filings.toolsItem 1. FINANCIAL STATEMENTS
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Item 1. FINANCIAL STATEMENTS
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts
Unaudited
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 3,034,414 | $ | 2,863,670 | $ | 9,175,331 | $ | 7,931,438 | |||||||||||||||||||||||||||
| Cost of Products Sold | 2,528,364 | 2,440,322 | 7,577,062 | 6,581,613 | |||||||||||||||||||||||||||||||
| Gross Profit | 506,049 | 423,348 | 1,598,269 | 1,349,825 | |||||||||||||||||||||||||||||||
| Selling, General and Administrative | 222,147 | 226,284 | 672,777 | 622,630 | |||||||||||||||||||||||||||||||
| Equity in Earnings of Affiliates | 7,138 | 10,420 | 19,951 | 37,722 | |||||||||||||||||||||||||||||||
| Operating Income | 291,040 | 207,484 | 945,443 | 764,917 | |||||||||||||||||||||||||||||||
| Interest and Investment Income | 14,411 | 8,457 | 20,078 | 36,740 | |||||||||||||||||||||||||||||||
| Interest Expense | 15,615 | 11,703 | 44,913 | 27,718 | |||||||||||||||||||||||||||||||
| Earnings Before Income Taxes | 289,836 | 204,238 | 920,608 | 773,940 | |||||||||||||||||||||||||||||||
| Provision for Income Taxes | 71,010 | 27,164 | 200,393 | 146,549 | |||||||||||||||||||||||||||||||
| Net Earnings | 218,826 | 177,074 | 720,215 | 627,390 | |||||||||||||||||||||||||||||||
| Less: Net Earnings (Loss) Attributable to Noncontrolling Interest | (89) | 157 | 112 | 290 | |||||||||||||||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | $ | 218,915 | $ | 176,917 | $ | 720,103 | $ | 627,101 | |||||||||||||||||||||||||||
| Net Earnings Per Share | |||||||||||||||||||||||||||||||||||
| Basic | $ | 0.40 | $ | 0.33 | $ | 1.32 | $ | 1.16 | |||||||||||||||||||||||||||
| Diluted | $ | 0.40 | $ | 0.32 | $ | 1.31 | $ | 1.15 | |||||||||||||||||||||||||||
| Weighted-average Shares Outstanding | |||||||||||||||||||||||||||||||||||
| Basic | 546,077 | 541,746 | 544,486 | 540,618 | |||||||||||||||||||||||||||||||
| Diluted | 550,167 | 548,072 | 549,377 | 547,684 |
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
Unaudited
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | ||||||||||||||||||||||||||||||||
| Net Earnings | $ | 218,826 | $ | 177,074 | $ | 720,215 | $ | 627,390 | |||||||||||||||||||||||||||
| Other Comprehensive Income (Loss), Net of Tax: | |||||||||||||||||||||||||||||||||||
| Foreign Currency Translation | (29,228) | 12,626 | (14,233) | 23,489 | |||||||||||||||||||||||||||||||
| Pension and Other Benefits | 2,505 | 4,199 | 7,643 | 12,598 | |||||||||||||||||||||||||||||||
| Deferred Hedging | (35,138) | (8,612) | 967 | 42,016 | |||||||||||||||||||||||||||||||
| Total Other Comprehensive Income (Loss) | (61,861) | 8,213 | (5,623) | 78,103 | |||||||||||||||||||||||||||||||
| Comprehensive Income | 156,965 | 185,287 | 714,592 | 705,493 | |||||||||||||||||||||||||||||||
| Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interest | (540) | 270 | (206) | 671 | |||||||||||||||||||||||||||||||
| Comprehensive Income Attributable to Hormel Foods Corporation | $ | 157,505 | $ | 185,017 | $ | 714,798 | $ | 704,822 |
See Notes to Consolidated Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
In thousands, except share and per share amounts
Unaudited
| July 31, 2022 | October 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and Cash Equivalents | $ | 850,344 | $ | 613,530 | |||||||
| Short-term Marketable Securities | 18,314 | 21,162 | |||||||||
| Accounts Receivable (Net of Allowance for Doubtful Accounts of $3,500 at July 31, 2022, and $4,033 at October 31, 2021) | 802,850 | 895,719 | |||||||||
| Inventories | 1,679,179 | 1,369,198 | |||||||||
| Taxes Receivable | 7,733 | 8,293 | |||||||||
| Prepaid Expenses and Other Current Assets | 45,063 | 39,914 | |||||||||
| Total Current Assets | 3,403,484 | 2,947,816 | |||||||||
| Goodwill | 4,929,337 | 4,929,102 | |||||||||
| Other Intangibles | 1,808,235 | 1,822,273 | |||||||||
| Pension Assets | 311,157 | 289,096 | |||||||||
| Investments In and Receivables from Affiliates | 277,727 | 299,019 | |||||||||
| Other Assets | 292,412 | 299,907 | |||||||||
| Property, Plant and Equipment | |||||||||||
| Land | 74,274 | 72,133 | |||||||||
| Buildings | 1,392,584 | 1,332,881 | |||||||||
| Equipment | 2,554,146 | 2,415,063 | |||||||||
| Construction in Progress | 238,690 | 316,455 | |||||||||
| Less: Allowance for Depreciation | (2,141,628) | (2,027,414) | |||||||||
| Net Property, Plant and Equipment | 2,118,067 | 2,109,117 | |||||||||
| Total Assets | $ | 13,140,418 | $ | 12,696,329 |
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
In thousands, except share and per share amounts
Unaudited
| July 31, 2022 | October 31, 2021 | ||||||||||
| Liabilities and Shareholders' Investment | |||||||||||
| Current Liabilities | |||||||||||
| Accounts Payable and Accrued Expenses | $ | 799,202 | $ | 844,502 | |||||||
| Accrued Marketing Expenses | 131,495 | 114,746 | |||||||||
| Employee Related Expenses | 248,551 | 269,327 | |||||||||
| Interest and Dividends Payable | 167,534 | 154,803 | |||||||||
| Taxes Payable | 64,311 | 23,520 | |||||||||
| Current Maturities of Long-term Debt | 8,807 | 8,756 | |||||||||
| Total Current Liabilities | 1,419,899 | 1,415,654 | |||||||||
| Long-term Debt Less Current Maturities | 3,294,287 | 3,315,147 | |||||||||
| Pension and Post-retirement Benefits | 551,458 | 546,362 | |||||||||
| Other Long-term Liabilities | 153,773 | 162,623 | |||||||||
| Deferred Income Taxes | 354,053 | 278,183 | |||||||||
| Shareholders' Investment | |||||||||||
| Preferred Stock, Par Value $0.01 a Share– | — | — | |||||||||
| Authorized 160,000,000 Shares: Issued–None | |||||||||||
| Common Stock, Non-voting, Par Value $0.01 a Share– | — | — | |||||||||
| Authorized 400,000,000 Shares: Issued–None | |||||||||||
| Common Stock, Par Value $0.01465 a Share– | 8,001 | 7,946 | |||||||||
| Authorized 1,600,000,000 Shares: | |||||||||||
| Shares Issued as of July 31, 2022: 546,155,583 | |||||||||||
| Shares Issued as of October 31, 2021: 542,412,403 | |||||||||||
| Additional Paid-in Capital | 459,272 | 360,336 | |||||||||
| Accumulated Other Comprehensive Loss | (282,574) | (277,269) | |||||||||
| Retained Earnings | 7,176,977 | 6,881,870 | |||||||||
| Hormel Foods Corporation Shareholders' Investment | 7,361,676 | 6,972,883 | |||||||||
| Noncontrolling Interest | 5,272 | 5,478 | |||||||||
| Total Shareholders' Investment | 7,366,948 | 6,978,360 | |||||||||
| Total Liabilities and Shareholders' Investment | $ | 13,140,418 | $ | 12,696,329 |
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT
In thousands, except per share amounts
Unaudited
| Quarter Ended July 25, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 25, 2021 | 540,411 | $ | 7,917 | — | $ | — | $ | 319,048 | $ | 6,699,336 | $ | (325,629) | $ | 5,178 | $ | 6,705,851 | |||||||||||||||||||||||||||||||||||||
