accounted for as a business combination using the acquisition method. The Company determined the acquisition date fair values of the assets acquired using independent appraisals. The Company completed purchase accounting allocations in the fourth quarter of fiscal 2021.
i
The
following unaudited pro forma financial information presents the combined results of operations as if the acquisition of the Planters® snack nuts business had occurred on October 27, 2019. These unaudited pro forma results do not necessarily reflect the actual results of operations that would have been achieved had the acquisition occurred on that date, nor are they necessarily indicative of future results of operations.
Pro
Forma Net Earnings Attributable to Hormel Foods Corporation
i215,983
i704,143
/
The
pro forma results include charges for depreciation and amortization of acquired assets and interest expense on debt issued to finance the acquisition, as well as the related income taxes. The pro forma results for the third quarter and nine months ended July 25, 2021 include an adjustment to add back the transaction costs incurred and revaluation of inventory acquired in those periods, along with the related income tax effects.
NOTE C - iGOODWILL
AND INTANGIBLE ASSETS
Goodwill: iThe change in the carrying amounts of goodwill for the nine months ended July 31, 2022 are:
Amortization expense was $i4.8 million and $i14.5 million for the quarter and nine months ended July
31, 2022, respectively, compared to $i4.4 million and $i12.3 million for the quarter and nine months ended July 25, 2021.
i
Estimated
annual amortization expense for the five fiscal years after October 31, 2021, is as follows:
in thousands
Amortization Expense
2022
$
i19,244
2023
i18,351
2024
i16,352
2025
i14,627
2026
i14,170
/
NOTE
D - iINVESTMENTS 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 method. These investments, along with any
related receivables from affiliates, are included in the Consolidated Condensed Statements of Financial Position as Investments In and Receivables From Affiliates.
i
Investments In and Receivables From Affiliates consist of:
For
the quarter and nine months ended July 31, 2022, $i0.0 million and $i30.5
million of dividends were received from affiliates, compared to $i11.2 million and $i33.7
million of dividends received for the quarter and nine months ended July 25, 2021.
The Company recognized a basis difference of $i21.3 million associated with the formation of MegaMex Foods, LLC, of which $i10.4
million is remaining as of July 31, 2022. This difference is being amortized through Equity in Earnings of Affiliates.
The Company uses hedging programs to manage price risk associated with commodity purchases and interest rates. These programs utilize futures, swaps, and options contracts to manage the
Company’s exposure to market fluctuations. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Effectiveness testing is performed on a quarterly basis to ascertain a high level of effectiveness for cash flow and fair value hedging programs. If the requirements of hedge accounting are no longer met, hedge accounting will be discontinued immediately and any future changes to fair value will be recorded directly through earnings.
Cash Flow Commodity Hedges:The Company designates grain and lean hog futures, swaps, and options used to offset price fluctuations in the
Company’s future direct grain and hog purchases as cash flow hedges. Effective gains or losses related to these cash flow hedges are reported in Accumulated Other Comprehensive Loss (AOCL) and reclassified into earnings, through Cost of Products Sold, in the periods in which the hedged transactions affect earnings. The Company typically does not hedge its grain exposure beyond the next two upcoming fiscal years and its hog exposure beyond the next fiscal year.
Fair Value Commodity Hedges: The Company designates the futures it uses to minimize the price risk assumed when fixed forward priced contracts are
offered to the Company’s commodity suppliers as fair value hedges. The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery. Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and recorded on the Consolidated Condensed Statements of Financial Position as a Current Asset and Current Liability, respectively. Effective gains or losses related to these fair value hedges are recognized through Cost of Products Sold in the periods in which the hedged transactions affect earnings.
Cash Flow Interest Rate Hedges: In the second quarter of fiscal
2021, the Company designated itwo separate interest rate locks as cash flow hedges to manage interest rate risk associated with the anticipated debt transactions required to fund the acquisition of the Planters® snack nuts business. The total notional amount of the Company's locks was $i1.25 billion.
In the third quarter of fiscal 2021, the associated unsecured senior notes were issued with a tenor of seven and ithirty years and both locks were lifted (See Note J - Long-term Debt and Other Borrowing Arrangements). Mark-to-market gains and losses on these instruments were deferred as a component of AOCL. The resulting gain in AOCL is reclassified to Interest Expense in the periods in which the hedged transactions affect earnings.
Fair Value Interest Rate Hedge: In the first quarter of fiscal 2022, the
Company entered into an interest rate swap to protect against changes in the fair value of a portion of previously issued senior unsecured notes attributable to the change in the benchmark interest rate. The hedge specifically designates the last $i450 million of the notes due June 2024 (the “2024 Notes”). The swap compounds quarterly and settles semi-annually with gains and losses recognized in earnings through interest expense. The swap includes SOFR plus a spread adjustment as a fallback rate to be used when LIBOR ceases to be published in June 2023. Mark-to-market changes
in the fair value of the interest rate swap and hedged debt are also recognized as interest expense.
Other Derivatives: The Company holds certain futures contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets. The Company has not applied hedge accounting to these positions. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.
(1)Amounts
represent the gross fair value of commodity 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 commodity derivative in the Consolidated Condensed Statements of Financial Position. The gross asset position as of July 31, 2022 is offset by the obligation to return net cash collateral of $i4.8 million
contained within the master netting arrangement. The gross asset position as of October 31, 2021 is offset by the obligation to return net cash collateral of $i10.8 million. See Note I - Fair Value Measurements for a discussion of these net amounts as reported in the Consolidated Condensed Statements of Financial Position.
Fair Value Hedge - Assets (Liabilities):iThe
carrying amount of the Company's fair value hedged assets (liabilities) are:
Carrying Amount of Hedged Assets/(Liabilities)
in thousands
Location on Consolidated Condensed Statements of Financial Position
(1)Represents the carrying amount of fair value hedged assets and liabilities which are offset by other assets included in master netting arrangements described above.
(2) Represents the carrying amount of the hedged portion of the "2024 Notes". As of July 31, 2022, a cumulative basis adjustment of $i17.5 million has been included in the carrying
amount.
