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Hormel Foods 10-Q 2014

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 January 26, 2014

or

 

[    ]   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

 

41-0319970

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

                   1 Hormel Place

 

 

 

                Austin, Minnesota

 

 

55912-3680

(Address of principal executive offices)

 

 

(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               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               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    

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

 

Smaller reporting company    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       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 March 2, 2014

Common Stock

 

$.0293 par value          263,990,215

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 – January 26, 2014 and October 27, 2013

CONSOLIDATED STATEMENTS OF OPERATIONS – Three Months Ended January 26, 2014 and January 27, 2013

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – Three Months Ended January 26, 2014 and January 27, 2013

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT – Twelve Months Ended October 27, 2013 and Three Months Ended January 26, 2014

CONSOLIDATED STATEMENTS OF CASH FLOWS – Three Months Ended January 26, 2014 and January 27, 2013

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)

 

 

 

January 26,

 

October 27,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

639,844

 

$

434,014

 

Accounts receivable

 

505,024

 

551,500

 

Inventories

 

924,500

 

967,977

 

Deferred income taxes

 

73,543

 

73,543

 

Prepaid expenses

 

13,888

 

13,000

 

Other current assets

 

10,034

 

7,379

 

TOTAL CURRENT ASSETS

 

2,166,833

 

2,047,413

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

23,323

 

25,086

 

 

 

 

 

 

 

GOODWILL

 

962,102

 

934,472

 

 

 

 

 

 

 

OTHER INTANGIBLES

 

378,361

 

378,093

 

 

 

 

 

 

 

PENSION ASSETS

 

166,494

 

162,535

 

 

 

 

 

 

 

INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES

 

258,128

 

270,609

 

 

 

 

 

 

 

OTHER ASSETS

 

144,408

 

142,339

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

Land

 

61,516

 

58,506

 

Buildings

 

783,098

 

784,133

 

Equipment

 

1,546,306

 

1,532,527

 

Construction in progress

 

104,612

 

85,696

 

 

 

2,495,532

 

2,460,862

 

Less allowance for depreciation

 

(1,528,011)

 

(1,505,529)

 

 

 

967,521

 

955,333

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

5,067,170

 

$

4,915,880

 

 

 

 

 

 

 

 

 

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)

 

 

 

January 26,

 

October 27,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

 

 $

354,832

 

 $

387,284

 

Accrued expenses

 

45,757

 

20,965

 

Accrued workers compensation

 

40,190

 

38,217

 

Accrued marketing expenses

 

117,563

 

91,332

 

Employee related expenses

 

142,902

 

192,063

 

Taxes payable

 

67,361

 

8,637

 

Interest and dividends payable

 

55,920

 

45,511

 

TOTAL CURRENT LIABILITIES

 

824,525

 

784,009

 

 

 

 

 

 

 

PENSION AND POST-RETIREMENT BENEFITS

 

483,449

 

481,230

 

 

 

 

 

 

 

LONG-TERM DEBT–less current maturities

 

250,000

 

250,000

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

84,765

 

84,062

 

 

 

 

 

 

 

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 263,927,305 shares January 26, 2014

 

 

 

 

 

issued 263,658,296 shares October 27, 2013

 

7,733

 

7,725

 

Additional paid-in capital

 

7,794

 

-

 

Accumulated other comprehensive loss

 

(150,986)

 

(149,214)

 

Retained earnings

 

3,553,213

 

3,452,529

 

HORMEL FOODS CORPORATION SHAREHOLDERS’ INVESTMENT

 

3,417,754

 

3,311,040

 

NONCONTROLLING INTEREST

 

6,677

 

5,539

 

TOTAL SHAREHOLDERS’ INVESTMENT

 

3,424,431

 

3,316,579

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

 $

5,067,170

 

 $

4,915,880

 

 

 

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

 

 

 

January 26,
2014

 

January 27,
2013

 

 

 

 

 

 

 

Net sales

 

  $

2,242,672

 

  $

2,116,241

 

Cost of products sold

 

1,844,030

 

1,772,048

 

GROSS PROFIT

 

398,642

 

344,193

 

 

 

 

 

 

 

Selling, general and administrative

 

166,189

 

155,831

 

 

 

 

 

 

 

Equity in earnings of affiliates

 

4,739

 

9,843

 

 

 

 

 

 

 

OPERATING INCOME

 

237,192

 

198,205

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

Interest and investment income

 

1,173

 

1,810

 

Interest expense

 

(3,094)

 

(3,094)

 

 

 

 

 

 

 

EARNINGS BEFORE INCOME TAXES

 

235,271

 

196,921

 

 

 

 

 

 

 

Provision for income taxes

 

80,813

 

65,876

 

 

 

 

 

 

 

NET EARNINGS

 

154,458

 

131,045

 

Less: Net earnings attributable to noncontrolling interest

 

1,110

 

1,329

 