| Net Earnings | 176,917 | 157 | 177,074 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | 8,100 | 113 | 8,213 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation Expense | 4,479 | 4,479 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of Stock Options/Restricted Shares | 2,125 | 31 | 30,635 | 30,666 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Declared Cash Dividends – $0.2450 per Share | (132,551) | (132,551) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 25, 2021 | 542,536 | $ | 7,948 | — | $ | — | $ | 354,162 | $ | 6,743,701 | $ | (317,528) | $ | 5,448 | $ | 6,793,732 | |||||||||||||||||||||||||||||||||||||
| Quarter Ended July 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at May 1, 2022 | 546,053 | $ | 8,000 | — | $ | — | $ | 451,836 | $ | 7,100,730 | $ | (221,164) | $ | 5,812 | $ | 7,345,214 | |||||||||||||||||||||||||||||||||||||
| Net Earnings | 218,915 | (89) | 218,826 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | (61,410) | (451) | (61,861) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation Expense | 4,566 | 4,566 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of Stock Options/Restricted Shares | 103 | 2 | 2,870 | 2,872 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Declared Cash Dividends – $0.2600 per Share | (142,668) | (142,668) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 31, 2022 | 546,156 | $ | 8,001 | — | $ | — | $ | 459,272 | $ | 7,176,977 | $ | (282,574) | $ | 5,272 | $ | 7,366,948 |
| Nine Months Ended July 25, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 25, 2020 | 539,887 | $ | 7,909 | — | $ | — | $ | 289,554 | $ | 6,523,335 | $ | (395,250) | $ | 4,778 | $ | 6,430,326 | |||||||||||||||||||||||||||||||||||||
| Net Earnings | 627,101 | 290 | 627,390 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | 77,722 | 381 | 78,103 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of Common Stock | (217) | (9,653) | (9,653) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation Expense | 38 | 1 | 20,313 | 20,313 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of Stock Options/Restricted Shares | 2,828 | 41 | 44,416 | 44,457 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares Retired | (217) | (3) | 217 | 9,653 | (120) | (9,530) | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Declared Cash Dividends – $0.7350 per Share | (397,204) | (397,204) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 25, 2021 | 542,536 | $ | 7,948 | — | $ | — | $ | 354,162 | $ | 6,743,701 | $ | (317,528) | $ | 5,448 | $ | 6,793,732 | |||||||||||||||||||||||||||||||||||||
| Nine Months Ended July 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total Shareholders’ Investment | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 31, 2021 | 542,412 | $ | 7,946 | — | $ | — | $ | 360,336 | $ | 6,881,870 | $ | (277,269) | $ | 5,478 | $ | 6,978,360 | |||||||||||||||||||||||||||||||||||||
| Net Earnings | 720,103 | 112 | 720,215 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | (5,305) | (318) | (5,623) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation Expense | 37 | 1 | 20,933 | 20,933 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of Stock Options/Restricted Shares | 3,706 | 54 | 78,003 | 78,058 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Declared Cash Dividends – $0.7800 per Share | (424,996) | (424,996) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 31, 2022 | 546,156 | $ | 8,001 | — | $ | — | $ | 459,272 | $ | 7,176,977 | $ | (282,574) | $ | 5,272 | $ | 7,366,948 |
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
In thousands
Unaudited
| Nine Months Ended | |||||||||||
| July 31, 2022 | July 25, 2021 | ||||||||||
| Operating Activities | |||||||||||
| Net Earnings | $ | 720,215 | $ | 627,390 | |||||||
| Adjustments to Reconcile to Net Cash Provided by (Used in) Operating Activities: | |||||||||||
| Depreciation and Amortization | 191,568 | 162,490 | |||||||||
| Equity in Earnings of Affiliates | (19,951) | (37,722) | |||||||||
| Distributions Received from Equity Method Investees | 30,539 | 33,749 | |||||||||
| Provision for Deferred Income Taxes | 71,427 | 2,375 | |||||||||
| Loss (Gain) on Property/Equipment Sales and Plant Facilities | 5,098 | 1,596 | |||||||||
| Non-cash Investment Activities | 13,610 | (21,802) | |||||||||
| Stock-based Compensation Expense | 20,933 | 20,313 | |||||||||
| Changes in Operating Assets and Liabilities, Net of Acquisitions: | |||||||||||
| Decrease (Increase) in Accounts Receivable | 96,674 | (191,783) | |||||||||
| Decrease (Increase) in Inventories | (311,312) | (202,217) | |||||||||
| Decrease (Increase) in Prepaid Expenses and Other Current Assets | (3,666) | 47,553 | |||||||||
| Increase (Decrease) in Pension and Post-retirement Benefits | (6,906) | 3,629 | |||||||||
| Increase (Decrease) in Accounts Payable and Accrued Expenses | (84,384) | (30,187) | |||||||||
| Increase (Decrease) in Net Income Taxes Payable | 39,312 | 22,403 | |||||||||
| Net Cash Provided by (Used in) Operating Activities | 763,157 | 437,786 | |||||||||
| Investing Activities | |||||||||||
| Net (Purchase) Sale of Securities | 1,296 | (1,304) | |||||||||
| Acquisitions of Businesses/Intangibles | — | (3,396,246) | |||||||||
| Purchases of Property and Equipment | (189,184) | (139,361) | |||||||||
| Proceeds from Sales of Property and Equipment | 1,044 | 1,910 | |||||||||
| Decrease (Increase) in Investments, Equity in Affiliates, and Other Assets | 8,275 | 668 | |||||||||
| Proceeds from Company-owned Life Insurance | 6,742 | 4,015 | |||||||||
| Net Cash Provided by (Used in) Investing Activities | (171,827) | (3,530,320) | |||||||||
| Financing Activities | |||||||||||
| Proceeds from Long-term Debt | — | 2,276,292 | |||||||||
| Repayments of Long-term Debt and Finance Leases | (6,498) | (256,535) | |||||||||
| Dividends Paid on Common Stock | (415,923) | (390,206) | |||||||||
| Share Repurchase | — | (9,653) | |||||||||
| Proceeds from Exercise of Stock Options | 77,958 | 44,007 | |||||||||
| Net Cash Provided by (Used in) Financing Activities | (344,463) | 1,663,905 | |||||||||
| Effect of Exchange Rate Changes on Cash | (10,054) | 5,683 | |||||||||
| Increase (Decrease) in Cash and Cash Equivalents | 236,814 | (1,422,946) | |||||||||
| Cash and Cash Equivalents at Beginning of Year | 613,530 | 1,714,309 | |||||||||
| Cash and Cash Equivalents at End of Quarter | $ | 850,344 | $ | 291,363 |
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include certain information and footnotes required by U.S. generally accepted accounting principles (GAAP) for comprehensive financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results and cash flows for the interim period are not necessarily indicative of the results that may be expected for the full year.