Accumulated Other Comprehensive Loss Impact: As of July 31, 2022, the Company included in AOCL hedging gains (before tax) of $i34.0 million on commodity contracts and $i13.7
million related to interest rate settled positions. The Company expects to recognize the majority of the gains on commodity contracts over the next twelve months. Gains on interest rate contracts offset the hedged interest payments over the tenor of the debt instruments.
(1) See Note H - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on Net Earnings.
(2) Represents the time value of corn options excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in AOCL.
Consolidated
Statements of Operations Impact: The effect on the Consolidated Statements of Operations for gains or losses (before tax) related to the Company's derivative instruments are:
(1)During
the second quarter of fiscal 2022, the Company discontinued hedge accounting on i0.6 million bushels of corn usage that was deemed no longer probable to occur.
(2)Amounts represent gains or losses on commodity contracts designated as fair value hedges that were closed
during the quarter and nine months ended July 31, 2022, which were offset by a corresponding gain or loss on the underlying hedged purchase commitment. Additional gains or losses related to changes in the fair value of open commodity contracts, along with the offsetting gain or loss on the hedged purchase commitment, are also marked-to-market through earnings with no impact on a net basis.
(3) Total Gain (Loss) on Commodity Contracts is recognized in earnings through Cost of Products Sold.
(4) Total Gain (Loss) on Interest Rate Contracts
is recognized in earnings through Interest Expense.
Non-service
cost components of net pension and postretirement benefit cost are presented within Interest and Investment Income on the Consolidated Statements of Operations.
(1) Included
in the computation of net periodic cost. See Note G - Pension and Other Post-Retirement Benefits for additional information.
(2) Included in Cost of Products Sold and Interest Expense in the Consolidated Statements of Operations. See Note F - Derivatives and Hedging for additional information.
/
NOTE I - iFAIR
VALUE MEASUREMENTS
i
Accounting guidance establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of the three levels below based on the inputs used in the valuation.
Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Observable
inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.
Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.
The
Company’s financial assets and liabilities carried at fair value on a recurring basis as of July 31, 2022, and October 31, 2021, and their level within the fair value hierarchy are presented in the table below.
The
following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:
(1)The Company’s cash equivalents considered Level 1 consist primarily of bank deposits, money market funds rated AAA, or other highly liquid investment accounts, and have a maturity date of three months or less. Cash equivalents considered Level 2 are funds holding agency bonds or securities recognized at amortized cost.
(2)The Company holds securities as part of a portfolio maintained to generate investment income and to provide cash for operations of the
Company, if necessary. The portfolio is managed by a third party who is responsible for daily trading activities, and all assets within the portfolio are highly liquid. The cash, U.S. government securities, and money market funds rated AAA held by the portfolio are classified as Level 1. The current investment portfolio also includes corporate bonds and other asset backed securities for which there is an active, quoted market. Market prices are obtained from a variety of industry providers, large financial institutions, and other third-party sources to calculate a representative daily market value, and therefore, these securities are classified as Level 2.
(3)The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred compensation
plans. The majority of the funds held in the rabbi trust relate to supplemental executive retirement plans and have been invested primarily in fixed income funds managed by a third party. The declared rate on these funds is set based on a formula using the yield of the general account investment portfolio supporting the fund, adjusted for expenses and other charges. The rate is guaranteed for one year at issue and may be reset annually on the policy anniversary, subject to a guaranteed minimum rate. As the value is based on adjusted market rates and the fixed rate is only reset on an annual basis, these funds are classified as Level 2.
Under the Company's deferred compensation plans, participants can defer certain types of compensation and elect to receive a return based on the changes in fair value of
various investment options which include equity securities, money market accounts, bond funds or other portfolios for which there is an active quoted market. The Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based on a specified percentage of the I.R.S. applicable federal rates. These liabilities are classified as Level 2. The Company maintains funding in the rabbi trust generally mirroring the selections within the deferred compensation plans. These funds are managed by a third-party insurance policy, the values of which represent their cash surrender value based on the fair value of the underlying investments in the account. These policies are classified as Level 2.
The rabbi trust is included in Other Assets and deferred compensation liabilities in Other Long-term Liabilities on the Consolidated Condensed Statements of Financial Position. Securities held by the rabbi trust are classified as trading securities. Unrealized gains and losses associated with these investments are included in the Company's earnings. During the quarter and nine months ended July 31, 2022, securities held by the rabbi trust generated losses of $i0.1
million and $i12.1 million, respectively, compared to gains of $i1.5 million and $i18.6 million
for the quarter and nine months ended July 25, 2021.
(4)The Company’s commodity derivatives represent futures, swaps, and options contracts used in its hedging or other programs to offset price fluctuations associated with purchases of corn and hogs, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers. The Company’s futures
contracts for corn are traded on the Chicago Board of Trade, while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange. These are active markets with quoted prices available, and these contracts are classified as Level 1. The Company’s corn futures option contracts are OTC instruments classified as Level 2 whose value is calculated using the Black-Scholes pricing model, corn future prices quoted from the Chicago Board of Trade, and other adjustments to inputs that are observable in active markets. All derivatives
are reviewed for potential credit risk and risk of nonperformance. The net balance for each program is included in Other Current Assets or Accounts Payable, as appropriate, in the Consolidated Condensed Statements of Financial Position. As of July 31, 2022, the Company has recognized the obligation to return net cash collateral of $i4.8 million from various counterparties (including cash of $i24.9
million less $i20.1 million of realized gain). As of October 31, 2021, the Company had recognized the obligation to return net cash collateral of $i10.8
million from various counterparties (including cash of $i45.6 million less $i34.8 million of realized gain).
(5)The
Company holds an interest rate hedging position to minimize the risk related to future interest rate changes. The fair value of the outstanding interest rate hedge agreement is based on an observable benchmark interest rate (LIBOR) and therefore classified as Level 2. The interest rate derivatives are included in Interest and Dividends Payable in the Consolidated Condensed Statements of Financial Position.
