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 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | ||||||||||||||||||||
| Net Sales | $ | 2,963,299 | $ | 3,034,414 | $ | 8,911,930 | $ | 9,175,331 | |||||||||||||||
| Cost of Products Sold | 2,465,251 | 2,528,364 | 7,426,514 | 7,577,062 | |||||||||||||||||||
| Gross Profit | 498,048 | 506,049 | 1,485,417 | 1,598,269 | |||||||||||||||||||
| Selling, General, and Administrative | 291,073 | 222,147 | 725,621 | 672,777 | |||||||||||||||||||
| Equity in Earnings of Affiliates | 9,784 | 7,138 | 42,213 | 19,951 | |||||||||||||||||||
| Operating Income | 216,759 | 291,040 | 802,009 | 945,443 | |||||||||||||||||||
| Interest and Investment Income | 9,239 | 14,411 | 20,700 | 20,078 | |||||||||||||||||||
| Interest Expense | 18,372 | 15,615 | 55,042 | 44,913 | |||||||||||||||||||
| Earnings Before Income Taxes | 207,626 | 289,836 | 767,666 | 920,608 | |||||||||||||||||||
| Provision for Income Taxes | 45,055 | 71,010 | 170,230 | 200,393 | |||||||||||||||||||
| Net Earnings | 162,571 | 218,826 | 597,437 | 720,215 | |||||||||||||||||||
| Less: Net Earnings (Loss) Attributable to Noncontrolling Interest | (108) | (89) | (200) | 112 | |||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | $ | 162,679 | $ | 218,915 | $ | 597,637 | $ | 720,103 | |||||||||||||||
| Net Earnings Per Share | |||||||||||||||||||||||
| Basic | $ | 0.30 | $ | 0.40 | $ | 1.09 | $ | 1.32 | |||||||||||||||
| Diluted | $ | 0.30 | $ | 0.40 | $ | 1.09 | $ | 1.31 | |||||||||||||||
| Weighted-average Shares Outstanding | |||||||||||||||||||||||
| Basic | 546,358 | 546,077 | 546,389 | 544,486 | |||||||||||||||||||
| Diluted | 548,637 | 550,167 | 549,227 | 549,377 |
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
Unaudited
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| July 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | ||||||||||||||||||||
| Net Earnings | $ | 162,571 | $ | 218,826 | $ | 597,437 | $ | 720,215 | |||||||||||||||
| Other Comprehensive Income (Loss), Net of Tax: | |||||||||||||||||||||||
| Foreign Currency Translation | (10,572) | (29,228) | 27,362 | (14,233) | |||||||||||||||||||
| Pension and Other Benefits | 2,195 | 2,505 | 7,368 | 7,643 | |||||||||||||||||||
| Deferred Hedging | 2,518 | (35,138) | (31,058) | 967 | |||||||||||||||||||
| Equity Method Investments | 8,733 | — | 10,141 | — | |||||||||||||||||||
| Total Other Comprehensive Income (Loss) | 2,875 | (61,861) | 13,813 | (5,623) | |||||||||||||||||||
| Comprehensive Income | 165,445 | 156,965 | 611,250 | 714,592 | |||||||||||||||||||
| Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interest | (510) | (540) | (338) | (206) | |||||||||||||||||||
| Comprehensive Income Attributable to Hormel Foods Corporation | $ | 165,955 | $ | 157,505 | $ | 611,588 | $ | 714,798 |
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 30, 2023 | October 30, 2022 | ||||||||||
| Assets | |||||||||||
| Cash and Cash Equivalents | $ | 669,124 | $ | 982,107 | |||||||
| Short-term Marketable Securities | 17,423 | 16,149 | |||||||||
| Accounts Receivable (Net of Allowance for Doubtful Accounts of $3,561 at July 30, 2023, and $3,507 at October 30, 2022) | 786,246 | 867,593 | |||||||||
| Inventories | 1,737,865 | 1,716,059 | |||||||||
| Taxes Receivable | 7,498 | 7,177 | |||||||||
| Prepaid Expenses and Other Current Assets | 36,613 | 48,041 | |||||||||
| Total Current Assets | 3,254,770 | 3,637,125 | |||||||||
| Goodwill | 4,931,590 | 4,925,829 | |||||||||
| Other Intangibles | 1,790,761 | 1,803,027 | |||||||||
| Pension Assets | 235,943 | 245,566 | |||||||||
| Investments in Affiliates | 743,474 | 271,058 | |||||||||
| Other Assets | 338,741 | 283,169 | |||||||||
| Property, Plant, and Equipment | |||||||||||
| Land | 72,648 | 74,303 | |||||||||
| Buildings | 1,426,048 | 1,398,255 | |||||||||
| Equipment | 2,717,472 | 2,636,660 | |||||||||
| Construction in Progress | 216,478 | 216,246 | |||||||||
| Less: Allowance for Depreciation | (2,301,168) | (2,184,319) | |||||||||
| Net Property, Plant, and Equipment | 2,131,479 | 2,141,146 | |||||||||
| Total Assets | $ | 13,426,757 | $ | 13,306,919 |
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 30, 2023 | October 30, 2022 | ||||||||||
| Liabilities and Shareholders' Investment | |||||||||||
| Accounts Payable | $ | 703,407 | $ | 816,604 | |||||||
| Accrued Expenses | 119,464 | 58,801 | |||||||||
| Accrued Marketing Expenses | 100,974 | 113,105 | |||||||||
| Employee Related Expenses | 241,879 | 279,072 | |||||||||
| Interest and Dividends Payable | 158,335 | 163,963 | |||||||||
| Taxes Payable | 49,583 | 32,925 | |||||||||
| Current Maturities of Long-term Debt | 946,981 | 8,796 | |||||||||
| Total Current Liabilities | 2,320,622 | 1,473,266 | |||||||||
| Long-term Debt Less Current Maturities | 2,360,380 | 3,290,549 | |||||||||
| Pension and Post-retirement Benefits | 396,297 | 385,832 | |||||||||
| Deferred Income Taxes | 467,827 | 475,212 | |||||||||
| Other Long-term Liabilities | 163,768 | 141,840 | |||||||||