NET EARNINGS ATTRIBUTABLE TO HORMEL FOODS CORPORATION

 

  $

153,348

 

  $

129,716

 

 

 

 

 

 

 

NET EARNINGS PER SHARE:

 

 

 

 

 

BASIC

 

  $

0.58

 

  $

0.49

 

DILUTED

 

  $

0.57

 

  $

0.48

 

 

 

 

 

 

 

WEIGHTED-AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

BASIC

 

263,752

 

263,944

 

DILUTED

 

270,224

 

269,140

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE:

 

  $

0.20

 

  $

0.17

 

 

 

See Notes to Consolidated Financial Statements

 

5



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

January 26,
2014

 

January 27,
2013

 

 

 

 

 

 

 

NET EARNINGS

$

154,458

$

131,045

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

Foreign currency translation

 

(2,291)

 

384

 

Pension and other benefits

 

1,019

 

5,554

 

Deferred hedging

 

(472)

 

(6,812)

 

TOTAL OTHER COMPREHENSIVE LOSS

 

(1,744)

 

(874)

 

COMPREHENSIVE INCOME

 

152,714

 

130,171

 

Less: Comprehensive income attributable to noncontrolling interest

 

1,138

 

1,344

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO HORMEL FOODS CORPORATION

$

151,576

$

128,827

 

 

 

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 28, 2012

 

  $

7,707

 

$

-

 

$

-

 

$

3,135,317

 

  $

(323,569

)

  $

5,470

 

  $

2,824,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

526,211

 

 

 

3,865

 

530,076

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

174,355

 

204

 

174,559

 

Purchases of common stock

 

 

 

(70,819

)

 

 

 

 

 

 

 

 

(70,819

)

Stock-based compensation expense

 

 

 

 

 

17,596

 

 

 

 

 

 

 

17,596

 

Exercise of stock options/nonvested shares

 

69

 

 

 

23,955

 

 

 

 

 

 

 

24,024

 

Shares retired

 

(51

)

70,819

 

(41,551

)

(29,217

)

 

 

 

 

-

 

Distribution to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

(4,000

)

(4,000

)

Declared cash dividends – $.68 per share

 

 

 

 

 

 

 

(179,782

)

 

 

 

 

(179,782

)

Balance at October 27, 2013

 

  $

7,725

 

$

-

 

$

-

 

$

3,452,529

 

  $

(149,214

)

  $

5,539

 

  $

3,316,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

153,348

 

 

 

1,110

 

154,458

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

(1,772

)

28

 

(1,744

)

Stock-based compensation expense

 

 

 

 

 

4,957

 

 

 

 

 

 

 

4,957

 

Exercise of stock options/nonvested shares

 

8

 

 

 

2,837

 

 

 

 

 

 

 

2,845

 

Declared cash dividends – $.20 per share

 

 

 

 

 

 

 

(52,664

)

 

 

 

 

(52,664

)

Balance at January 26, 2014

 

  $

7,733

 

$

-

 

$

7,794

 

$

3,553,213

 

  $

(150,986

)

  $

6,677

 

  $

3,424,431

 

 

 

See Notes to Consolidated Financial Statements

 

7



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

January 26,
2014

 

January 27,
2013

 

OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

 $

154,458

 

 $

131,045

 

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

29,429

 

27,655

 

Amortization of intangibles

 

2,331

 

2,189

 

Equity in earnings of affiliates, net of dividends

 

5,285

 

156

 

Provision for deferred income taxes

 

428

 

(2,395)

 

Gain on property/equipment sales and plant facilities

 

(369)

 

(234)

 

Non-cash investment activities

 

(135)

 

(1,142)

 

Stock-based compensation expense

 

4,957

 

5,576

 

Excess tax benefit from stock-based compensation

 

(4,111)

 

(13,261)

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Decrease in accounts receivable

 

46,476

 

40,505

 

Decrease (increase) in inventories

 

46,161

 

(3,161)

 

(Increase) decrease in prepaid expenses and other current assets

 

(4,297)

 

2,318

 

Increase in pension and post-retirement benefits

 

1,234

 

6,511

 

Increase (decrease) in accounts payable and accrued expenses

 

32,445

 

(53,949)

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

314,292

 

141,813

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Sale of trading securities

 

-

 

77,558

 

Acquisitions of businesses/intangibles

 

(41,401)

 

-

 

Purchases of property/equipment

 

(37,038)

 

(22,053)

 

Proceeds from sales of property/equipment

 

4,278

 

2,919

 

Decrease in investments, equity in affiliates, and other assets

 

4,028

 

7,919

 

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

 

(70,133)

 

66,343

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Dividends paid on common stock

 

(44,833)

 

(39,438)

 

Proceeds from exercise of stock options

 

3,437

 

23,222

 

Excess tax benefit from stock-based compensation

 

4,111

 

13,261

 

NET CASH USED IN FINANCING ACTIVITIES

 

(37,285)

 

(2,955)

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

(1,044)

 

88

 

INCREASE IN CASH AND CASH EQUIVALENTS

 

205,830

 

205,289

 

Cash and cash equivalents at beginning of year

 

434,014

 

682,388

 

CASH AND CASH EQUIVALENTS AT END OF QUARTER

 

 $

639,844

 

 $

887,677

 

 

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 27, 2013, 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 27, 2013.