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 Condensed Statements of Financial Position. The fair value of long-term debt, utilizing
discounted cash flows (Level 2), was $i3.0 billion as of July 31, 2022, and $i3.3 billion as of October 31, 2021. See Note J - Long Term
Debt and Other Borrowing Arrangements for additional information.
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 quarter and nine months ended July 31, 2022, and July 25, 2021, there were no material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
NOTE J - iLONG-TERM
DEBT AND OTHER BORROWING ARRANGEMENTS
Interest Due Semi-annually through June 2051 Maturity Date
$
i600,000
$
i600,000
Senior
Unsecured Notes, with Interest at i1.800%
Interest Due Semi-annually through June 2030 Maturity Date
i1,000,000
i1,000,000
Senior
Unsecured Notes, with Interest at i1.700%
Interest Due Semi-annually through June 2028 Maturity Date
i750,000
i750,000
Senior
Unsecured Notes, with Interest at i0.650%
Interest Due Semi-annually through June 2024 Maturity Date
i950,000
i950,000
Unamortized
Discount on Senior Notes
(i7,934)
(i8,484)
Unamortized
Debt Issuance Costs
(i20,751)
(i23,435)
Interest
Rate Swap
(i17,473)
i—
Finance
Lease Liabilities
i46,723
i52,999
Other
Financing Arrangements
i2,529
i2,823
Total
$
i3,303,094
$
i3,323,903
Less:
Current Maturities of Long-term Debt
i8,807
i8,756
Long-term
Debt Less Current Maturities
$
i3,294,287
$
i3,315,147
/
Senior
Unsecured Notes: On June 11, 2020, the Company issued senior notes in an aggregate principal amount of $i1.0 billion, due June 11, 2030. The notes bear interest at a fixed rate of i1.800%
per annum, with interest paid semi-annually in arrears on June 11 and December 11 of each year, commencing December 11, 2020. The notes may be redeemed in whole or in part at any time at the applicable redemption price set forth in the prospectus supplement. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to i101% of their principal amount, plus accrued and unpaid interest,
if any, to the date of purchase.
On June 3, 2021, the Company issued $i950.0
million aggregate principal amount of its i0.650% notes due 2024 (the "2024 Notes"), $i750.0 million aggregate principal amount of its i1.700%
notes due 2028 (the "2028 Notes") and $i600.0 million aggregate principal amount of its i3.050% notes due 2051 (the "2051 Notes"). Interest will accrue per annum at the
stated rates with interest on the notes being paid semi-annually in arrears on June 3 and December 3 of each year, commencing December 3, 2021. Interest rate risk was hedged utilizing interest rate locks on the 2028 Notes and 2051 Notes. The Company lifted the hedges in conjunction with the issuance of these notes. The 2024 Notes may be redeemed in whole or in part ione year after their issuance without penalty
for early partial payments or full redemption. The 2028 Notes and 2051 Notes may be redeemed in whole or in part at any time at the applicable redemption price. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to ii101/%
of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
In the first quarter of fiscal 2022, the Company entered into an interest rate swap with a notional amount totaling $i450.0 million effectively converting a portion of the 2024 Notes from a fixed to variable rate basis. The interest rate swap was designated as a fair value hedge of the underlying debt obligation. See Note F - Derivatives and Hedging
for additional details.
Unsecured Revolving Credit Facility: On May 6, 2021, the Company entered into an unsecured revolving credit agreement with Wells Fargo Bank, National Association as administrative agent, swingline lender and issuing lender, U.S. Bank National Association, JPMorgan Chase Bank, N.A. and BofA Securities, Inc. as syndication agents and the lenders party thereto. In connection with entering the revolving credit agreement, the Company terminated its existing credit facility that was entered into on June 24, 2015. The revolving credit agreement provides for an unsecured revolving credit facility with an
aggregate principal commitment amount at any time outstanding of up to $i750.0 million with an uncommitted increase option of an additional $i375.0 million
upon the satisfaction of certain conditions. The unsecured revolving line of credit bears interest, at the Company’s election, at either a Base Rate plus margin of i0.0% to i0.150%
or the Eurocurrency Rate plus margin of i0.575% to i1.150% and a variable fee of i0.050%
to i0.100% is paid for the availability of this credit line. Extensions of credit under the facility may be made in the form of revolving loans, swingline loans and letters of credit. The lending commitments under the agreement are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding. As of July
31, 2022, and October 31, 2021, the Company had iino/
outstanding draws from this facility.
Debt Covenants: The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of July 31, 2022, the Company was in compliance with all of these covenants.
NOTE K - iINCOME
TAXES
The Company's tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter. The effects of tax legislation are recognized in the period in which the law is enacted. The deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years the related temporary differences are anticipated to reverse.
The Company's effective tax rate for the quarter and nine months ended July 31, 2022, was i24.5
percent and i21.8 percent compared to i13.3 percent and i18.9
percent for the corresponding periods a year ago. The higher effective tax rate in the current quarter is due primarily to the decrease in tax benefits from stock option exercises.
The amount of unrecognized tax benefits, including interest and penalties, is recorded in Other Long-term Liabilities. If recognized as of July 31, 2022, and July 25, 2021, $i19.5
million and $i24.5 million, respectively, would impact the Company’s effective tax rate. The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense. Interest and penalties included in income tax expense was immaterial for the quarter ended July 31, 2022,
and July 25, 2021. The amount of accrued interest and penalties at July 31, 2022, and July 25, 2021, associated with unrecognized tax benefits was $i4.8 million and $i7.5
million, respectively.
The Company is regularly audited by federal and state taxing authorities. The United States Internal Revenue Service (I.R.S.) concluded its examination of fiscal 2019 in the second quarter of fiscal 2021. The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years through 2023. 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 2015. While it is reasonably possible that one or more of these audits may be completed within the next 12 months and the related unrecognized tax benefits may change, based on the status of the examinations it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.