These statements should be reviewed in conjunction with the consolidated financial statements and associated notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021. The significant accounting policies used in preparing these interim consolidated financial statements are consistent with those described in Note A - Summary of Significant Accounting Policies to the consolidated financial statements in the Form 10-K with the exception of new requirements adopted in the first quarter of fiscal 2022. The Company has determined there have been no material changes in the Company’s significant accounting policies, including estimates and assumptions, as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
Fiscal Year: The Company’s fiscal year ends on the last Sunday in October. Fiscal 2022 consists of 52 weeks. Fiscal 2021 consisted of 53 weeks with the additional week occurring in the fourth quarter.
Rounding: Certain amounts in the Consolidated Financial Statements and associated notes may not foot due to rounding. All percentages have been calculated using unrounded amounts.
Reclassifications: Certain reclassifications of previously reported amounts have been made to conform to the current year presentation.
Accounting Changes and Recent Accounting Pronouncements:
New Accounting Pronouncements Adopted in Current Fiscal Year
In December 2019, the Financial Accounting Standards Board (FASB) issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions in Topic 740 and clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2022 and adoption did not have a material impact on its consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The guidance provides optional expedients and exceptions to account for contracts, hedging relationships, and other transactions that reference London Interbank Referenced Rate (LIBOR) or another reference rate expected to be discontinued. The optional guidance can be applied from March 12, 2020 through December 31, 2022. The Company currently holds an interest rate swap which uses LIBOR as the benchmark interest rate. When LIBOR ceases to be published in June 2023, the benchmark interest rate of the swap will change to Secured Overnight Financing Rate (SOFR) plus a spread adjustment. The Company does not expect adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.
Recently issued accounting standards or pronouncements not disclosed have been excluded as they are currently not relevant to the Company.
NOTE B - ACQUISITIONS AND DIVESTITURES
Acquisitions: On June 7, 2021, the Company acquired the Planters*®* snack nuts business from The Kraft Heinz Company. The acquisition includes the Planters*®, NUT-rition®, and Corn Nuts®* brands. The final purchase price, including working capital adjustments, was $3.4 billion. The transaction was funded with the Company’s cash on hand and from the issuance of long-term debt.
Planters*®* is an iconic snack brand and this acquisition significantly expands the Company's presence, and should broaden the scope for future acquisitions, in the growing snacking space. Operating results for this acquisition have been included in the Company's Consolidated Statements of Operations from the date of acquisition and are reflected in the Grocery Products, Refrigerated Foods, and International & Other segments. The acquisition contributed $243.1 million and $753.9 million of net sales during the third quarter and nine months of fiscal 2022, respectively. The acquisition contributed $141.3 million of net sales during the comparable periods of fiscal 2021. As the acquisition has been integrated within the Company's existing operations, post-acquisition net earnings are not discernible.
Acquisition-related costs were $27.5 million and $30.3 million for the third quarter and nine months ended July 25, 2021, respectively, which are reflected in the Consolidated Statements of Operations as Selling, General and Administrative. Additional one-time adjustments related to the revaluation of acquired inventory of $12.9 million were recognized in the Consolidated Statements of Operations as Cost of Products Sold for the third quarter and nine months ended July 25, 2021. The combined impact of these one-time acquisition costs and accounting adjustments were $40.4 million and $43.2 million for the third quarter and nine months ended July 25, 2021, respectively.
The acquisition was accounted for as a business combination using the acquisition method. The Company determined the acquisition date fair values of the assets acquired using independent appraisals. The Company completed purchase accounting allocations in the fourth quarter of fiscal 2021.
The following unaudited pro forma financial information presents the combined results of operations as if the acquisition of the Planters*®* snack nuts business had occurred on October 27, 2019. These unaudited pro forma results do not necessarily reflect the actual results of operations that would have been achieved had the acquisition occurred on that date, nor are they necessarily indicative of future results of operations.
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| in thousands | July 25, 2021 | July 25, 2021 | |||||||||||||||||||||
| Pro Forma Net Sales | $ | 2,981,630 | $ | 8,606,935 | |||||||||||||||||||
| Pro Forma Net Earnings Attributable to Hormel Foods Corporation | 215,983 | 704,143 |
The pro forma results include charges for depreciation and amortization of acquired assets and interest expense on debt issued to finance the acquisition, as well as the related income taxes. The pro forma results for the third quarter and nine months ended July 25, 2021 include an adjustment to add back the transaction costs incurred and revaluation of inventory acquired in those periods, along with the related income tax effects.
NOTE C - GOODWILL AND INTANGIBLE ASSETS
Goodwill: The change in the carrying amounts of goodwill for the nine months ended July 31, 2022 are:
| in thousands | Grocery Products | Refrigerated Foods | Jennie-O Turkey Store | International & Other | Total | ||||||||||||||||||||||||
| Balance at October 31, 2021 | $ | 2,398,354 | $ | 2,094,421 | $ | 176,628 | $ | 259,699 | $ | 4,929,102 | |||||||||||||||||||
| Foreign Currency Translation | — | — | — | 235 | 235 | ||||||||||||||||||||||||
| Balance at July 31, 2022 | $ | 2,398,354 | $ | 2,094,421 | $ | 176,628 | $ | 259,935 | $ | 4,929,337 |
Intangible Assets: The carrying amounts for indefinite-lived intangible assets are:
| in thousands | July 31, 2022 | October 31, 2021 | |||||||||
| Brands/Tradenames/Trademarks | $ | 1,665,190 | $ | 1,665,190 | |||||||
| Other Intangibles | 184 | 184 | |||||||||
| Foreign Currency Translation | (6,318) | (6,646) | |||||||||
| Total | $ | 1,659,056 | $ | 1,658,728 |
The gross carrying amount and accumulated amortization for definite-lived intangible assets are:
| July 31, 2022 | October 31, 2021 | ||||||||||||||||||||||||||||||||||
| in thousands | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||||||||||||||
| Customer Lists/Relationships | $ | 168,239 | $ | (66,558) | $ | 168,239 | $ | (56,882) | |||||||||||||||||||||||||||
| Other Intangibles | 59,241 | (10,544) | 60,241 | (8,356) | |||||||||||||||||||||||||||||||
| Tradenames/Trademarks | 10,536 | (7,308) | 10,536 | (5,700) | |||||||||||||||||||||||||||||||
| Foreign Currency Translation | — | (4,426) | — | (4,534) | |||||||||||||||||||||||||||||||
| Total | $ | 238,016 | $ | (88,836) | $ | 239,016 | $ | (75,471) |
Amortization expense was $4.8 million and $14.5 million for the quarter and nine months ended July 31, 2022, respectively, compared to $4.4 million and $12.3 million for the quarter and nine months ended July 25, 2021.
