filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management
Management’s Responsibility for Financial Statements
The accompanying financial statements were prepared by the management of Hormel Foods Corporation which is responsible for their integrity and objectivity. These statements have been prepared in accordance with U.S. generally accepted accounting principles appropriate in the circumstances and, as such, include amounts that are based on our best estimates and judgments.
Hormel Foods Corporation has developed a system of internal controls designed to assure that the records reflect the transactions of the Company and that the established policies and procedures are adhered to. This system is augmented by well-communicated written policies and procedures, a strong program of internal audit, and well-qualified personnel.
These financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm, and their report is included herein. The audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and includes a review of the Company’s accounting and financial controls and tests of transactions.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the independent auditors, management, and the internal auditors to assure that each is carrying out its responsibilities. Both Ernst & Young LLP and our internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the results of their audit work and their opinions on the adequacy of internal controls and the quality of financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of Hormel Foods Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rule 13a–15(f). The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting standards. Under the supervision, and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
Based on our evaluation under the framework in Internal Control - Integrated Framework, we concluded that our internal control over financial reporting was effective as of October 27, 2019. Our internal control over financial reporting as of October 27, 2019, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
| /s/ James P. Snee | /s/ James N. Sheehan |
| Chairman of the Board, | Executive Vice President |
| President and Chief Executive Officer | and Chief Financial Officer |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hormel Foods Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Hormel Foods Corporation’s internal control over financial reporting as of October 27, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hormel Foods Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of October 27, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated statements of financial position of Hormel Foods Corporation (the Company) as of October 27, 2019 and October 28, 2018, the related consolidated statements of operations, comprehensive income, changes in shareholders’ investment, and cash flows for each of the three years in the period ended October 27, 2019 and the related notes and financial statement schedule listed in the index at Item 15 and our report dated December 6, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
December 6, 2019
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hormel Foods Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Hormel Foods Corporation (the Company) as of October 27, 2019 and October 28, 2018, the related consolidated statements of operations, comprehensive income, changes in shareholders’ investment, and cash flows for each of the three years in the period ended October 27, 2019 and the related notes and financial statement schedule listed in the index at Item 15 (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 27, 2019 and October 28, 2018, and the results of its operations and its cash flows for each of the three years in the period ended October 27, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 27, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated December 6, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion**.**
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Valuation of Alternative Investments - Pension Assets | ||||
| Description of the Matter | At October 27, 2019, the Company had $1.5 billion in plan assets related to the defined benefit pension plans. Approximately 43% of the total pension assets are in global stocks - collective investment funds, private equity funds, real estate - domestic funds, and hedge funds. These types of investments are referred to as “alternative investments.” As documented in Note G of the financial statements, these alternative investments are valued at net asset value (NAV) or are valued using significant unobservable inputs. | |||
| Auditing the fair value of these alternative investments is challenging because of the higher estimation uncertainty of the inputs to the fair value calculations, including the underlying NAVs, discounted cash flow valuations, comparable market valuations, and adjustments for currency, credit liquidity and other risks. Additionally, certain information regarding the fair value of these alternative investments is based on unaudited information available to management at the time of valuation. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls addressing the risk of material misstatement relating to valuation of alternative investments. This included testing management's review controls over the valuation of alternative investments, for example, a review of fund performance in comparison to the selected benchmark and meetings with the investment advisor on a quarterly basis to review market performance and fund returns in comparison with relevant indices and the investment policy. We also tested management's independent price testing of underlying investments performed for certain investments on an annual basis. | |||
| Our audit procedures included, among others, inquiring of management and the investment advisor regarding changes to the investment portfolio and investment strategies. We confirmed the fair value of the investments and ownership interest directly with the fund managers. We inspected the trust statement for observable transactions near year end to compare to the estimated fair value. We also obtained the latest audited financial statements for certain investments, performed a rollforward of the investment balance to compute an estimated market return on investment, and compared the market return to relevant benchmarks. | ||||
| Valuation of Indefinite-Lived Intangible Assets - Trade Names | ||||
| Description of the Matter | At October 27, 2019, the Company’s indefinite-lived intangible assets relating to brands, tradenames, and trademarks were $956.8 million. As explained in Note D of the financial statements, indefinite-lived intangible assets are tested by management for impairment at least annually. Due to the lack of excess value of certain trade names with combined carrying values representing less than $100 million, the Company elected to test these assets using a quantitative analysis. | |||
| Auditing management’s quantitative indefinite-lived intangible asset impairment test was complex and highly judgmental due to the significant measurement uncertainty in determining the fair value of the asset which was subject to a quantitative impairment test. For example, the fair value estimate was sensitive to significant assumptions including future net sales projections, royalty rates, and discount rates, which are affected by expected future market or economic conditions and industry and company-specific qualitative factors. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s indefinite lived intangible assets quantitative impairment test. This included evaluating controls over management's review of the forecasting process used to develop future net sales projections, as well as controls over the review of the other significant assumptions. We also tested management's controls to validate that the data used in the valuation was complete and accurate. | |||
| Our audit procedures included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to forecasts used in the Company’s annual operating plans, current industry and economic trends, and other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the trade names that would result from changes in the assumptions. Finally, we compared the fair values for each trade name subject to the quantitative impairment assessment to their carrying values in order to conclude on whether impairment charges were necessary. |
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1931.
Minneapolis, Minnesota
December 6, 2019
Consolidated Statements of Financial Position
| October 27, | October 28, | |||||||
| (in thousands, except share and per share amounts) | 2019 | 2018 | ||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and Cash Equivalents | $ | 672,901 | $ | 459,136 | ||||
| Short-term Marketable Securities | 14,736 | — | ||||||
| Accounts Receivable (Net of Allowance for Doubtful Accounts of $4,063 at October 27, 2019, and $4,051 at October 28, 2018) | 574,396 | 600,438 | ||||||
| Inventories | 1,042,362 | 963,527 | ||||||
| Income Taxes Receivable | 19,924 | 3,995 | ||||||
| Prepaid Expenses | 22,637 | 16,342 | ||||||
| Other Current Assets | 14,457 | 6,662 | ||||||
| Total Current Assets | 2,361,413 | 2,050,100 | ||||||
| Goodwill | 2,481,645 | 2,714,116 | ||||||
| Other Intangibles | 1,033,862 | 1,207,219 | ||||||
| Pension Assets | 135,915 | 195,153 | ||||||
| Investments In and Receivables from Affiliates | 289,157 | 273,153 | ||||||
| Other Assets | 177,901 | 189,951 | ||||||
| Property, Plant and Equipment | ||||||||
| Land | 49,758 | 50,332 | ||||||
| Buildings | 1,083,902 | 956,260 | ||||||
| Equipment | 1,965,478 | 1,863,020 | ||||||
| Construction in Progress | 256,190 | 332,205 | ||||||
| Less: Allowance for Depreciation | (1,726,217 | ) | (1,689,217 | ) | ||||
| Net Property, Plant and Equipment | 1,629,111 | 1,512,600 | ||||||
| Total Assets | $ | 8,109,004 | $ | 8,142,292 | ||||
| Liabilities and Shareholders’ Investment | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable | $ | 590,033 | $ | 618,830 | ||||
| Accrued Expenses | 62,031 | 48,298 | ||||||
| Accrued Workers Compensation | 24,272 | 24,594 | ||||||
| Accrued Marketing Expenses | 96,305 | 118,887 | ||||||
| Employee Related Expenses | 213,515 | 224,736 | ||||||
| Taxes Payable | 6,208 | 2,490 | ||||||
| Interest and Dividends Payable | 112,685 | 101,079 | ||||||
| Total Current Liabilities | 1,105,049 | 1,138,914 | ||||||
| Long-term Debt – Less Current Maturities | 250,000 | 624,840 | ||||||
| Pension and Post-retirement Benefits | 536,490 | 477,557 | ||||||
| Other Long-term Liabilities | 115,356 | 99,070 | ||||||
| Deferred Income Taxes | 176,574 | 197,093 | ||||||
| Shareholders’ Investment | ||||||||
| Preferred Stock, Par Value $0.01 a Share — Authorized 160,000,000 Shares; Issued — None | ||||||||
| Common Stock, Nonvoting, Par Value $0.01 a Share — Authorized 400,000,000 Shares; Issued — None | ||||||||
| Common Stock, Par Value $0.01465 a Share — Authorized 1,600,000,000 Shares; Issued 534,488,746 Shares October 27, 2019 Issued 534,135,484 Shares October 28, 2018 | 7,830 | 7,825 | ||||||
| Additional Paid-in Capital | 184,921 | 106,528 | ||||||
| Accumulated Other Comprehensive Loss | (399,500 | ) | (243,498 | ) | ||||
| Retained Earnings | 6,128,207 | 5,729,956 | ||||||
| Hormel Foods Corporation Shareholders’ Investment | 5,921,458 | 5,600,811 | ||||||
| Noncontrolling Interest | 4,077 | 4,007 | ||||||
| Total Shareholders’ Investment | 5,925,535 | 5,604,818 | ||||||
| Total Liabilities and Shareholders’ Investment | $ | 8,109,004 | $ | 8,142,292 |
See Notes to Consolidated Financial Statements.
Consolidated Statements of Operations
| Fiscal Year Ended | ||||||||||||
| October 27, | October 28, | October 29, | ||||||||||
| (in thousands, except per share amounts) | 2019 | 2018* | 2017* | |||||||||
| Net sales | $ | 9,497,317 | $ | 9,545,700 | $ | 9,167,519 | ||||||
| Cost of Products Sold | 7,612,669 | 7,566,227 | 7,170,883 | |||||||||
| Gross Profit | 1,884,648 | 1,979,473 | 1,996,636 | |||||||||
| Selling, General and Administrative | 727,584 | 841,205 | 759,304 | |||||||||
| Goodwill/Intangible Impairment | — | 17,279 | 180 | |||||||||
| Equity in Earnings of Affiliates | 39,201 | 58,972 | 39,590 | |||||||||
| Operating Income | 1,196,265 | 1,179,961 | 1,276,742 | |||||||||
| Other Income and Expense: | ||||||||||||
| Interest and Investment Income | 31,520 | 27,817 | 14,586 | |||||||||
| Interest Expense | (18,070 | ) | (26,494 | ) | (12,683 | ) | ||||||
| Earnings Before Income Taxes | 1,209,715 | 1,181,284 | 1,278,645 | |||||||||
| Provision for Income Taxes | 230,567 | 168,702 | 431,542 | |||||||||
| Net Earnings | 979,148 | 1,012,582 | 847,103 | |||||||||
| Less: Net Earnings Attributable to Noncontrolling Interest | 342 | 442 | 368 | |||||||||
| Net Earnings Attributable to Hormel Foods Corporation | $ | 978,806 | $ | 1,012,140 | $ | 846,735 | ||||||
| Net Earnings Per Share: | ||||||||||||
| Basic | $ | 1.83 | $ | 1.91 | $ | 1.60 | ||||||
| Diluted | $ | 1.80 | $ | 1.86 | $ | 1.57 | ||||||
| Weighted-average Shares Outstanding: | ||||||||||||
| Basic | 534,578 | 530,742 | 528,363 | |||||||||
| Diluted | 545,232 | 543,869 | 539,116 |
*Adjusted due to the adoption of Accounting Standards Update (ASU) 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). See Note A - Summary of Significant Accounting Policies.
See Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
| Fiscal Year Ended | ||||||||||||
| October 27, | October 28, | October 29, | ||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Net Earnings | $ | 979,148 | $ | 1,012,582 | $ | 847,103 | ||||||
| Other Comprehensive Income (Loss), Net of Tax: | ||||||||||||
| Foreign Currency Translation | (8,414 | ) | (38,233 | ) | (1,335 | ) | ||||||
| Pension and Other Benefits | (97,486 | ) | 44,862 | 54,077 | ||||||||
| Deferred Hedging | 3,425 | (2,277 | ) | (4,492 | ) | |||||||
| Total Other Comprehensive Income (Loss) | (102,475 | ) | 4,352 | 48,250 | ||||||||
| Comprehensive Income | 876,673 | 1,016,934 | 895,353 | |||||||||
| Less: Comprehensive Income Attributable to Noncontrolling Interest | 70 | 217 | 390 | |||||||||
| Comprehensive Income Attributable to Hormel Foods Corporation | $ | 876,603 | $ | 1,016,717 | $ | 894,963 |
See Notes to Consolidated Financial Statements.