Subsequent to the end of the quarter, the Inflation Reduction Act of 2022 was signed into law. This legislation includes provisions that provide tax incentives as well as impose a 15% minimum tax on certain corporations' book income and a 1% excise tax on
certain stock repurchases. The Company is evaluating the effect these new laws, which will be effective in fiscal years 2023 and 2024, may have on our consolidated financial statements.
NOTE L - iEARNINGS
PER SHARE DATA
The reported net earnings attributable to the Company were used when computing basic and diluted earnings per share. iThe following table sets forth the shares used as the denominator for those computations:
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 ifour segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other.
The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market, along with the sale of nutritional and private label shelf-stable
products to retail, foodservice, and industrial customers. This segment also includes the results from the Company’s MegaMex Foods, LLC joint venture.
The Refrigerated Foods segment consists primarily of the processing, marketing, and sale of branded and unbranded pork, beef, and poultry products for retail, foodservice, deli, convenience store, and commercial customers.
The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and commercial customers.
The International & Other segment includes Hormel Foods International which manufactures, markets, and sells Company products
internationally. This segment also includes the results from the Company’s international joint ventures and royalty arrangements.
Intersegment sales are eliminated in the Consolidated Statements of Operations. The Company does not allocate deferred compensation, investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and expenses at the corporate level. Equity in Earnings of Affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests
are excluded. These items are included below as Net Unallocated Expense and Noncontrolling Interest when reconciling to Earnings Before Income Taxes.
Sales and segment profit for each of the Company’s reportable segments and reconciliation to Earnings Before Income Taxes are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets.
Therefore, the Company does not represent that these segments, if operated independently, would report the profit and other financial information shown below.
Revenue has been disaggregated into the categories below to show how sales channels affect the nature, amount, timing, and uncertainty of revenue and cash flows. iTotal revenue contributed by sales channel are:
Beginning
in the first quarter of fiscal 2022, the Company updated its presentation of revenue disaggregation by sales channel, combining U.S. Deli and U.S. Retail as market conditions have evolved providing many similarities between the channels. The prior year presentation has been updated to conform to the current period presentation.
The Company’s products consist primarily of meat and other food products. Total revenue contributed by classes of similar products are:
Perishable
includes fresh meats, frozen items, refrigerated meal solutions, bacon, sausages, hams, and guacamole (excludes Jennie-O Turkey Store products). Shelf-stable includes canned luncheon meats, nut butters, snack nuts, chili, shelf-stable microwaveable meals, hash, stews, tortillas, salsas, tortilla chips, and other items that do not require refrigeration. The Poultry category is composed primarily of Jennie-O Turkey Store products. The Miscellaneous category primarily consists of nutritional food products and supplements, dessert and drink mixes, and industrial gelatin products.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS
OF OPERATIONS
Overview
The Company is a global manufacturer and marketer of branded food products. It operates in four reportable segments as described in Note M - Segment Reporting in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
The Company reported net earnings per diluted share of $0.40 for the third quarter of fiscal 2022, up 25 percent compared to last year. Significant factors impacting the quarter were:
•Net
sales for the third quarter were a record, driven by the inclusion of the Planters® snack nuts business, growth from the Company's foodservice businesses, and strong demand across the nut butters, Mexican and simple meals portfolios in Grocery Products. Net sales also benefited from pricing actions across the portfolio.
•Segment profit for the quarter increased 18 percent. Strong results from Jennie-O Turkey Store, Refrigerated Foods, and the contribution from the Planters® snack nuts business were the key contributors to growth.
•Compared to the prior year, earnings before income taxes for the quarter increased
42 percent. Last year's results were impacted by one-time acquisition costs and accounting adjustments related to the acquisition of the Planters® snack nuts business of $40 million.
•Jennie-O Turkey Store segment profit increased significantly due to higher commodity prices and foodservice sales.
•Refrigerated Foods segment profit growth was driven by strong results from the value-added businesses, more than offsetting higher operational and logistics costs, and lower commodity profitability.
•International & Other segment profit declined for the quarter. Profit growth in China, due primarily to lower pork input costs, did not offset the impact of lower export sales.
•Grocery Products segment profit declined due to the impact from continued inflationary pressures and lower results from MegaMex.
•Year-to-date cash flow from operations was $763 million, up 74 percent compared to the prior year.
•Fourth quarter and full year comparisons will be to fiscal 2021 results which included an extra week in the fourth quarter.
•On August 9, 2022, the
Company announced a new strategic operating model and will be transitioning to three operating segments – Retail, Foodservice and International. The Company will begin operating under the new model at the beginning of fiscal 2023 on October 31, 2022. Earnings will first be reported under this structure for the first quarter of fiscal 2023.
Consolidated Results
Volume, Net Sales, Earnings, and Diluted Earnings per Share
Net Earnings Attributable to Hormel Foods Corporation
218,915
176,917
23.7
720,103
627,101
14.8
Diluted
Earnings per Share
0.40
0.32
25.0
1.31
1.15
13.9
Adjusted Diluted Earnings Per Share (1)
0.40
0.39
2.6
1.31
1.21
8.3
(1) See
the "Non-GAAP Financial Measures" section below for a description of the Company's use of measures not defined by GAAP.
Net Sales
Record net sales for the third quarter and first nine months of the year were driven primarily by the inclusion of the Planters® snack nuts business and by growth from the Company's foodservice businesses. All segments have benefited from pricing actions taken during the first nine months of the year to offset inflationary pressures. The third quarter marked the seventh consecutive quarter of record sales.
Cost
of products sold for the third quarter and first nine months of fiscal 2022 increased due to inflationary pressures stemming from raw materials, packaging, freight, labor and many other inputs. The inclusion of the Planters® snack nuts business was also a driver of higher costs.
Costs are expected to remain elevated due to the continued impacts of broad-based inflation. In general, raw material input costs for pork, beef, turkey, chicken, and feed are anticipated to remain above historical levels.
Gross
profit as a percentage of net sales for the third quarter and first nine months of fiscal 2022 increased due primarily to improved profitability from the Jennie-O Turkey Store segment, the inclusion of the Planters® snack nuts business, and pricing actions to help mitigate inflationary pressures across all segments. Gross profit as a percentage of net sales also benefited from the reduction of lower margin commodity sales resulting from the Company's new pork supply agreement.