Estimated annual amortization expense for the five fiscal years after October 31, 2021, is as follows:
| in thousands | Amortization Expense | ||||
| 2022 | $ | 19,244 | |||
| 2023 | 18,351 | ||||
| 2024 | 16,352 | ||||
| 2025 | 14,627 | ||||
| 2026 | 14,170 |
NOTE D - INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES
The Company accounts for its majority-owned operations under the consolidation method. Investments in which the Company owns a minority interest and for which there are no other indicators of control are accounted for under the equity method. These investments, along with any related receivables from affiliates, are included in the Consolidated Condensed Statements of Financial Position as Investments In and Receivables From Affiliates.
Investments In and Receivables From Affiliates consist of:
| in thousands | Segment | % Owned | July 31, 2022 | October 31, 2021 | |||||||||||||
| MegaMex Foods, LLC | Grocery Products | 50% | $ | 188,746 | $ | 205,413 | |||||||||||
| Other Joint Ventures | International & Other | Various (20-50%) | 88,981 | 93,606 | |||||||||||||
| Total | $ | 277,727 | $ | 299,019 |
Equity in Earnings of Affiliates consists of:
| Quarter Ended | Nine Months Ended | |||||||||||||||||||||||||
| in thousands | Segment | July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | |||||||||||||||||||||
| MegaMex Foods, LLC | Grocery Products | $ | 4,555 | $ | 7,529 | $ | 14,562 | $ | 29,625 | |||||||||||||||||
| Other Joint Ventures | International & Other | 2,582 | 2,891 | 5,390 | 8,097 | |||||||||||||||||||||
| Total | $ | 7,138 | $ | 10,420 | $ | 19,951 | $ | 37,722 |
For the quarter and nine months ended July 31, 2022, $0.0 million and $30.5 million of dividends were received from affiliates, compared to $11.2 million and $33.7 million of dividends received for the quarter and nine months ended July 25, 2021.
The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $10.4 million is remaining as of July 31, 2022. This difference is being amortized through Equity in Earnings of Affiliates.
NOTE E - INVENTORIES
Principal components of inventories are:
| in thousands | July 31, 2022 | October 31, 2021 | |||||||||
| Finished Products | $ | 945,454 | $ | 725,115 | |||||||
| Raw Materials and Work-in-Process | 431,005 | 395,403 | |||||||||
| Operating Supplies | 207,504 | 163,416 | |||||||||
| Maintenance Materials and Parts | 95,216 | 85,264 | |||||||||
| Total | $ | 1,679,179 | $ | 1,369,198 |
NOTE F - DERIVATIVES AND HEDGING
The Company uses hedging programs to manage price risk associated with commodity purchases and interest rates. These programs utilize futures, swaps, and options contracts to manage the Company’s exposure to market fluctuations. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Effectiveness testing is performed on a quarterly basis to ascertain a high level of effectiveness for cash flow and fair value hedging programs. If the requirements of hedge accounting are no longer met, hedge accounting will be discontinued immediately and any future changes to fair value will be recorded directly through earnings.
Cash Flow Commodity Hedges: The Company designates grain and lean hog futures, swaps, and options used to offset price fluctuations in the Company’s future direct grain and hog purchases as cash flow hedges. Effective gains or losses related to these cash flow hedges are reported in Accumulated Other Comprehensive Loss (AOCL) and reclassified into earnings, through Cost of Products Sold, in the periods in which the hedged transactions affect earnings. The Company typically does not hedge its grain exposure beyond the next two upcoming fiscal years and its hog exposure beyond the next fiscal year.
Fair Value Commodity Hedges: The Company designates the futures it uses to minimize the price risk assumed when fixed forward priced contracts are offered to the Company’s commodity suppliers as fair value hedges. The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery. Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and recorded on the Consolidated Condensed Statements of Financial Position as a Current Asset and Current Liability, respectively. Effective gains or losses related to these fair value hedges are recognized through Cost of Products Sold in the periods in which the hedged transactions affect earnings.
Cash Flow Interest Rate Hedges: In the second quarter of fiscal 2021, the Company designated two separate interest rate locks as cash flow hedges to manage interest rate risk associated with the anticipated debt transactions required to fund the acquisition of the Planters*®* snack nuts business. The total notional amount of the Company's locks was $1.25 billion. In the third quarter of fiscal 2021, the associated unsecured senior notes were issued with a tenor of seven and thirty years and both locks were lifted (See Note J - Long-term Debt and Other Borrowing Arrangements). Mark-to-market gains and losses on these instruments were deferred as a component of AOCL. The resulting gain in AOCL is reclassified to Interest Expense in the periods in which the hedged transactions affect earnings.
Fair Value Interest Rate Hedge: In the first quarter of fiscal 2022, the Company entered into an interest rate swap to protect against changes in the fair value of a portion of previously issued senior unsecured notes attributable to the change in the benchmark interest rate. The hedge specifically designates the last $450 million of the notes due June 2024 (the “2024 Notes”). The swap compounds quarterly and settles semi-annually with gains and losses recognized in earnings through interest expense. The swap includes SOFR plus a spread adjustment as a fallback rate to be used when LIBOR ceases to be published in June 2023. Mark-to-market changes in the fair value of the interest rate swap and hedged debt are also recognized as interest expense.
Other Derivatives: The Company holds certain futures contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets. The Company has not applied hedge accounting to these positions. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.
Volume: The Company's outstanding contracts related to its commodity hedging programs include:
| Volume | |||||||||||
| Commodity Contracts | July 31, 2022 | October 31, 2021 | |||||||||
| Corn | 34.9 million bushels | 33.1 million bushels | |||||||||
| Lean Hogs | 165.0 million pounds | 120.0 million pounds |
Fair Value of Derivatives: The fair values of the Company’s derivative instruments designated as hedges are:
| Gross Fair Value | ||||||||||||||
| in thousands | Location on Consolidated Condensed Statements of Financial Position | July 31, 2022 | October 31, 2021 | |||||||||||
| Derivatives Designated as Hedges: | ||||||||||||||
| Commodity Contracts(1) | Other Current Assets | $ | 19,058 | $ | 21,798 | |||||||||
| Interest Rate Contracts | Interest and Dividends Payable | (17,473) | — | |||||||||||
(1) Amounts represent the gross fair value of commodity derivative assets and liabilities. The Company nets the derivative assets and liabilities for each of its hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The amount or timing of cash collateral balances may impact the classification of the commodity derivative in the Consolidated Condensed Statements of Financial Position. The gross asset position as of July 31, 2022 is offset by the obligation to return net cash collateral of $4.8 million contained within the master netting arrangement. The gross asset position as of October 31, 2021 is offset by the obligation to return net cash collateral of $10.8 million. See Note I - Fair Value Measurements for a discussion of these net amounts as reported in the Consolidated Condensed Statements of Financial Position.
Fair Value Hedge - Assets (Liabilities): The carrying amount of the Company's fair value hedged assets (liabilities) are:
| Carrying Amount of Hedged Assets/(Liabilities) | ||||||||||||||
| in thousands | Location on Consolidated Condensed Statements of Financial Position | July 31, 2022 | October 31, 2021 | |||||||||||
| Fair Value Hedges: | ||||||||||||||
| Commodity Contracts | Accounts Payable(1) | $ | (2,126) | $ | 3,432 | |||||||||
| Interest Rate Contracts | Long-term Debt - Less Current Maturities(2) | (432,527) | — |
(1) Represents the carrying amount of fair value hedged assets and liabilities which are offset by other assets included in master netting arrangements described above.
