Item 1A. RISK FACTORS
Business and Operational Risks
Deterioration of economic conditions could harm the Company’s business. The Company's business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, tax rates, availability of capital, energy availability and costs (including fuel surcharges), political developments, civil unrest, and the effects of governmental initiatives to manage economic conditions. Decreases in consumer spending rates and shifts in consumer product preferences could also negatively impact the Company.
Volatility in financial markets and the deterioration of national and global economic conditions could impact the Company’s operations as follows:
▪The financial stability of our customers and suppliers may be compromised, which could result in additional bad debts for the Company or non-performance by suppliers.
▪The value of our investments in debt and equity securities may decline, including most significantly the Company’s trading securities held as part of a rabbi trust to fund supplemental executive retirement plans and deferred income plans, and the Company’s assets held in pension plans.
▪Future volatility or disruption in the capital and credit markets could impair the Company's liquidity or increase costs of borrowing.
▪The Company may be required to redirect cash flow from operations or explore alternative strategies, such as disposing of assets, to fulfill the payment of principal and interest on its indebtedness.
The Company utilizes hedging programs to manage its exposure to various market risks, such as commodity prices and interest rates, which qualify for hedge accounting for financial reporting purposes. Volatile fluctuations in market conditions could cause these instruments to become ineffective, which could require any gains or losses associated with these instruments to be reported in the Company’s earnings each period. These instruments may limit the Company’s ability to benefit from market gains if commodity prices and/or interest rates become more favorable than those secured under the Company’s hedging programs.
The Company's goodwill and indefinite lived intangible assets are initially recorded at fair value and are not amortized, but are reviewed for impairment annually or more frequently if impairment indicators arise. Impairment testing requires judgement around estimates and assumptions and is impacted by factors such as revenue growth rates, operating margins, tax rates, royalty rates, and discount rates. An unfavorable change in these factors may lead to the impairment of goodwill and/or intangible assets.
Additionally, if another highly pathogenic human disease outbreak developed in the United States, it may negatively impact the national economy, demand for Company products, and/or the Company’s workforce availability, and the Company’s financial results could suffer. The Company has developed contingency plans to address infectious disease scenarios and the potential impact on its operations, and will continue to update these plans as necessary. There can be no assurance given, however, these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
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The uncertain and rapidly changing COVID-19 pandemic could adversely affect the Company’s business, financial condition and results of operations. The ongoing COVID-19 global pandemic has had, and will likely continue to have, negative impacts across many of the Company's business units and facilities. The Company's operations and business have been impacted directly and indirectly by various government actions taken to stop or slow the spread of COVID-19, including travel restrictions, border shutdowns, stay-at-home and shelter-in-place orders, shutdowns of non-essential businesses, and emergency declarations.
The near- and long-term impacts of COVID-19 are unknown and impossible to predict with any level of certainty. The following potential risk factors arising from COVID-19 pandemic have had and/or may continue to have one or more of the following impacts on the Company's operations:
▪One or more of the Company's manufacturing facilities may be shut down or have their operations significantly impacted due to employee illnesses, increased absenteeism, and/or actions by government agencies. Capital projects may be delayed as additional capacity is no longer currently needed or materials are unavailable. The Company's co-manufacturers and material suppliers may face similar impacts.
▪Regulatory restrictions and measures taken at the Company's facilities to prevent or slow down the spread of COVID-19 may impact the facilities’ efficiency.
▪Operating costs may increase as measures are put in place to prevent or slow down the spread of COVID-19, such as facility improvements, employee testing, short-term disability policies, and manufacturing employee bonus payments.
▪Any new or additional measures required by national, state or local governments to combat COVID-19, such as a COVID-19 vaccine mandate, may similarly add additional operational costs.
▪Ongoing closure or reduced operations at foodservice establishments may impact results for the Company's foodservice business. Bankruptcy filings and/or delinquent payments from foodservice industry or other customers may negatively impact cash flow.
▪A national and/or global economic downturn may impact consumer purchase behavior such as reduced volume for foodservice products and premium brands.
▪It may become more difficult and/or expensive to obtain debt or equity financing necessary to sustain the Company's operations, make capital expenditures, and/or finance future acquisitions.
▪The Company may face litigation by stockholders, employees, suppliers, customers, consumers, and others relating to COVID-19 and its effects.
▪The Company relies on its dedicated employees, many of whom have a long tenure with the Company. Operations may be negatively impacted if members of the Company's leadership team, or other key employees, become ill with COVID-19 or otherwise terminate their employment as a result of COVID-19. Further, the Company may face challenges hiring, onboarding, and training new employees, including leadership, which may impact results. The Company also may face operational challenges if government quarantine orders restrict movement of employees.
