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Hormel Foods 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended April 28, 2013

 

or

 

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

 

For the transition period from                                                     to                                                    

 

Commission File Number: 1-2402

 

HORMEL FOODS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

41-0319970

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

 

 

 

1 Hormel Place

Austin, Minnesota

(Address of principal executive offices)

 

55912-3680

(Zip Code)

 

(507) 437-5611

(Registrant’s telephone number, including area code)

 

None

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x YES   o NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x YES   o NO

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o  (Do not check if a smaller reporting company)

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes   x No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at June 2, 2013

Common Stock

 

$.0293 par value      264,841,438

Common Stock Non-Voting

 

$.01 par value                          -0-

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION — April 28, 2013 and October 28, 2012

CONSOLIDATED STATEMENTS OF OPERATIONS — Three and Six Months Ended April 28, 2013 and April 29, 2012

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — Three and Six Months Ended April 28, 2013 and April 29, 2012

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT — Twelve Months Ended October 28, 2012 and Six Months Ended April 28, 2013

CONSOLIDATED STATEMENTS OF CASH FLOWS — Six Months Ended April 28, 2013 and April 29, 2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

CRITICAL ACCOUNTING POLICIES

RESULTS OF OPERATIONS

Overview

Consolidated Results

Segment Results

Related Party Transactions

LIQUIDITY AND CAPITAL RESOURCES

FORWARD-LOOKING STATEMENTS

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

Item 4.

Controls and Procedures

 

 

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

 

Item 1A.

Risk Factors

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

Item 6.

Exhibits

 

 

SIGNATURES

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands, except share and per share amounts)

 

 

 

April 28,

 

October 28,

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

262,748

 

$

682,388

 

Short-term marketable securities

 

 

77,387

 

Accounts receivable

 

462,239

 

507,041

 

Inventories

 

998,931

 

950,521

 

Income taxes receivable

 

17,181

 

16,460

 

Deferred income taxes

 

71,284

 

68,560

 

Prepaid expenses

 

12,037

 

12,772

 

Other current assets

 

7,920

 

5,555

 

TOTAL CURRENT ASSETS

 

1,832,340

 

2,320,684

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

137,618

 

144,245

 

 

 

 

 

 

 

GOODWILL

 

932,114

 

630,875

 

 

 

 

 

 

 

OTHER INTANGIBLES

 

382,816

 

123,072

 

 

 

 

 

 

 

PENSION ASSETS

 

49

 

49

 

 

 

 

 

 

 

INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES

 

284,043

 

286,537

 

 

 

 

 

 

 

OTHER ASSETS

 

140,902

 

134,024

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

Land

 

57,611

 

56,258

 

Buildings

 

780,877

 

767,876

 

Equipment

 

1,501,230

 

1,435,630

 

Construction in progress

 

83,331

 

82,254

 

 

 

2,423,049

 

2,342,018

 

Less allowance for depreciation

 

(1,465,290

)

(1,417,538

)

 

 

957,759

 

924,480

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

4,667,641

 

$

4,563,966

 

 

See Notes to Consolidated Financial Statements

 

3



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands, except share and per share amounts)

 

 

 

April 28,

 

October 28,

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

 

$

315,040

 

$

385,877

 

Accrued expenses

 

42,871

 

49,792

 

Accrued workers compensation

 

35,991

 

33,543

 

Accrued marketing expenses

 

99,535

 

78,712

 

Employee related expenses

 

161,975

 

193,463

 

Taxes payable

 

6,881

 

4,864

 

Interest and dividends payable

 

45,601

 

40,049

 

TOTAL CURRENT LIABILITIES

 

707,894

 

786,300

 

 

 

 

 

 

 

PENSION AND POST-RETIREMENT BENEFITS

 

612,451

 

615,428

 

 

 

 

 

 

 

LONG-TERM DEBT—less current maturities

 

250,000

 

250,000

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

79,464

 

87,313

 

 

 

 

 

 

 

SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

Preferred stock, par value $.01 a share—authorized 160,000,000 shares; issued—none

 

 

 

 

 

Common stock, non-voting, par value $.01 a share—authorized 400,000,000 shares; issued—none

 

 

 

 

 

Common stock, par value $.0293 a share—authorized 800,000,000 shares;

 

 

 

 

 

issued 264,944,979 shares April 28, 2013

 

 

 

 