(2) Represents the carrying amount of the hedged portion of the "2024 Notes". As of July 31, 2022, a cumulative basis adjustment of $17.5 million has been included in the carrying amount.
Accumulated Other Comprehensive Loss Impact: As of July 31, 2022, the Company included in AOCL hedging gains (before tax) of $34.0 million on commodity contracts and $13.7 million related to interest rate settled positions. The Company expects to recognize the majority of the gains on commodity contracts over the next twelve months. Gains on interest rate contracts offset the hedged interest payments over the tenor of the debt instruments.
The effect of AOCL for gains or losses (before tax) related to the Company's derivative instruments are:
| Gain/(Loss) Recognized in AOCL (1) | Gain/(Loss) Reclassified from AOCL into Earnings (1) | Location on Consolidated Statements of Operations | |||||||||||||||||||||
| Quarter Ended | Quarter Ended | ||||||||||||||||||||||
| in thousands | July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | |||||||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||||||||
| Commodity Contracts | $ | (24,312) | $ | 5,467 | $ | 21,216 | $ | 14,261 | Cost of Products Sold | ||||||||||||||
| Excluded Component (2) | (576) | 1,261 | — | — | |||||||||||||||||||
| Interest Rate Contracts | — | (3,675) | 247 | 152 | Interest Expense | ||||||||||||||||||
| Gain/(Loss) Recognized in AOCL (1) | Gain/(Loss) Reclassified from AOCL into Earnings (1) | Location on Consolidated Statements of Operations | |||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | ||||||||||||||||||||||
| in thousands | July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | |||||||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||||||||
| Commodity Contracts | $ | 46,299 | $ | 58,129 | $ | 40,231 | $ | 18,723 | Cost of Products Sold | ||||||||||||||
| Excluded Component (2) | (4,020) | 1,261 | — | — | |||||||||||||||||||
| Interest Rate Contracts | — | 14,864 | 741 | 152 | Interest Expense |
(1) See Note H - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on Net Earnings.
(2) Represents the time value of corn options excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in AOCL.
Consolidated Statements of Operations Impact: The effect on the Consolidated Statements of Operations for gains or losses (before tax) related to the Company's derivative instruments are:
| Consolidated Statements of Operations Impact | |||||||||||||||||||||||
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| in thousands | July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | |||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | $ | 218,915 | $ | 176,917 | $ | 720,103 | $ | 627,101 | |||||||||||||||
| Cash Flow Hedges - Commodity Contracts | |||||||||||||||||||||||
| Gain (Loss) Reclassified from AOCL | 21,216 | 14,261 | 38,561 | 18,723 | |||||||||||||||||||
| Amortization of Excluded Component from Options | (1,145) | (1,543) | (3,089) | (1,543) | |||||||||||||||||||
| Gain (Loss) Due to Discontinuance of Cash Flow Hedges (1) | — | — | 1,620 | — | |||||||||||||||||||
| Fair Value Hedges - Commodity Contracts | |||||||||||||||||||||||
| Gain (Loss) on Commodity Futures (2) | (6,758) | (11,739) | (20,165) | (26,010) | |||||||||||||||||||
| Total Gain (Loss) on Commodity Contracts (3) | $ | 13,313 | $ | 979 | $ | 16,927 | $ | (8,830) | |||||||||||||||
| Cash Flow Hedges - Interest Rate Locks | |||||||||||||||||||||||
| Amortization of Gain on Interest Rate Locks | 247 | 152 | 741 | 152 | |||||||||||||||||||
| Fair Value Hedge - Interest Rate Swap | |||||||||||||||||||||||
| Gain (Loss) on Interest Rate Swap | (222) | — | 1,270 | — | |||||||||||||||||||
| Total Gain (Loss) on Interest Rate Contracts (4) | $ | 25 | $ | 152 | $ | 2,011 | $ | 152 | |||||||||||||||
| Total Gain (Loss) Recognized in Earnings | $ | 13,338 | $ | 1,131 | $ | 18,938 | $ | (8,678) |
(1) During the second quarter of fiscal 2022, the Company discontinued hedge accounting on 0.6 million bushels of corn usage that was deemed no longer probable to occur.
(2) Amounts represent gains or losses on commodity contracts designated as fair value hedges that were closed during the quarter and nine months ended July 31, 2022, which were offset by a corresponding gain or loss on the underlying hedged purchase commitment. Additional gains or losses related to changes in the fair value of open commodity contracts, along with the offsetting gain or loss on the hedged purchase commitment, are also marked-to-market through earnings with no impact on a net basis.
(3) Total Gain (Loss) on Commodity Contracts is recognized in earnings through Cost of Products Sold.
(4) Total Gain (Loss) on Interest Rate Contracts is recognized in earnings through Interest Expense.
NOTE G - PENSION AND OTHER POST-RETIREMENT BENEFITS
Net periodic benefit cost for pension and other post-retirement benefit plans consists of:
| Pension Benefits | |||||||||||||||||||||||
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| in thousands | July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | |||||||||||||||||||
| Service Cost | $ | 10,019 | $ | 9,107 | $ | 30,057 | $ | 27,321 | |||||||||||||||
| Interest Cost | 12,639 | 12,362 | 37,919 | 37,086 | |||||||||||||||||||
| Expected Return on Plan Assets | (27,062) | (25,189) | (81,186) | (75,567) | |||||||||||||||||||
| Amortization of Prior Service Cost | (374) | (367) | (1,122) | (1,101) | |||||||||||||||||||
| Recognized Actuarial Loss | 3,132 | 5,578 | 9,397 | 16,735 | |||||||||||||||||||
| Net Periodic Cost | $ | (1,645) | $ | 1,491 | $ | (4,936) | $ | 4,474 |
| Post-retirement Benefits | |||||||||||||||||||||||
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| in thousands | July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | |||||||||||||||||||
| Service Cost | $ | 118 | $ | 131 | $ | 351 | $ | 392 | |||||||||||||||
| Interest Cost | 1,923 | 1,948 | 5,763 | 5,844 | |||||||||||||||||||
| Amortization of Prior Service Cost | 2 | (164) | 6 | (492) | |||||||||||||||||||
| Recognized Actuarial Loss | 610 | 495 | 1,829 | 1,486 | |||||||||||||||||||
| Net Periodic Cost | $ | 2,652 | $ | 2,410 | $ | 7,950 | $ | 7,230 |
Non-service cost components of net pension and postretirement benefit cost are presented within Interest and Investment Income on the Consolidated Statements of Operations.