 

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 a gain of $0.5 million for the quarter ended January 26, 2014, compared to a gain of $1.5 million for the quarter ended January 27, 2013.  The majority of this portfolio is held in fixed return investments to reduce the exposure to volatility in equity markets.

 

During the first quarter of fiscal 2013, the Company also held securities as part of an investment portfolio, which were classified as short-term marketable securities on the Consolidated Statements of Financial Position.  These investments were also trading securities.  Therefore, unrealized gains and losses were included in the Company’s earnings.  The Company recorded a gain of $0.2 million related to these investments for the quarter ended January 27, 2013. 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 revocable standby letters of credit totaling $4.9 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.

 

9



Table of Contents

 

New Accounting Pronouncements

 

In December 2011, the Financial Accounting Standards Board (FASB) updated the guidance within Accounting Standards Codification (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 adopted the new provisions of this accounting standard at the beginning of fiscal year 2014, and adoption did not have a material impact on the consolidated financial statements.

 

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 U. S. 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 adopted the new provisions of this accounting standard at the beginning of fiscal year 2014, and adoption did not have a material impact on the consolidated financial statements as it relates to presentation and disclosure only.

 

In January 2014, the FASB updated the guidance within ASC 323, Investments-Equity Method and Joint Ventures.  The update provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit.  The amendments modify the conditions that a reporting entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments.  If the modified conditions are met, the amendments permit an entity to make an accounting policy election to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). Additionally, the amendments introduce new recurring disclosures about all investments in qualified affordable housing projects irrespective of the method used to account for the investments.  The updated guidance is to be applied retrospectively, and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted.  The Company expects to adopt the new provisions of this accounting standard at the beginning of fiscal year 2016, 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 purchase price of $665.4 million in cash.  This acquisition included the Little Rock, Arkansas manufacturing facility and all sales worldwide, except sales in China.  The purchase price was funded by the Company with cash on hand generated from operations and liquidating marketable securities.

 

On November 26, 2013, the Company also acquired the China based SKIPPY peanut butter business from Unilever United States Inc. for a preliminary purchase price of $41.4 million in cash.  This acquisition includes the Weifang, China manufacturing facility and all sales in Mainland China.  The purchase price was also funded by the Company with cash on hand.  The purchase price is preliminary pending final working capital and tax valuations.

 

Operating results for both of these acquisitions have been included in the Company’s Consolidated Statements of Operations from the date of acquisition and are primarily reflected in the Grocery Products and International & Other reporting segments.  The acquisitions contributed $86.5 million of net sales for the first quarter of fiscal

 

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2014.  Pro forma results are not presented, as the acquisitions are not considered material to the consolidated Company.

 

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.

 

 

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 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 January 26, 2014, and changes during the quarter then ended, is as follows:

 

 

 

Shares

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic Value
(in thousands)

 

Outstanding at October 27, 2013

 

18,466

 

$22.09

 

 

 

 

 

Granted

 

1,032

 

45.98

 

 

 

 

 

Exercised

 

524

 

19.64

 

 

 

 

 

Forfeited

 

11

 

33.51

 

 

 

 

 

Outstanding at January 26, 2014

 

18,963

 

$23.45

 

5.6 years

 

$ 412,144

 

Exercisable at January 26, 2014

 

13,694

 

$19.91

 

4.5 years

 

$ 345,526

 

 

The weighted-average grant date fair value of stock options granted and the total intrinsic value of options exercised (in thousands) during the first quarter of fiscal years 2014 and 2013 are as follows:

 

 

 

Three Months Ended

 

 

 

January 26,
2014

 

January 27,
2013

 

Weighted-average grant date fair value

 

$

9.89

 

$

5.10

 

Intrinsic value of exercised options

 

$

13,402

 

$

46,520

 

 

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

 

 

 

January 26,
2014

 

January 27,
2013

 

Risk-Free Interest Rate

 

2.5%

 

1.3%

 

Dividend Yield

 

1.7%

 

2.2%

 

Stock Price Volatility

 

20.0%

 

20.0%

 

Expected Option Life

 

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

 

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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.  There were no changes to the balance of nonvested shares during the first quarter, with 112 thousand shares outstanding at a weighted-average grant date fair value of $24.77 as of January 26, 2014.  No shares vested during the first quarter of fiscal year 2014 or fiscal year 2013.