| 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– | 8,005 | 8,002 | |||||||||
| Authorized 1,600,000,000 Shares: | |||||||||||
| Shares Issued as of July 30, 2023: 546,466,703 | |||||||||||
| Shares Issued as of October 30, 2022: 546,237,051 | |||||||||||
| Additional Paid-in Capital | 499,304 | 469,468 | |||||||||
| Accumulated Other Comprehensive Loss | (241,610) | (255,561) | |||||||||
| Retained Earnings | 7,447,567 | 7,313,374 | |||||||||
| Hormel Foods Corporation Shareholders' Investment | 7,713,265 | 7,535,284 | |||||||||
| Noncontrolling Interest | 4,598 | 4,936 | |||||||||
| Total Shareholders' Investment | 7,717,863 | 7,540,219 | |||||||||
| Total Liabilities and Shareholders' Investment | $ | 13,426,757 | $ | 13,306,919 |
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 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 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 | |||||||||||||||||||||||||||||||||||||
| Quarter Ended July 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 30, 2023 | 546,255 | $ | 8,002 | — | $ | — | $ | 488,100 | $ | 7,435,292 | $ | (244,887) | $ | 5,108 | $ | 7,691,615 | |||||||||||||||||||||||||||||||||||||
| Net Earnings | 162,679 | (108) | 162,571 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | 3,277 | (402) | 2,875 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation Expense | 5,034 | 5,034 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of Stock Options/Restricted Shares | 212 | 3 | 5,931 | 5,933 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Declared Dividends – $0.2750 per Share | 239 | (150,404) | (150,165) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 30, 2023 | 546,467 | $ | 8,005 | — | $ | — | $ | 499,304 | $ | 7,447,567 | $ | (241,610) | $ | 4,598 | $ | 7,717,863 |
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT
In thousands, except per share amounts
Unaudited
| 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 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 | |||||||||||||||||||||||||||||||||||||
| Nine Months Ended July 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 30, 2022 | 546,237 | $ | 8,002 | — | $ | — | $ | 469,468 | $ | 7,313,374 | $ | (255,561) | $ | 4,936 | $ | 7,540,219 | |||||||||||||||||||||||||||||||||||||
| Net Earnings | 597,637 | (200) | 597,437 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | 13,950 | (138) | 13,813 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of Common Stock | (310) | (12,303) | (12,303) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation Expense | 44 | – | 20,946 | 20,946 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of Stock Options/Restricted Shares | 496 | 7 | 8,482 | 8,489 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares Retired | (310) | (5) | 310 | 12,303 | (277) | (12,021) | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Declared Dividends – $0.8250 per Share | 685 | (451,423) | (450,738) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 30, 2023 | 546,467 | $ | 8,005 | — | $ | — | $ | 499,304 | $ | 7,447,567 | $ | (241,610) | $ | 4,598 | $ | 7,717,863 |
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
In thousands
Unaudited
| Nine Months Ended | |||||||||||
| July 30, 2023 | July 31, 2022 | ||||||||||
| Operating Activities | |||||||||||
| Net Earnings | $ | 597,437 | $ | 720,215 | |||||||
| Adjustments to Reconcile to Net Cash Provided by (Used in) Operating Activities: | |||||||||||
| Depreciation and Amortization | 216,432 | 191,568 | |||||||||
| Equity in Earnings of Affiliates | (42,213) | (19,951) | |||||||||
| Distributions Received from Equity Method Investees | 28,160 | 30,539 | |||||||||
| Provision for Deferred Income Taxes | (273) | 71,427 | |||||||||
| Loss (Gain) on Sales of Property, Plant, and Equipment | (314) | 5,098 | |||||||||
| Non-cash Investment Activities | (12,047) | 13,610 | |||||||||
| Stock-based Compensation Expense | 20,946 | 20,933 | |||||||||
| Changes in Operating Assets and Liabilities: | |||||||||||
| Decrease (Increase) in Accounts Receivable | 81,423 | 96,674 | |||||||||
| Decrease (Increase) in Inventories | (20,536) | (311,312) | |||||||||
| Decrease (Increase) in Prepaid Expenses and Other Assets | (52,117) | (3,666) | |||||||||
| Increase (Decrease) in Pension and Post-retirement Benefits | 29,571 | (6,906) | |||||||||
| Increase (Decrease) in Accounts Payable and Accrued Expenses | (131,204) | (84,384) | |||||||||
| Increase (Decrease) in Net Income Taxes Payable | 13,491 | 39,312 | |||||||||
| Net Cash Provided by (Used in) Operating Activities | 728,756 | 763,157 | |||||||||
| Investing Activities | |||||||||||
| Net (Purchase) Sale of Securities | (49) | 1,296 | |||||||||
| Purchases of Property, Plant, and Equipment | (168,529) | (189,184) | |||||||||
| Proceeds from Sales of Property, Plant, and Equipment | 5,306 | 1,044 | |||||||||
| Proceeds from (Purchases of) Affiliates and Other Investments | (427,195) | 8,275 | |||||||||
| Proceeds from Company-owned Life Insurance | 1,980 | 6,742 | |||||||||