Compared to the prior year, gross profit as a percentage of net sales for the third quarter increased for the Jennie-O Turkey Store, Refrigerated Foods, and International & Other segments while declining for Grocery Products. For the first nine months of fiscal 2022, gross profit
as a percentage of net sales increased for the Jennie-O Turkey Store and International & Other segments, was flat for Refrigerated Foods and lower for Grocery Products.
Looking ahead to the fourth quarter of fiscal 2022, the Company expects gross profit as a percentage of net sales to improve sequentially compared to the third quarter of fiscal 2022. The net impact of input cost inflation poses the largest risk to this assumption.
For the third quarter, SG&A expenses declined as the comparable period last year included one-time acquisition-related costs associated with the Planters®
snack nuts business. SG&A expenses for the first nine months increased due to the addition of the Planters® snack nuts business and higher marketing and advertising investments. As a percent of net sales, SG&A expenses declined for the first nine months, driven by record sales and disciplined cost management.
Advertising investments in the third quarter were $37 million compared to $31 million last year. For the first nine months of fiscal 2022, advertising investments increased $28 million, or 29 percent, compared to the prior year. The Company plans to continue to invest in its leading brands.
Equity in earnings of affiliates for the third quarter and first nine months of fiscal 2022 decreased significantly
due to lower results for MegaMex. MegaMex results have been negatively impacted by inflationary pressures, including significantly higher costs for avocados.
The effective tax rate for the third quarter increased as last year's tax rate reflected stock option exercise benefits and a one-time foreign tax benefit. The effective tax rate for fiscal 2022 is expected to be between 20.5% and 22.5%. For further information, refer to Note K - Income Taxes.
Segment Results
Net sales and segment profit for each of the Company’s reportable segments are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost
allocations and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the profit and other financial information shown below.
Volume and sales for the third quarter increased significantly, led by strong demand across the nut butters, Mexican and simple meals portfolios, and from the inclusion of the Planters® snack nuts
business. Organic net sales gains in the third quarter were led by products such as SKIPPY® spreads, WHOLLY® Guacamole, Hormel® chili, Dinty Moore®beef stew and Mary Kitchen® hash, in addition to strategic pricing actions. For the first nine months of fiscal 2022, sales increased primarily due to the inclusion of the Planters® snack nuts business.
Segment profit for the third quarter and first nine months of the year decreased, as the contribution from the
Planters® snack nuts business and organic net sales growth was more than offset by inflationary pressures and lower results from MegaMex.
Looking to the fourth quarter, Grocery Products expects improved results compared to the third quarter of fiscal 2022 due to strong demand across the business and from pricing actions effective at the beginning of the fourth quarter. Risks to profitability include higher than anticipated elasticities impacting sales volumes and production challenges on key product lines.
For
the third quarter, net sales increased due to continued strong results from the foodservice businesses, growth from many retail products, strategic pricing actions across the portfolio and the inclusion of the Planters® snack nuts business in the convenience channel. For the first nine months of fiscal 2022, net sales increased due to strong results from the foodservice businesses, strategic pricing actions across the portfolio, and from the inclusion of the Planters® snack nuts business. Consistent with the Company's long-term strategy to better align resources to value-added growth, the overall decline in volume for the third quarter and first nine months of fiscal 2022 was due primarily to lower commodity sales resulting from the
Company's new pork supply agreement.
Segment profit growth during the third quarter was driven by strong results from the value-added businesses, more than offsetting higher operational and logistics costs, and lower commodity profitability. For the first nine months of fiscal 2022, segment profit growth was primarily driven by strong results from the foodservice businesses, more than offsetting higher operational and logistics costs.
For the fourth quarter, Refrigerated Foods expects profit to decline compared to the prior year as continued strength in the foodservice businesses and strong demand for its retail products are more than offset by higher raw material, operational and logistics costs.
As anticipated, volume and net sales declined for the third quarter of fiscal 2022 as a result of the supply impacts on the Company's vertically integrated supply chain from highly pathogenic
avian influenza (HPAI). For the quarter, foodservice and whole-bird sales increased due to favorable pricing, partially offsetting lower commodity and retail sales. For the first nine months of fiscal 2022, higher foodservice and whole-bird sales due to favorable pricing drove the overall sales increases.
For the third quarter and first nine months of the year, higher commodity prices and foodservice sales drove the substantial improvement in segment profit.
Jennie-O Turkey Store remains on pace to exceed profit expectations for the year, with significant profit growth in the fourth quarter. Sales volumes are projected to decline approximately 30 percent in the fourth quarter due to continued supply gaps in its vertically integrated supply chain and whole bird sales pulled forward into the third quarter. Risks to the outlook include a material
impact to production and sales volumes from HPAI in the vertically integrated supply chain.
Volume and sales declined during the third quarter as higher global sales of SPAM® luncheon meat and improved results in Brazil did not overcome an overall decline in export sales and lower
sales in China. Export volumes declined as a result of current export logistics challenges and lower commodity sales due to the Company's new pork supply agreement. Sales in China
were negatively affected by COVID-related restrictions and temporary plant shutdowns. Volume and sales declined during the first nine months of the year as a result of lower commodity sales due to the Company's new pork supply agreement and
ongoing export logistics challenges.
Segment profit for the third quarter and first nine months of fiscal 2022 declined due in large part to lower results from the export business, which has been negatively impacted by logistics challenges and meaningfully higher freight expenses.
The International & Other segment anticipates growth in the fourth quarter driven by branded exports and improved profitability in China. Persistent shipping interruptions pose a risk to export sales and profit growth, while additional COVID-related restrictions in China could pressure in-country results.
Unallocated Income and Expenses
The Company
does not allocate deferred compensation, investment income, interest expense or interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at the corporate level. Equity in earnings of affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included in the segment table for the purpose of reconciling segment results to earnings before income taxes.