Consolidated Statements of Changes in Shareholders’ Investment
| Hormel Foods Corporation Shareholders | ||||||||||||||||||||||||||||||||||
| (in thousands, except per | Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||
| share amounts) | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||
| Balance at October 30, 2016 | 528,484 | $ | 7,742 | — | $ | — | $ | — | $ | 4,736,567 | $ | (296,303 | ) | $ | 3,400 | $ | 4,451,406 | |||||||||||||||||
| Net Earnings | 846,735 | 368 | 847,103 | |||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | 48,228 | 22 | 48,250 | |||||||||||||||||||||||||||||||
| Purchases of Common Stock | (2,738 | ) | (94,487 | ) | (94,487 | ) | ||||||||||||||||||||||||||||
| Stock-based Compensation Expense | 1 | 15,590 | 15,591 | |||||||||||||||||||||||||||||||
| Exercise of Stock Options/ Restricted Shares | 2,678 | 38 | 30,827 | 30,865 | ||||||||||||||||||||||||||||||
| Shares Retired | (2,738 | ) | (40 | ) | 2,738 | 94,487 | (32,747 | ) | (61,700 | ) | — | |||||||||||||||||||||||
| Declared Cash Dividends — $0.68 per Share | (359,031 | ) | (359,031 | ) | ||||||||||||||||||||||||||||||
| Balance at October 29, 2017 | 528,424 | $ | 7,741 | — | $ | — | $ | 13,670 | $ | 5,162,571 | $ | (248,075 | ) | $ | 3,790 | $ | 4,939,697 | |||||||||||||||||
| Net Earnings | 1,012,140 | 442 | 1,012,582 | |||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | 4,577 | (225 | ) | 4,352 | ||||||||||||||||||||||||||||||
| Purchases of Common Stock | (1,385 | ) | (46,898 | ) | (46,898 | ) | ||||||||||||||||||||||||||||
| Stock-based Compensation Expense | 1 | 20,594 | 20,595 | |||||||||||||||||||||||||||||||
| Exercise of Stock Options/ Restricted Shares | 7,096 | 103 | 72,399 | 72,502 | ||||||||||||||||||||||||||||||
| Shares Retired | (1,385 | ) | (20 | ) | 1,385 | 46,898 | (135 | ) | (46,743 | ) | — | |||||||||||||||||||||||
| Declared Cash Dividends — $0.75 per Share | (398,012 | ) | (398,012 | ) | ||||||||||||||||||||||||||||||
| Balance at October 28, 2018 | 534,135 | $ | 7,825 | — | $ | — | $ | 106,528 | $ | 5,729,956 | $ | (243,498 | ) | $ | 4,007 | $ | 5,604,818 | |||||||||||||||||
| Net Earnings | 978,806 | 342 | 979,148 | |||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | (102,203 | ) | (272 | ) | (102,475 | ) | ||||||||||||||||||||||||||||
| Purchases of Common Stock | (4,309 | ) | (174,246 | ) | (174,246 | ) | ||||||||||||||||||||||||||||
| Stock-based Compensation Expense | 1 | 19,706 | 19,707 | |||||||||||||||||||||||||||||||
| Exercise of Stock Options/ Restricted Shares | 4,663 | 67 | 59,974 | 60,041 | ||||||||||||||||||||||||||||||
| Shares Retired | (4,309 | ) | (63 | ) | 4,309 | 174,246 | (1,287 | ) | (172,896 | ) | — | |||||||||||||||||||||||
| Cumulative Effect Adjustment from the Adoption of: | ||||||||||||||||||||||||||||||||||
| ASU 2016-16 | (10,475 | ) | (10,475 | ) | ||||||||||||||||||||||||||||||
| ASU 2017-12 | 21 | (21 | ) | — | ||||||||||||||||||||||||||||||
| ASU 2018-02 | 52,342 | (53,778 | ) | (1,436 | ) | |||||||||||||||||||||||||||||
| Declared Cash Dividends — $0.84 per Share | (449,547 | ) | (449,547 | ) | ||||||||||||||||||||||||||||||
| Balance at October 27, 2019 | 534,489 | $ | 7,830 | — | $ | — | $ | 184,921 | $ | 6,128,207 | $ | (399,500 | ) | $ | 4,077 | $ | 5,925,535 |
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
| Fiscal Year Ended | ||||||||||||
| October 27, | October 28, | October 29, | ||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Operating Activities | ||||||||||||
| Net Earnings | $ | 979,148 | $ | 1,012,582 | $ | 847,103 | ||||||
| Adjustments to Reconcile to Net Cash Provided by Operating Activities: | ||||||||||||
| Depreciation | 153,182 | 149,205 | 122,594 | |||||||||
| Amortization | 12,027 | 12,653 | 8,383 | |||||||||
| Goodwill/Intangible Impairment | — | 17,279 | 180 | |||||||||
| Equity in Earnings of Affiliates | (39,201 | ) | (58,972 | ) | (39,590 | ) | ||||||
| Distributions Received from Equity Method Investees | 22,500 | 30,023 | 27,521 | |||||||||
| Provision for Deferred Income Taxes | 28,641 | (7,441 | ) | 62,166 | ||||||||
| (Gain) Loss on Property/Equipment Sales and Plant Facilities | (811 | ) | (2,867 | ) | 322 | |||||||
| Gain on Sale of Business | (16,469 | ) | — | — | ||||||||
| Gain on Insurance Proceeds | — | — | (3,914 | ) | ||||||||
| Non-cash Investment Activities | (20,180 | ) | (7,908 | ) | (4,864 | ) | ||||||
| Stock-based Compensation Expense | 19,707 | 20,595 | 15,591 | |||||||||
| Changes in Operating Assets and Liabilities, Net of Acquisitions: | ||||||||||||
| (Increase) Decrease in Accounts Receivable | (11,146 | ) | 36,133 | (29,717 | ) | |||||||
| (Increase) Decrease in Inventories | (123,843 | ) | (8,293 | ) | 41,028 | |||||||
| (Increase) Decrease in Prepaid Expenses and Other Current Assets | (10,105 | ) | (4,771 | ) | (22,459 | ) | ||||||
| (Decrease) Increase in Pension and Post-retirement Benefits | (10,416 | ) | (13,216 | ) | (13,275 | ) | ||||||
| (Decrease) Increase in Accounts Payable and Accrued Expenses | (44,109 | ) | 48,376 | (2,553 | ) | |||||||
| (Decrease) Increase in Net Income Taxes Payable | (15,929 | ) | 18,351 | 25,369 | ||||||||
| Net Cash Provided by Operating Activities | $ | 922,996 | $ | 1,241,729 | $ | 1,033,885 | ||||||
| Investing Activities | ||||||||||||
| Net (Purchase) Sale of Securities | $ | (14,496 | ) | $ | — | $ | — | |||||
| Proceeds from Sale of Business | 479,806 | — | 135,944 | |||||||||
| Acquisitions of Businesses/Intangibles | — | (857,668 | ) | (520,463 | ) | |||||||
| Purchases of Property/Equipment | (293,838 | ) | (389,607 | ) | (221,286 | ) | ||||||
| Proceeds from Sales of Property/Equipment | 37,402 | 9,749 | 3,754 | |||||||||
| (Increase) Decrease in Investments, Equity in Affiliates, and Other Assets | (6,479 | ) | (7,546 | ) | 5,095 | |||||||
| Proceeds from Company-owned Life Insurance | 17,758 | 9,704 | 5,323 | |||||||||
| Proceeds from Insurance Recoveries | — | — | 4,454 | |||||||||
| Net Cash Provided by (Used in) Investing Activities | $ | 220,153 | $ | (1,235,368 | ) | $ | (587,179 | ) | ||||
| Financing Activities | ||||||||||||
| Proceeds from Long-term Debt | $ | — | $ | 375,000 | $ | — | ||||||
| Principal Payments on Long-term Debt | (374,840 | ) | (160 | ) | — | |||||||
| Dividends Paid on Common Stock | (437,053 | ) | (388,107 | ) | (346,010 | ) | ||||||
| Share Repurchase | (174,246 | ) | (46,898 | ) | (94,487 | ) | ||||||
| Proceeds from Exercise of Stock Options | 59,895 | 71,803 | 21,726 | |||||||||
| Net Cash (Used in) Provided by Financing Activities | $ | (926,244 | ) | $ | 11,638 | $ | (418,771 | ) | ||||
| Effect of Exchange Rate Changes on Cash | (3,140 | ) | (2,985 | ) | 1,044 | |||||||
| Increase in Cash and Cash Equivalents | 213,765 | 15,014 | 28,979 | |||||||||
| Cash and Cash Equivalents at Beginning of Year | 459,136 | 444,122 | 415,143 | |||||||||
| Cash and Cash Equivalents at End of Year | $ | 672,901 | $ | 459,136 | $ | 444,122 |
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Note A
Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the accounts of Hormel Foods Corporation (the Company) and all of its majority-owned subsidiaries after elimination of intercompany accounts, transactions, and profits.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Fiscal Year: The Company’s fiscal year ends on the last Sunday in October. Fiscal years 2019, 2018, and 2017 consisted of 52 weeks.
Cash and Cash Equivalents: The Company considers all investments with an original maturity of three months or less on their acquisition date to be cash equivalents. The Company’s cash equivalents as of October 27, 2019, and October 28, 2018, consisted primarily of bank deposits, money market funds rated AAA, or other highly liquid investment accounts. The Net Asset Value (NAV) of the Company’s money market funds is based on the market value of the securities in the portfolio.
Fair Value Measurements: Pursuant to the provisions of Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (ASC 820), the Company measures certain assets and liabilities at fair value or discloses the fair value of certain assets and liabilities recorded at cost in the consolidated financial statements. Fair value is calculated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). ASC 820 establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of three levels based on the inputs used in the valuation. The Company classifies assets and liabilities in their entirety based on the lowest level of input significant to the fair value measurement. The three levels are defined as follows:
Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Observable inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.
Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.
See additional discussion regarding the Company’s fair value measurements in Note G - Pension and Other Post-retirement Benefits, Note H - Derivatives and Hedging, and Note M - Fair Value Measurements.
Compensation: The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred compensation plans. Under the plans, participants can defer certain types of compensation and elect to receive a return on the deferred amounts based on the changes in fair value of various investment options, 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 losses and gains associated with these investments are included in the Company’s earnings. Securities held by the trust generated gains (losses) of $8.3 million, $(0.4) million, and $6.2 million for fiscal years 2019, 2018, and 2017, respectively.
Inventories: Inventories are stated at the lower of cost or net realizable value. Cost is determined principally under the average cost method. Adjustments to the Company’s lower of cost or net realizable value inventory reserve are reflected in Cost of Products Sold in the Consolidated Statements of Operations.
Property, Plant and Equipment: Property, Plant and Equipment are stated at cost. The Company uses the straight-line method in computing depreciation. The annual provisions for depreciation have been computed principally using the following ranges of asset lives: buildings 20 to 40 years, and equipment 3 to 14 years.
Impairment of Long-Lived Assets and Definite-Lived Intangible Assets: Definite-lived intangible assets are amortized over their estimated useful lives. The Company reviews long-lived assets and definite-lived intangible assets for impairment annually, or more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying
value of the assets and any related goodwill, the carrying value is reduced to the estimated fair value. The Company recorded no material impairment charges for long-lived or definite-lived assets in fiscal 2019, 2018, 2017.
Goodwill and Other Indefinite-Lived Intangibles: Indefinite-lived intangible assets are originally recorded at their estimated fair values at date of acquisition and the residual of the purchase price is recorded to goodwill. Goodwill and other indefinite-lived intangible assets are allocated to reporting units that will receive the related sales and income. Goodwill and indefinite-lived intangible assets are tested annually for impairment or more frequently if impairment indicators arise.
In conducting the annual impairment test for goodwill, the Company has the option to first assess qualitative factors to determine whether it is more likely than not (> 50% likelihood) the fair value of any reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines an impairment is more likely than not, the Company is required to perform a quantitative impairment test. Otherwise, no further analysis is required. Alternatively, the Company may elect to proceed directly to the quantitative impairment test.
In conducting a qualitative assessment, the Company analyzes actual and projected growth trends for net sales, gross margin, and segment profit for each reporting unit, as well as historical performance versus plan and the results of prior quantitative tests. Additionally, the Company assesses factors that may impact the business's financial results such as macroeconomic conditions and the related impact, market-related exposures, plans to market for sale all or a portion of the business, competitive changes, new or discontinued product lines, and changes in key personnel.
If performed, the quantitative goodwill impairment test is performed at the reporting unit level. First, the fair value of each reporting unit is compared to its corresponding carrying value, including goodwill. The fair value of each reporting unit is estimated using discounted cash flow valuations (Level 3), which incorporate assumptions regarding future growth rates, terminal values, and discount rates. The estimates and assumptions used consider historical performance and are consistent with the assumptions used in determining future profit plans for each reporting unit, which are approved by the Company’s Board of Directors. If the quantitative assessment results in the carrying value exceeding the fair value of any reporting unit, the results from the quantitative analysis will be relied upon to determine both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.
During the fourth quarter of fiscal 2019, the Company completed its annual goodwill impairment tests and elected to perform a qualitative assessment. As a result of the qualitative testing during fiscal 2019 and 2018, and quantitative testing during fiscal 2017, no impairment charges were recorded.
In conducting the annual impairment test for its indefinite-lived intangible assets, the Company first performs a qualitative assessment to determine whether it is more likely than not (> 50% likelihood) an indefinite-lived intangible asset is impaired. If the Company concludes this is the case, a quantitative test for impairment must be performed. Otherwise, the Company does not need to perform a quantitative test.
In conducting the qualitative assessment, the Company analyzes growth rates for historical and projected net sales and the results of prior quantitative tests. Additionally, each reporting unit assesses critical items that may impact their intangible assets or the applicable royalty rates to determine if there are factors that could indicate impairment of the asset.
If performed, the quantitative impairment test compares the fair value and carrying value of the indefinite-lived intangible asset. The fair value of indefinite-lived intangible assets is primarily determined on the basis of estimated discounted value using the relief from royalty method (Level 3), which incorporates assumptions regarding future sales projections, discount rates, and royalty rates. If the carrying value exceeds fair value, the indefinite-lived intangible asset is considered impaired and an impairment charge is recorded for the difference. Even if not required, the Company periodically elects to perform the quantitative test in order to confirm the qualitative assessment.
During the fourth quarter of fiscal 2019, the Company completed its annual indefinite-lived asset impairment tests and elected to perform a qualitative assessment. As a result of the review, it was revealed that further assessment in the form of a quantitative test was necessary for two indefinite-lived intangible assets. No impairment charges were recorded for fiscal 2019. During fiscal 2018, a $17.3 million intangible asset impairment charge was recorded for the CytoSport trademark. See additional discussion regarding the Company’s goodwill and intangible assets in Note E - Goodwill and Intangible Assets. During fiscal years 2018 and 2017, there were no other material impairment charges recorded.
Pension and Other Post-retirement Benefits: The Company has elected to use the corridor approach to recognize expenses related to its defined benefit pension and other post-retirement benefit plans. Under the corridor approach, actuarial gains or losses resulting from experience and changes in assumptions are deferred and amortized over future periods. For the defined benefit pension plans, the unrecognized gains and losses are amortized when the net gain or loss exceeds 10.0% of the greater of the projected benefit obligation or the fair value of plan assets at the beginning of the year. For the other post-retirement plans, the unrecognized gains and losses are amortized when the net gain or loss exceeds 10.0% of the accumulated pension benefit obligation at the beginning of the year. For plans with active employees, net gains or losses in excess of the corridor are amortized over the average remaining service period of participating employees expected to receive benefits under those plans.