| Net Cash Provided by (Used in) Investing Activities | (588,489) | (171,827) | |||||||||
| Financing Activities | |||||||||||
| Proceeds from Long-term Debt | 1,980 | — | |||||||||
| Repayments of Long-term Debt and Finance Leases | (6,584) | (6,498) | |||||||||
| Dividends Paid on Common Stock | (442,560) | (415,923) | |||||||||
| Share Repurchase | (12,303) | — | |||||||||
| Proceeds from Exercise of Stock Options | 8,489 | 77,958 | |||||||||
| Net Cash Provided by (Used in) Financing Activities | (450,977) | (344,463) | |||||||||
| Effect of Exchange Rate Changes on Cash | (2,273) | (10,054) | |||||||||
| Increase (Decrease) in Cash and Cash Equivalents | (312,983) | 236,814 | |||||||||
| Cash and Cash Equivalents at Beginning of Year | 982,107 | 613,530 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 669,124 | $ | 850,344 |
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 (U.S.) 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 30, 2022. 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. 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 30, 2022.
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.
Reportable Segments: As of October 30, 2022, the Company had four operating and reportable segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International and Other. At the beginning of fiscal 2023, the Company transitioned to a new strategic operating model, which aligns its businesses to be more agile, consumer and customer focused, and market driven. Effective on October 31, 2022, the Company operates with the following three operating and reportable segments: Retail, Foodservice, and International, which are consistent with how the Company's chief operating decision maker assesses performance and allocates resources. This change had no impact on the consolidated results of operations, financial position, shareholders' investment, or cash flows. Prior period segment results have been retrospectively recast to reflect the new reportable segments.
Accounting Changes and Recent Accounting Pronouncements: Recently issued accounting standards or pronouncements not disclosed have been excluded as they are currently not relevant to the Company.
NOTE B - GOODWILL AND INTANGIBLE ASSETS
Goodwill: In the first quarter of fiscal 2023, as a result of the organizational changes referenced in Note A - Summary of Significant Accounting Policies, the Company conducted an assessment of its operating segments and reporting units. Based on this analysis, goodwill was reallocated using the relative fair value approach. The change in the carrying amount of goodwill for the nine months ended July 30, 2023, is:
| in thousands | Retail | Foodservice | International | Total | |||||||||||||||||||
| Balance at October 30, 2022 | $ | 2,916,796 | $ | 1,750,594 | $ | 258,440 | $ | 4,925,829 | |||||||||||||||
| Foreign Currency Translation | — | — | 5,761 | 5,761 | |||||||||||||||||||
| Balance at July 30, 2023 | $ | 2,916,796 | $ | 1,750,594 | $ | 264,200 | $ | 4,931,590 |
Intangible Assets: The carrying amounts for indefinite-lived intangible assets are:
| in thousands | July 30, 2023 | October 30, 2022 | |||||||||
| Brands/Tradenames/Trademarks | $ | 1,665,190 | $ | 1,665,190 | |||||||
| Other Intangibles | 184 | 184 | |||||||||
| Foreign Currency Translation | (5,380) | (6,599) | |||||||||
| Total | $ | 1,659,994 | $ | 1,658,775 |
The gross carrying amount and accumulated amortization for definite-lived intangible assets are:
| July 30, 2023 | October 30, 2022 | ||||||||||||||||||||||||||||||||||
| in thousands | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||||||||||||||
| Customer Lists/Relationships | $ | 168,239 | $ | (79,450) | $ | 168,239 | $ | (69,779) | |||||||||||||||||||||||||||
| Other Intangibles | 59,241 | (14,794) | 59,241 | (11,606) | |||||||||||||||||||||||||||||||
| Tradenames/Trademarks | 6,540 | (4,779) | 10,536 | (7,828) | |||||||||||||||||||||||||||||||
| Foreign Currency Translation | — | (4,229) | — | (4,551) | |||||||||||||||||||||||||||||||
| Total | $ | 234,020 | $ | (103,252) | $ | 238,016 | $ | (93,764) |
Amortization expense is as follows:
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| in thousands | July 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | |||||||||||||||||||||||||||||||
| Amortization Expense | $ | 4,605 | $ | 4,838 | $ | 13,806 | $ | 14,474 |
Estimated annual amortization expense for the five fiscal years after October 30, 2022, is as follows:
| in thousands | Amortization Expense | ||||
| 2023 | $ | 18,320 | |||
| 2024 | 16,331 | ||||
| 2025 | 14,628 | ||||
| 2026 | 14,172 | ||||
| 2027 | 13,940 |
NOTE C - INVESTMENTS IN 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, including balances due to or from affiliates, are reflected in the Consolidated Condensed Statements of Financial Position as Investments in Affiliates. Financial results for certain entities are reported on a 30- to 90-day lag. The Company reviewed the investments in affiliates and determined that no other-than-temporary impairment existed as of July 30, 2023.