For the third quarter and first nine months of fiscal 2022, net unallocated expense decreased due to one-time acquisition costs and accounting adjustments of $40 million and $43 million, respectively, related to the acquisition of the Planters® snack nuts business in the prior year. Higher interest expense and lower investment income net of deferred compensation this year have been the primary drivers of higher
expenses to-date.
Non-GAAP Financial Measures
The non-GAAP adjusted financial measure of adjusted diluted earnings per share is presented to provide investors with additional information to facilitate the comparison of past and present operations. Adjusted diluted earnings per share excludes the impact of the acquisition-related expenses and accounting adjustments related to the acquisition of the Planters® snack nuts business. The tax impact was calculated using the effective tax rate for the quarter in which the expenses and accounting adjustments were incurred.
The non-GAAP adjusted financial measures of organic net sales and organic volume are presented to provide investors with additional information to facilitate the comparison of
past and present operations. Organic net sales and organic volume are defined as net sales and volume, excluding the impact of acquisitions and divestitures. Organic net sales and organic volume exclude the impact of the acquisition of the Planters® snack nuts business (June 2021) in the Grocery Products, Refrigerated Foods and International & Other segments.
The Company believes these non-GAAP financial measures provide useful information to investors because they are the measures used to evaluate performance on a comparable year-over-year basis. Non-GAAP measures are not intended to be a substitute for GAAP measures in analyzing financial performance. These non-GAAP measures are not in accordance with generally accepted accounting principles and may
be different from non-GAAP measures used by other companies.
The tables below show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures.
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 31, 2021.
When
assessing liquidity and capital resources, the Company evaluates cash and cash equivalents, short-term and long-term investments, income from operations, and borrowing capacity.
Cash
and cash equivalents increased $237 million in the nine months ended July 31, 2022 as cash from operating activities was sufficient to cover dividend payments and capital expenditures. The use of cash to fund the acquisition of the Planters® snack nuts business was the primary driver of the decline in cash and cash equivalents in the prior year. Additional details related to significant drivers of cash flows are provided below.
Cash Provided by (Used in) Operating Activities
•Cash flows from operating activities benefited from earnings, while changes in operating assets and liabilities during the nine months ended July 31, 2022 were overall unfavorable.
–Inventory
increased $311 million compared to $202 million in the prior year. The higher inventory value in fiscal 2022 was primarily due to a recovery in inventory volumes and sustained higher raw material costs. The increase in inventory levels during fiscal 2021 was the result of inflation in raw materials and supplies along with the additional inventory activity for the Planters® snack nuts business since its acquisition.
–Accounts receivable declined $97 million in the nine months ended July 31, 2022 as a result of the timing of sales and collections. In comparison, accounts receivable rose $192 million in the nine months ended July 25, 2021 with the additional accounts receivable activity for the Planters®
snack nuts business since its acquisition.
–Accounts payable and accrued expenses decreased $84 million and $30 million in the nine months ended July 31, 2022 and July 25, 2021, respectively, primarily due to the timing of invoice payments.
Cash Provided by (Used in) Investing Activities
•Capital expenditures were $189 million and $139 million in the nine months ended July 31, 2022 and July 25, 2021, respectively. The Company's target for capital expenditures for fiscal 2022 is $310
million. The largest spend in both years was related to capacity expansion in Omaha, Nebraska. Additional projects include a new production line for the SPAM® family of products in Dubuque, Iowa in fiscal 2022 and Project Orion in fiscal 2021. For the remainder of the fiscal year, the Company will prioritize projects which increase value added production capacity, improve infrastructure, drive cost savings and leverage automation.
•In the nine months ended July 25, 2021, the Company acquired the Planters® snack nuts business for $3.4 billion. See
Note B - Acquisitions and Divestitures for more information.
Cash Provided by (Used in) Financing Activities
•Cash dividends paid to the Company’s shareholders continue to be an ongoing financing activity for the Company with payments totaling $416 million in the nine months ended July 31, 2022 compared to $390 million in the comparable period of fiscal 2021. For fiscal 2022, the annual dividend rate was increased 6 percent to $1.04 per share, representing the 56th consecutive annual dividend increase. The Company has paid dividends for 376 consecutive
quarters.
•Proceeds from exercise of stock options was $78 million in the nine months ended July 31, 2022 compared to $44 million in the comparable period of fiscal 2021. The increase in proceeds was caused by the number of options exercised with 3.7 million shares issued during fiscal 2022 compared to 2.8 million shares during fiscal 2021.
•The Company issued unsecured senior notes in an aggregate principal amount of $2.3 billion to fund the acquisition of the Planters® snack nuts business in the nine months ended July 25, 2021. See Note J - Long-term Debt and Other Borrowing Arrangements
for more information.
•The Company repaid $250.0 million of its senior unsecured notes upon maturity in April 2021.
Sources and Uses of Cash
The Company believes its balanced business model, with diversification across raw material inputs, channels, and categories, provides stability in ever changing economic environments. The Company applies a waterfall approach to capital resource allocation, which focuses first on required uses of cash such as capital expenditures to maintain facilities, dividend returns to
investors, and mandatory debt repayments. Next, the Company looks to strategic items in support of growth initiatives such as acquisitions and innovation investments, which is followed by opportunistic uses including incremental debt repayment and share repurchases. The Company believes its anticipated income from operations, cash on hand, and borrowing capacity under the current credit facility will be adequate to meet all short-term and long-term commitments. The Company's ability to leverage its balance sheet through the issuance of debt provides the flexibility to take advantage of strategic opportunities which may require additional funding.
There
have been no material changes to the information regarding the Company’s future contractual financial obligations previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of July 31, 2022, the Company was in compliance with all of these debt covenants and expects to maintain this compliance.
Trademarks
References to the Company’s brands or products in italics within this report represent valuable trademarks owned or licensed by Hormel Foods, LLC or other subsidiaries of Hormel Foods Corporation.
CRITICAL ACCOUNTING ESTIMATES
This discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. The significant accounting policies used in preparing these Consolidated Financial Statements are consistent with those described in Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements in the Form 10-K with the exception of new requirements adopted in the first quarter of fiscal 2022.