For plans with only retiree participants, net gains or losses in excess of the corridor are amortized over the average remaining life of the retirees receiving benefits under those plans.
Contingent Liabilities: The Company may be subject to investigations, legal proceedings, or claims related to the ongoing operation of its business, including claims both by and against the Company. 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 for claims when losses become probable and reasonably estimable. Where the Company is able to reasonably estimate a range of potential losses, the Company records the amount within that range which constitutes the Company’s best estimate. The Company also discloses the nature of and range of loss for claims against the Company when losses are reasonably possible and material.
Foreign Currency Translation: Assets and liabilities denominated in foreign currency are translated at the current exchange rate as of the date of the Consolidated Statements of Financial Position. Amounts in the Consolidated Statements of Operations are translated at the average monthly exchange rate. Translation adjustments resulting from fluctuations in exchange rates are recorded as a component of Accumulated Other Comprehensive Loss in Shareholders’ Investment.
When calculating foreign currency translation, the Company deemed its foreign investments to be permanent in nature and has not provided for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars.
Derivatives and Hedging Activity: The Company uses commodity positions to manage its exposure to price fluctuations in those markets. The contracts are recorded at fair value on the Consolidated Statements of Financial Position within Other Current Assets or Accounts Payable. Additional information on hedging activities is presented in Note H - Derivatives and Hedging.
Equity Method Investments: The Company has a number of investments in joint ventures where its voting interests are in excess of 20 percent but not greater than 50 percent and for which there are no other indicators of control. The Company accounts for such investments under the equity method of accounting and its underlying share of each investee’s equity is reported in the Consolidated Statements of Financial Position as part of Investments In and Receivables from Affiliates.
The Company regularly monitors and evaluates the fair value of its equity investments. If events and circumstances indicate that a decline in the fair value of these assets has occurred and is other than temporary, the Company will record a charge in Equity in Earnings of Affiliates in the Consolidated Statements of Operations. The Company’s investments do not have a readily determinable fair value as none of them are publicly traded. The fair values of the Company’s private equity investments are determined by discounting the estimated future cash flows of each entity. These cash flow estimates include assumptions on growth rates and future currency exchange rates (Level 3). The Company did not record an impairment charge on any of its equity investments in fiscal years 2019, 2018, or 2017. See additional discussion regarding the Company’s equity method investments in Note I - Investments In and Receivables From Affiliates.
Revenue Recognition: The Company recognizes revenues at the net consideration the Company expects to receive in exchange for goods sold. The amount of net consideration recognized includes estimates of variable consideration, including costs for trade promotion programs, consumer incentives, and allowances and discounts associated with distressed or potentially unsaleable products. Products are delivered upon receipt of customer purchase orders with acceptable terms, including price and reasonably assured collectability. Additional information on revenue recognition is presented in Note B - Revenue Recognition.
Allowance for Doubtful Accounts: The Company estimates the Allowance for Doubtful Accounts based on a combination of factors, including the age of its Accounts Receivable balances, customer history, collection experience, and current market factors. Additionally, a specific reserve may be established if the Company becomes aware of a customer’s inability to meet its financial obligations.
Advertising Expenses: Advertising costs are expensed when incurred. Advertising expenses include all media advertising but exclude the costs associated with samples, demonstrations, and market research. Advertising costs for fiscal years 2019, 2018, and 2017 were $131.1 million, $151.5 million, and $135.6 million, respectively.
Shipping and Handling Costs: The Company’s shipping and handling expenses are included in Cost of Products Sold on the Consolidated Statements of Operations.
Research and Development Expenses: Research and development costs are expensed as incurred and are included in Selling, General, and Administrative expenses on the Consolidated Statements of Operations. Research and development expenses incurred for fiscal years 2019, 2018, and 2017 were $32.5 million, $33.8 million, and $34.2 million, respectively.
Income Taxes: The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur.
In accordance with ASC 740, Income Taxes, the Company recognizes a tax position in its financial statements when it is more likely than not that the position will be sustained upon examination based on the technical merits of the position. That position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Employee Stock Options: The Company records stock-based compensation expense in accordance with ASC 718, Compensation – Stock Compensation. For options subject to graded vesting, the Company recognizes stock-based compensation expense ratably over the shorter of the vesting period or requisite service period. Stock-based compensation expense for grants made to retirement-eligible employees is recognized on the date of grant. The Company estimates forfeitures at the time of grant based on historical experience and revises in subsequent periods if actual forfeitures differ.
Share Repurchases: On January 29, 2013, the Company’s Board of Directors authorized the repurchase of 10.0 million shares (pre-split) of its common stock with no expiration date. On November 23, 2015, the Company’s Board of Directors authorized a two-for-one split of the Company’s voting common stock. As part of the Board’s approval of that stock split, the number of shares remaining to be repurchased was adjusted proportionately. The Company may purchase shares of its common stock through open market and privately negotiated transactions at prices deemed appropriate by management. The timing and amount of repurchase transactions under the repurchase authorization depend on market conditions as well as corporate and regulatory considerations. During the year ended October 27, 2019, the Company repurchased a total of 4.3 million shares at an average price of $40.44. As of October 27, 2019, the remaining share repurchase authorization under the program was 4.8 million shares (post-split).
Supplemental Cash Flow Information: Non-cash investment activities presented on the Consolidated Statements of Cash Flows primarily 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 presented in the Consolidated Statements of Operations as Interest and Investment Income.
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 Income, other than those related to the adoption of ASU 2017-07 as described within the new accounting pronouncements adopted in the current fiscal year.
Accounting Changes and Recent Accounting Pronouncements
New Accounting Pronouncements adopted in current fiscal year
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This topic converges the guidance within U.S. 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 provides enhanced disclosures about revenue, guidance for transactions which were not previously addressed, and improves guidance for multiple-element arrangements. The new guidance was effective for annual reporting periods beginning after December 15, 2017. The updated guidance is to be applied either retrospectively or by using a cumulative effect adjustment. The Company adopted the provisions of the new standard using the full retrospective method at the beginning of fiscal 2019. Refer to Note B - Revenue Recognition for additional disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). 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 was 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 adopted the updated provisions at the beginning of fiscal 2019, resulting in a reclassification from prepaid tax assets to deferred tax assets. In addition, due to the impact of the lower tax rate on deferred tax balances resulting from the Tax Cuts and Jobs Act (Tax Act), the Company recognized a cumulative effect adjustment to Retained Earnings of $10.5 million.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). The updated guidance requires an employer to report the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in the same line item as other compensation costs. Other components of net periodic pension cost and net periodic post-retirement benefit cost must 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. This guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The updated guidance should be applied retrospectively for the presentation of components of net benefit cost and prospectively for the capitalization of the service cost component of net benefit cost. The Company adopted the updated provisions at the beginning of fiscal 2019. The Company elected to utilize a practical expedient which allows the Company to use historical amounts disclosed in the Pension and Other Post-retirement Benefits footnote as an estimation basis for retrospectively applying the requirements to separately report the other components in the Consolidated Statements of Operations. Due to the retrospective adoption, the Company reclassified
$19.0 million and $3.7 million of non-service cost components of net periodic benefit costs from Operating Income to Interest and Investment Income on the Consolidated Statements of Operations for the years ended October 28, 2018 and October 29, 2017.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities (Topic 815). The updated guidance expands an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. Entities will apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements apply prospectively. The updated guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim or annual period. The Company early adopted the updated guidance at the beginning of fiscal 2019; therefore, eliminating the requirement to separately measure and report hedge ineffectiveness. The Company applied the amendment to cash flow hedge relationships existing on the date of adoption using a modified retrospective approach. Presentation and disclosure requirements were applied on a prospective basis. The adoption resulted in an immaterial adjustment from Retained Earnings to Accumulated Other Comprehensive Loss.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). The updated guidance allows entities to reclassify stranded income tax effects resulting from the Tax Act from Accumulated Other comprehensive income to retained earnings in their consolidated financial statements. Under the Tax Act, deferred taxes were adjusted to reflect the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate, which left the tax effects on items within Accumulated Other Comprehensive Loss stranded at an inappropriate tax rate. The updated guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim period and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company early adopted the updated provisions at the beginning of fiscal 2019, resulting in a reclassification of $53.8 million from Accumulated Other Comprehensive Loss to Retained Earnings.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification (ASC). The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance of ASU 2018-09. The amendments effective upon issuance did not have a material impact on the Company's consolidated financial statements. A majority of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018. The Company early adopted the remaining amendments in the fourth quarter of fiscal 2019. The adoption did not have an impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Topic 350). The amendments in the update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years and is to be applied either retrospectively or prospectively to all implementation costs incurred after the adoption date. Early adoption is permitted, including adoption in any interim period. The Company early adopted the updated provisions on a prospective basis at the beginning of fiscal 2019. Subsequent to adoption, the Company has capitalized $27.6 million in cloud implementation costs, primarily associated with the transition to Oracle Cloud Solutions.
New Accounting Pronouncements not yet adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement, and presentation of expenses will depend on the classification as a finance or operating lease. The update also requires expanded quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The requirements of the new standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt the provisions of this new accounting standard at the beginning of fiscal 2020. For transition purposes, the Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. In July 2018, the FASB issued ASU 2018-11, which provides an optional transition method allowing entities the option to use the effective date as the date of initial application on transition. The Company elected this transition method, and as a result, the Company will not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date. The Company elected to not separate lease and non-lease components. The Company did not elect the hindsight practical expedient. In connection with the adoption of the new lease accounting standard, the Company completed scoping reviews and developed business processes, accounting policies and internal controls. The Company implemented new lease accounting software to provide a centralized repository and assist in the preparation of the standard's additional reporting requirements. Based on the assessment to-date, the Company expects an
increase of approximately $110 million to $120 million to assets and an offsetting increase to liabilities on the Consolidated Statements of Financial Position. The Company expects the lease standard to have an immaterial impact on the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). The update provides guidance on the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The amendment replaces the current incurred loss impairment approach with a methodology to reflect expected credit losses and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The updated guidance is to be applied on a modified retrospective approach and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, and interim periods therein. The Company is currently assessing the timing and impact of adopting the updated provisions.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820).
The updated guidance requires entities to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Amendments in this guidance also require disclosure of transfers into and out of Level 3 of the fair value hierarchy, purchases and issues of Level 3 assets and liabilities, and clarify that the measurement uncertainty disclosure is about the uncertainty in measurement as of the reporting date. The guidance removes requirements to disclose the amounts and reasons for transfers between Level 1 and Level 2, policy for timing between of transfers between levels, and the valuation processes for Level 3 fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans (Topic 715). The updated guidance requires additional disclosures of weighted-average interest crediting rates for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation. Amendments in the guidance also clarify the requirement to disclose the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets. The same disclosure is needed for the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The guidance removes certain previous disclosure requirements no longer considered cost beneficial. The amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company is currently assessing the timing and impact of adopting the updated provisions.
Recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not relevant to the Company.
Note B
Revenue Recognition
Revenue from Contracts with Customers: Effective October 29, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers using the full retrospective adoption method. The impact of adopting this guidance was immaterial to the Company’s financial statements and related disclosures. Under ASC 606, a contract with a customer is an agreement which both parties have approved, that creates enforceable rights and obligations, has commercial substance, where payment terms are identified, and collectability is probable. The Company’s customer contracts predominantly contain a single performance obligation to fulfill customer orders for the purchase of specified products. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Revenue from product sales is primarily identified by purchase orders (“contracts”) which in some cases are governed by a master sales agreement. The purchase orders in combination with the invoice typically specify quantity and product(s) ordered, shipping terms, and certain aspects of the transaction price including discounts. Contracts are at standalone pricing or governed by pricing lists or brackets. The Company's revenue is recognized at the point in time when performance obligations have been satisfied, and control of the product has transferred to the customer. This is typically once the shipped product is received or picked up by the customer. Revenues are recognized at the net consideration the Company expects to receive in exchange for the goods. The amount of net consideration recognized includes estimates of variable consideration, including costs for trade promotion programs, consumer incentives, and allowances and discounts associated with distressed or potentially unsaleable products.
A majority of the Company’s revenue is short-term in nature with shipments within one year from order date. The Company's payment terms generally range between 7 to 45 days and vary by sales channel and other factors.
The Company promotes products through advertising, consumer incentives, and trade promotions. These programs include discounts, slotting fees, coupons, rebates, and in-store display incentives. Customer trade promotion and consumer incentive activities are recorded as a reduction to the sale price based on amounts estimated as variable consideration. The Company
estimates variable consideration at the expected value method to determine the total consideration which the Company expects to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of anticipated performance and all information (historical, current and forecasted) that is reasonably available.
The Company elected to account for shipping and handling costs as contract fulfillment costs, and exclude taxes imposed on and collected from customers in revenue producing transactions (e.g., sales, use, and value added taxes) from the transaction price.
Disaggregation of Revenue: The Company discloses revenue by reportable segment, sales channel, and class of similar product in Note P - Segment Reporting.
Contract Balances: The Company does not have significant deferred revenue or unbilled receivable balances as a result of transactions with customers.
Contract Costs: The Company elected to apply the practical expedient to not capitalize contract costs to obtain contracts with duration of one year or less, which are expensed and included in the Consolidated Statements of Operations.
Note C
Acquisitions and Divestitures
Divestiture: On April 15, 2019, the Company completed the sale of CytoSport, Inc. (Cytosport), which includes the Muscle Milk*®* and Evolve*®* brands, to PepsiCo, Inc., and received final proceeds of $479.8 million. The divestiture resulted in a pretax gain of $16.5 million recognized in Selling, General and Administrative expense and a tax benefit of $17.0 million recognized within the Provision for Income Taxes on the Consolidated Statements of Operations.