On December 15, 2022, the Company purchased a 29% common stock interest in PT Garudafood Putra Putri Jaya Tbk (Garudafood), a food and beverage company in Indonesia, from various minority shareholders. On April 12, 2023, the Company purchased additional shares increasing the ownership interest to 30%. This investment expands the Company's presence in Southeast Asia and supports the global execution of the snacking and entertaining strategic priority. The Company has the ability to exercise significant influence, but not control, over Garudafood; therefore, the investment is accounted for under the equity method.
The Company obtained the Garudafood interest for a purchase price of $425.8 million, including associated transaction costs. The transaction was funded using the Company's cash on hand. Based on a third-party valuation, the Company's basis difference between the fair value of the investment and proportionate share of the carrying value of Garudafood's net assets is $324.8 million. The basis difference related to inventory, property, plant and equipment, and certain intangible assets is being amortized through Equity in Earnings of Affiliates over the associated useful lives. As of July 30, 2023, the remaining basis difference was $335.3 million, which includes the impact of foreign currency translation. Based on quoted market prices, the fair value of the common stock held in Garudafood was $348.2 million as of July 28, 2023.
Equity in Earnings of Affiliates consists of:
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||||
| in thousands | % Owned | Segment | July 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | |||||||||||||||||||||||
| MegaMex Foods, LLC | 50% | Retail | $ | 8,099 | $ | 4,555 | $ | 34,712 | $ | 14,562 | |||||||||||||||||||
| Other Joint Ventures | Various (20-50%) | International | 1,685 | 2,582 | 7,501 | 5,390 | |||||||||||||||||||||||
| Total | $ | 9,784 | $ | 7,138 | $ | 42,213 | $ | 19,951 |
Distributions received from equity method investees include:
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| in thousands | July 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | |||||||||||||||||||
| Dividends | $ | 14,509 | $ | — | $ | 28,160 | $ | 30,539 |
The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $9.5 million is remaining as of July 30, 2023. This difference is being amortized through Equity in Earnings of Affiliates.
NOTE D - INVENTORIES
Principal components of inventories are:
| in thousands | July 30, 2023 | October 30, 2022 | |||||||||
| Finished Products | $ | 969,749 | $ | 974,160 | |||||||
| Raw Materials and Work-in-Process | 479,371 | 440,193 | |||||||||
| Operating Supplies | 182,586 | 206,289 | |||||||||
| Maintenance Materials and Parts | 106,159 | 95,417 | |||||||||
| Total | $ | 1,737,865 | $ | 1,716,059 |
NOTE E - DERIVATIVES AND HEDGING
The Company uses hedging programs to manage 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 is discontinued immediately and any future changes to fair value are recorded directly through earnings.
Cash Flow Commodity Hedges: The Company designates grain, lean hog, and natural gas futures, swaps, and options contracts used to offset price fluctuations in the Company’s future purchases of these commodities 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 or natural gas exposure beyond the next two upcoming fiscal years and its lean 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 and the gain or loss on the hedged purchase commitment are marked-to-market through earnings and recorded in the Consolidated Condensed Statements of Financial Position as a Current Asset and Current Liability, respectively. 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 period 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 designated the last $450 million of the notes due June 2024 (the 2024 Notes). The Company terminated the swap in the fourth quarter of fiscal 2022. The loss related to the swap was recorded as a fair value hedging adjustment to the hedged debt and will be amortized through earnings over the remaining life of the debt.
Other Derivatives: The Company holds certain futures and swap contracts to manage the Company's exposure to fluctuations in grain and pork 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 | |||||||||||
| in millions | July 30, 2023 | October 30, 2022 | |||||||||
| Corn | 30.0 bushels | 34.3 bushels | |||||||||
| Lean Hogs | 151.9 pounds | 177.5 pounds | |||||||||
| Natural Gas | 2.1 MMBtu | — MMBtu |
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 30, 2023 | October 30, 2022 | |||||||||||
| Commodity Contracts (1) | Other Current Assets | $ | (6,510) | $ | 13,504 | |||||||||
(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 commodity 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 on the Consolidated Condensed Statements of Financial Position. The gross liability position as of July 30, 2023, includes the right to reclaim net cash collateral of $27.3 million contained within the master netting arrangement. The gross asset position as of October 30, 2022, is offset by the obligation to return net cash collateral of $1.3 million. See Note H - Fair Value Measurements for a discussion of these net amounts as reported on 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 30, 2023 | October 30, 2022 | |||||||||||
| Commodity Contracts | Accounts Payable (1) | $ | 2,664 | $ | 5,725 | |||||||||
| Interest Rate Contracts | Current Maturities of Long-term Debt (2) | (439,424) | — | |||||||||||
| Interest Rate Contracts | Long-term Debt Less Current Maturities | — | (430,050) |
(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 30, 2023, the carrying amount of the 2024 Notes included a cumulative fair value hedging adjustment of $10.6 million from discontinued hedges. In the third quarter of fiscal 2023, the 2024 Notes and the fair value hedging adjustment were reclassified from Long-term Debt less Current Maturities to Current Maturities of Long-term Debt on the Consolidated Condensed Statements of Financial Position.