 

Stock-based compensation expense, along with the related income tax benefit, for the first quarter of fiscal years 2014 and 2013 is presented in the table below.

 

 

 

Three Months Ended

 

(in thousands)

 

January 26,
2014

 

January 27,
2013

 

Stock-based compensation expense recognized

 

$ 4,957

 

$   5,576

 

Income tax benefit recognized

 

1,884

 

2,108

 

After-tax stock-based compensation expense

 

$3,073

 

$   3,468

 

 

At January 26, 2014, there was $12.6 million of total unrecognized compensation expense from stock-based compensation arrangements granted under the plans.  This compensation is expected to be recognized over a weighted-average period of approximately 3.0 years.  During the quarter ended January 26, 2014, cash received from stock option exercises was $3.4 million compared to $23.2 million for the quarter ended January 27, 2013.  The total tax benefit to be realized for tax deductions from these option exercises for the quarter ended January 26, 2014, was $5.1 million compared to $17.6 million in the comparable quarter of fiscal 2013.

 

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 carrying amounts of goodwill for the quarter ended January 26, 2014, are presented in the table below.  The addition during the first quarter is entirely due to the acquisition of the China based SKIPPY peanut butter business on November 26, 2013.

 

(in thousands)

 

Grocery
Products

 

Refrigerated
Foods

 

JOTS

 

Specialty
Foods

 

International
& Other

 

Total

 

Balance as of October 27, 2013

 

  $

322,942

 

  $

96,643

 

  $

203,214

 

  $

207,028

 

  $

104,645

 

  $

934,472

 

Goodwill acquired

 

-

 

-

 

-

 

-

 

27,630

 

27,630

 

Balance as of January 26, 2014

 

  $

322,942

 

  $

96,643

 

  $

203,214

 

  $

207,028

 

  $

132,275

 

  $

962,102

 

 

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The gross carrying amount and accumulated amortization for definite-lived intangible assets are presented in the table below.  Customer relationships of $2.6 million were acquired during the first quarter of fiscal 2014 related to the China based SKIPPY peanut butter business.

 

 

 

January 26, 2014

 

October 27, 2013

 

(in thousands)

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Customer lists/relationships

 

  $

45,940

 

  $

(15,794)

 

  $

43,340

 

  $

(14,719)

 

Formulas & recipes

 

17,854

 

(14,359)

 

17,854

 

(13,824)

 

Proprietary software & technology

 

14,820

 

(12,404)

 

14,820

 

(12,024)

 

Other intangibles

 

9,386

 

(8,341)

 

9,386

 

(7,999)

 

Total

 

  $

88,000

 

  $

(50,898)

 

  $

85,400

 

  $

(48,566)

 

 

Amortization expense was $2.3 million for the quarter ended January 26, 2014, compared to $2.2 million for the quarter ended January 27, 2013.

 

Estimated annual amortization expense (in thousands) for the five fiscal years after October 27, 2013, is as follows:

 

Fiscal Year

 

Estimated
Amortization
Expense

 

2014

 

$ 8,797

 

2015

 

5,647

 

2016

 

3,525

 

2017

 

3,091

 

2018

 

2,849

 

 

The carrying amounts for indefinite-lived intangible assets are presented in the table below.

 

(in thousands)

 

January 26, 2014

 

October 27, 2013

 

Brands/tradenames/trademarks

 

  $

333,275

 

  $

333,275

 

Other intangibles

 

7,984

 

7,984

 

Total

 

  $

341,259

 

  $

341,259

 

 

 

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

 

January 26,
2014

 

October 27,
2013

 

MegaMex Foods, LLC

 

Grocery Products

 

50%

 

   $

189,980

 

    $

203,413

 

Foreign Joint Ventures

 

International & Other

 

Various (26-50%)

 

68,148

 

67,196

 

Total

 

 

 

 

 

   $

258,128

 

    $

270,609

 

 

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Equity in earnings of affiliates consists of the following:

 

 

 

 

 

Three Months Ended

 

(in thousands)

 

Segment

 

January 26,
2014

 

January 27,
2013

 

MegaMex Foods, LLC

 

Grocery Products

 

$   2,528

 

$   7,037

 

Foreign Joint Ventures

 

International & Other

 

2,211

 

2,806

 

Total

 

 

 

$   4,739

 

$    9,843

 

 

Dividends received from affiliates were $10.0 million for both the three months ended January 26, 2014 and the three months ended January 27, 2013.  The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $17.6 million is remaining as of January 26, 2014.  This difference is being amortized through equity in earnings of affiliates.

 

 

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

 

(in thousands)

 

January 26,
2014

 

January 27,
2013

 

Basic weighted-average shares outstanding

 

263,752

 

263,944

 

 

 

 

 

 

 

Dilutive potential common shares

 

6,472

 

5,196

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

270,224

 

269,140

 

 

For the three months ended January 26, 2014, and January 27, 2013, a total of 0.6 million and 1.0 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.