CytoSport's results of operations through the date of divestiture are included within Earnings Before Income Taxes in the Consolidated Statements of Operations and are reflected within the Grocery Products and International & Other segments (See Note P - Segment Reporting).
Acquisition: On November 27, 2017, the Company acquired Columbus Manufacturing, Inc. (Columbus), an authentic premium deli meat and salami company, from Arbor Investments for a final purchase price of $857.4 million. The transaction was funded with cash on hand and by borrowing $375.0 million under a term loan facility and $375.0 million under a revolving credit facility.
Columbus specializes in authentic premium deli meat and salami. This acquisition allows the Company to enhance its scale in the deli by broadening its portfolio of products, customers, and consumers.
The acquisition was accounted for as a business combination using the acquisition method. The Company obtained an independent appraisal. A final allocation of the purchase price to the acquired assets, liabilities, and goodwill is presented in the table below.
| (in thousands) | |||
| Accounts Receivable | $ | 21,199 | |
| Inventory | 32,817 | ||
| Prepaid and Other Assets | 881 | ||
| Other Assets | 936 | ||
| Property, Plant and Equipment | 83,662 | ||
| Intangible Assets | 223,704 | ||
| Goodwill | 610,602 | ||
| Current Liabilities | (21,366 | ) | |
| Deferred Taxes | (95,077 | ) | |
| Purchase Price | $ | 857,358 |
Goodwill is calculated as the excess of the purchase price over the fair value of the net assets recognized. The $610.6 million of goodwill recorded as part of the acquisition primarily reflects the value of the potential to expand presence in the deli channel and serve as the catalyst for uniting all of the Company's deli businesses into one customer-facing organization. The goodwill and intangible assets have been allocated to the Refrigerated Foods segment.
Operating results for this acquisition have been included in the Company’s Consolidated Statements of Operations from the date of acquisition and are reflected in the Refrigerated Foods segment.
On August 22, 2017, the Company acquired Cidade do Sol (Ceratti) for a final purchase price of $103.3 million. The transaction was funded by the Company with cash on hand. The Company completed a final allocation of the fair value of Ceratti based on the acquisition method of accounting and third party valuation appraisals. Refer to Note E - Goodwill and Intangible Assets for amounts assigned to goodwill and intangible assets.
Ceratti is a growing, branded, value-added meats company in Brazil offering more than 70 products in 15 categories including authentic meats such as mortadella, sausage, and salami for Brazilian retail and foodservice markets under the popular Ceratti® brand. The acquisition of the Ceratti® brand allows the Company to establish a full in-country presence in the fast-growing Brazilian market with a premium brand.
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 International & Other segment.
On August 16, 2017, the Company acquired Fontanini Italian Meats and Sausages (Fontanini), a branded foodservice business, from Capitol Wholesale Meats, Inc. for a final purchase price of $425.7 million. The transaction was funded with cash on hand and by utilizing short-term financing. The transaction provided a cash flow benefit resulting from the amortization of the tax basis of assets, the net present value of which is approximately $64.7 million. The Company completed a final allocation of the fair value of Fontanini based on the acquisition method of accounting and third party valuation appraisals. Refer to Note E - Goodwill and Intangible Assets for amounts assigned to goodwill and intangible assets.
Fontanini specializes in authentic Italian meats and sausages, as well as a variety of other premium meat products including pizza toppings and meatballs and allows the Company to expand the foodservice business.
Operating results for this acquisition have been included in the Company’s Consolidated Statements of Operations from the date of acquisition and are reflected in the Refrigerated Foods segment.
Note D
Inventories
Principal components of inventories are:
| (in thousands) | October 27, 2019 | October 28, 2018 | ||||||
| Finished Products | $ | 604,035 | $ | 525,628 | ||||
| Raw Materials and Work-in-Process | 255,474 | 247,495 | ||||||
| Operating Supplies | 116,981 | 126,644 | ||||||
| Maintenance Materials and Parts | 65,872 | 63,760 | ||||||
| Total | $ | 1,042,362 | $ | 963,527 |
Note E
Goodwill and Intangible Assets
Goodwill: The changes in the carrying amount of goodwill for the fiscal years ended October 27, 2019, and October 28, 2018, are presented in the table below. Beginning balances for fiscal 2019 have been reclassified to conform to the current year presentation between segments. See Note P - Segment Reporting and Note C - Acquisitions and Divestitures for additional information. The reduction in goodwill during fiscal 2019 is due to the divestiture of CytoSport on April 15, 2019. Additions in fiscal 2018 relate to the acquisition of Columbus.
| (in thousands) | Grocery Products | Refrigerated Foods | Jennie-O Turkey Store | International & Other | Total | |||||||||||||||
| Balance at October 29, 2017 | $ | 882,582 | $ | 795,699 | $ | 203,214 | $ | 238,318 | $ | 2,119,813 | ||||||||||
| Goodwill Acquired | — | 610,602 | — | — | 610,602 | |||||||||||||||
| Foreign Currency Translation | — | — | — | (20,224 | ) | (20,224 | ) | |||||||||||||
| Purchase Adjustments | — | 596 | — | 3,329 | 3,925 | |||||||||||||||
| Reported Balance at October 28, 2018 | $ | 882,582 | $ | 1,406,897 | $ | 203,214 | $ | 221,423 | $ | 2,714,116 | ||||||||||
| Segment Reclassification | (25,209 | ) | 51,795 | (26,586 | ) | — | — | |||||||||||||
| Adjusted Balance at October 28, 2018 | $ | 857,373 | $ | 1,458,692 | $ | 176,628 | $ | 221,423 | $ | 2,714,116 | ||||||||||
| Goodwill Sold | (225,072 | ) | — | — | (4,945 | ) | (230,017 | ) | ||||||||||||
| Foreign Currency Translation | — | — | — | (2,454 | ) | (2,454 | ) | |||||||||||||
| Balance as of October 27, 2019 | $ | 632,301 | $ | 1,458,692 | $ | 176,628 | $ | 214,024 | $ | 2,481,645 |
Intangible Assets: The carrying amounts for indefinite-lived intangible assets are presented in the table below. The decrease primarily represents the fair value of trademarks sold as part of the CytoSport divestiture of $147.9 million in fiscal 2019.
| October 27, | October 28, | |||||||
| (in thousands) | 2019 | 2018 | ||||||
| Brands/Tradenames/Trademarks | $ | 959,400 | $ | 1,108,122 | ||||
| Other Intangibles | 184 | 184 | ||||||
| Foreign Currency Translation | (3,803 | ) | (3,484 | ) | ||||
| Total | $ | 955,781 | $ | 1,104,822 |
The gross carrying amount and accumulated amortization for definite-lived intangible assets are presented in the table below. In fiscal 2019, customer relationships of $13.4 million were sold as part of the divestiture of CytoSport. In fiscal 2018, customer relationships of $29.4 million were acquired related to Columbus.
| October 27, 2019 | October 28, 2018 | |||||||||||||||||||||
| Gross | Weighted- | Gross | Weighted- | |||||||||||||||||||
| Carrying | Accumulated | Avg Life | Carrying | Accumulated | Avg Life | |||||||||||||||||
| (in thousands) | Amount | Amortization | (in Years) | Amount | Amortization | (in Years) | ||||||||||||||||
| Customer Lists/Relationships | $ | 113,739 | $ | (36,744 | ) | 12.7 | $ | 137,039 | $ | (36,367 | ) | 12.4 | ||||||||||
| Other Intangibles | 6,957 | (2,817 | ) | 6.3 | 6,155 | (1,547 | ) | 6.4 | ||||||||||||||
| Foreign Currency Translation | — | (3,054 | ) | — | — | (2,883 | ) | — | ||||||||||||||
| Total | $ | 120,696 | $ | (42,615 | ) | 12.3 | $ | 143,194 | $ | (40,797 | ) | 12.2 |
Amortization expense for the last three fiscal years was as follows:
| (in millions) | ||||
| 2019 | $ | 11.6 | ||
| 2018 | 12.7 | |||
| 2017 | 8.4 |
Estimated annual amortization expense for the five fiscal years after October 27, 2019, is as follows:
| (in millions) | ||||
| 2020 | $ | 10.7 | ||
| 2021 | 10.7 | |||
| 2022 | 10.4 | |||
| 2023 | 9.5 | |||
| 2024 | 7.4 |
During the fourth quarter of fiscal years 2019, 2018, and 2017, the Company completed the required annual impairment tests of indefinite-lived intangible assets and goodwill. An impairment was indicated for the CytoSport trademark in the Grocery Products segment, resulting in a charge of $17.3 million in fiscal 2018. No other impairment was indicated. Useful lives of intangible assets were also reviewed during this process, with no material changes identified.
Note F
Long-term Debt and Other Borrowing Arrangements
Long-term Debt consists of:
| (in thousands) | October 27, 2019 | October 28, 2018 | ||||||
| Term Loan | $ | — | $ | 374,840 | ||||
| Senior Unsecured Notes, with Interest at 4.125%, Interest Due Semi-annually through April 2021 Maturity Date | 250,000 | 250,000 | ||||||
| Less: Current Maturities | — | — | ||||||
| Total | $ | 250,000 | $ | 624,840 |
The Company has a $400.0 million unsecured revolving line of credit which matures in June 2021. The unsecured revolving line of credit bears interest at a variable rate based on LIBOR and a fixed fee is paid for the availability of this credit line. As of October 27, 2019, and October 28, 2018, the Company had no outstanding draws from this line of credit.
With the acquisition of Columbus Manufacturing Inc. in November 2017, the Company obtained a two-year $375.0 million term loan which was due in full in November 2019. The term loan was paid in full in April 2019.
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 current fiscal year, the Company was in compliance with all of these covenants.
Total interest paid in the last three fiscal years is as follows:
| (in millions) | ||||
| 2019 | $ | 19.0 | ||
| 2018 | 25.6 | |||
| 2017 | 12.7 |
Note G
Pension and Other Post-retirement Benefits
The Company has several defined benefit plans and defined contribution plans covering most employees. Benefits for defined benefit pension plans covering hourly employees are provided based on stated amounts for each year of service, while plan benefits covering salaried employees are based on final average compensation. Total costs associated with the Company’s defined contribution benefit plans in fiscal years 2019, 2018, and 2017, were $43.0 million, $44.2 million, and $45.2 million, respectively.
Certain groups of employees are eligible for post-retirement health or welfare benefits. Benefits for retired employees vary for each group depending on respective retirement dates and applicable plan coverage in effect. Contribution requirements for retired employees are governed by the Retiree Health Care Payment Program and may change each year as the cost to provide coverage is determined.
Net periodic cost of defined benefit plans included the following:
| Pension Benefits | Post-retirement Benefits | |||||||||||||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Service Cost | $ | 26,042 | $ | 31,612 | $ | 30,256 | $ | 690 | $ | 980 | $ | 1,106 | ||||||||||||
| Interest Cost | 60,385 | 56,196 | 54,263 | 12,016 | 11,169 | 11,630 | ||||||||||||||||||
| Expected Return on Plan Assets | (92,492 | ) | (99,091 | ) | (90,936 | ) | — | — | — | |||||||||||||||
| Amortization of Prior Service Cost | (2,795 | ) | (2,468 | ) | (3,000 | ) | (2,675 | ) | (3,111 | ) | (4,274 | ) | ||||||||||||
| Recognized Actuarial Loss (Gain) | 14,805 | 18,166 | 26,166 | — | 179 | 2,424 | ||||||||||||||||||
| Curtailment (Gain) Charge | 2,825 | — | — | 1,219 | — | — | ||||||||||||||||||
| Net Periodic Cost | $ | 8,770 | $ | 4,415 | $ | 16,749 | $ | 11,250 | $ | 9,217 | $ | 10,886 |
Non-service cost components of net pension and post-retirement benefit cost are presented within Interest and Investment Income on the Consolidated Statements of Operations.