 

issued 263,044,280 shares October 28, 2012

 

7,763

 

7,707

 

Additional paid-in capital

 

26,671

 

 

Accumulated other comprehensive loss

 

(325,172

)

(323,569

)

Retained earnings

 

3,300,597

 

3,135,317

 

HORMEL FOODS CORPORATION SHAREHOLDERS’ INVESTMENT

 

3,009,859

 

2,819,455

 

NONCONTROLLING INTEREST

 

7,973

 

5,470

 

TOTAL SHAREHOLDERS’ INVESTMENT

 

3,017,832

 

2,824,925

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

$

4,667,641

 

$

4,563,966

 

 

See Notes to Consolidated Financial Statements

 

4



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 28,
2013

 

April 29,
2012

 

April 28,
2013

 

April 29,
2012

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,152,686

 

$

2,012,859

 

$

4,268,927

 

$

4,052,298

 

Cost of products sold

 

1,799,885

 

1,677,252

 

3,571,933

 

3,379,282

 

GROSS PROFIT

 

352,801

 

335,607

 

696,994

 

673,016

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

173,066

 

148,684

 

328,897

 

301,161

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of affiliates

 

7,194

 

7,816

 

17,037

 

18,817

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

186,929

 

194,739

 

385,134

 

390,672

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Interest and investment income

 

1,116

 

2,338

 

2,926

 

3,928

 

Interest expense

 

(3,142

)

(3,283

)

(6,236

)

(6,497

)

 

 

 

 

 

 

 

 

 

 

EARNINGS BEFORE INCOME TAXES

 

184,903

 

193,794

 

381,824

 

388,103

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

58,262

 

64,859

 

124,138

 

129,835

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

126,641

 

128,935

 

257,686

 

258,268

 

Less: Net earnings attributable to noncontrolling interest

 

1,121

 

1,048

 

2,450

 

1,986

 

NET EARNINGS ATTRIBUTABLE TO HORMEL FOODS CORPORATION

 

$

125,520

 

$

127,887

 

$

255,236

 

$

256,282

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

BASIC

 

$

0.47

 

$

0.49

 

$

0.97

 

$

0.97

 

DILUTED

 

$

0.46

 

$

0.48

 

$

0.95

 

$

0.95

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

BASIC

 

264,868

 

263,610

 

264,406

 

263,778

 

DILUTED

 

270,780

 

269,061

 

269,960

 

269,334

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE:

 

$

0.17

 

$

0.15

 

$

0.34

 

$

0.30

 

 

See Notes to Consolidated Financial Statements

 

5



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 28,
2013

 

April 29,
2012

 

April 28,
2013

 

April 29,
2012

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

126,641

 

$

128,935

 

$

257,686

 

$

258,268

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

413

 

531

 

797

 

1,124

 

Pension and other benefits

 

5,482

 

2,688

 

11,036

 

3,569

 

Deferred hedging

 

(6,571

)

(5,382

)

(13,383

)

(16,673

)

TOTAL OTHER COMPREHENSIVE LOSS

 

(676

)

(2,163

)

(1,550

)

(11,980

)

COMPREHENSIVE INCOME

 

125,965

 

126,772

 

256,136

 

246,288

 

Less: Comprehensive income attributable to noncontrolling interest

 

1,159

 

1,078

 

2,503

 

2,052

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO HORMEL FOODS CORPORATION

 

$

124,806

 

$

125,694

 

$

253,633

 

$

244,236

 

 

See Notes to Consolidated Financial Statements

 

6



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Hormel Foods Corporation Shareholders

 

 

 

 

 

 

 

Common
Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Non-
controlling
Interest

 

Total
Shareholders’
Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 30, 2011

 

$

7,734

 

$

 

$

 

$

2,824,331

 

$

(175,483

)

$

3,234

 

$

2,659,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

500,050

 

 

 

4,911

 

504,961

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

(148,086

)

51

 

(148,035

)

Purchases of common stock

 

 

 

(61,366

)

 

 

 

 

 

 

 

 

(61,366

)

Stock-based compensation expense

 

 

 

 

 

16,710

 

 

 

 

 

 

 

16,710

 

Exercise of stock options/nonvested shares

 

36

 

(295

)

13,576

 

 

 

 

 

 

 

13,317

 

Shares retired

 

(63

)

61,661

 

(30,286

)

(31,312

)

 

 

 

 

 

Proceeds from noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

774

 