Accumulated Other Comprehensive Loss Impact: As of July 30, 2023, the Company included in AOCL hedging losses (before tax) of $14.3 million on commodity contracts and gains of $12.7 million related to interest rate settled positions. The Company expects to recognize the majority of the losses on commodity contracts over the next twelve months. Gains on interest rate contracts offset the hedged interest payments over the tenor of the associated debt instruments.
The effect on 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 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | ||||||||||||||||||||||
| Cash Flow Hedges | ||||||||||||||||||||||||||
| Commodity Contracts | $ | (2,600) | $ | (24,312) | $ | (5,758) | $ | 21,216 | Cost of Products Sold | |||||||||||||||||
| Excluded Component (2) | 423 | (576) | — | — | ||||||||||||||||||||||
| Interest Rate Contracts | — | — | 247 | 247 | 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 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | ||||||||||||||||||||||
| Cash Flow Hedges | ||||||||||||||||||||||||||
| Commodity Contracts | $ | (34,151) | $ | 46,299 | $ | 5,833 | $ | 40,231 | Cost of Products Sold | |||||||||||||||||
| Excluded Component (2) | (268) | (4,020) | — | — | ||||||||||||||||||||||
| Interest Rate Contracts | — | — | 741 | 741 | Interest Expense |
(1) See Note G - 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 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | |||||||||||||||||||
| Net Earnings Attributable to Hormel Foods Corporation | $ | 162,679 | $ | 218,915 | $ | 597,637 | $ | 720,103 | |||||||||||||||
| Cash Flow Hedges - Commodity Contracts | |||||||||||||||||||||||
| Gain (Loss) Reclassified from AOCL | (5,758) | 21,216 | 5,833 | 38,561 | |||||||||||||||||||
| Amortization of Excluded Component from Options | (1,531) | (1,145) | (4,441) | (3,089) | |||||||||||||||||||
| Gain (Loss) Reclassified from AOCL Due to Discontinuance of Cash Flow Hedges (1) | — | — | — | 1,620 | |||||||||||||||||||
| Fair Value Hedges - Commodity Contracts | |||||||||||||||||||||||
| Gain (Loss) on Commodity Futures (2) | 1,019 | (6,758) | (440) | (20,165) | |||||||||||||||||||
| Total Gain (Loss) on Commodity Contracts (3) | (6,271) | 13,313 | 952 | 16,927 | |||||||||||||||||||
| Cash Flow Hedges - Interest Rate Locks | |||||||||||||||||||||||
| Gain (Loss) Reclassified from AOCL | 247 | 247 | 741 | 741 | |||||||||||||||||||
| Fair Value Hedge - Interest Rate Swap | |||||||||||||||||||||||
| Gain (Loss) on Interest Rate Swap | — | (222) | — | 1,270 | |||||||||||||||||||
| Amortization of Loss Due to Discontinuance of Fair Value Hedge (4) | (3,125) | — | (9,374) | — | |||||||||||||||||||
| Total Gain (Loss) on Interest Rate Contracts (5) | (2,878) | 25 | (8,633) | 2,011 | |||||||||||||||||||
| Total Gain (Loss) Recognized in Earnings | $ | (9,148) | $ | 13,338 | $ | (7,681) | $ | 18,938 |
(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. A gain of $1.7 million related to the discontinued hedges and an immaterial loss related to the excluded component from options was reclassified directly into earnings.
(2) Represents gains or losses on commodity contracts designated as fair value hedges that were closed during the quarter ended July 30, 2023, 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) Represents the fair value hedging adjustment amortized through earnings.
(5) Total Gain (Loss) on Interest Rate Contracts is recognized in earnings through Interest Expense.