Actuarial gains and losses and any adjustments resulting from plan amendments are deferred and amortized to expense over periods ranging from 9-23 years for pension benefits and 5-16 years for post-retirement benefits. The following amounts have not been recognized in net periodic pension cost and are included in Accumulated Other Comprehensive Loss:
| Pension Benefits | Post-retirement Benefits | |||||||||||||||
| (in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Unrecognized Prior Service Credit | $ | 40 | $ | 8,097 | $ | 3,166 | $ | 6,461 | ||||||||
| Unrecognized Actuarial Losses | (429,599 | ) | (336,894 | ) | (34,266 | ) | (9,302 | ) |
The following amounts are expected to be recognized in net periodic benefit expense in fiscal 2020:
| (in thousands) | Pension Benefits | Post- retirement Benefits | ||||||
| Amortized Prior Service Credit | $ | (2,168 | ) | $ | (2,651 | ) | ||
| Recognized Actuarial Losses | 22,383 | 1,046 |
The following is a reconciliation of the beginning and ending balances of the benefit obligation, the fair value of plan assets, and the funded status of the plans as of the October 27, 2019, and the October 28, 2018, measurement dates:
| Pension Benefits | Post-retirement Benefits | |||||||||||||||
| (in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Change in Benefit Obligation | ||||||||||||||||
| Benefit Obligation at Beginning of Year | $ | 1,350,903 | $ | 1,460,098 | $ | 272,272 | $ | 304,683 | ||||||||
| Service Cost | 26,042 | 31,612 | 690 | 980 | ||||||||||||
| Interest Cost | 60,385 | 56,196 | 12,016 | 11,169 | ||||||||||||
| Actuarial (Gain) Loss | 241,694 | (134,924 | ) | 24,912 | (24,515 | ) | ||||||||||
| Plan Amendments | 8,086 | — | — | — | ||||||||||||
| Curtailment (Gain) Loss | (513 | ) | — | 1,839 | — | |||||||||||
| Participant Contributions | — | — | 2,302 | 2,232 | ||||||||||||
| Medicare Part D Subsidy | — | — | 662 | 768 | ||||||||||||
| Benefits Paid | (70,420 | ) | (62,079 | ) | (23,747 | ) | (23,045 | ) | ||||||||
| Benefit Obligation at End of Year | $ | 1,616,177 | $ | 1,350,903 | $ | 290,946 | $ | 272,272 |
| Pension Benefits | Post-retirement Benefits | |||||||||||||||
| (in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Change in Plan Assets | ||||||||||||||||
| Fair Value of Plan Assets at Beginning of Year | $ | 1,313,380 | $ | 1,379,953 | $ | — | $ | — | ||||||||
| Actual Return on Plan Assets | 226,171 | (10,780 | ) | — | — | |||||||||||
| Participant Contributions | — | — | 2,302 | 2,232 | ||||||||||||
| Employer Contributions | 8,157 | 6,286 | 21,445 | 20,813 | ||||||||||||
| Benefits Paid | (70,420 | ) | (62,079 | ) | (23,747 | ) | (23,045 | ) | ||||||||
| Fair Value of Plan Assets at End of Year | $ | 1,477,288 | $ | 1,313,380 | $ | — | $ | — | ||||||||
| Funded Status at End of Year | $ | (138,889 | ) | $ | (37,523 | ) | $ | (290,946 | ) | $ | (272,272 | ) |
Amounts recognized in the Consolidated Statements of Financial Position as of October 27, 2019, and October 28, 2018, are as follows:
| Pension Benefits | Post-retirement Benefits | |||||||||||||||
| (in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Pension Assets | $ | 135,915 | $ | 195,153 | $ | — | $ | — | ||||||||
| Employee-related Expenses | (8,842 | ) | (6,851 | ) | (20,418 | ) | (20,540 | ) | ||||||||
| Pension and Post-retirement Benefits | (265,962 | ) | (225,825 | ) | (270,528 | ) | (251,732 | ) | ||||||||
| Net Amount Recognized | $ | (138,889 | ) | $ | (37,523 | ) | $ | (290,946 | ) | $ | (272,272 | ) |
The accumulated benefit obligation for all pension plans was $1.6 billion as of October 27, 2019, and $1.3 billion as of October 28, 2018. The following table provides information for pension plans with accumulated benefit obligations in excess of plan assets:
| (in thousands) | 2019 | 2018 | ||||||
| Projected Benefit Obligation | $ | 274,804 | $ | 232,676 | ||||
| Accumulated Benefit Obligation | 269,114 | 227,015 | ||||||
| Fair Value of Plan Assets | — | — |
Weighted-average assumptions used to determine benefit obligations are as follows:
| 2019 | 2018 | |||||
| Discount Rate | 3.37 | % | 4.55 | % | ||
| Rate of Future Compensation Increase (For Plans that Base Benefits on Final Compensation Level) | 4.06 | % | 3.96 | % |
Weighted-average assumptions used to determine net periodic benefit costs are as follows:
| 2019 | 2018 | 2017 | |||||||
| Discount Rate | 4.55 | % | 3.91 | % | 3.94 | % | |||
| Rate of Future Compensation Increase (for Plans that Base Benefits on Final Compensation Level) | 3.96 | % | 3.95 | % | 3.96 | % | |||
| Expected Long-term Return on Plan Assets | 7.15 | % | 7.30 | % | 7.50 | % |
The expected long-term rate of return on plan assets is based on fair value and is developed in consultation with outside advisors. A range is determined based on the composition of the asset portfolio, historical long-term rates of return, and estimates of future performance.
For measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered health care benefits for pre-Medicare and post-Medicare retirees’ coverage is assumed for 2020. The pre-Medicare and post-Medicare rate is assumed to decrease to 5.0% for 2025, and remain steady thereafter.
The assumed discount rate, expected long-term rate of return on plan assets, rate of future compensation increase, and health care cost trend rate have a significant impact on the amounts reported for the benefit plans. A one-percentage-point change in these rates would have the following effects:
| 1-Percentage-Point | ||||||||||||||||
| Expense | Benefit Obligation | |||||||||||||||
| (in thousands) | Increase | Decrease | Increase | Decrease | ||||||||||||
| Pension Benefits | ||||||||||||||||
| Discount Rate | $ | (15,524 | ) | $ | 19,667 | $ | (212,189 | ) | $ | 269,098 | ||||||
| Expected Long-term Rate of Return on Plan Assets | (14,469 | ) | 14,469 | — | — | |||||||||||
| Rate of Future Compensation Increase | 5,138 | (4,471 | ) | 10,730 | (9,339 | ) | ||||||||||
| Post-retirement Benefits | ||||||||||||||||
| Discount Rate | $ | 460 | $ | 4,094 | $ | (27,176 | ) | $ | 32,603 | |||||||
| Health Care Cost Trend Rate | 1,249 | (1,080 | ) | 29,725 | (25,575 | ) |
The Company’s funding policy is to make annual contributions of not less than the minimum required by applicable regulations. The Company expects to make contributions of $29.7 million during fiscal 2020 that represent benefit payments for unfunded plans.
Benefits expected to be paid over the next ten fiscal years are as follows:
| (in thousands) | Pension Benefits | Post-retirement Benefits | ||||||
| 2020 | $ | 67,623 | $ | 20,752 | ||||
| 2021 | 69,920 | 20,630 | ||||||
| 2022 | 72,134 | 20,391 | ||||||
| 2023 | 74,884 | 20,161 | ||||||
| 2024 | 78,467 | 19,750 | ||||||
| 2025-2029 | 436,746 | 89,926 |
The investment strategy for defined benefit pension plan assets attempts to minimize the long-term cost of pension benefits, reduce the volatility of pension expense, and achieve a healthy funded status for the plans. The Company establishes target allocations in consultation with outside advisors through the use of asset-liability modeling in an effort to match the duration of the plan assets with the duration of the Company’s projected benefit liability. In fiscal 2019, the Company revised its target allocations to consolidate similar asset classes and employ additional risk management strategies.
The actual and target weighted-average asset allocations for the Company’s pension plan assets as of the plan measurement date are as follows:
| 2019 | |||||
| Asset Category | Actual % | Target Range % | |||
| Fixed Income | 44.9 | 35-60 | |||
| Global Stocks | 38.0 | 20-55 | |||
| Private Equity | 5.7 | 0-10 | |||
| Real Estate | 5.4 | 0-10 | |||
| Hedge Funds | 4.8 | 0-10 | |||
| Cash and Cash Equivalents | 1.2 | — |
| 2018 | |||||
| Asset Category | Actual % | Target Range % | |||
| Large Capitalization Equity | 13.7 | 12-22 | |||
| Small Capitalization Equity | 12.7 | 3-13 | |||
| International Equity | 14.9 | 10-20 | |||
| Global Equity | 12.4 | 5-20 | |||
| Private Equity | 5.8 | 0-15 | |||
| Total Equity Securities | 59.5 | 50-75 | |||
| Fixed Income | 33.6 | 25-45 | |||
| Real Estate | 5.7 | 0-10 | |||
| Cash and Cash Equivalents | 1.2 | — |
The following tables show the categories of defined benefit pension plan assets and the level under which fair values were determined in the fair value hierarchy. Assets measured at fair value using the net asset value (NAV) per share practical expedient are not required to be classified in the fair value hierarchy. These amounts are provided to permit reconciliation to the total fair value of plan assets.
| Fair Value Measurements as of October 27, 2019 | ||||||||||||||||
| (in thousands) | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Plan Assets in Fair Value Hierarchy | ||||||||||||||||
| Cash Equivalents(1) | $ | 17,385 | $ | 2,445 | $ | 14,940 | $ | — | ||||||||
| Private Equity(2) | ||||||||||||||||
| Domestic | 49,049 | — | — | 49,049 | ||||||||||||
| International | 35,852 | — | — | 35,852 | ||||||||||||
| Fixed Income(3) | ||||||||||||||||
| US Government Issues | 281,879 | 277,790 | 4,089 | — | ||||||||||||
| Municipal Issues | 20,846 | — | 20,846 | — | ||||||||||||
| Corporate Issues – Domestic | 313,719 | — | 313,719 | — | ||||||||||||
| Corporate Issues – Foreign | 46,181 | — | 46,181 | — | ||||||||||||
| Global Stocks - Mutual Funds(4) | 156,974 | 156,974 | — | — | ||||||||||||
| Plan Assets in Fair Value Hierarchy | $ | 921,885 | $ | 437,209 | $ | 399,775 | $ | 84,901 | ||||||||
| Plan Assets at Net Asset Value | ||||||||||||||||
| Real Estate – Domestic(5) | $ | 79,329 | ||||||||||||||
| Global Stocks - Collective Investment Funds(6) | 404,971 | |||||||||||||||
| Hedge Funds(7) | 71,103 | |||||||||||||||
| Plan Assets at Net Asset Value | $ | 555,403 | ||||||||||||||
| Total Plan Assets at Fair Value | $ | 1,477,288 |
| Fair Value Measurements as of October 28, 2018 | ||||||||||||||||
| (in thousands) | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Plan Assets in Fair Value Hierarchy | ||||||||||||||||
| Cash Equivalents(1) | $ | 16,129 | $ | 16,129 | $ | — | $ | — | ||||||||
| Large Capitalization Equity(8) | ||||||||||||||||
| Domestic | 113,086 | 113,086 | — | — | ||||||||||||
| Foreign | 29,810 | 29,810 | — | — | ||||||||||||
| Small Capitalization Equity(9) | ||||||||||||||||
| Domestic | 145,872 | 145,872 | — | — | ||||||||||||
| Foreign | 21,417 | 21,417 | — | — | ||||||||||||
| Private Equity(2) | ||||||||||||||||
| Domestic | 51,377 | — | — | 51,377 | ||||||||||||
| International | 24,880 | — | — | 24,880 | ||||||||||||
| Fixed Income(3) | ||||||||||||||||
| US Government Issues | 157,312 | 153,566 | 3,746 | — | ||||||||||||
| Municipal Issues | 19,456 | — | 19,456 | — | ||||||||||||
| Corporate Issues – Domestic | 222,617 | — | 222,617 | — | ||||||||||||
| Corporate Issues – Foreign | 42,513 | — | 42,513 | — | ||||||||||||
| Plan Assets in Fair Value Hierarchy | $ | 844,469 | $ | 479,880 | $ | 288,332 | $ | 76,257 | ||||||||
| Plan Assets at Net Asset Value | ||||||||||||||||
| Large Capitalization Equity – Domestic(10) | $ | 37,176 | ||||||||||||||
| International Equity – Mutual Fund(11) | 107,956 | |||||||||||||||
| International Equity – Collective Trust(12) | 86,641 | |||||||||||||||
| Global Equity – Mutual Fund(13) | 162,630 | |||||||||||||||
| Real Estate – Domestic(5) | 74,508 | |||||||||||||||
| Plan Assets at Net Asset Value | $ | 468,911 | ||||||||||||||
| Total Plan Assets at Fair Value | $ | 1,313,380 |
The following is a description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments:
(1) Cash Equivalents: These Level 1 and Level 2 investments consist primarily of highly liquid money market mutual funds traded in active markets in addition to highly liquid futures and T-bills with an observable daily settlement price.
(2) Private Equity: These Level 3 investments consist of various collective investment funds, which are managed by a third party, invested in a well-diversified portfolio of equity investments from top performing, high quality firms focused on U.S. and foreign small to mid-markets, venture capitalists, and entrepreneurs with a concentration in areas of innovation. Investment strategies include buyouts, growth capital, buildups, and distressed, as well as early stages of company development mainly in the U.S. The fair value of these funds is based on the fair value of the underlying investments.
(3) Fixed Income: The Level 1 investments include U.S. Treasury bonds and notes, which are valued at the closing price reported on the active market in which the individual securities are traded. The Level 2 investments consist principally of U.S. government securities, which are valued daily using institutional bond quote sources and mortgage-backed securities pricing sources and municipal, domestic, and foreign securities, which are valued daily using institutional bond quote sources.
(4) Global Stocks - Mutual Fund: These Level 1 investments include open-ended mutual funds consisting of a mix of U.S. common stocks and foreign common stocks, which is valued at closing price reported on the active market in which the fund is traded. The investment strategy is to obtain long term capital appreciation by focusing on companies generating above average earnings growth and are leading growth businesses in the marketplace. There are no restrictions on redemptions.
(5) Real Estate - domestic: These investments include ownership in open-ended real estate funds, which manage diversified portfolios of commercial properties within the office, residential, retail, and industrial property sectors. Investment strategies aim to acquire, own, hold, or dispose of investments with the goal of achieving current income and/or capital appreciation. The real estate investments are valued at the NAV of shares held by the Master Trust. Requests to redeem shares are granted on a quarterly basis with either 45 or 90 days advance notice, subject to availability of cash.
(6) Global Stocks - Collective Investment Funds: These investments include commingled funds consisting of a mix of U.S. common stocks and foreign common stocks. The collective investment funds are valued at the NAV of shares held by the Master Trust. The investment strategy is to obtain long term capital appreciation by focusing on companies generating above average earnings growth and are leading growth businesses in the marketplace. All funds are daily liquid with the exception of one that is available on the first business day of the month for subscriptions and withdrawals.
(7) Hedge Funds: These investments are designed to provide diversification to an overall institutional portfolio and, in particular, provide protection against equity market downturns. They are comprised of CTAs/Managed Futures, Global Marcro (Discretionary and/or Quant), and Long Volatility/Tail Risk Hedging strategies. The hedge funds are valued at the NAV of shares held by the Master Trust. Requests to redeem shares are granted daily, monthly or quarterly.
(8) Large Capitalization Equity: The Level 1 investments include a mix of predominately U.S. common stocks and foreign common stocks, which are valued at the closing price reported on the active market in which the individual securities are traded.