774

 

Distribution to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

(3,500

)

(3,500

)

Declared cash dividends — $.60 per share

 

 

 

 

 

 

 

(157,752

)

 

 

 

 

(157,752

)

Balance at October 28, 2012

 

$

7,707

 

$

 

$

 

$

3,135,317

 

$

(323,569

)

$

5,470

 

$

2,824,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

255,236

 

 

 

2,450

 

257,686

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

(1,603

)

53

 

(1,550

)

Purchases of common stock

 

 

 

(7,928

)

 

 

 

 

 

 

 

 

(7,928

)

Stock-based compensation expense

 

 

 

 

 

11,906

 

 

 

 

 

 

 

11,906

 

Exercise of stock options/nonvested shares

 

62

 

 

 

22,687

 

 

 

 

 

 

 

22,749

 

Shares retired

 

(6

)

7,928

 

(7,922

)

 

 

 

 

 

 

 

Declared cash dividends — $.34 per share

 

 

 

 

 

 

 

(89,956

)

 

 

 

 

(89,956

)

Balance at April 28, 2013

 

$

7,763

 

$

 

$

26,671

 

$

3,300,597

 

$

(325,172

)

$

7,973

 

$

3,017,832

 

 

See Notes to Consolidated Financial Statements

 

7



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

April 28, 2013

 

April 29, 2012

 

OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

$

257,686

 

$

258,268

 

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

56,405

 

55,254

 

Amortization of intangibles

 

4,756

 

4,453

 

Equity in earnings of affiliates, net of dividends

 

2,991

 

(7,657

)

Provision for deferred income taxes

 

(266

)

(793

)

Gain on property/equipment sales and plant facilities

 

(41

)

(279

)

Non-cash investment activities

 

(1,884

)

(2,309

)

Stock-based compensation expense

 

11,906

 

11,129

 

Excess tax benefit from stock-based compensation

 

(18,138

)

(4,634

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Decrease in accounts receivable

 

44,802

 

21,762

 

Decrease (increase) in inventories

 

816

 

(26,849

)

Decrease (increase) in prepaid expenses and other current assets

 

19

 

(14,782

)

Increase in pension and post-retirement benefits

 

14,769

 

8,569

 

Decrease in accounts payable and accrued expenses

 

(116,263

)

(89,101

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

257,558

 

213,031

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Sale of trading securities

 

77,558

 

 

Acquisitions of businesses/intangibles

 

(663,128

)

(168

)

Purchases of property/equipment

 

(45,494

)

(58,217

)

Proceeds from sales of property/equipment

 

4,311

 

1,803

 

(Increase) decrease in investments, equity in affiliates, and other assets

 

(5,016

)

4,746

 

NET CASH USED IN INVESTING ACTIVITIES

 

(631,769

)

(51,836

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from short-term debt

 

25,000

 

 

Principal payments on short-term debt

 

(25,000

)

 

Dividends paid on common stock

 

(84,405

)

(73,186

)

Share repurchase

 

(7,928

)

(42,088

)

Proceeds from exercise of stock options

 

28,615

 

10,028

 

Excess tax benefit from stock-based compensation

 

18,138

 

4,634

 

NET CASH USED IN FINANCING ACTIVITIES

 

(45,580

)

(100,612

)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

151

 

1,066

 

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(419,640

)

61,649

 

Cash and cash equivalents at beginning of year

 

682,388

 

463,130

 

CASH AND CASH EQUIVALENTS AT END OF QUARTER

 

$

262,748

 

$

524,779

 

 

See Notes to Consolidated Financial Statements

 

8



Table of Contents

 

HORMEL FOODS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE A                GENERAL

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.  The balance sheet at October 28, 2012, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 28, 2012.

 

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

 

Investments

 

The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans, which is included in other assets on the Consolidated Statements of Financial Position.  The securities held by the trust are classified as trading securities.  Therefore, unrealized gains and losses associated with these investments are included in the Company’s earnings.  Securities held by the trust generated gains of  $1.3 million and $2.8 million for the second quarter and six months ended April 28, 2013, respectively, compared to gains of $1.4 million and $2.7 million for the second quarter and six months ended April 29, 2012.  The majority of this portfolio is held in fixed return investments to reduce the exposure to volatility in equity markets.