NOTE F - 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 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | |||||||||||||||||||
| Service Cost | $ | 8,902 | $ | 10,019 | $ | 26,705 | $ | 30,057 | |||||||||||||||
| Interest Cost | 17,157 | 12,639 | 51,472 | 37,919 | |||||||||||||||||||
| Expected Return on Plan Assets | (19,571) | (27,062) | (58,714) | (81,186) | |||||||||||||||||||
| Amortization of Prior Service Cost | (461) | (374) | (1,383) | (1,122) | |||||||||||||||||||
| Recognized Actuarial (Gain) Loss | 3,325 | 3,132 | 9,976 | 9,397 | |||||||||||||||||||
| Net Periodic Benefit Cost | $ | 9,353 | $ | (1,645) | $ | 28,058 | $ | (4,936) |
| Post-retirement Benefits | |||||||||||||||||||||||
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| in thousands | July 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | |||||||||||||||||||
| Service Cost | $ | 62 | $ | 118 | $ | 185 | $ | 351 | |||||||||||||||
| Interest Cost | 3,016 | 1,923 | 9,044 | 5,763 | |||||||||||||||||||
| Amortization of Prior Service Cost | 2 | 2 | 6 | 6 | |||||||||||||||||||
| Recognized Actuarial (Gain) Loss | (7) | 610 | (21) | 1,829 | |||||||||||||||||||
| Net Periodic Benefit Cost | $ | 3,073 | $ | 2,652 | $ | 9,214 | $ | 7,950 |
Non-service cost components of net pension and post-retirement benefit cost are presented within Interest and Investment Income in the Consolidated Statements of Operations.
NOTE G - ACCUMULATED OTHER COMPREHENSIVE LOSS
Components of Accumulated Other Comprehensive Loss are as follows:
| in thousands | Foreign Currency Translation | Pension & Other Benefits | Derivatives & Hedging | Equity Method Investments | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||
| Balance at April 30, 2023 | $ | (52,124) | $ | (190,451) | $ | (3,720) | $ | 1,408 | $ | (244,887) | |||||||||||||||||||||||||
| Unrecognized Gains (Losses) | 0 | 0 | |||||||||||||||||||||||||||||||||
| Gross | (10,170) | 39 | (2,177) | 8,733 | (3,575) | ||||||||||||||||||||||||||||||
| Tax Effect | — | — | 542 | — | 542 | ||||||||||||||||||||||||||||||
| Reclassification into Net Earnings | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
| Gross | — | 2,859 | (1) | 5,511 | (2) | — | 8,371 | ||||||||||||||||||||||||||||
| Tax Effect | — | (703) | (1,358) | — | (2,062) | ||||||||||||||||||||||||||||||
| Change Net of Tax | (10,170) | 2,195 | 2,518 | 8,733 | 3,277 | ||||||||||||||||||||||||||||||
| Balance at July 30, 2023 | $ | (62,293) | $ | (188,256) | $ | (1,202) | $ | 10,141 | $ | (241,610) | |||||||||||||||||||||||||
| Balance at October 30, 2022 | $ | (89,793) | $ | (195,624) | $ | 29,856 | $ | — | $ | (255,561) | |||||||||||||||||||||||||
| Unrecognized Gains (Losses) | |||||||||||||||||||||||||||||||||||
| Gross | 27,499 | 1,166 | (34,419) | 10,141 | 4,388 | ||||||||||||||||||||||||||||||
| Tax Effect | — | (266) | 8,394 | — | 8,128 | ||||||||||||||||||||||||||||||
| Reclassification into Net Earnings | |||||||||||||||||||||||||||||||||||
| Gross | — | 8,578 | (1) | (6,574) | (2) | — | 2,004 | ||||||||||||||||||||||||||||
| Tax Effect | — | (2,110) | 1,541 | — | (570) | ||||||||||||||||||||||||||||||
| Change Net of Tax | 27,499 | 7,368 | (31,058) | 10,141 | 13,950 | ||||||||||||||||||||||||||||||
| Balance at July 30, 2023 | $ | (62,293) | $ | (188,256) | $ | (1,202) | $ | 10,141 | $ | (241,610) |
(1) Included in the computation of net periodic benefit cost. See Note F - 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 E - Derivatives and Hedging for additional information.
NOTE H - 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 and their level within the fair value hierarchy are presented in the tables below.
| Fair Value Measurements at July 30, 2023 | |||||||||||||||||||||||
| 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) | $ | 669,124 | $ | 668,157 | $ | 966 | $ | — | |||||||||||||||
| Short-term Marketable Securities (2) | 17,423 | 2,818 | 14,606 | — | |||||||||||||||||||
| Other Trading Securities (3) | 197,065 | — | 197,065 | — | |||||||||||||||||||
| Commodity Derivatives (4) | 11,381 | 11,558 | (176) | — | |||||||||||||||||||
| Total Assets at Fair Value | $ | 894,994 | $ | 682,533 | $ | 212,461 | $ | — | |||||||||||||||
| Liabilities at Fair Value | |||||||||||||||||||||||
| Deferred Compensation (3) | $ | 60,789 | $ | — | $ | 60,789 | $ | — | |||||||||||||||
| Total Liabilities at Fair Value | $ | 60,789 | $ | — | $ | 60,789 | $ | — |
| Fair Value Measurements at October 30, 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) | $ | 982,107 | $ | 980,730 | $ | 1,377 | $ | — | |||||||||||||||
| Short-term Marketable Securities (2) | 16,149 | 8,763 | 7,386 | — | |||||||||||||||||||
| Other Trading Securities (3) | 186,243 | — | 186,243 | — | |||||||||||||||||||
| Commodity Derivatives (4) | 12,448 | 12,228 | 220 | — | |||||||||||||||||||
| Total Assets at Fair Value | $ | 1,196,947 | $ | 1,001,721 | $ | 195,226 | $ | — | |||||||||||||||
| Liabilities at Fair Value | |||||||||||||||||||||||
| Deferred Compensation (3) | $ | 57,790 | $ | — | $ | 57,790 | $ | — | |||||||||||||||
| Total Liabilities at Fair Value | $ | 57,790 | $ | — | $ | 57,790 | $ | — |
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 as 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 Internal Revenue Service (IRS) 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 30, 2023, securities held by the rabbi trust generated gains of $5.1 million and $12.1 million, respectively, compared to losses of $0.1 million and $12.1 million for the quarter and nine months ended July 31, 2022, respectively.