(9) Small Capitalization Equity: The Level 1 investments include a mix of predominately U.S. common stocks and foreign common stocks, which are valued at the closing price reported on the active market in which the individual securities are traded.
(10) Large Capitalization Equity – Domestic: The collective investment is valued at the publicly available NAV of shares held by the Master Trust at year end. The investment objective is to maintain a portfolio of equity securities that approximate the weighted total rate of return within the Standard & Poor’s 500 stock index. There are no restrictions on redemptions.
(11) International Equity – Mutual Funds: The mutual funds are valued at the publicly available NAV of shares held by the Master Trust at year end. The investment seeks long term growth of principal and income by investing in medium to large well established companies. There are no restrictions on redemptions.
(12) International Equity – Collective Trust: The collective investment funds are valued at the NAV of shares held by the Master Trust at year end. The investment objective of this fund is to generate a long term return through investments in quoted international equities. Redemptions can be made on a monthly basis as of the first business day of each month.
(13) Global Equity – Mutual Fund: This investment includes an open-ended mutual fund consisting of a mix of U.S. common stocks and foreign common stocks, which is valued at the publicly available NAV of shares held by the Master Trust at year end. The investment strategy is to obtain long term capital appreciation by focusing on companies generating above average earnings growth and are leading growth businesses in the marketplace. There are no restrictions on redemptions.
A reconciliation of the beginning and ending balance of the investments measured at fair value using significant unobservable inputs (Level 3) is as follows:
| (in thousands) | 2019 | 2018 | ||||||
| Beginning Balance | $ | 76,257 | $ | 74,204 | ||||
| Purchases, Issuances, and Settlements (Net) | (2,894 | ) | (14,867 | ) | ||||
| Unrealized Gains (Losses) | 1,182 | 3,724 | ||||||
| Realized Gains | 9,738 | 11,331 | ||||||
| Interest and Dividend Income | 618 | 1,865 | ||||||
| Ending Balance | $ | 84,901 | $ | 76,257 |
The Company has commitments totaling $125.0 million for the private equity investments within the pension plans. The unfunded private equity commitment balance for each investment category as of October 27, 2019, and October 28, 2018 is as follows:
| (in thousands) | 2019 | 2018 | ||||||
| Domestic Equity | $ | 363 | $ | 677 | ||||
| International Equity | 22,969 | 36,142 | ||||||
| Unfunded Commitment Balance | $ | 23,332 | $ | 36,819 |
Funding for future private equity capital calls will come from existing pension plan assets and not from additional cash contributions into the Company’s pension plans.
Note H
Derivatives and Hedging
The Company uses hedging programs to manage price risk associated with commodity purchases. These programs utilize futures and options contracts to manage the Company’s exposure to price fluctuations in the commodities markets. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Effectiveness testing is performed on a quarterly basis to ascertain a high level of effectiveness for cash flow and fair value hedging programs.
Cash Flow Hedges: The Company designates corn and lean hog futures and options used to offset price fluctuations in the Company’s future direct grain and hog purchases as cash flow hedges. Effective gains or losses related to these cash flow hedges are reported in Accumulated Other Comprehensive Loss and reclassified into earnings, through Cost of Products Sold, in the period or periods in which the hedged transactions affect earnings. The Company typically does not hedge its grain exposure beyond the next two upcoming fiscal years and its hog exposure beyond the next fiscal year.
Fair Value Hedges: The Company designates the futures it uses to minimize the price risk assumed when fixed forward priced contracts are offered to the Company’s commodity suppliers as fair value hedges. The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery. Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and recorded on the Consolidated Statements of Financial Position as a Current Asset and Liability, respectively. Effective gains or losses related to these fair value hedges are recognized through Cost of Products Sold in the period or periods in which the hedged transactions affect earnings.
Other Derivatives: The Company holds certain futures and options contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets. The Company has not applied hedge accounting to these positions. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.
Volume: As of October 27, 2019, and October 28, 2018, the Company had the following outstanding commodity futures and options contracts related to its hedging programs:
| Volume | ||
| Commodity Contracts | October 27, 2019 | October 28, 2018 |
| Corn | 30.4 million bushels | 23.0 million bushels |
| Lean Hogs | 187.3 million pounds | 56.9 million pounds |
Fair Value of Derivatives: The fair values of the Company’s derivative instruments (in thousands) as of October 27, 2019, and October 28, 2018, were as follows:
| Fair Value(1) | ||||||||||
| Derivatives Designated as Hedges | Location on Consolidated Statements of Financial Position | October 27, 2019 | October 28, 2018 | |||||||
| Commodity Contracts | Other Current Assets | $ | 6,405 | $ | (30 | ) |
(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 M - Fair Value Measurements for a discussion of these net amounts as reported in the Consolidated Statements of Financial Position.
Fair Value Hedge - Assets (Liabilities): The carrying amount of the Company’s fair value hedge assets (liabilities) (in thousands) as of October 27, 2019, and October 28, 2018, were as follows:
| Location on Consolidated Statements of Financial Position | Carrying Amount of the Hedged Assets/(Liabilities) | |||||||
| October 27, 2019 | October 28, 2018 | |||||||
| Accounts Payable | $ | (2,805 | ) | $ | (594 | ) |
Accumulated Other Comprehensive Loss Impact: In fiscal 2019, the Company adopted the amended guidance of ASC 815, Derivatives and Hedging. As a result, hedge ineffectiveness related to effective relationships is now deferred in Accumulated Other Comprehensive Loss until the hedged item impacts earnings. Prior to fiscal 2019, gains or losses on the derivative instrument in excess of the cumulative change in the cash flows of the hedged item, if any (i.e, the ineffective portion) were recognized in the Consolidated Statements of Operations during the current period. As of October 27, 2019, the Company has included in Accumulated Other Comprehensive Loss, hedging gains of $3.2 million (before tax) relating to its positions. The Company expects to recognize the majority of these gains over the next 12 months.
The effect of Accumulated Other Comprehensive Loss for gains or losses (before tax, in thousands) related to the Company's derivative instruments for the fiscal years ended October 27, 2019, and October 28, 2018, was as follows:
| Gain/(Loss) Recognized in AOCL(1) | Location on Consolidated Statements of Operations | Gain/(Loss) Reclassified from AOCL into Earnings(1) | Gain/(Loss) Recognized in Earnings (Ineffective Portion) | |||||||||||||||||||||||
| Fiscal Year Ended | Fiscal Year Ended | Fiscal Year Ended | ||||||||||||||||||||||||
| Cash Flow Hedges | October 27, 2019 | October 28, 2018 | October 27, 2019 | October 28, 2018 | October 27, 2019 | October 28, 2018 | ||||||||||||||||||||
| Commodity Contracts | $ | 2,813 | $ | (8,634 | ) | Cost of Products Sold | $ | (1,701 | ) | $ | (5,480 | ) | $ | — | $ | (177 | ) |
(1) See Note J - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on Net Earnings.
Consolidated Statements of Operations Impact: The effect on the Consolidated Statements of Operations for gains or losses (before tax, in thousands) related to the Company's derivative instruments for the fiscal years ended, were as follows:
| Cost of Products Sold | |||||||||||
| October 27, 2019 | October 28, 2018 | October 29, 2017 | |||||||||
| Consolidated Statements of Operations | $ | 7,612,669 | $ | 7,566,227 | $ | 7,170,883 | |||||
| Cash Flow Hedges - Commodity Contracts | |||||||||||
| Gain (Loss) Reclassified from AOCL | $ | (1,701 | ) | $ | (5,480 | ) | $ | 5,994 | |||
| Amortization of Excluded Component from Options | (2,489 | ) | — | — | |||||||
| Gain (Loss) due to Ineffectiveness | — | (177 | ) | 156 | |||||||
| Fair Value Hedges - Commodity Contracts | |||||||||||
| Gain (Loss) on Commodity Futures(1) | 5,197 | 3,572 | (327 | ) | |||||||
| Gain (Loss) due to Ineffectiveness | — | (171 | ) | 267 | |||||||
| Total Gain (Loss) Recognized in Earnings | $ | 1,007 | $ | (2,256 | ) | $ | 6,090 |
(1) Amounts represent losses on commodity contracts designated as fair value hedges that were closed during the quarter, 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.
Note I
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 | October 27, 2019 | October 28, 2018 | ||||||||
| MegaMex Foods, LLC | Grocery Products | 50% | $ | 218,592 | $ | 205,148 | ||||||
| Foreign Joint Ventures | International & Other | Various (26 – 40%) | 70,565 | 68,005 | ||||||||
| Total | $ | 289,157 | $ | 273,153 |
Equity in Earnings of Affiliates consists of the following:
| (in thousands) | Segment | 2019 | 2018 | 2017 | ||||||||||
| MegaMex Foods, LLC | Grocery Products | $ | 38,676 | $ | 52,988 | $ | 31,357 | |||||||
| Foreign Joint Ventures | International & Other | 525 | 5,984 | 8,233 | ||||||||||
| Total | $ | 39,201 | $ | 58,972 | $ | 39,590 |
Dividends received from affiliates for the fiscal years ended October 27, 2019, October 28, 2018, and October 29, 2017, were $22.5 million, $30.0 million, and $27.5 million, respectively.
The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $12.7 million is remaining as of October 27, 2019. This difference is being amortized through Equity in Earnings of Affiliates.
Note J
Accumulated Other Comprehensive Loss
Components of Accumulated Other Comprehensive Loss are as follows:
| (in thousands) | Foreign Currency Translation | Pension & Other Post-retirement Benefits | Deferred Hedging Gain (Loss) | Accumulated Other Comprehensive Loss | ||||||||||||||
| Balance at October 30, 2016 | $ | (5,489 | ) | $ | (296,552 | ) | $ | 5,738 | $ | (296,303 | ) | |||||||
| Unrecognized Gains (Losses) | ||||||||||||||||||
| Gross | (1,357 | ) | 65,305 | (1,393 | ) | 62,555 | ||||||||||||
| Tax Effect | — | (24,535 | ) | 759 | (23,776 | ) | ||||||||||||
| Reclassification into Net Earnings | ||||||||||||||||||
| Gross | — | 21,316 | (1) | (5,994 | ) | (2) | 15,322 | |||||||||||
| Tax Effect | — | (8,009 | ) | 2,136 | (5,873 | ) | ||||||||||||
| Net of Tax Amount | (1,357 | ) | 54,077 | (4,492 | ) | 48,228 | ||||||||||||
| Balance at October 29, 2017 | $ | (6,846 | ) | $ | (242,475 | ) | $ | 1,246 | $ | (248,075 | ) | |||||||
| Unrecognized Gains (Losses) | ||||||||||||||||||
| Gross | (38,008 | ) | 46,430 | (8,634 | ) | (212 | ) | |||||||||||
| Tax Effect | — | (11,244 | ) | 2,090 | (9,154 | ) | ||||||||||||
| Reclassification into Net Earnings | ||||||||||||||||||
| Gross | — | 12,766 | (1) | 5,480 | (2) | 18,246 | ||||||||||||
| Tax Effect | — | (3,090 | ) | (1,213 | ) | (4,303 | ) | |||||||||||
| Net of Tax Amount | (38,008 | ) | 44,862 | (2,277 | ) | 4,577 | ||||||||||||
| Reported Balance at October 28, 2018 | $ | (44,854 | ) | $ | (197,613 | ) | $ | (1,031 | ) | $ | (243,498 | ) | ||||||
| Impact of Adoption of ASU | ||||||||||||||||||
| ASU 2017-12 | — | — | (21 | ) | (3) | (21 | ) | |||||||||||
| ASU 2018-02 | — | (53,778 | ) | (3) | — | (53,778 | ) | |||||||||||
| Adjusted Balance at October 28, 2018 | (44,854 | ) | (251,391 | ) | (1,052 | ) | (297,297 | ) | ||||||||||
| Unrecognized Gains (Losses) | ||||||||||||||||||
| Gross | (8,142 | ) | (138,356 | ) | 2,834 | (143,664 | ) | |||||||||||
| Tax Effect | — | 33,822 | (699 | ) | 33,123 | |||||||||||||
| Reclassification into Net Earnings | ||||||||||||||||||
| Gross | — | 9,335 | (1) | 1,701 | (2) | 11,036 | ||||||||||||
| Tax Effect | — | (2,287 | ) | (411 | ) | (2,698 | ) | |||||||||||
| Net of Tax Amount | (8,142 | ) | (97,486 | ) | 3,425 | (102,203 | ) | |||||||||||
| Balance at October 27, 2019 | $ | (52,996 | ) | $ | (348,877 | ) | $ | 2,373 | $ | (399,500 | ) |
(1) Included in computation of net periodic cost. See Note G - Pension and Other Post-Retirement Benefits for additional details.
(2) Included in cost of products sold in the Consolidated Statements of Operations.
(3) Cumulative effect from the adoption of Accounting Standards Updates. See Note A - Significant Accounting Policies for additional details.
Note K
Income Taxes
On December 22, 2017, the United States enacted comprehensive tax legislation into law, H.R. 1, commonly referred to as The Tax Cuts and Jobs Act (Tax Act). Except for certain provisions, the Tax Act was effective for tax years beginning on or after January 1, 2018. As a fiscal year U.S. taxpayer, the majority of the provisions, such as eliminating the domestic manufacturing deduction, creating new taxes on certain foreign sourced income, and introducing new limitations on certain business deductions, became effective for the Company in fiscal 2019. The global intangible low taxed income (GILTI) and foreign derived intangible income (FDII) provisions became effective for fiscal 2019 and resulted in an immaterial impact to the Company. For fiscal 2018, the most significant impacts included lowering of the U.S. federal corporate income tax rate, remeasuring certain net deferred tax liabilities, and the transition tax on the deemed repatriation of certain foreign earnings. The phase-in of the lower
federal corporate income tax rate resulted in a 21.0 percent tax rate for fiscal 2019 and a blended tax rate of 23.4 percent for fiscal 2018, as compared to the pretax reform federal corporate income tax rate of 35.0 percent. The tax rate will continue to be 21.0 percent in subsequent fiscal years.