 

During fiscal 2012 and 2013, the Company also held securities as part of an investment portfolio, which are classified as short-term marketable securities on the Consolidated Statements of Financial Position.  These investments are also trading securities.  Therefore, unrealized gains and losses are included in the Company’s earnings.  The Company recorded a gain of $0.2 million related to these investments during the first quarter of fiscal 2013, compared to gains of $0.4 million and $0.7 million for the second quarter and six months ended April 29, 2012.  These securities were liquidated in the first quarter of fiscal 2013.

 

Supplemental Cash Flow Information

 

Non-cash investment activities presented on the Consolidated Statements of Cash Flows generally consist of unrealized gains or losses on the Company’s rabbi trust and other investments, amortization of affordable housing investments, and amortization of bond financing costs.  The noted investments are included in other assets or short-term marketable securities on the Consolidated Statements of Financial Position.  Changes in the value of these investments are included in the Company’s net earnings and are presented in the Consolidated Statements of Operations as either interest and investment income or interest expense, as appropriate.

 

Guarantees

 

The Company enters into various agreements guaranteeing specified obligations of affiliated parties.  The Company’s guarantees either terminate in one year or remain in place until such time as the Company revokes the agreement.  The Company currently provides a revocable standby letter of credit for $5.6 million to guarantee obligations that may arise under worker compensation claims of an affiliated party.  This potential obligation is not reflected in the Company’s Consolidated Statements of Financial Position.

 

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Table of Contents

 

New Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (FASB) updated the guidance within Accounting Standards Codification (ASC) 220, Comprehensive Income.  The update eliminates the option for companies to report other comprehensive income and its related components in the Statement of Changes in Stockholders’ Equity.  Instead, companies have the option to present total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous Statement of Comprehensive Income or in two separate but consecutive statements.  The updated guidance is to be applied retrospectively, and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted.  The Company early adopted the provisions of this accounting standard during the fourth quarter of fiscal 2012, and adoption did not have a material impact on the consolidated financial statements, as it relates to presentation only.

 

In February 2013, the FASB further updated the guidance within ASC 220, Comprehensive Income.  The update requires companies to report, in one place, information about reclassifications out of accumulated other comprehensive income (AOCI) and changes in AOCI balances.  For significant items reclassified out of AOCI to net income in their entirety in the same reporting period, reporting is required about the effect of the reclassifications on the respective line items in the statement where net income is presented.  For items that are not reclassified to net income in their entirety in the same reporting period, a cross reference to other disclosures currently required under United States Generally Accepted Accounting Principles is required.  The above information must be presented in one place, either parenthetically on the face of the financial statements by income statement line item, or in a note.  The updated guidance is to be applied prospectively, and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, with early adoption permitted.  The Company intends to adopt the new provisions of this accounting standard at the beginning of fiscal year 2014, and adoption is not expected to have a material impact on the consolidated financial statements as it relates to presentation and disclosure only.

 

In December 2011, the FASB updated the guidance within ASC 210, Balance Sheet.  The update enhances disclosures related to the offsetting of certain assets and liabilities to enable users of financial statements to understand the effect of those arrangements on financial position.  The updated guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  The Company will adopt the new provisions of this accounting standard at the beginning of fiscal year 2014, and adoption is not expected to have a material impact on the consolidated financial statements.

 

NOTE B                ACQUISITIONS

 

On January 31, 2013, the Company acquired the United States based SKIPPY peanut butter business from Conopco, Inc. (doing business as Unilever United States Inc.), of Englewood Cliffs, N.J. for a preliminary purchase price of $663.1 million in cash.  This acquisition includes the Little Rock, Arkansas manufacturing facility and all sales worldwide, except sales in China.  The Company expects to close the acquisition of the China based SKIPPY peanut butter business by the end of fiscal year 2013 for an additional investment of approximately $42.0 million, subject to regulatory approvals and working capital adjustments.  The purchase price was funded by the Company with cash on hand generated from operations and liquidating marketable securities.

 

SKIPPY is a well-established brand that allows the Company to expand its presence in the center of the store with a non-meat protein product and reinforces the Company’s balanced product portfolio.  The acquisition also provides the opportunity to strengthen the Company’s global presence and complements the international sales strategy for the SPAM family of products.

 

The acquisition will be accounted for as a business combination using the acquisition method.  The Company has estimated the acquisition date fair values of the assets acquired and liabilities assumed, using independent appraisals and other analyses, and is in the process of determining final working capital adjustments. Therefore, a preliminary allocation of the purchase price to the acquired assets, liabilities, and goodwill is presented in the table below.