▪It is possible that the COVID-19 pandemic has and continues to negatively affect the Company's labor availability, relations, or labor costs.
▪Many of the Company's office-based employees continue to work remotely on occasion, which may bring additional information technology and data security risks.
▪Supply chain disruptions of various types arising from COVID-19 may impact the Company's ability to make products, the cost for such products, and the ability to deliver products to customers. Closure or reduced operations of material suppliers could result in shortages of key raw materials, as well as impact prices for those materials. The volatility in the market for raw material and supplies could impact the Company's profitability.
▪National, state, and local government orders closing or limiting operation of borders and ports, or imposing quarantine, could impact the Company's ability to obtain raw materials and to deliver finished goods to customers.
▪COVID-19 has wide-reaching impacts to society and the business, making all decisions, interactions, and transactions significantly more complex.
▪The Company is committed to being transparent through communications to inform shareholders, employees, customers, consumers, and others about the enhanced safety protocols implemented. The Company must keep pace with a rapidly changing media environment. If the Company's public relations efforts are not effective or if consumers perceive them to be irresponsible, the Company's competitive position, reputation, and market share may suffer.
The extent of the impact on the Company’s business, financial condition, and results of operations is dependent on the length and severity of the pandemic. Vaccines to prevent COVID-19 were approved by health agencies in the U.S. and other countries in which the Company operates, which began to be administered near the end of calendar year 2020. New variants of the virus appear to have increased transmissibility, which could complicate treatment and vaccination programs. The COVID-19 pandemic is an unprecedented situation and the Company's understanding of and response to its impacts is changing and evolving. The additional risk factors identified here are based upon information known at this time. The COVID-19 pandemic may adversely impact the Company's operations in one or more ways not identified to date.
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The Company’s operations are subject to the general risks associated with acquisitions and divestitures. The Company has made several acquisitions and divestitures in recent years, including the acquisition of the Planters®snack nuts business in June 2021, that align with the Company’s strategic initiative of delivering long-term value to shareholders. The Company regularly reviews strategic opportunities to grow through acquisitions and to divest non-strategic assets. Potential risks associated with these transactions include the inability to consummate a transaction timely or on favorable terms, diversion of management's attention from other business concerns, potential loss of key employees and customers of current or acquired companies, inability to integrate or divest operations successfully, possible assumption of unknown liabilities, potential disputes with buyers or sellers, inability to obtain favorable financing terms, potential impairment charges if purchase assumptions are not achieved, and the inherent risks in entering markets or lines of business in which the Company has limited or no prior experience. Any or all of these risks could impact the Company’s financial results and business reputation. In addition, acquisitions outside the United States may present unique challenges and increase the Company's exposure to the risks associated with foreign operations. The Company's level of indebtedness increased significantly to fund the purchase of the Planters® snack nuts business and may continue to increase to fund future acquisitions. Higher levels of debt may among other things, impact the Company's liquidity and increase the Company's exposure to negative fluctuations in interest rates.
The Company is subject to disruption of operations at co-manufacturers, suppliers, logistics providers, customers, or other third-party service providers.
▪Disruption of operations at co‐manufacturers, suppliers, or logistics providers have and may continue to impact the Company’s product and input supplies as well as the ability to distribute products.
▪Disruptions related to significant customers or sales channels has and could continue to result in a reduction in sales or change in the mix of products sold.
▪Disruption in services from partners such as third-party service providers used to support various business functions such as benefit plan administration, payroll processing, information technology and cloud computing services could have an adverse effect on the Company's business.
Any of these disruptions could have an adverse effect on the Company’s financial results. Actions taken to mitigate the impact of any potential disruption, including increasing inventory in anticipation of a potential production or supply interruption, may adversely affect the Company’s financial results. Additionally, labor shortages have caused disruptions for many of these providers and may continue to impact the Company's ability to receive inputs or distribute products.
The Company is subject to the loss of a material contract. The Company is a party to several supply, distribution, contract packaging and other material contracts. The loss of a material contract or failure to obtain new material contracts could adversely affect the Company’s financial results.
The Company may be adversely impacted if the Company is unable to protect information technology systems against, or effectively respond to, cyber attacks or security breaches. Information technology systems are an important part of the Company’s business operations. In addition, the Company increasingly relies upon third-party service providers for a variety of business functions, including cloud-based services. Cyber incidents are occurring more frequently and are being made by groups and individuals with a wide range of motives and expertise. From time to time, the Company has experienced, and may experience in the future, breaches of our security measures due to human error, malfeasance, insider threats, system errors or vulnerabilities or other irregularities, none of which have been material to date.