In March 2018, the FASB issued ASU 2018-05, which provides guidance for companies related to the Tax Act. ASU 2018-05 allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Company made reasonable estimates to record a net tax benefit of $72.9 million during fiscal 2018. This provisional net tax benefit included a benefit of $81.2 million from re-measuring the Company's net U.S. deferred tax liabilities, partially offset by the Company's accrual for the transition tax and other U.S. tax law changes of $8.3 million. The Company completed its provisional tax analysis during the first quarter of 2019 and did not record any significant adjustments to the provisional amounts booked in fiscal 2018.
With respect to the new Tax Act provision on GILTI, the Company has elected to treat GILTI as a period cost.
The components of the Provision for Income Taxes are as follows:
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Current | ||||||||||||
| U.S. Federal | $ | 161,233 | $ | 134,869 | $ | 329,707 | ||||||
| State | 30,774 | 27,782 | 32,719 | |||||||||
| Foreign | 9,919 | 13,492 | 6,950 | |||||||||
| Total Current | 201,926 | 176,143 | 369,376 | |||||||||
| Deferred | ||||||||||||
| U.S. Federal | 27,817 | (15,573 | ) | 57,533 | ||||||||
| State | 1,473 | 10,975 | 4,510 | |||||||||
| Foreign | (649 | ) | (2,843 | ) | 123 | |||||||
| Total Deferred | 28,641 | (7,441 | ) | 62,166 | ||||||||
| Total Provision for Income Taxes | $ | 230,567 | $ | 168,702 | $ | 431,542 |
Deferred Income Taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred income tax liabilities and assets are as follows:
| (in thousands) | October 27, 2019 | October 28, 2018 | ||||||
| Deferred Tax Liabilities | ||||||||
| Goodwill and Intangible Assets | $ | (240,935 | ) | $ | (266,709 | ) | ||
| Tax over Book Depreciation and Basis Differences | (153,104 | ) | (117,861 | ) | ||||
| Other, net | (11,844 | ) | (11,221 | ) | ||||
| Deferred Tax Assets | ||||||||
| Pension and Other Post-retirement Benefits | 105,948 | 75,501 | ||||||
| Employee Compensation Related Liabilities | 65,887 | 64,852 | ||||||
| Marketing and Promotional Accruals | 15,581 | 22,595 | ||||||
| Other, net | 41,893 | 35,750 | ||||||
| Net Deferred Tax (Liabilities) Assets | $ | (176,574 | ) | $ | (197,093 | ) |
Reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
| 2019 | 2018 | 2017 | |||||||
| U.S. Statutory Rate | 21.0 | % | 23.4 | % | 35.0 | % | |||
| State Taxes on Income, Net of Federal Tax Benefit | 2.5 | 2.6 | 1.7 | ||||||
| Domestic Production Activities Deduction | — | (1.5 | ) | (2.4 | ) | ||||
| Divestitures | (1.4 | ) | — | — | |||||
| Provisional Tax Law Change | — | (6.3 | ) | — | |||||
| Stock-based Compensation | (2.2 | ) | (3.4 | ) | — | ||||
| All Other, net | (0.8 | ) | (0.5 | ) | (0.6 | ) | |||
| Effective Tax Rate | 19.1 | % | 14.3 | % | 33.7 | % |
In fiscal 2019, the Company recorded a net tax benefit of $17.5 million related to the divestiture of CytoSport.
As of October 27, 2019, the Company had $126.0 million of undistributed earnings from non-U.S. subsidiaries. The Company maintains all earnings are permanently reinvested. Accordingly, no additional income taxes have been provided for withholding tax, state tax, or other taxes.
Total income taxes paid during fiscal years 2019, 2018, and 2017 were $221.4 million, $147.5 million, and $336.0 million, respectively.
The following table sets forth changes in the unrecognized tax benefits, excluding interest and penalties, for fiscal years 2018 and 2019.
| (in thousands) | ||||
| Balance as of October 29, 2017 | $ | 32,797 | ||
| Tax Positions Related to the Current Period | ||||
| Increases | 3,540 | |||
| Tax Positions Related to Prior Periods | ||||
| Increases | 3,712 | |||
| Decreases | (1,874 | ) | ||
| Settlements | (2,702 | ) | ||
| Decreases Related to a Lapse of Applicable Statute of Limitations | (2,356 | ) | ||
| Balance as of October 28, 2018 | $ | 33,117 | ||
| Tax Positions Related to the Current Period | ||||
| Increases | 4,885 | |||
| Tax Positions Related to Prior Periods | ||||
| Increases | 2,997 | |||
| Decreases | (9,585 | ) | ||
| Settlements | (927 | ) | ||
| Decreases Related to a Lapse of Applicable Statute of Limitations | (2,661 | ) | ||
| Balance as of October 27, 2019 | $ | 27,826 |
The amount of unrecognized tax benefits, including interest and penalties, is recorded in Other Long-term Liabilities. If recognized as of October 27, 2019, and October 28, 2018, $22.5 million and $26.3 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, with losses of $0.1 million and $0.6 million included in expense for fiscal 2019 and 2018, respectively. The amount of accrued interest and penalties at October 27, 2019, and October 28, 2018, associated with unrecognized tax benefits was $6.2 million and $6.5 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 2017 in the second quarter of fiscal 2019. The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years through 2021. The objective of CAP is to contemporaneously work with the I.R.S. to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return. The Company may elect to continue participating in CAP for future tax years; the Company may withdraw from the program at any time.
The Company is in various stages of audit by several state taxing authorities on a variety of fiscal years, 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 L
Stock-Based Compensation
The Company issues stock options and restricted shares as part of its stock incentive plans for employees and non-employee directors. Stock-based compensation expense for fiscal years 2019, 2018, and 2017, was $19.7 million, $20.6 million, and $15.6 million, respectively.
At October 27, 2019, there was $27.6 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 2.6 years. During fiscal years 2019, 2018, and 2017, cash received from stock option exercises was $59.9 million, $71.8 million, and $21.7 million, respectively.
Shares issued for option exercises and restricted shares may be either authorized but unissued shares, or shares of treasury stock. The number of shares available for future grants was 14.9 million at October 27, 2019, 16.1 million at October 28, 2018, and 46.7 million at October 29, 2017.
Stock Options: The Company’s policy is to grant options with the exercise price equal to the market price of the common stock on the date of grant. Options typically vest over four years and expire ten years after the date of the grant. 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.
Effective with fiscal 2020 grants, the Company has determined the equity award value for eligible employees will be delivered fifty percent in stock options as described above and fifty percent in time-vested restricted stock units with a three-year cliff vesting.
During the third quarter of fiscal 2018, the Company made a one-time grant of 200 stock options to each active, full-time employee and 100 stock options to each active, part-time employee of the Company on April 30, 2018. The options vest in five years and expire ten years after the grant date.
A reconciliation of the number of options outstanding and exercisable (in thousands) as of October 27, 2019, and changes during the fiscal year then ended, is as follows:
| Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||
| Outstanding at October 28, 2018 | 29,536 | $ | 23.55 | ||||||||||
| Granted | 1,809 | 44.37 | |||||||||||
| Exercised | 4,599 | 13.03 | |||||||||||
| Forfeited | 747 | 36.40 | |||||||||||
| Expired | 5 | 35.87 | |||||||||||
| Outstanding at October 27, 2019 | 25,994 | $ | 26.49 | 5.2 | $ | 372,979 | |||||||
| Exercisable at October 27, 2019 | 17,955 | $ | 21.38 | 3.8 | $ | 344,595 |
The weighted-average grant date fair value of stock options granted and the total intrinsic value of options exercised (in thousands) during each of the past three fiscal years is as follows:
| Fiscal Year Ended | ||||||||||||
| October 27, | October 28, | October 29, | ||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Weighted-average Grant Date Fair Value | $ | 9.24 | $ | 7.16 | $ | 6.41 | ||||||
| Intrinsic Value of Exercised Options | 138,282 | 187,486 | 87,543 |
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:
| Fiscal Year Ended | |||||||||
| October 27, | October 28, | October 29, | |||||||
| 2019 | 2018 | 2017 | |||||||
| Risk-free Interest Rate | 2.8 | % | 2.7 | % | 2.4 | % | |||
| Dividend Yield | 1.9 | % | 2.1 | % | 2.0 | % | |||
| Stock Price Volatility | 19.0 | % | 19.0 | % | 19.0 | % | |||
| Expected Option Life | 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 based on the dividend rate approved by the Company’s Board of Directors and the stock price on the grant date. The expected volatility assumption is based primarily on historical volatility. As a reasonableness test, implied volatility from exchange traded options is also examined to validate the volatility range obtained from the historical analysis. The expected life assumption is based on an analysis of past exercise behavior by option holders. In performing the valuations for option grants, the Company has not stratified option holders as exercise behavior has historically been consistent across all employee and non-employee director groups.
Restricted Shares: Restricted shares awarded to non-employee directors on February 1 are subject to a restricted period which expires at the date of the Company’s next annual stockholders meeting. Newly elected directors receive a prorated award of restricted shares of the Company's common stock, which expires on the date of the Company's second succeeding annual stockholders meeting.
A reconciliation of the restricted shares (in thousands) as of October 27, 2019, and changes during the fiscal year then ended, is as follows:
| Shares | Weighted- Average Grant Date Fair Value | ||||||
| Restricted at October 28, 2018 | 52 | $ | 34.08 | ||||
| Granted | 51 | 42.23 | |||||
| Vested | 52 | 34.08 | |||||
| Restricted at October 27, 2019 | 51 | $ | 42.23 |
The weighted-average grant date fair value of restricted shares granted, the total fair value (in thousands) of restricted shares granted, and the fair value (in thousands) of shares that have vested during each of the past three fiscal years is as follows:
| Fiscal Year Ended | ||||||||||||
| October 27, | October 28, | October 29, | ||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Weighted-average Grant Date Fair Value | $ | 42.23 | $ | 34.08 | $ | 35.62 | ||||||
| Fair Value of Restricted Shares Granted | 2,134 | 1,760 | 2,080 | |||||||||
| Fair Value of Shares Vested | $ | 1,760 | $ | 2,053 | $ | 1,920 |
Note M
Fair Value Measurements
Pursuant to the provisions of ASC 820, the Company’s financial assets and liabilities carried at fair value on a recurring basis in the consolidated financial statements as of October 27, 2019, and October 28, 2018, and their level within the fair value hierarchy are presented in the table below.
| Fair Value Measurements at October 27, 2019 | ||||||||||||||||
| Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| (in thousands) | ||||||||||||||||
| Assets at Fair Value | ||||||||||||||||
| Cash and Cash Equivalents(1) | $ | 672,901 | $ | 672,458 | $ | 443 | $ | — | ||||||||
| Short-term Marketable Securities(2) | 14,736 | 5,186 | 9,550 | — | ||||||||||||
| Other Trading Securities(3) | 157,526 | — | 157,526 | — | ||||||||||||
| Commodity Derivatives(4) | 12,882 | 12,882 | — | — | ||||||||||||
| Total Assets at Fair Value | $ | 858,045 | $ | 690,526 | $ | 167,519 | $ | — | ||||||||
| Liabilities at Fair Value | ||||||||||||||||
| Deferred Compensation(3) | $ | 62,373 | $ | — | $ | 62,373 | $ | — | ||||||||
| Total Liabilities at Fair Value | $ | 62,373 | $ | — | $ | 62,373 | $ | — |
| Fair Value Measurements at October 28, 2018 | ||||||||||||||||
| Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| (in thousands) | ||||||||||||||||
| Assets at Fair Value | ||||||||||||||||
| Cash and Cash Equivalents(1) | $ | 459,136 | $ | 459,136 | $ | — | $ | — | ||||||||
| Other Trading Securities(3) | 137,311 | — | 137,311 | — | ||||||||||||
| Commodity Derivatives(4) | 4,611 | 4,611 | — | — | ||||||||||||
| Total Assets at Fair Value | $ | 601,058 | $ | 463,747 | $ | 137,311 | $ | — | ||||||||
| Liabilities at Fair Value | ||||||||||||||||
| Deferred Compensation(3) | $ | 60,181 | $ | — | $ | 60,181 | $ | — | ||||||||
| Total Liabilities at Fair Value | $ | 60,181 | $ | — | $ | 60,181 | $ | — |
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 booked 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) | 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 funds held in the rabbi trust are included in Other Assets on the Consolidated Statements of Financial Position. 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 Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based on a specified percentage of the I.R.S. applicable federal rates. These balances are classified as Level 2. 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. |
(4) The Company’s commodity derivatives represent futures contracts and options used in its hedging or other programs to offset price fluctuations associated with purchases of corn, 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 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. Over-the-counter (OTC) derivative instruments are valued using discounted cashflow models, observable market inputs, and other mathematical pricing models. The Company’s lean hog option contracts are OTC instruments whose value is calculated using the Black-Scholes pricing model, lean hog future prices quoted from the Chicago Mercantile Exchange, and other adjustments to inputs that are observable in active markets. As the value of these instruments is driven by observable prices in active markets they are classified as Level 2. 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 October 27, 2019, the Company has recognized the right to reclaim net cash collateral of $6.5 million from various counterparties (including $10.5 million of realized gains on closed positions offset by cash owed of $4.0 million). As of October 28, 2018, the Company had recognized the right to reclaim net cash collateral of $4.6 million from various counterparties (including cash of $4.7 million less $0.1 of realized losses).
The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value. The Company does not carry its long-term debt at fair value in its Consolidated Statements of Financial Position. The fair value of long-term debt, utilizing discounted cash flows (Level 2), was $257.7 million as of October 27, 2019, and $631.3 million as of October 28, 2018.