 

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Table of Contents

 

At January 31, 2013 (in thousands)

 

 

 

Inventory

 

$

49,227

 

Property, plant and equipment

 

48,461

 

Intangible assets

 

264,500

 

Goodwill

 

301,239

 

Current liabilities

 

(299

)

Purchase price

 

$

663,128

 

 

Goodwill is calculated as the excess of the purchase price over the fair value of the net assets recognized.  The goodwill recorded as part of the acquisition primarily reflects the value of the assembled workforce, cost synergies, and the potential to integrate and expand existing product lines.  The goodwill balance is expected to be deductible for income tax purposes. The goodwill and intangible assets have been allocated to the Grocery Products and International & Other reporting segments.

 

The Company recognized $7.5 million of transaction costs (excluding transitional service expenses) related to the acquisition through the second quarter, and the charges were reported in selling, general and administrative expense in the Consolidated Statement of Operations.

 

Operating results for this acquisition have been included in the Company’s Consolidated Statements of Operations from the date of acquisition (i.e. beginning in the second quarter) and are reflected in the Grocery Products and International & Other reporting segments.  The acquisition contributed $87.0 million of net sales and had an immaterial impact on segment profit for the second quarter.  Pro forma results are not presented, as the acquisition was not considered material to the consolidated Company.

 

NOTE C                STOCK-BASED COMPENSATION

 

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

 

A reconciliation of the number of options outstanding and exercisable (in thousands) as of April 28, 2013, and changes during the six months then ended, is as follows:

 

 

 

Shares

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic Value
(in thousands)

 

Outstanding at October 28, 2012

 

20,454

 

$

19.67

 

 

 

 

 

Granted

 

2,217

 

32.18

 

 

 

 

 

Exercised

 

3,629

 

15.57

 

 

 

 

 

Forfeited

 

21

 

27.77

 

 

 

 

 

Outstanding at April 28, 2013

 

19,021

 

$

21.90

 

5.9 years

 

$

347,329

 

Exercisable at April 28, 2013

 

13,002

 

$

18.88

 

4.7 years

 

$

209,268

 

 

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Table of Contents

 

The weighted-average grant date fair value of stock options granted and the total intrinsic value of options exercised (in thousands) during the second quarter and first six months of fiscal years 2013 and 2012 are as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 28,
2013

 

April 29,
2012

 

April 28,
2013

 

April 29,
2012

 

Weighted-average grant date fair value of options granted

 

$

6.57

 

$

5.37

 

$

5.50

 

$

5.64

 

Intrinsic value of exercised options

 

$

16,133

 

$

9,492

 

$

62,653

 

$

15,321

 

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 28,
2013

 

April 29,
2012

 

April 28,
2013

 

April 29,
2012

 

Risk-Free Interest Rate

 

1.7

%

1.6

%

1.4

%

1.8

%

Dividend Yield

 

1.9

%

2.1

%

2.1

%

2.0

%

Stock Price Volatility

 

20.0

%

21.0

%

20.0

%

21.0

%

Expected Option Life

 

8 years

 

8 years

 

8 years

 

8 years

 

 

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

 

The Company’s nonvested shares granted on or before September 26, 2010, vest after five years or upon retirement.  Nonvested shares granted after September 26, 2010, vest after one year.  A reconciliation of the nonvested shares (in thousands) as of April 28, 2013, and changes during the six months then ended, is as follows:

 

 

 

Shares

 

Weighted-
Average Grant-
Date Fair Value

 

Nonvested at October 28, 2012

 

139

 

$

21.47

 

Granted

 

45

 

35.42

 

Vested

 

70

 

24.93

 

Nonvested at April 28, 2013

 

114

 

$

24.86

 

 

The weighted-average grant date fair value of nonvested shares granted, the total fair value (in thousands) of nonvested shares granted, and the fair value (in thousands) of shares that have vested during the first six months of fiscal years 2013 and 2012 are as follows:

 

 

 

Six Months Ended

 

 

 

April 28,
2013

 

April 29,
2012

 

Weighted-average grant date fair value

 

$

35.42

 

$

28.97

 

Fair value of nonvested shares granted

 

$

1,600

 

$

1,304

 

Fair value of shares vested

 

$

1,758

 

$

2,324

 

 

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Table of Contents

 

Stock-based compensation expense, along with the related income tax benefit, for the second quarter and first six months of fiscal years 2013 and 2012 is presented in the table below.