NOTE H - ACCUMULATED OTHER COMPREHENSIVE LOSS
Components of Accumulated Other Comprehensive Loss are:
| in thousands | Foreign Currency Translation | Pension & Other Benefits | Derivatives & Hedging | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||
| Balance at May 1, 2022 | $ | (36,319) | $ | (256,073) | $ | 71,228 | $ | (221,164) | |||||||||||||||||||||
| Unrecognized Gains (Losses) | |||||||||||||||||||||||||||||
| Gross | (28,777) | (39) | (24,888) | (53,703) | |||||||||||||||||||||||||
| Tax Effect | — | — | 5,999 | 5,999 | |||||||||||||||||||||||||
| Reclassification into Net Earnings | |||||||||||||||||||||||||||||
| Gross | — | 3,370 | (1) | (21,463) | (2) | (18,093) | |||||||||||||||||||||||
| Tax Effect | — | (827) | 5,214 | 4,387 | |||||||||||||||||||||||||
| Net of Tax Amount | (28,777) | 2,505 | (35,138) | (61,410) | |||||||||||||||||||||||||
| Balance at July 31, 2022 | $ | (65,096) | $ | (253,568) | $ | 36,090 | $ | (282,574) | |||||||||||||||||||||
| Balance at October 31, 2021 | $ | (51,181) | $ | (261,211) | $ | 35,123 | $ | (277,269) | |||||||||||||||||||||
| Unrecognized Gains (Losses) | |||||||||||||||||||||||||||||
| Gross | (13,915) | 12 | 42,279 | 28,377 | |||||||||||||||||||||||||
| Tax Effect | — | — | (10,285) | (10,285) | |||||||||||||||||||||||||
| Reclassification into Net Earnings | |||||||||||||||||||||||||||||
| Gross | — | 10,110 | (1) | (40,972) | (2) | (30,862) | |||||||||||||||||||||||
| Tax Effect | — | (2,480) | 9,944 | 7,465 | |||||||||||||||||||||||||
| Net of Tax Amount | (13,915) | 7,643 | 967 | (5,305) | |||||||||||||||||||||||||
| Balance at July 31, 2022 | $ | (65,096) | $ | (253,568) | $ | 36,090 | $ | (282,574) |
(1) Included in the computation of net periodic cost. See Note G - Pension and Other Post-Retirement Benefits for additional information.
(2) Included in Cost of Products Sold and Interest Expense in the Consolidated Statements of Operations. See Note F - Derivatives and Hedging for additional information.
NOTE I - FAIR VALUE MEASUREMENTS
Accounting guidance establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of the three levels below based on the inputs used in the valuation.
Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Observable inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.
Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.
The Company’s financial assets and liabilities carried at fair value on a recurring basis as of July 31, 2022, and October 31, 2021, and their level within the fair value hierarchy are presented in the table below.
| Fair Value Measurements at July 31, 2022 | |||||||||||||||||||||||
| in thousands | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets at Fair Value | |||||||||||||||||||||||
| Cash and Cash Equivalents (1) | $ | 850,344 | $ | 850,015 | $ | 328 | $ | — | |||||||||||||||
| Short-term Marketable Securities (2) | 18,314 | 9,395 | 8,919 | — | |||||||||||||||||||
| Other Trading Securities (3) | 190,962 | — | 190,962 | — | |||||||||||||||||||
| Commodity Derivatives (4) | 14,719 | 12,678 | 2,042 | — | |||||||||||||||||||
| Total Assets at Fair Value | $ | 1,074,339 | $ | 872,088 | $ | 202,251 | $ | — | |||||||||||||||
| Liabilities at Fair Value | |||||||||||||||||||||||
| Deferred Compensation (3) | $ | 60,977 | $ | — | $ | 60,977 | $ | — | |||||||||||||||
| Interest Rate Derivatives (5) | 17,473 | — | 17,473 | — | |||||||||||||||||||
| Total Liabilities at Fair Value | $ | 78,450 | $ | — | $ | 78,450 | $ | — |
| Fair Value Measurements at October 31, 2021 | |||||||||||||||||||||||
| in thousands | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets at Fair Value | |||||||||||||||||||||||
| Cash and Cash Equivalents (1) | $ | 613,530 | $ | 611,111 | $ | 2,419 | $ | — | |||||||||||||||
| Short-term Marketable Securities (2) | 21,162 | 8,790 | 12,372 | — | |||||||||||||||||||
| Other Trading Securities (3) | 203,020 | — | 203,020 | — | |||||||||||||||||||
| Commodity Derivatives (4) | 13,522 | 8,104 | 5,418 | — | |||||||||||||||||||
| Total Assets at Fair Value | $ | 851,234 | $ | 628,005 | $ | 223,229 | $ | — | |||||||||||||||
| Liabilities at Fair Value | |||||||||||||||||||||||
| Deferred Compensation (3) | $ | 70,466 | $ | — | $ | 70,466 | $ | — | |||||||||||||||
| Total Liabilities at Fair Value | $ | 70,466 | $ | — | $ | 70,466 | $ | — |
The following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:
(1) The Company’s cash equivalents considered Level 1 consist primarily of bank deposits, money market funds rated AAA, or other highly liquid investment accounts, and have a maturity date of three months or less. Cash equivalents considered Level 2 are funds holding agency bonds or securities recognized at amortized cost.
(2) The Company holds securities as part of a portfolio maintained to generate investment income and to provide cash for operations of the Company, if necessary. The portfolio is managed by a third party who is responsible for daily trading activities, and all assets within the portfolio are highly liquid. The cash, U.S. government securities, and money market funds rated AAA held by the portfolio are classified as Level 1. The current investment portfolio also includes corporate bonds and other asset backed securities for which there is an active, quoted market. Market prices are obtained from a variety of industry providers, large financial institutions, and other third-party sources to calculate a representative daily market value, and therefore, these securities are classified as Level 2.
(3) The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred compensation plans. The majority of the funds held in the rabbi trust relate to supplemental executive retirement plans and have been invested primarily in fixed income funds managed by a third party. The declared rate on these funds is set based on a formula using the yield of the general account investment portfolio supporting the fund, adjusted for expenses and other charges. The rate is guaranteed for one year at issue and may be reset annually on the policy anniversary, subject to a guaranteed minimum rate. As the value is based on adjusted market rates and the fixed rate is only reset on an annual basis, these funds are classified as Level 2.
Under the Company's deferred compensation plans, participants can defer certain types of compensation and elect to receive a return based on the changes in fair value of various investment options which include equity securities, money market accounts, bond funds or other portfolios for which there is an active quoted market. The Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based on a specified percentage of the I.R.S. applicable federal rates. These liabilities are classified as Level 2. The Company maintains funding in the rabbi trust generally mirroring the selections within the deferred compensation plans. These funds are managed by a third-party insurance policy, the values of which represent their cash surrender value based on the fair value of the underlying investments in the account. These policies are classified as Level 2.
The rabbi trust is included in Other Assets and deferred compensation liabilities in Other Long-term Liabilities on the Consolidated Condensed Statements of Financial Position. Securities held by the rabbi trust are classified as trading securities. Unrealized gains and losses associated with these investments are included in the Company's earnings. During the quarter and nine months ended July 31, 2022, securities held by the rabbi trust generated losses of $0.1 million and $12.1 million, respectively, compared to gains of $1.5 million and $18.6 million for the quarter and nine months ended July 25, 2021.
(4) The Company’s commodity derivatives represent futures, swaps, and options contracts used in its hedging or other programs to offset price fluctuations associated with purchases of corn and hogs, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers. The Company’s futures contracts for corn are traded on the Chicago Board of Trade, while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange. These are active markets with quoted prices available, and these contracts are classified as Level 1. The Company’s corn futures option contracts are OTC instruments classified as Level 2 whose value is calculated using the Black-Scholes pricing model, corn future prices quoted from the Chicago Board of Trade, and other adjustments to inputs that are observable in active markets. All derivatives are reviewed for potential credit risk and risk of nonperformance. The net balance for each program is included in Other Current Assets or Accounts Payable, as appropriate, in the Consolidated Condensed Statements of Financial Position. As of July 31, 2022, the Company has recognized the obligation to return net cash collateral of $4.8 million from various counterparties (including cash of $24.9 million less $20.1 million of realized gain). As of October 31, 2021, the Company had recognized the obligation to return net cash collateral of $10.8 million from various counterparties (including cash of $45.6 million less $34.8 million of realized gain).