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 fourth quarter of fiscal year 2018, a $17.3 million intangible asset impairment charge was recorded for a CytoSport trademark. See additional discussion regarding the Company’s goodwill and intangible assets in Note E - Goodwill and Intangible Assets. During fiscal years 2019, 2018, and 2017, there were no other material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
Note N
Commitments and Contingencies
In order to ensure a steady supply of hogs and turkeys, and to keep the cost of products stable, the Company has entered into contracts with producers for the purchase of hogs and turkeys at formula-based prices over periods up to 10 years. The Company has also entered into grow-out contracts with independent farmers to raise turkeys for the Company for periods up to 25 years. Under these arrangements, the Company owns the livestock, feed, and other supplies while the independent farmers provide facilities and labor. The Company has also contracted for the purchase of corn, soybean meal, feed ingredients, and other raw materials from independent suppliers for periods up to five years. Under these contracts, the Company is committed to make purchases, assuming current price levels, as follows:
| (in thousands) | October 27, 2019 | ||
| 2020 | $ | 851,469 | |
| 2021 | 645,323 | ||
| 2022 | 494,924 | ||
| 2023 | 441,092 | ||
| 2024 | 365,740 | ||
| Later Years | 414,889 | ||
| Total | $ | 3,213,437 |
Purchases under these contracts for fiscal years 2019, 2018, and 2017 were $1.0 billion, $1.3 billion, and $1.4 billion, respectively.
The Company has noncancelable operating and capital lease commitments on facilities and equipment at October 27, 2019, as follows:
| (in thousands) | Operating | Capital | ||||
| 2020 | $ | 15,603 | $ | 1,834 | ||
| 2021 | 10,470 | 1,787 | ||||
| 2022 | 7,951 | 1,709 | ||||
| 2023 | 6,953 | 1,709 | ||||
| 2024 | 4,840 | 1,709 | ||||
| Later Years | 21,773 | 13,815 | ||||
| Total Future Payments | $ | 67,590 | $ | 22,563 | ||
| Less: Interest | 2,850 | |||||
| Present Value of Future Minimum Capital Lease Payments | $ | 19,713 |
The Company expensed $23.1 million, $22.9 million, and $19.2 million for rent in fiscal years 2019, 2018, and 2017, respectively.
As of October 27, 2019, the Company has $44.8 million 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, that amount includes revocable standby letters of credit totaling $2.7 million 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.
The Company is involved in litigation on an ongoing basis arising in the ordinary course of business. In the opinion of management, the outcome of litigation currently pending will not materially affect the Company’s results of operations, financial condition, or liquidity.
Note O
Earnings Per Share Data
The reported Net Earnings Attributable to the Company were used when computing Basic and Diluted Earnings Per Share for all years presented. A reconciliation of the shares used in the computation is as follows:
| (in thousands) | 2019 | 2018 | 2017 | ||||||
| Basic Weighted-average Shares Outstanding | 534,578 | 530,742 | 528,363 | ||||||
| Dilutive Potential Common Shares | 10,654 | 13,127 | 10,753 | ||||||
| Diluted Weighted-average Shares Outstanding | 545,232 | 543,869 | 539,116 |
For fiscal years 2019, 2018, and 2017, a total of 2.8 million, 7.3 million, and 3.7 million weighted-average outstanding stock options, respectively, were not included in the computation of dilutive potential common shares since their inclusion would have had an antidilutive effect on Earnings Per Share.
Note P
Segment Reporting
The Company develops, processes, and distributes a wide array of food products in a variety of markets. The Company reports its results in the following four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. At the beginning of fiscal 2019, the Hormel Deli Solutions division combined all deli businesses, including the Jennie-O Turkey Store deli division, into one division within the Refrigerated Foods segment. In addition, the ingredients business was realigned from the Grocery Products segment to the Refrigerated Foods segment. Periods presented herein have been adjusted to reflect these changes.
The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market, along with the sale of nutritional and private label shelf-stable products to retail, foodservice, and industrial customers. This segment also includes the results from the Company’s MegaMex joint venture.
The Refrigerated Foods segment consists primarily of the processing, marketing, and sale of branded and unbranded pork, beef, and poultry products for retail, foodservice, deli, and commercial customers.
The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and commercial customers.
The International & Other segment includes Hormel Foods International which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Company’s international joint ventures and royalty arrangements.
Intersegment sales are recorded at prices that approximate cost and are eliminated in the Consolidated Statements of Operations. The Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance. The Company also retains various other income and expenses at the corporate level. Equity in earnings of affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included below as Net Unallocated Expense and Noncontrolling Interest when reconciling to Earnings Before Income Taxes.
Sales and operating profits for each of the Company’s reportable segments and reconciliation to earnings before income taxes are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the profit and other financial information shown below.
| Fiscal Year | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Sales to Unaffiliated Customers | ||||||||||||
| Grocery Products | $ | 2,369,317 | $ | 2,480,367 | $ | 2,507,503 | ||||||
| Refrigerated Foods | 5,210,741 | 5,109,881 | 4,759,839 | |||||||||
| Jennie-O Turkey Store | 1,323,783 | 1,331,013 | 1,355,163 | |||||||||
| International & Other | 593,476 | 624,439 | 545,014 | |||||||||
| Total | $ | 9,497,317 | $ | 9,545,700 | $ | 9,167,519 | ||||||
| Intersegment Sales | ||||||||||||
| Grocery Products | $ | 41 | $ | 38 | $ | 32 | ||||||
| Refrigerated Foods | 16,351 | 8,591 | 7,832 | |||||||||
| Jennie-O Turkey Store | 123,712 | 110,753 | 113,384 | |||||||||
| International & Other | $ | — | — | — | ||||||||
| Total | 140,104 | 119,382 | 121,248 | |||||||||
| Intersegment Elimination | (140,104 | ) | (119,382 | ) | (121,248 | ) | ||||||
| Total | $ | — | $ | — | $ | — | ||||||
| Net Sales | ||||||||||||
| Grocery Products | $ | 2,369,358 | $ | 2,480,405 | $ | 2,507,535 | ||||||
| Refrigerated Foods | 5,227,092 | 5,118,472 | 4,767,671 | |||||||||
| Jennie-O Turkey Store | 1,447,495 | 1,441,766 | 1,468,547 | |||||||||
| International & Other | 593,476 | 624,439 | 545,014 | |||||||||
| Intersegment Elimination | (140,104 | ) | (119,382 | ) | (121,248 | ) | ||||||
| Total | $ | 9,497,317 | $ | 9,545,700 | $ | 9,167,519 | ||||||
| Segment Profit | ||||||||||||
| Grocery Products | $ | 339,497 | $ | 353,266 | $ | 373,330 | ||||||
| Refrigerated Foods | 681,763 | 670,948 | 666,125 | |||||||||
| Jennie-O Turkey Store | 117,962 | 131,846 | 183,433 | |||||||||
| International & Other | 75,513 | 88,953 | 85,304 | |||||||||
| Total Segment Profit | 1,214,735 | $ | 1,245,013 | $ | 1,308,192 | |||||||
| Net Unallocated Expense | 5,362 | 64,171 | 29,915 | |||||||||
| Noncontrolling Interest | 342 | 442 | 368 | |||||||||
| Earnings Before Income Taxes | $ | 1,209,715 | $ | 1,181,284 | $ | 1,278,645 | ||||||
| Assets | ||||||||||||
| Grocery Products | $ | 1,774,235 | $ | 2,172,117 | $ | 2,181,762 | ||||||
| Refrigerated Foods | 3,583,639 | 3,444,646 | 2,389,896 | |||||||||
| Jennie-O Turkey Store | 1,023,787 | 1,016,961 | 910,614 | |||||||||
| International & Other | 692,310 | 679,003 | 675,878 | |||||||||
| Corporate | 1,035,033 | 829,565 | 817,758 | |||||||||
| Total | $ | 8,109,004 | $ | 8,142,292 | $ | 6,975,908 | ||||||
| Additions to Property, Plant & Equipment | ||||||||||||
| Grocery Products | $ | 37,892 | $ | 13,042 | $ | 16,443 | ||||||
| Refrigerated Foods | 174,506 | 220,499 | 79,836 | |||||||||
| Jennie-O Turkey Store | 31,607 | 131,946 | 88,063 | |||||||||
| International & Other | 9,248 | 16,513 | 33,124 | |||||||||
| Corporate | 40,585 | 7,607 | 3,820 | |||||||||
| Total | $ | 293,838 | $ | 389,607 | $ | 221,286 | ||||||
| Depreciation and Amortization | ||||||||||||
| Grocery Products | $ | 31,406 | $ | 35,210 | $ | 37,089 | ||||||
| Refrigerated Foods | 77,100 | 70,579 | 45,926 | |||||||||
| Jennie-O Turkey Store | 34,696 | 33,316 | 31,603 | |||||||||
| International & Other | 10,666 | 10,755 | 4,042 | |||||||||
| Corporate | 11,342 | 11,998 | 12,317 | |||||||||
| Total | $ | 165,210 | $ | 161,858 | $ | 130,977 |
Revenue has been disaggregated into the categories below to show how sales channels affect the nature, amount, timing, and uncertainty of revenue and cash flows. The amount of total revenues contributed by sales channel for the last three fiscal years are as follows:
| Fiscal Year Ended | ||||||||||||
| (in thousands) | October 27, 2019 | October 28, 2018 | October 29, 2017 | |||||||||
| U.S. Retail | $ | 4,947,398 | $ | 5,112,988 | $ | 5,492,825 | ||||||
| U.S. Foodservice | 2,943,352 | 2,824,951 | 2,611,218 | |||||||||
| U.S. Deli | 939,069 | 914,009 | 460,250 | |||||||||
| International | 667,498 | 693,752 | 603,226 | |||||||||
| Total | $ | 9,497,317 | $ | 9,545,700 | $ | 9,167,519 |
The Company’s products primarily consist of meat and other food products. The amount of total revenues contributed by classes of similar products for the last three fiscal years are as follows:
| Fiscal Year Ended | ||||||||||||
| (in thousands) | October 27, 2019 | October 28, 2018 | October 29, 2017 | |||||||||
| Perishable | $ | 5,370,409 | $ | 5,336,046 | $ | 4,922,958 | ||||||
| Poultry | 1,849,294 | 1,842,320 | 1,750,996 | |||||||||
| Shelf-stable | 1,829,138 | 1,765,955 | 1,851,839 | |||||||||
| Miscellaneous | 448,476 | 601,379 | 641,726 | |||||||||
| Total | $ | 9,497,317 | $ | 9,545,700 | $ | 9,167,519 |
Perishable includes fresh meats, frozen items, refrigerated meal solutions, sausages, hams, guacamole, and bacon (excluding Jennie-O Turkey Store products). Shelf-stable includes canned luncheon meats, peanut butter, chilies, shelf-stable microwaveable meals, hash, stews, meat spreads, flour and corn 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. The reduction in the Miscellaneous category during fiscal 2019 is due to the divestiture of CytoSport on April 15, 2019.
Revenues from external customers are classified as domestic or foreign based on the destination where title passes. No individual foreign country is material to the consolidated results. Additionally, the Company’s long-lived assets located in foreign countries are not significant. Total revenues attributed to the U.S. and all foreign countries in total for the last three fiscal years are as follows:
| Fiscal Year Ended | ||||||||||||
| (in thousands) | October 27, 2019 | October 28, 2018 | October 29, 2017 | |||||||||
| United States | $ | 8,934,911 | $ | 8,957,305 | $ | 8,631,325 | ||||||
| Foreign | 562,406 | 588,395 | 536,194 | |||||||||
| Total | $ | 9,497,317 | $ | 9,545,700 | $ | 9,167,519 |
In fiscal 2019, sales to Walmart Inc. (Walmart) represented $1.4 billion or 13.5% of the Company’s consolidated revenues (measured as gross sales less returns and allowances). In fiscal 2018, sales to Walmart represented $1.4 billion or 13.6% of the Company’s consolidated revenues. Walmart is a customer for all four segments of the Company.
Note Q
Quarterly Results of Operations (Unaudited)
The following tabulations reflect the unaudited quarterly results of operations for the years ended October 27, 2019, and October 28, 2018.
| (in thousands, except per share data) | Net Sales | Gross Profit(3) | Net Earnings | Net Earnings Attributable to Hormel Foods Corporation(1) | Basic Earnings Per Share | Diluted Earnings Per Share(2) | ||||||||||||||||||
| 2019 | ||||||||||||||||||||||||
| First Quarter | $ | 2,360,355 | $ | 488,334 | $ | 241,519 | $ | 241,425 | $ | 0.45 | $ | 0.44 | ||||||||||||
| Second Quarter | 2,344,744 | 469,149 | 282,636 | 282,429 | 0.53 | 0.52 | ||||||||||||||||||
| Third Quarter | 2,290,705 | 433,442 | 199,427 | 199,449 | 0.37 | 0.37 | ||||||||||||||||||
| Fourth Quarter | 2,501,513 | 493,723 | 255,566 | 255,503 | 0.48 | 0.47 | ||||||||||||||||||
| 2018 | ||||||||||||||||||||||||
| First Quarter | $ | 2,331,293 | $ | 498,296 | $ | 303,211 | $ | 303,107 | $ | 0.57 | $ | 0.56 | ||||||||||||
| Second Quarter | 2,330,568 | 492,803 | 237,522 | 237,384 | 0.45 | 0.44 | ||||||||||||||||||
| Third Quarter | 2,359,142 | 455,046 | 210,353 | 210,243 | 0.40 | 0.39 | ||||||||||||||||||
| Fourth Quarter | 2,524,697 | 533,328 | 261,496 | 261,406 | 0.49 | 0.48 |
(1) Excludes net earnings attributable to the Company’s noncontrolling interests.
(2) Quarterly amounts are independently computed and may not add to the annual amounts.
(3) Fiscal 2018 adjusted due to the adoption of ASU 2017-07. See Note A - Summary of Significant Accounting Policies.
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