(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, natural gas, hogs, and pork, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers. The Company’s futures and options 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 holds natural gas and pork swap contracts that are over-the-counter instruments classified as Level 2. The value of the natural gas swap contracts is calculated using quoted prices from the New York Mercantile Exchange, and the value of the pork swap contracts are calculated using a futures implied USDA estimated pork cut-out value. All derivatives are reviewed for potential credit risk and risk of nonperformance. The net balance for commodity derivatives is included in Other Current Assets or Accounts Payable, as appropriate, in the Consolidated Condensed Statements of Financial Position. As of July 30, 2023, the Company has recognized the right to reclaim net cash collateral of $27.3 million from various counterparties (including cash of $31.1 million less $3.8 million of realized loss). As of October 30, 2022, the Company had recognized the obligation to return net cash collateral of $1.3 million from various counterparties (including cash of $27.5 million less $26.2 million of realized gain).
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 on its Consolidated Condensed Statements of Financial Position. The fair value of long-term debt, utilizing discounted cash flows (Level 2), was $2.8 billion as of July 30, 2023, and $2.7 billion as of October 30, 2022. 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). There were no material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the quarter and nine months ended July 30, 2023, and July 31, 2022.
NOTE I - COMMITMENTS AND CONTINGENCIES
Except as described below, there were no material changes outside the ordinary course of business during the quarter and nine months ended July 30, 2023, to the contractual obligations and other commitments last disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 30, 2022.
On August 15, 2023, the Company received an unexpected, unfavorable arbitration ruling involving an isolated commercial dispute with a third party. The estimated liability of $70.0 million is reflected within Selling, General, and Administrative expense in the Consolidated Statements of Operations for the quarter and nine months ended July 30, 2023, and Accrued Expenses on the Consolidated Condensed Statements of Financial Position as of July 30, 2023. The associated one-time payment is expected to be made in the fourth quarter of fiscal 2023 in accordance with the terms of the arbitrator’s ruling. The adverse arbitration ruling is not subject to further appeal or judicial review.
NOTE J - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term Debt consists of:
| in thousands | July 30, 2023 | October 30, 2022 | |||||||||
| 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 | (7,199) | (7,750) | |||||||||
| Unamortized Debt Issuance Costs | (17,172) | (19,856) | |||||||||
| Interest Rate Swap Liabilities (1) | (10,576) | (19,950) | |||||||||
| Finance Lease Liabilities | 38,211 | 44,473 | |||||||||
| Other Financing Arrangements | 4,098 | 2,429 | |||||||||
| Total | 3,307,361 | 3,299,345 | |||||||||
| Less: Current Maturities of Long-term Debt | 946,981 | 8,796 | |||||||||
| Long-term Debt Less Current Maturities | $ | 2,360,380 | $ | 3,290,549 |
(1) See Note E - Derivatives and Hedging for additional information.
Senior Unsecured Notes: 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). 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. Interest will accrue per annum at the stated rates with interest on the notes being paid semi-annually in arrears on June 3 and December 3 of each year, commencing December 3, 2021. Interest rate risk was hedged utilizing interest rate locks on the 2028 Notes and 2051 Notes. The Company lifted the hedges in conjunction with the issuance of these notes. See Note E - Derivatives and Hedging for additional information. 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. During the third quarter of fiscal 2023, the 2024 Notes were reclassified to Current Maturities of Long-term Debt on the Consolidated Condensed Statement of Financial Position.
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.
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. 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.
On April 17, 2023, the Company entered into a first amendment (Amendment) to the Company’s $750.0 million revolving credit agreement. The Amendment provides for, among other things (i) the replacement of London Interbank Offered Rate (LIBOR) with Term Secured Overnight Financing Rate (SOFR) and Daily Simple Singapore Overnight Rate Average (SORA) for the Eurocurrency Rate for Dollars and Singapore Dollars, including applicable credit spread adjustments and relevant SOFR benchmark provisions, (ii) permitting two one-year extension options to be exercised at any anniversary, (iii) removing the change in debt ratings notice requirement, (iv) shortening the notice period requirements for Base Rate Loans to allow for same day notice, and (v) increasing the number of permitted interest periods from 8 to 15.
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 Adjusted Term SOFR, Adjusted Daily Simple Risk-Free Rate (RFR) or 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 30, 2023, and October 30, 2022, 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 30, 2023, 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 30, 2023, was 21.7 percent and 22.2 percent, respectively, compared to 24.5 percent and 21.8 percent, respectively, for the corresponding periods a year ago. The Company benefited in the current quarter from favorable changes in certain U.S. income and deductions in the fiscal 2022 federal tax return filing.