 

 

NOTE G                                         ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Components of accumulated other comprehensive loss are as follows:

 

(in thousands)

 

Foreign
Currency
Translation

 

Pension &
Other Benefits

 

Deferred Gain
(Loss) -
Hedging

 

Accumulated
Other
Comprehensive
Loss

 

Balance at October 27, 2013

 

$ 

9,391

 

$

(153,001)

 

$

(5,604)

 

$

(149,214)

 

Unrecognized (losses) gains:

 

 

 

 

 

 

 

 

 

Gross

 

(2,319)

 

38

 

(4,004)

 

(6,285)

 

Tax effect

 

 

 

(14)

 

1,507

 

1,493

 

Reclassification into net earnings:

 

 

 

 

 

 

 

 

 

Gross

 

 

 

1,604 (1)

 

3,249 (2)

 

4,853

 

Tax effect

 

 

 

(609)

 

(1,224)

 

(1,833)

 

Net of tax amount

 

(2,319)

 

1,019

 

(472)

 

(1,772)

 

Balance at January 26, 2014

 

7,072

 

$

(151,982)

 

$

(6,076)

 

$

(150,986)

 

 

(1)                                  Included in the computation of net periodic cost (see Note K “Pension and Other Post-Retirement Benefits” for additional details).

(2)                                  Included in cost of products sold in the Consolidated Statements of Operations.

 

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NOTE H               INVENTORIES

 

Principal components of inventories are:

 

(in thousands)

 

January 26,
2014

 

October 27,
2013

Finished products

 

  $

499,703

 

  $

544,858

Raw materials and work-in-process

 

250,802

 

248,411

Materials and supplies

 

173,995

 

174,708

Total

 

  $

924,500

 

  $

967,977

 

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 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 January 26, 2014, and October 27, 2013, the Company had the following outstanding commodity futures contracts that were entered into to hedge forecasted purchases:

 

 

 

Volume

Commodity

 

January 26, 2014

 

October 27, 2013

  Corn

 

15.9 million bushels

 

14.7 million bushels

 

As of January 26, 2014, the Company has included in AOCL, hedging losses of $9.7 million (before tax) relating to these positions, compared to losses of $9.0 million (before tax) as of October 27, 2013.  The Company expects to recognize the majority of these losses over the next 12 months.  The balance as of January 26, 2014, includes a loss of $0.7 million related to corn futures contracts held for the Company’s hog operations.  These contracts were dedesignated as cash flow hedges during fiscal year 2013, as they were no longer highly effective.  These losses will remain in AOCL until the hedged transactions occur or it is probable the hedged transactions will not occur.  Gains or losses related to these contracts after the date of dedesignation have been recognized in earnings as incurred.

 

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 Statement 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 January 26, 2014, and October 27, 2013, the Company had the following outstanding commodity futures contracts designated as fair value hedges:

 

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Table of Contents

 

 

 

Volume

 

Commodity

 

January 26, 2014

 

October 27, 2013

 

  Corn

 

5.4 million bushels

 

5.8 million bushels

 

  Lean hogs

 

1.1 million cwt

 

1.4 million cwt

 

 

Other Derivatives:  During fiscal years 2014 and 2013, the Company has held certain futures and options contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets and foreign currencies.  The Company has not applied hedge accounting to these positions.  All foreign exchange and options contracts were closed as of the end of fiscal year 2013.

 

Additionally, during fiscal year 2013, the Company dedesignated its corn futures contracts held for its hog operations that were previously designated as cash flow hedges, as these contracts were no longer highly effective.  Hedge accounting is no longer being applied to these contracts, and gains or losses occurring after the date of dedesignation have been recognized in earnings as incurred.

 

As of January 26, 2014, and October 27, 2013, the Company had the following outstanding futures related to these programs:

 

 

 

Volume

 

Commodity

 

January 26, 2014

 

October 27, 2013

 

  Corn

 

2.1 million bushels

 

1.7 million bushels

 

 

Fair Values:  The fair values of the Company’s derivative instruments (in thousands) as of January 26, 2014, and October 27, 2013, were as follows:

 

 

 

 

 

Fair Value (1)

 

 

Location on
Consolidated
Statements of Financial
Position

 

January 26,
2014

 

October 27,
2013

Asset Derivatives:

 

 

 

 

 

 

Derivatives Designated as Hedges:

 

 

 

 

 

 

Commodity contracts

 

  Other current assets

 

$  (25,145)

 

$   (25,802)

 

 

 

 

 

 

 

Derivatives Not Designated as Hedges:

 

 

 

 

 

 

Commodity contracts

 

  Other current assets

 

(2,277)

 

(3,783)

 

 

 

 

 

 

 

Total Asset Derivatives

 

 

 

$  (27,422)

 

$   (29,585)

 

 

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

 

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Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the first quarter ended January 26, 2014, and January 27, 2013, were as follows:

 

 

 

Gain/(Loss)
Recognized in
AOCL
(Effective Portion)
(1)(2)

 

Location on
Consolidated

 

Gain/(Loss)
Reclassified from
AOCL into Earnings
(Effective Portion)
(1)(2)

 

Gain/(Loss)
Recognized in Earnings
(Ineffective
Portion)
(3)(5)

 

 

 

Three Months Ended

 

 

 

Three Months Ended

 

 

Three Months Ended

Cash Flow Hedges:

 

January 26,
2014

 

January 27,
2013

 

Statements
of Operations

 

January 26,
2014

 

January 27,
2013

 

January 26,
2014

 

January 27,
2013

  Commodity contracts

 

     $

(4,004)

 

     $

(4,091)

 

Cost of products sold

 

     $

(3,249)

 

     $

6,830

 

     $

(294)

 

     $

166

 

 

 

 

 

 

 

 

 

 

 

 

 

Location on
Consolidated

 

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

 

Gain/(Loss)
Recognized in Earnings
(Ineffective
Portion)
(3)(6)

 

 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

Fair Value Hedges:

 

 

 

 

 

Statements
of Operations

 

January 26,
2014

 

January 27,
2013

 

January 26,
2014

 

January 27,
2013

  Commodity contracts

 

 

 

 

 

 

 

Cost of products sold

 

      $

1,254

 

    $

(1,086)

 

      $

(38)

 

     $

(30)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain/(Loss)
Recognized
in Earnings
(2)

 

 

 

 

 

 

Location on
Consolidated
Statements
of Operations

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Derivatives Not
Designated as Hedges:

 

 

 

 

 

 

January 26,
2014

 

January 27,
2013

 

 

 

 

  Commodity contracts

 

 

 

 

 

 

 

Cost of products sold

 

        $

(517)

 

    $

(1,084)

 

 

 

 

 

 

 

 

(1)  Amounts represent gains or losses in AOCL before tax.  See Note G “Accumulated Other Comprehensive Loss” or the Consolidated Statements of Comprehensive Income for the after tax impact of these gains or losses on net earnings.

(2)  During fiscal year 2013, the Company dedesignated and ceased hedge accounting for its corn futures contracts held for its hog operations.  At the date of dedesignation of these hedges, losses of $2.0 million (before tax) were deferred in AOCL, with $0.7 million (before tax) remaining as of January 26, 2014.  These losses will remain in AOCL until the hedged transactions occur or it is probable the hedged transactions will not occur.  Gains or losses related to these contracts after the date of dedesignation have been recognized in earnings as incurred.

(3)  There were no gains or losses excluded from the assessment of hedge effectiveness during the quarter.

(4)  Amounts represent losses on commodity contracts designated as fair value hedges that were closed during the quarter, which were offset by a corresponding gain on the underlying hedged purchase commitment.  Additional gains or losses related to changes in the fair value of open commodity contracts, along with the offsetting gain or loss on the hedged purchase commitment, are also marked-to-market through earnings with no impact on a net basis.

(5)  There were no gains or losses resulting from the discontinuance of cash flow hedges during the quarter.

(6)  There were no gains or losses recognized as a result of a hedged firm commitment no longer qualifying as a fair value hedge during the quarter.

 

 

NOTE J                FAIR VALUE MEASUREMENTS

 

Pursuant to the provisions of ASC 820, Fair Value Measurements and Disclosures (ASC 820), the Company measures certain assets and liabilities at fair value or discloses the fair value of certain assets and liabilities recorded at cost in the consolidated financial statements.  Fair value is calculated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  ASC 820 establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of three levels based on the inputs used in the valuation.  Assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement.  The three levels are defined as follows:

 

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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 that are measured at fair value on a recurring basis as of January 26,2014, and October 27, 2013, and their level within the fair value hierarchy, are presented in the tables below.

 

 

 

Fair Value Measurements at January 26, 2014

 

(in thousands)

 

Fair Value at
January 26,
2014

 

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)

 

$   639,844

 

$  639,844

 

$            -

 

$          -

 

Other trading securities (2)

 

114,824

 

38,429

 

76,395

 

-

 

Commodity derivatives (3)

 

6,720

 

6,720

 

-

 

-

 

Total Assets at Fair Value

 

$   761,388

 

$  684,993

 

$  76,395

 

$          -

 

 

 

 

 

 

 

 

 

 

 

Liabilities at Fair Value:

 

 

 

 

 

 

 

 

 

Deferred compensation (2)

 

$     52,149

 

$  21,445

 

$  30,704

 

$          -

 

Total Liabilities at Fair Value

 

$     52,149

 

$  21,445

 

$  30,704

 

$          -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at October 27, 2013

 

(in thousands)

 

Fair Value at
October 27,
2013

 

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)

 

$  434,014

 

$   434,014

 