(5) The Company holds an interest rate hedging position to minimize the risk related to future interest rate changes. The fair value of the outstanding interest rate hedge agreement is based on an observable benchmark interest rate (LIBOR) and therefore classified as Level 2. The interest rate derivatives are included in Interest and Dividends Payable in the Consolidated Condensed Statements of Financial Position.
The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value. The Company does not carry its long-term debt at fair value in its Consolidated Condensed Statements of Financial Position. The fair value of long-term debt, utilizing discounted cash flows (Level 2), was $3.0 billion as of July 31, 2022, and $3.3 billion as of October 31, 2021. See Note J - Long Term Debt and Other Borrowing Arrangements for additional information.
The Company measures certain nonfinancial assets and liabilities at fair value, which are recognized or disclosed on a nonrecurring basis (e.g. goodwill, intangible assets, and property, plant and equipment). During the quarter and nine months ended July 31, 2022, and July 25, 2021, there were no material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
NOTE J - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term Debt consists of:
| in thousands | July 31, 2022 | October 31, 2021 | |||||||||
| Senior Unsecured Notes, with Interest at 3.050% Interest Due Semi-annually through June 2051 Maturity Date | $ | 600,000 | $ | 600,000 | |||||||
| Senior Unsecured Notes, with Interest at 1.800% Interest Due Semi-annually through June 2030 Maturity Date | 1,000,000 | 1,000,000 | |||||||||
| Senior Unsecured Notes, with Interest at 1.700% Interest Due Semi-annually through June 2028 Maturity Date | 750,000 | 750,000 | |||||||||
| Senior Unsecured Notes, with Interest at 0.650% Interest Due Semi-annually through June 2024 Maturity Date | 950,000 | 950,000 | |||||||||
| Unamortized Discount on Senior Notes | (7,934) | (8,484) | |||||||||
| Unamortized Debt Issuance Costs | (20,751) | (23,435) | |||||||||
| Interest Rate Swap | (17,473) | — | |||||||||
| Finance Lease Liabilities | 46,723 | 52,999 | |||||||||
| Other Financing Arrangements | 2,529 | 2,823 | |||||||||
| Total | $ | 3,303,094 | $ | 3,323,903 | |||||||
| Less: Current Maturities of Long-term Debt | 8,807 | 8,756 | |||||||||
| Long-term Debt Less Current Maturities | $ | 3,294,287 | $ | 3,315,147 |
Senior Unsecured Notes: On June 11, 2020, the Company issued senior notes in an aggregate principal amount of $1.0 billion, due June 11, 2030. The notes bear interest at a fixed rate of 1.800% per annum, with interest paid semi-annually in arrears on June 11 and December 11 of each year, commencing December 11, 2020. The notes may be redeemed in whole or in part at any time at the applicable redemption price set forth in the prospectus supplement. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
On June 3, 2021, the Company issued $950.0 million aggregate principal amount of its 0.650% notes due 2024 (the "2024 Notes"), $750.0 million aggregate principal amount of its 1.700% notes due 2028 (the "2028 Notes") and $600.0 million aggregate principal amount of its 3.050% notes due 2051 (the "2051 Notes"). Interest will accrue per annum at the stated rates with interest on the notes being paid semi-annually in arrears on June 3 and December 3 of each year, commencing December 3, 2021. Interest rate risk was hedged utilizing interest rate locks on the 2028 Notes and 2051 Notes. The Company lifted the hedges in conjunction with the issuance of these notes. The 2024 Notes may be redeemed in whole or in part one year after their issuance without penalty for early partial payments or full redemption. The 2028 Notes and 2051 Notes may be redeemed in whole or in part at any time at the applicable redemption price. If a change of control triggering event occurs, the Company must offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
In the first quarter of fiscal 2022, the Company entered into an interest rate swap with a notional amount totaling $450.0 million effectively converting a portion of the 2024 Notes from a fixed to variable rate basis. The interest rate swap was designated as a fair value hedge of the underlying debt obligation. See Note F - Derivatives and Hedging for additional details.
Unsecured Revolving Credit Facility: On May 6, 2021, the Company entered into an unsecured revolving credit agreement with Wells Fargo Bank, National Association as administrative agent, swingline lender and issuing lender, U.S. Bank National Association, JPMorgan Chase Bank, N.A. and BofA Securities, Inc. as syndication agents and the lenders party thereto. In connection with entering the revolving credit agreement, the Company terminated its existing credit facility that was entered into on June 24, 2015. The revolving credit agreement provides for an unsecured revolving credit facility with an aggregate principal commitment amount at any time outstanding of up to $750.0 million with an uncommitted increase option of an additional $375.0 million upon the satisfaction of certain conditions. The unsecured revolving line of credit bears interest, at the Company’s election, at either a Base Rate plus margin of 0.0% to 0.150% or the Eurocurrency Rate plus margin of 0.575% to 1.150% and a variable fee of 0.050% to 0.100% is paid for the availability of this credit line. Extensions of credit under the facility may be made in the form of revolving loans, swingline loans and letters of credit. The lending commitments under the agreement are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding. As of July 31, 2022, and October 31, 2021, the Company had no outstanding draws from this facility.
Debt Covenants: The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of July 31, 2022, the Company was in compliance with all of these covenants.
NOTE K - INCOME TAXES
The Company's tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter. The effects of tax legislation are recognized in the period in which the law is enacted. The deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years the related temporary differences are anticipated to reverse.
The Company's effective tax rate for the quarter and nine months ended July 31, 2022, was 24.5 percent and 21.8 percent compared to 13.3 percent and 18.9 percent for the corresponding periods a year ago. The higher effective tax rate in the current quarter is due primarily to the decrease in tax benefits from stock option exercises.
The amount of unrecognized tax benefits, including interest and penalties, is recorded in Other Long-term Liabilities. If recognized as of July 31, 2022, and July 25, 2021, $19.5 million and $24.5 million, respectively, would impact the Company’s effective tax rate. The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense. Interest and penalties included in income tax expense was immaterial for the quarter ended July 31, 2022, and July 25, 2021. The amount of accrued interest and penalties at July 31, 2022, and July 25, 2021, associated with unrecognized tax benefits was $4.8 million and $7.5 million, respectively.
The Company is regularly audited by federal and state taxing authorities. The United States Internal Revenue Service (I.R.S.) concluded its examination of fiscal 2019 in the second quarter of fiscal 2021. The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years through 2023. The objective of CAP is to contemporaneously work with the I.R.S. to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return. The Company may elect to continue participating in CAP for future tax years; the Company may withdraw from the program at any time.
The Company is in various stages of audit by several state taxing authorities on a variety of fiscal years, as far back as 2015. While it is reasonably possible that one or more of these audits may be completed within the next 12 months and the related unrecognized tax benefits may change, based on the status of the examinations it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.
Subsequent to the end of the quarter, the Inflation Reduction Act of 2022 was signed into law. This legislation includes provisions that provide tax incentives as well as impose a 15% minimum tax on certain corporations' book income and a 1% excise tax on
certain stock repurchases. The Company is evaluating the effect these new laws, which will be effective in fiscal years 2023 and 2024, may have on our consolidated financial statements.