Unrecognized tax benefits, including interest and penalties, are recorded in Other Long-term Liabilities. These benefits, if recognized as of July 30, 2023, would impact the Company’s effective tax rate by $19.6 million compared to $19.5 million as of July 31, 2022. 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 quarters ended July 30, 2023, and July 31, 2022.
The amount of accrued interest and penalties associated with unrecognized tax benefits was $3.2 million at July 30, 2023, and $4.8 million at July 31, 2022.
The Company is regularly audited by federal and state taxing authorities. The IRS concluded their examination of fiscal year 2021 in the second quarter. Previously, the IRS placed the Company in the Bridge phase of the Compliance Assurance Process (CAP) for fiscal 2020. In this phase, the IRS will not accept any disclosures, conduct any reviews, or provide any assurances. The Company has elected to participate in CAP for fiscal years through 2023. The objective of CAP is to contemporaneously work with the IRS 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.
The Inflation Reduction Act of 2022 was signed into law on August 16, 2022. The 15% corporate minimum tax will apply to the Company in fiscal year 2024.
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 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | |||||||||||||||||||
| Basic Weighted-average Shares Outstanding | 546,358 | 546,077 | 546,389 | 544,486 | |||||||||||||||||||
| Dilutive Potential Common Shares | 2,279 | 4,090 | 2,838 | 4,891 | |||||||||||||||||||
| Diluted Weighted-average Shares Outstanding | 548,637 | 550,167 | 549,227 | 549,377 | |||||||||||||||||||
| Antidilutive Potential Common Shares | 7,589 | 1,787 | 5,998 | 2,026 |
NOTE M - SEGMENT REPORTING
The Company develops, processes, and distributes a wide array of food products in a variety of markets. As discussed in Note A - Summary of Significant Accounting Policies, the Company transitioned to a new operating model in the first quarter of fiscal 2023 and now reports its results in the following three segments: Retail, Foodservice, and International, which is consistent with how the Company's chief operating decision maker (CODM) assesses performance and allocates resources. Prior period segment results have been retrospectively recast to reflect the new reportable segments.
The Retail segment consists primarily of the processing, marketing, and sale of food products sold predominantly in the retail market. This segment also includes the results from the Company’s MegaMex Foods, LLC joint venture.
The Foodservice segment consists primarily of the processing, marketing, and sale of food and nutritional products for foodservice, convenience store, and commercial customers.
The International segment processes, 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 consolidation and are not reviewed when evaluating segment performance. 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.
Financial measures for each of the Company’s reportable segments and reconciliation to consolidated Earnings Before Income Taxes are set forth below. The Company's CODM reviews assets at a consolidated level and does not use assets by segment to
evaluate performance or allocate resources. Therefore, the Company does not disclose assets by segment. 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 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | |||||||||||||||||||
| Net Sales | |||||||||||||||||||||||
| Retail | $ | 1,891,746 | $ | 1,924,553 | $ | 5,765,786 | $ | 5,921,145 | |||||||||||||||
| Foodservice | 890,949 | 917,671 | 2,607,140 | 2,681,737 | |||||||||||||||||||
| International | 180,605 | 192,190 | 539,005 | 572,450 | |||||||||||||||||||
| Total Net Sales | $ | 2,963,299 | $ | 3,034,414 | $ | 8,911,930 | $ | 9,175,331 | |||||||||||||||
| Segment Profit | |||||||||||||||||||||||
| Retail | $ | 151,128 | $ | 163,092 | $ | 459,031 | $ | 522,980 | |||||||||||||||
| Foodservice | 146,270 | 128,798 | 428,110 | 399,482 | |||||||||||||||||||
| International | 12,222 | 24,464 | 45,723 | 78,833 | |||||||||||||||||||
| Total Segment Profit | 309,619 | 316,354 | 932,863 | 1,001,295 | |||||||||||||||||||
| Net Unallocated Expense | 101,886 | 26,429 | 164,997 | 80,799 | |||||||||||||||||||
| Noncontrolling Interest | (108) | (89) | (200) | 112 | |||||||||||||||||||
| Earnings Before Income Taxes | $ | 207,626 | $ | 289,836 | $ | 767,666 | $ | 920,608 |
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 30, 2023 | July 31, 2022 | July 30, 2023 | July 31, 2022 | |||||||||||||||||||
| Perishable | $ | 2,068,787 | $ | 2,123,872 | $ | 6,222,485 | $ | 6,445,419 | |||||||||||||||
| Shelf-stable | 894,512 | 910,542 | 2,689,445 | 2,729,911 | |||||||||||||||||||
| Total Net Sales | $ | 2,963,299 | $ | 3,034,414 | $ | 8,911,930 | $ | 9,175,331 |
Perishable includes fresh meats, frozen items, refrigerated meal solutions, bacon, sausages, hams, guacamole, and other items that require refrigeration. Shelf-stable includes canned luncheon meats, nut butters, snack nuts, chili, shelf-stable microwaveable meals, hash, stews, tortillas, salsas, tortilla chips, nutritional food supplements, and other items that do not require refrigeration.
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