Critical accounting estimates are defined as those reflective of significant judgments, estimates, and uncertainties, which may result in materially different results under different assumptions and conditions. There have been no material changes in the
Company’s Critical Accounting Estimates as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking” information within the meaning of the federal securities laws. The “forward-looking” information may include statements concerning the Company’s outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts.
The
Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. The Company is filing this cautionary statement in connection with the Reform Act. When used in this Quarterly Report on Form 10-Q, the Company’s Annual Report to Stockholders, other filings by the Company with the Securities and Exchange Commission, the Company’s press releases, and oral statements made by the
Company’s representatives, the words or phrases “should result,”“believe,”“intend,”“plan,”“are expected to,”“targeted,”“will continue,”“will approximate,”“is anticipated,”“estimate,”“project,” or similar expressions are intended to identify forward-looking statements within the meaning of the Reform Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected.
In connection with the “safe harbor” provisions of the Reform Act, the Company is identifying risk factors that could affect financial performance and cause the Company’s
actual results to differ materially from opinions or statements expressed with respect to future periods. The discussions of risk factors in the Company's most recent Annual Report on Form 10-K and in Part II, Item 1A of this Quarterly Report on Form 10-Q contain certain cautionary statements regarding the Company’s business, which should be considered by investors and others. Such risk factors should be considered in conjunction with any discussions of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts
or investors, or other communications by the Company.
In making these statements, the Company is not undertaking, and specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the Company’s business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the Company has attempted to list comprehensively these important cautionary risk factors, the
Company wishes to caution investors and others that other factors may in the future prove to be important in affecting the Company’s business or results of operations.
The Company cautions readers not to place undue reliance on forward-looking statements, which represent current views as of the date made. Forward-looking statements are inherently at risk to changes in the national and worldwide economic environment, which could
include, among other things, risks related to the deterioration of economic conditions; the COVID-19 pandemic; risks associated with acquisitions and divestitures; potential disruption of operations including at co-manufacturers, suppliers, logistics providers, customers, or other third-party service providers; risk of loss of a material contract; the Company’s inability to protect information technology systems against, or effectively respond to, cyber attacks or security breaches; deterioration of labor relations, labor availability or increases to labor costs; general risks of the food industry, including food contamination; outbreaks of disease among livestock and poultry flocks; fluctuations in commodity prices and availability of raw materials and other inputs; fluctuations in market demand
for the Company’s products; risks of litigation; potential sanctions and compliance costs arising from government regulation; compliance with stringent environmental regulation and potential environmental litigation; and risks arising from the Company’s foreign operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various forms of market risk as a part of its ongoing business practices. The
Company utilizes derivative instruments to mitigate earnings fluctuations due to market volatility.
Commodity Price Risk:The Company is subject to commodity price risk primarily through grain and live hog markets. To reduce these exposures and offset the fluctuations caused by changes in market conditions, the Company employs hedging programs. These programs utilize futures, swaps, and options and are accounted for as cash flow hedges. The fair value of the Company’s cash flow commodity contracts as of July
31, 2022, was $26.9 million compared to $25.2 million as of October 31, 2021. The Company measures its market risk exposure on its cash flow commodity contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices. A 10 percent decrease in the market price would have negatively impacted the fair value of the Company's cash flow commodity contracts as of July 31, 2022, by $29.3 million, which in turn would lower the
Company's future cost on purchased commodities by a similar amount.
Interest Rate Risk: The Company is subject to interest rate risk primarily from changes in fair value of long-term fixed rate debt. As of July 31, 2022, the Company’s long-term debt had a fair value of $3.0 billion compared to $3.3 billion as of October 31, 2021. The Company measures its market risk exposure of long-term fixed rate debt using a sensitivity analysis, which considers a 10 percent change in interest rates. A 10 percent decrease in interest rates would have
positively impacted the fair value of the Company’s long-term debt as of July 31, 2022, by $80.1 million. A 10 percent increase would have negatively impacted the long-term debt by $75.5 million.
To reduce the risk of changes in fair value of long-term debt, the Company has entered into an interest rate swap on a portion of the debt that receives a fixed rate and pays a floating rate. The notional amount of the Company's interest rate swap is $450.0 million. The Company measures its market risk exposure on interest rate contracts
using sensitivity analysis, which considers a hypothetical change of 25 basis points in the underlying benchmark interest rate. An increase of 25 basis points would have negatively impacted the fair value of the Company's interest rate swap by $1.8 million, while a decrease of 25 basis points would have positively impacted the value by a similar amount.
Foreign Currency Exchange Rate Risk: The fair values of certain Company assets are subject to fluctuations in foreign currency exchange rates. The Company's net asset position in foreign currencies as of July 31, 2022 was $667.1 million, compared to $657.2 million as of October
31, 2021, with most of the exposure existing in Chinese yuan and Brazilian real. The Company currently does not use market risk sensitive instruments to manage this risk.
Investment Risk: The Company has corporate-owned life insurance policies classified as trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. As of July 31, 2022, the balance of these securities totaled $191.0 million compared to $203.0 million as of October 31, 2021. The rabbi trust is invested primarily in fixed income funds. The
Company is subject to market risk due to fluctuations in the value of the remaining investments as unrealized gains and losses associated with these securities are included in the Company’s net earnings on a mark-to-market basis. A 10 percent decline in the value of the investments not held in fixed income funds would have a negative impact to the Company’s pretax earnings of approximately $8.1 million, while a 10 percent increase in value would have a positive impact of the same amount.
As of the end of the period covered by this report (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information the Company is required to disclose in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Internal Controls.
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the third quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings related to the ongoing operation of its business, including claims both by and against the Company. At any time, such proceedings typically involve claims related to product liability, labeling, contracts, antitrust regulations, intellectual property, competition laws, employment practices, or other actions brought by employees, customers, consumers, competitors or
suppliers. The Company establishes accruals for its potential exposure, as appropriate, for claims against the Company when losses become probable and reasonably estimable. However, future developments or settlements are uncertain and may require the Company to change such accruals as proceedings progress. 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.