 

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

 

April 28,
2013

 

April 29,
2012

 

April 28,
2013

 

April 29,
2012

 

Stock-based compensation expense recognized

 

$

6,330

 

$

4,889

 

$

11,906

 

$

11,129

 

Less: Income tax benefit recognized

 

(2,393

)

(1,854

)

(4,502

)

(4,220

)

After-tax stock-based compensation expense

 

$

3,937

 

$

3,035

 

$

7,404

 

$

6,909

 

 

At April 28, 2013, there was $13.1 million of total unrecognized compensation expense from stock-based compensation arrangements granted under the plans.  This compensation is expected to be recognized over a weighted-average period of approximately 4.8 years.  During the second quarter and six months ended April 28, 2013, cash received from stock option exercises was $5.4 million and $28.6 million, respectively, compared to $6.1 million and $10.0 million for the second quarter and six months ended April 29, 2012.  The total tax benefit to be realized for tax deductions from these option exercises for the second quarter and six months ended April 28, 2013, was $6.1 million and $23.7 million, respectively, compared to $3.6 million and $5.8 million in the comparable periods in fiscal 2012.

 

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

 

NOTE D                GOODWILL AND INTANGIBLE ASSETS

 

The changes in the carrying amount of goodwill for the six months ended April 28, 2013, are presented in the table below. There were no changes to the carrying amount of goodwill in the first quarter of fiscal 2013.  The additions during the second quarter are entirely due to the acquisition of the United States based SKIPPY peanut butter business on January 31, 2013.  The goodwill amounts are preliminary pending final working capital adjustments.

 

(in thousands)

 

Grocery
Products

 

Refrigerated
Foods

 

JOTS

 

Specialty
Foods

 

International
& Other

 

Total

 

Balance as of October 28, 2012

 

$

123,316

 

$

96,643

 

$

203,214

 

$

207,028

 

$

674

 

$

630,875

 

Goodwill acquired

 

197,339

 

 

 

 

 

103,900

 

301,239

 

Balance as of April 28, 2013

 

$

320,655

 

$

96,643

 

$

203,214

 

$

207,028

 

$

104,574

 

$

932,114

 

 

The gross carrying amount and accumulated amortization for definite-lived intangible assets are presented in the table below.  Customer relationships of $25.1 million were acquired during the second quarter of fiscal 2013 related to the United States based SKIPPY peanut butter business.

 

 

 

April 28, 2013

 

October 28, 2012

 

(in thousands)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Customer lists/relationships

 

$

47,130

 

$

(16,309

)

$

22,148

 

$

(14,684

)

Proprietary software & technology

 

20,940

 

(17,385

)

22,000

 

(17,319

)

Formulas & recipes

 

17,854

 

(12,755

)

17,854

 

(11,686

)

Other intangibles

 

9,786

 

(7,704

)

13,586

 

(10,686

)

Total

 

$

95,710

 

$

(54,153

)

$

75,588

 

$

(54,375

)

 

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Table of Contents

 

Amortization expense was $2.6 million and $4.8 million for the second quarter and six months ended April 28, 2013, respectively, compared to $2.1 million and $4.5 million for the second quarter and six months ended April 29, 2012.

 

Estimated annual amortization expense (in thousands) for the five fiscal years after October 28, 2012, is as follows:

 

Fiscal Year

 

Estimated
Amortization
Expense

 

2013

 

$

9,479

 

2014

 

8,654

 

2015

 

5,474

 

2016

 

3,348

 

2017

 

2,918

 

 

The carrying amounts for indefinite-lived intangible assets are presented in the table below.   The increase in the second quarter of fiscal 2013 represents the fair value of the trade name and trademarks acquired with the United States based SKIPPY peanut butter business.