$           -

 

$          -

 

Other trading securities (2)

 

114,300

 

38,489

 

75,811

 

-

 

Commodity derivatives (3)

 

6,086

 

6,086

 

-

 

-

 

Total Assets at Fair Value

 

$  554,400

 

$  478,589

 

$ 75,811

 

$          -

 

 

 

 

 

 

 

 

 

 

 

Liabilities at Fair Value:

 

 

 

 

 

 

 

 

 

Deferred compensation (2)

 

$    52,771

 

$   21,257

 

$  31,514

 

$          -

 

Total Liabilities at Fair Value

 

$    52,771

 

$   21,257

 

$  31,514

 

$          -

 

 

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 consist primarily of money market funds rated AAA, and other highly liquid investment accounts.  As these investments have a maturity date of three months or less, the carrying value approximates fair value.

(2)                                  The Company holds trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans.  The rabbi trust is included in other assets on the Consolidated Statements of Financial Position and is valued based on the underlying fair value of each fund held by the trust.  A majority of the funds held related to the supplemental executive retirement plans have been invested in fixed income funds managed by a third party.  The declared rate on these

 

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Table of Contents

 

funds is set based on a formula using the yield of the general account investment portfolio that supports the fund, adjusted for expenses and other charges.  The rate is guaranteed for one year at issue, and may be reset annually on the policy anniversary, subject to a guaranteed minimum rate.  As the value is based on adjusted market rates, and the fixed rate is only reset on an annual basis, these funds are classified as Level 2.  The remaining funds held are also managed by a third party, and include equity securities, money market accounts, bond funds, or other portfolios for which there is an active quoted market.  Therefore these securities are classified as Level 1.  The related deferred compensation liabilities are included in other long-term liabilities on the Consolidated Statements of Financial Position and are valued based on the underlying investment selections held in each participant’s account.  Investment options generally mirror those funds held by the rabbi trust, for which there is an active quoted market.  Therefore these investment balances are classified as Level 1.  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 United States Internal Revenue Service ( I.R.S.) Applicable Federal Rates in effect and therefore these balances are classified as Level 2.

(3)                                  The Company’s commodity derivatives represent futures contracts used in its hedging or other programs to offset price fluctuations associated with purchases of corn and soybean meal, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers.  The Company’s futures contracts for corn and soybean meal are traded on the Chicago Board of Trade, while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange.  These are active markets with quoted prices available and therefore these contracts are classified as Level 1.  All derivatives are reviewed for potential credit risk and risk of nonperformance.  The Company nets the derivative assets and liabilities for each of its hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract.  The net balance for each program is included in other current assets or accounts payable, as appropriate, in the Consolidated Statements of Financial Position.  As of January 26, 2014, the Company has recognized the right to reclaim cash collateral of $34.1 million from various counterparties.  As of October 27, 2013, the Company had recognized the right to reclaim cash collateral of $35.7 million from various counterparties.

 

The Company’s financial assets and liabilities also include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value.  The Company does not carry its long-term debt at fair value in its Consolidated Statements of Financial Position.  Based on borrowing rates available to the Company for long-term financing with similar terms and average maturities, the fair value of long-term debt, utilizing discounted cash flows (Level 2), was $262.0 million as of January 26, 2014, and $261.7 million as of October 27, 2013.

 

In accordance with the provisions of ASC 820, the Company also measures certain nonfinancial assets and liabilities at fair value that are recognized or disclosed on a nonrecurring basis (e.g. goodwill, intangible assets, and property, plant and equipment).  During the first quarter ended January 26, 2014, and January 27, 2013, there were no remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

 

 

NOTE K                                              PENSION AND OTHER POST-RETIREMENT BENEFITS

 

Net periodic benefit cost for pension and other post-retirement benefit plans consists of the following:

 

 

 

Pension Benefits

 

Post-retirement Benefits

 

 

Three Months Ended

 

Three Months Ended

(in thousands)

 

January 26,
2014

 

January 27,
2013

 

January 26,
2014

 

January 27,
2013

Service cost

 

  $

6,503

 

  $

7,745

 

  $

483

 

  $

612

Interest cost

 

13,374

 

11,922

 

3,785

 

3,694

Expected return on plan assets

 

(21,115)

 

(18,286)

 

-

 

-

Amortization of prior service cost

 

(1,243)

 

(1,270)

 

(334)

 

(265)

Recognized actuarial loss (gain)

 

3,182

 

8,505

 

(1)

 

1,913

Net periodic cost

 

  $

701

 

  $

8,616

 

  $

3,933

 

  $

5,954

 

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Table of Contents

 

NOTE L                                               INCOME TAXES

 

The amount of unrecognized tax benefits, including interest and penalties, at January 26, 2014, recorded in other long-term liabilities was $24.6 million, of which $16.3 million would impact the Company’s effective tax rate if recognized.  The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense, with $0.4 million included in expense in the first quarter of fiscal 2014.  The amount of accrued interest and penalties at January 26, 2014, associated with unrecognized tax benefits was $3.4 million.