The
Company is a defendant in three sets of antitrust lawsuits broadly targeting the pork and turkey industries. None of these cases involve allegations of bid rigging or other criminal conduct. The Company has not established reserves as it does not believe it will have liability in any of these cases.
Item 1A. RISK FACTORS
The Company's business, operations, and financial condition are subject to various risks and uncertainties. There have been no material changes to the risk factors previously disclosed in Part I, Item 1A. Risk Factors
in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021, except as follows:
BUSINESS AND OPERATIONAL RISKS
Deterioration of economic conditions could harm the Company’s business. The Company's business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, tax rates, availability of capital, energy availability and costs (including fuel surcharges), political developments, civil unrest, and the effects of governmental initiatives to manage
economic conditions. Decreases in consumer spending rates and shifts in consumer product preferences could also negatively impact the Company.
Volatility in financial markets and the deterioration of national and global economic conditions could impact the Company’s operations as follows:
▪The financial stability of our customers and suppliers may be compromised, which could result in additional bad debts for the Company or non-performance by suppliers.
▪The value of our investments in debt and equity securities may
decline, including most significantly the Company’s trading securities held as part of a rabbi trust to fund supplemental executive retirement plans and deferred income plans, and the Company’s assets held in pension plans.
▪Future volatility or disruption in the capital and credit markets could impair the Company's liquidity or increase costs
of borrowing.
▪The Company may be required to redirect cash flow from operations or explore alternative strategies, such as disposing of assets, to fulfill the payment of principal and interest on its indebtedness.
Although the Company has no operations in Russia or Ukraine, inflated fuel costs and supply chain shortages and delays have been experienced due to the impact of the conflict on the global economy. Further escalation related to the military conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, additional supply chain disruptions, rising prices for oil and other commodities, volatility
in capital markets and foreign exchange rates, rising interest rates or heightened cybersecurity risks, any of which may adversely affect the Company's business. In addition, the effects of the ongoing conflict could heighten many of the Company's other risk factors described in Part I, Item 1A, "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
The Company utilizes hedging programs to manage its exposure to various market risks, such as commodity prices and interest
rates, which qualify for hedge accounting for financial reporting purposes. Volatile fluctuations in market conditions could cause these instruments to become ineffective, which could require any gains or losses associated with these instruments to be reported in the Company’s earnings each period. These instruments may limit the Company’s ability to benefit from market gains if commodity prices and/or interest rates become more favorable than those secured under the Company’s hedging programs.
The Company's goodwill and indefinite lived intangible assets are initially recorded
at fair value and are not amortized, but are reviewed for impairment annually or more frequently if impairment indicators arise. Impairment testing requires judgement around estimates and assumptions and is impacted by factors such as revenue growth rates, operating margins, tax rates, royalty rates, and discount rates. An unfavorable change in these factors may lead to the impairment of goodwill and/or intangible assets.
Additionally, if another highly pathogenic human disease outbreak developed in the United States, it may negatively impact the national economy, demand for Company products, and/or the Company’s workforce availability, and the Company’s financial results could suffer. The
Company has developed contingency plans to address infectious disease scenarios and the potential impact on its operations, and will continue to update these plans as necessary. There can be no assurance given, however, these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
Deterioration of labor relations, labor availability or increases in labor costs could harm the Company’s business. As of July 31, 2022, the Company employed more than 20,000 people worldwide, of which approximately 20 percent were represented by labor
unions, principally the United Food and Commercial Workers Union. A significant increase in labor costs or a deterioration of labor relations at any of the Company’s facilities or co-manufacturing facilities resulting in work slowdowns or stoppages could harm the Company’s financial results. Labor and skilled labor availability challenges could continue to have an adverse effect on the Company's business. All union contracts are currently effective with none set to expire during the remainder of fiscal 2022.
The Bakery, Confectionery, Tobacco Workers and Grain Millers' International
Union represents approximately 50 workers at the Company's Fresno, California, manufacturing facility who were hired as a result of the Company's acquisition of the Corn Nuts® brand. Discussions for a first labor contract have been on-going since the acquisition. Subsequent to the end of the third quarter, the union called a strike resulting in a work stoppage at the facility. To date, the Company has continued to operate the facility at reduced capacity during the strike and will continue to work toward a labor contract
and resolution of the strike.
INDUSTRY RISKS
Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins.
The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including African swine fever (ASF), Bovine Spongiform Encephalopathy (BSE), pneumo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease (FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI). The outbreak of such diseases could adversely affect the
Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins. Additionally, the outbreak of disease may hinder the Company’s ability to market and sell products both domestically and internationally.
In recent years, the outbreak of ASF has impacted hog herds in China, Asia, Europe, and the Caribbean. If an outbreak of ASF were to occur in the United States, the Company's supply of hogs and pork could be materially impacted.
HPAI was detected within the United States in 2022 and was confirmed within the
Company's Jennie-O Turkey Store supply chain. The impact of HPAI has reduced and will continue to reduce production volume in the Company's turkey facilities at least through the first quarter of fiscal 2023. The Company is continuing to monitor the situation and will take the appropriate actions to protect the health of the turkeys across the supply chain.
The
Company has developed business continuity plans for various disease scenarios and will continue to update these plans as necessary. There can be no assurance given, however, that these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no issuer purchases of equity securities in the quarter ended July 31, 2022. The maximum number of shares that may yet be purchased under the plans or programs as of July
31, 2022 is 3,987,494. On January 29, 2013, the Company's Board of Directors authorized the repurchase of 10,000,000 shares of its common stock with no expiration date. On January 26, 2016, the Board of Directors approved a two-for-one split of the Company’s common stock to be effective January 27, 2016. As part of the stock split resolution, the number of shares remaining to be repurchased was adjusted proportionately.
The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 2022, formatted in Inline XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Condensed Statements of Financial Position, (iv) Consolidated Statements of Changes in Shareholders' Investment, (v) Consolidated Condensed Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
104
The
cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 2022, formatted in Inline XBRL (included as Exhibit 101).
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.