 

(in thousands)

 

April 28, 2013

 

October 28, 2012

 

Brands/trade names/trademarks

 

$

333,275

 

$

93,875

 

Other intangibles

 

7,984

 

7,984

 

Total

 

$

341,259

 

$

101,859

 

 

NOTE E                INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES

 

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

 

Investments in and receivables from affiliates consists of the following:

 

(in thousands)

 

Segment

 

% Owned

 

April 28,
2013

 

October 28,
2012

 

MegaMex Foods, LLC

 

Grocery Products

 

50%

 

$

199,809

 

$

205,315

 

Foreign Joint Ventures

 

International & Other

 

Various (26-50%)

 

84,234

 

81,222

 

Total

 

 

 

 

 

$

284,043

 

$

286,537

 

 

Equity in earnings of affiliates consists of the following:

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

 

Segment

 

April 28,
2013

 

April 29,
2012

 

April 28,
2013

 

April 29,
2012

 

MegaMex Foods, LLC

 

Grocery Products

 

$

7,607

 

$

7,501

 

$

14,644

 

$

16,125

 

Foreign Joint Ventures

 

International & Other

 

(413

)

315

 

2,393

 

2,692

 

Total

 

 

 

$

7,194

 

$

7,816

 

$

17,037

 

$

18,817

 

 

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

 

14



Table of Contents

 

NOTE F                EARNINGS PER SHARE DATA

 

The reported net earnings attributable to the Company were used when computing basic and diluted earnings per share.  The following table sets forth the shares used as the denominator for those computations:

 

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

 

April 28,
2013

 

April 29,
2012

 

April 28,
2013

 

April 29,
2012

 

Basic weighted-average shares outstanding

 

264,868

 

263,610

 

264,406

 

263,778

 

 

 

 

 

 

 

 

 

 

 

Dilutive potential common shares

 

5,912

 

5,451

 

5,554

 

5,556

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

270,780

 

269,061

 

269,960

 

269,334

 

 

For the second quarter and six months ended April 28, 2013, 0.6 million and 0.8 million weighted-average stock options, respectively, were not included in the computation of dilutive potential common shares since their inclusion would have had an antidilutive effect on earnings per share, compared to 2.6 million and 1.9 million for the second quarter and six months ended April 29, 2012.

 

NOTE G               ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of accumulated other comprehensive loss, net of tax, are as follows:

 

(in thousands)

 

April 28,
2013

 

October 28,
2012

 

Foreign currency translation

 

$

13,159

 

$

12,415

 

Pension & other benefits

 

(334,429

)

(345,465

)

Deferred (loss) gain on hedging

 

(3,902

)

9,481

 

Accumulated other comprehensive loss

 

$

(325,172

)

$

(323,569

)

 

NOTE H               INVENTORIES

 

Principal components of inventories are:

 

(in thousands)

 

April 28,
2013

 

October 28,
2012

 

Finished products

 

$

560,843

 

$

494,298

 

Raw materials and work-in-process

 

255,021

 

267,877

 

Materials and supplies

 

183,067

 

188,346

 

Total

 

$

998,931

 

$

950,521

 

 

NOTE I                 DERIVATIVES AND HEDGING

 

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

 

Cash Flow Hedges:  The Company currently utilizes corn futures to offset the price fluctuation in the Company’s future direct grain purchases, and has historically entered into various swaps to hedge the purchases of grain and natural gas at certain plant locations.  The financial instruments are designated and accounted for as cash flow hedges, and the Company measures the effectiveness of the hedges on a regular basis.  Effective gains or losses related to these cash flow hedges are reported in accumulated other

 

15



Table of Contents

 

comprehensive loss (AOCL) and reclassified into earnings, through cost of products sold, in the period or periods in which the hedged transactions affect earnings.  Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold.  The Company typically does not hedge its grain or natural gas exposure beyond the next two upcoming fiscal years.  As of April 28, 2013, and October 28, 2012, the Company had the following outstanding commodity futures contracts and swaps that were entered into to hedge forecasted purchases:

 

 

 

Volume

Commodity

 

April 28, 2013

 

October 28, 2012

Corn

 

15.9 million bushels

 

12.0 million bushels

 

As of April 28, 2013, the Company has included in AOCL, hedging losses of $6.2 million (before tax) relating to these positions, compared to gains of $15.2 million (before tax) as of October 28, 2012.  The Company expects to recognize the majority of these losses over the next 12 months.