 

The Company is regularly audited by federal and state taxing authorities.  During fiscal year 2013, the I.R.S. concluded its examination of the Company’s consolidated federal income tax returns for the fiscal years 2010 and 2011; examinations have not yet begun for more recent fiscal years.  The Company is in various stages of audit by several state taxing authorities on a variety of fiscal years, as far back as 2006.  While it is reasonably possible that one or more of these audits may be completed within the next 12 months and that the related unrecognized tax benefits may change, based on the status of the examinations it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.

 

 

NOTE M                                            SEGMENT REPORTING

 

The Company develops, processes, and distributes a wide array of food products in a variety of markets.  The Company reports its results in the following five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and International & Other.

 

The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market.  This segment also includes the results from the Company’s MegaMex joint venture.

 

The Refrigerated Foods segment includes the Hormel Refrigerated operating segment and the Affiliated Business Units.  This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork and beef products for retail, foodservice, and fresh product customers.  The Affiliated Business Units include the Farmer John, Burke Corporation, Dan’s Prize, Saag’s Products, Inc., and Precept Foods businesses.  Precept Foods, LLC, is a 50.01 percent owned joint venture.

 

The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers.

 

The Specialty Foods segment includes the Diamond Crystal Brands, Century Foods International, and Hormel Specialty Products operating segments.  This segment consists of the packaging and sale of private label shelf stable products, nutritional products, sugar, and condiments to industrial, retail, and foodservice customers.  This segment also includes the processing, marketing, and sale of nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products.

 

The International & Other segment includes the Hormel Foods International operating segment, which manufactures, markets, and sells Company products internationally.  This segment also includes the results from the Company’s international joint ventures and miscellaneous corporate sales.  This segment was previously the All Other segment, and was renamed in the second quarter of fiscal 2013, with no change in the composition of the segment.

 

Intersegment sales are recorded at prices that approximate cost and are eliminated in the Consolidated Statements of Operations.  The Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance.  The Company also retains various other income and unallocated expenses at corporate.  Equity in earnings of affiliates is included in segment operating profit; however, earnings attributable to the Company’s noncontrolling interests are excluded.  These items are included below as net interest and investment expense (income), general corporate expense, and noncontrolling interest when reconciling to earnings before income taxes.

 

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Table of Contents

 

Sales and operating profits for each of the Company’s reportable segments and reconciliation to earnings before income taxes are set forth below.  The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets.  Therefore, the Company does not represent that these segments, if operated independently, would report the operating profit and other financial information shown below.

 

 

 

Three Months Ended

(in thousands)

 

January 26,
2014

 

January 27,
2013

 

 

 

 

 

Sales to Unaffiliated Customers

 

 

 

 

Grocery Products

 

  $

401,520

 

  $

334,140

Refrigerated Foods

 

1,128,421

 

1,063,401

Jennie-O Turkey Store

 

399,400

 

390,334

Specialty Foods

 

195,979

 

233,845

International & Other

 

117,352

 

94,521

Total

 

  $

2,242,672

 

  $

2,116,241

 

 

 

 

 

Intersegment Sales

 

 

 

 

Grocery Products

 

  $

-

 

  $

-

Refrigerated Foods

 

5,746

 

2,443

Jennie-O Turkey Store

 

33,129

 

30,421

Specialty Foods

 

34

 

31

International & Other

 

-

 

-

Total

 

  $

38,909

 

  $

32,895

Intersegment elimination

 

(38,909)

 

(32,895)

Total

 

  $

-

 

  $

-

 

 

 

 

 

Net Sales

 

 

 

 

Grocery Products

 

  $

401,520

 

  $

334,140

Refrigerated Foods

 

1,134,167

 

1,065,844

Jennie-O Turkey Store

 

432,529

 

420,755

Specialty Foods

 

196,013

 

233,876

International & Other

 

117,352

 

94,521

Intersegment elimination

 

(38,909)

 

(32,895)

Total

 

  $

2,242,672

 

  $

2,116,241

 

 

 

 

 

Segment Operating Profit

 

 

 

 

Grocery Products

 

  $

56,342

 

  $

49,913

Refrigerated Foods

 

85,299

 

53,790

Jennie-O Turkey Store

 

59,545

 

58,945

Specialty Foods

 

21,255

 

23,761

International & Other

 

22,557

 

17,111

Total segment operating profit

 

  $

244,998

 

  $

203,520

 

 

 

 

 

Net interest and investment expense (income)

 

1,921

 

1,284

General corporate expense

 

8,916

 

6,644

Noncontrolling interest

 

1,110

 

1,329

 

 

 

 

 

Earnings before income taxes

 

  $

235,271

 

  $

196,921

 

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