NOTE L - EARNINGS PER SHARE DATA
The reported net earnings attributable to the Company were used when computing basic and diluted earnings per share. The following table sets forth the shares used as the denominator for those computations:
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| in thousands | July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | |||||||||||||||||||
| Basic Weighted-Average Shares Outstanding | 546,077 | 541,746 | 544,486 | 540,618 | |||||||||||||||||||
| Dilutive Potential Common Shares | 4,090 | 6,326 | 4,891 | 7,066 | |||||||||||||||||||
| Diluted Weighted-Average Shares Outstanding | 550,167 | 548,072 | 549,377 | 547,684 | |||||||||||||||||||
| Antidilutive Potential Common Shares | 1,787 | 2,350 | 2,026 | 2,305 |
NOTE M - SEGMENT REPORTING
The Company develops, processes, and distributes a wide array of food products in a variety of markets. The Company reports its results in the following four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other.
The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market, along with the sale of nutritional and private label shelf-stable products to retail, foodservice, and industrial customers. This segment also includes the results from the Company’s MegaMex Foods, LLC joint venture.
The Refrigerated Foods segment consists primarily of the processing, marketing, and sale of branded and unbranded pork, beef, and poultry products for retail, foodservice, deli, convenience store, and commercial customers.
The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and commercial customers.
The International & Other segment includes Hormel Foods International which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Company’s international joint ventures and royalty arrangements.
Intersegment sales are eliminated in the Consolidated Statements of Operations. The Company does not allocate deferred compensation, investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and expenses at the corporate level. Equity in Earnings of Affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included below as Net Unallocated Expense and Noncontrolling Interest when reconciling to Earnings Before Income Taxes.
Sales and segment profit for each of the Company’s reportable segments and reconciliation to Earnings Before Income Taxes are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the profit and other financial information shown below.
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| in thousands | July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | |||||||||||||||||||
| Sales to Unaffiliated Customers | |||||||||||||||||||||||
| Grocery Products | $ | 869,802 | $ | 698,584 | $ | 2,598,964 | $ | 1,904,415 | |||||||||||||||
| Refrigerated Foods | 1,660,257 | 1,624,641 | 4,932,070 | 4,445,099 | |||||||||||||||||||
| Jennie-O Turkey Store | 323,796 | 350,897 | 1,115,554 | 1,035,397 | |||||||||||||||||||
| International & Other | 180,559 | 189,548 | 528,743 | 546,528 | |||||||||||||||||||
| Total | $ | 3,034,414 | $ | 2,863,670 | $ | 9,175,331 | $ | 7,931,438 | |||||||||||||||
| Intersegment Sales | |||||||||||||||||||||||
| Grocery Products | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Refrigerated Foods | 4,645 | 7,636 | 18,825 | 19,527 | |||||||||||||||||||
| Jennie-O Turkey Store | 66,803 | 30,581 | 167,256 | 89,715 | |||||||||||||||||||
| International & Other | — | — | — | — | |||||||||||||||||||
| Total | 71,449 | 38,217 | 186,080 | 109,242 | |||||||||||||||||||
| Intersegment Elimination | (71,449) | (38,217) | (186,080) | (109,242) | |||||||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Net Sales | |||||||||||||||||||||||
| Grocery Products | $ | 869,802 | $ | 698,584 | $ | 2,598,964 | $ | 1,904,415 | |||||||||||||||
| Refrigerated Foods | 1,664,902 | 1,632,277 | 4,950,895 | 4,464,626 | |||||||||||||||||||
| Jennie-O Turkey Store | 390,599 | 381,478 | 1,282,810 | 1,125,112 | |||||||||||||||||||
| International & Other | 180,559 | 189,548 | 528,743 | 546,528 | |||||||||||||||||||
| Intersegment Elimination | (71,449) | (38,217) | (186,080) | (109,242) | |||||||||||||||||||
| Total | $ | 3,034,414 | $ | 2,863,670 | $ | 9,175,331 | $ | 7,931,438 | |||||||||||||||
| Segment Profit | |||||||||||||||||||||||
| Grocery Products | $ | 76,478 | $ | 80,791 | $ | 265,263 | $ | 270,963 | |||||||||||||||
| Refrigerated Foods | 177,109 | 153,216 | 517,993 | 467,740 | |||||||||||||||||||
| Jennie-O Turkey Store | 37,433 | 5,874 | 142,969 | 45,514 | |||||||||||||||||||
| International & Other | 25,334 | 27,915 | 75,071 | 84,600 | |||||||||||||||||||
| Total Segment Profit | 316,354 | 267,796 | 1,001,295 | 868,817 | |||||||||||||||||||
| Net Unallocated Expense | 26,429 | 63,715 | 80,799 | 95,166 | |||||||||||||||||||
| Noncontrolling Interest | (89) | 157 | 112 | 290 | |||||||||||||||||||
| Earnings Before Income Taxes | $ | 289,836 | $ | 204,238 | $ | 920,608 | $ | 773,940 |
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. Total revenue contributed by sales channel are:
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| in thousands | July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | |||||||||||||||||||||||||||||||
| U.S. Retail | $ | 1,866,971 | $ | 1,786,871 | $ | 5,771,835 | $ | 5,142,389 | |||||||||||||||||||||||||||
| U.S. Foodservice | 971,201 | 851,897 | 2,816,733 | 2,162,481 | |||||||||||||||||||||||||||||||
| International | 196,242 | 224,902 | 586,763 | 626,568 | |||||||||||||||||||||||||||||||
| Total | $ | 3,034,414 | $ | 2,863,670 | $ | 9,175,331 | $ | 7,931,438 |
Beginning in the first quarter of fiscal 2022, the Company updated its presentation of revenue disaggregation by sales channel, combining U.S. Deli and U.S. Retail as market conditions have evolved providing many similarities between the channels. The prior year presentation has been updated to conform to the current period presentation.
The Company’s products consist primarily of meat and other food products. Total revenue contributed by classes of similar products are:
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| in thousands | July 31, 2022 | July 25, 2021 | July 31, 2022 | July 25, 2021 | |||||||||||||||||||||||||||||||
| Perishable | $ | 1,813,513 | $ | 1,610,378 | $ | 5,369,888 | $ | 4,440,347 | |||||||||||||||||||||||||||
| Shelf-stable | 649,853 | 670,446 | 1,914,496 | 1,761,883 | |||||||||||||||||||||||||||||||
| Poultry | 470,207 | 500,121 | 1,572,342 | 1,468,957 | |||||||||||||||||||||||||||||||
| Miscellaneous | 100,841 | 82,726 | 318,606 | 260,251 | |||||||||||||||||||||||||||||||
| Total | $ | 3,034,414 | $ | 2,863,670 | $ | 9,175,331 | $ | 7,931,438 |
Perishable includes fresh meats, frozen items, refrigerated meal solutions, bacon, sausages, hams, and guacamole (excludes Jennie-O Turkey Store products). Shelf-stable includes canned luncheon meats, nut butters, snack nuts, chili, shelf-stable microwaveable meals, hash, stews, tortillas, salsas, tortilla chips, and other items that do not require refrigeration. The Poultry category is composed primarily of Jennie-O Turkey Store products. The Miscellaneous category primarily consists of nutritional food products and supplements, dessert and drink mixes, and industrial gelatin products.
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