 

Fair Value Hedges:  The Company utilizes futures to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers.  The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery.  The futures contracts are designated and accounted for as fair value hedges, and the Company measures the effectiveness of the hedges on a regular basis.  Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and are recorded on the Consolidated Statements of Financial Position as a current asset and liability, respectively.  Effective gains or losses related to these fair value hedges are recognized through cost of products sold in the period or periods in which the hedged transactions affect earnings.  Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold.  As of April 28, 2013, and October 28, 2012, the Company had the following outstanding commodity futures contracts designated as fair value hedges:

 

 

 

Volume

Commodity

 

April 28, 2013

 

October 28, 2012

Corn

 

9.5 million bushels

 

8.0 million bushels

Lean hogs

 

0.7 million cwt

 

0.9 million cwt

 

Other Derivatives:  During fiscal years 2013 and 2012, the Company has held certain futures to manage the Company’s exposure to fluctuations in commodity markets.  The Company has not applied hedge accounting to these positions.  As of April 28, 2013, and October 28, 2012, the Company had the following outstanding futures contracts related to other programs:

 

 

 

Volume

Commodity

 

April 28, 2013

 

October 28, 2012

Soybean meal

 

6,700 tons

 

 

16



Table of Contents

 

Fair Values:  The fair values of the Company’s derivative instruments (in thousands) as of April 28, 2013, and October 28, 2012, were as follows:

 

 

 

Location on
Consolidated

 

Fair Value (1)

 

 

 

Statements of Financial
Position

 

April 28,
2013

 

October 28,
2012

 

Asset Derivatives:

 

 

 

 

 

 

 

Derivatives Designated as Hedges:

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

(7,909

)

$

7,483

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedges:

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

(739

)

 

 

 

 

 

 

 

 

 

Total Asset Derivatives

 

 

 

$

(8,648

)

$

7,483

 

 

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

 

Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the second quarter ended April 28, 2013, and April 29, 2012, were as follows:

 

 

 

Gain/(Loss)
Recognized in
Accumulated Other
Comprehensive
Loss (AOCL)
(Effective Portion) (1)

 

Location on

 

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

 

Gain/(Loss)
Recognized in
Earnings (Ineffective
Portion) (2) (3)

 

 

 

Three Months Ended

 

Consolidated

 

Three Months Ended

 

Three Months Ended

 

Cash Flow Hedges:

 

April 28,
2013

 

April 29,
2012

 

Statements
of Operations

 

April 28,
2013

 

April 29,
2012

 

April 28,
2013

 

April 29,
2012

 

Commodity contracts

 

$

(8,378

)

$

(4,843

)

Cost of products sold

 

$

2,156

 

$

3,751

 

$

(392

)

$

 

 

 

 

 

 

 

 

 

 

 

Location on

 

Gain/(Loss)
Recognized in Earnings
(Effective Portion) (4)

 

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

 

 

 

Consolidated

 

Three Months Ended

 

Three Months Ended

 

Fair Value Hedges:

 

 

Statements
of Operations

 

April 28,
2013

 

April 29,
2012

 

April 28,
2013

 

April 29,
2012

 

Commodity contracts

 

Cost of products sold

 

$

3,628

 

$

2,695

 

$

85

 

$

135

 

 

 

 

 

 

 

 

 

 

 

 

 

Location on

 

Gain/(Loss)
Recognized
in Earnings

 

 

 

 

 

 

 

Consolidated

 

Three Months Ended

 

 

 

 

 

Derivatives Not
Designated as Hedges:

 

 

Statements
of Operations

 

April 28,
2013

 

April 29,
2012

 

 

 

 

 

Commodity contracts

 

Cost of products sold

 

$

351

 

$

86

 

 

 

 

 

 

17



Table of Contents

 

Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the six months ended April 28, 2013, and April 29, 2012, were as follows:

 

 

 

Gain/(Loss)
Recognized in
Accumulated Other
Comprehensive
Loss (AOCL)
(Effective Portion) (1)

 

Location on

 

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

 

Gain/(Loss)
Recognized in
Earnings (Ineffective
Portion) (2) (3)

 

 

 

Six Months Ended

 

Consolidated

 

Six Months Ended

 

Six Months Ended

 

 

 

April 28,

 

April 29,

 

Statements

 

April 28,

 

April 29,

 

April 28,

 

April 29,

 

Cash Flow Hedges:

 

2013

 

2012

 

of Operations

 

2013

 

2012

 

2013

 

2012

 

Commodity contracts

 

$

(12,469

)

$

(12,085

)

Cost of products sold

 

$

8,986

 

$

14,641

 

$

(226

)

$

 

 

 

 

 

 

 

 

 

 

 

Location on

 

Gain/(Loss)
Recognized in Earnings
(Effective Portion) (4)

 

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

 

 

 

Consolidated

 

Six Months Ended

 

Six Months Ended