In addition, the Company is in the midst of a multi-year transformation project (Project Orion) to achieve better analytics, customer service, and process efficiencies through the use of Oracle Cloud Solutions. This project is expected to improve the efficiency and effectiveness of certain financial and business transaction processes and the underlying systems environment. The initial phase to implement the human resource and payroll process was deployed during the first quarter of fiscal 2020. During the third quarter of fiscal 2020, the Company implemented the finance phase of the project. Additional integrations are expected to take place over the next few years. Such an implementation is a major undertaking from a financial, management, and personnel perspective. The implementation of the enterprise resource planning system may prove to be more difficult, costly, or time consuming than expected, and there can be no assurance that this system will be beneficial to the extent anticipated.
In an attempt to mitigate these risks, the Company has implemented and continues to evaluate security initiatives and business continuity plans.
Deterioration of labor relations, labor availability or increases in labor costs could harm the Company’s business. As of October 31, 2021, the Company employed more than 20,000 people worldwide, of which approximately 20 percent were represented by labor unions, principally the United Food and Commercial Workers Union. A significant increase in labor costs or a deterioration of labor relations at any of the Company’s facilities or co-manufacturing facilities resulting in work slowdowns or stoppages could harm the Company’s financial results. Labor and skilled labor availability challenges could continue to have an adverse effect on the Company's business.
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Industry Risks
The Company’s operations are subject to the general risks of the food industry. The food products manufacturing industry is subject to the risks posed by:
▪food spoilage;
▪food contamination caused by disease-producing organisms or pathogens, such as Listeria monocytogenes, Salmonella, and pathogenic E coli.;
▪food allergens;
▪nutritional and health-related concerns;
▪federal, state, and local food processing controls;
▪consumer product liability claims;
▪product tampering; and
▪the possible unavailability and/or expense of liability insurance.
The pathogens that may cause food contamination are found generally in livestock and in the environment and thus may be present in our products. These pathogens can also be introduced to our products as a result of improper handling by customers or consumers. We do not have control over handling procedures once our products have been shipped for distribution. If one or more of these risks were to materialize, the Company’s brand and business reputation could be negatively impacted. In addition, revenues could decrease, costs of doing business could increase, and the Company’s operating results could be adversely affected.
Outbreaks of disease among livestock and poultry flocks could harm the Company’s revenues and operating margins.
The Company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including African swine fever (ASF), Bovine Spongiform Encephalopathy (BSE), pneumo-virus, Porcine Circovirus 2 (PCV2), Porcine Reproduction & Respiratory Syndrome (PRRS), Foot-and-Mouth Disease (FMD), Porcine Epidemic Diarrhea Virus (PEDv), and Highly Pathogenic Avian Influenza (HPAI). The outbreak of such diseases could adversely affect the Company’s supply of raw materials, increase the cost of production, reduce utilization of the Company’s harvest facilities, and reduce operating margins. Additionally, the outbreak of disease may hinder the Company’s ability to market and sell products both domestically and internationally.
In recent years, the outbreak of ASF has impacted hog herds in China, Asia, Europe, and the Caribbean. If an outbreak of ASF were to occur in the United States, the Company's supply of hogs and pork could be materially impacted.
The Company has developed business continuity plans for various disease scenarios and will continue to update these plans as necessary. There can be no assurance given, however, that these plans will be effective in eliminating the negative effects of any such diseases on the Company’s operating results.
Fluctuations in commodity prices and availability of raw materials and other inputs could harm the Company’s earnings.The Company’s results of operations and financial condition are largely dependent upon the cost and supply of pork, poultry, beef, feed grains, and nuts as well as supplies, energy and other inputs and the selling prices for many of our products, which are determined by constantly changing market forces of supply and demand.
The company takes a balanced approach to sourcing pork raw materials including hogs purchased for our Austin, Minnesota processing facility, long-term supply agreements for pork, and spot market purchases of pork. This approach ensures a more stable supply of raw materials while minimizing extreme fluctuations in costs over the long-term. This may result, in the short-term, in higher or lower live hog costs compared to the cash spot market. Market-based pricing on certain product lines, and lead time required to implement pricing adjustments, may prevent all or part of these cost increases from being recovered, and these higher costs could adversely affect our short-term financial results.
Jennie-O Turkey Store raises turkeys and contracts with turkey growers to meet its raw material requirements for whole birds and processed turkey products. Results in these operations are affected by the cost and supply of feed grains, which fluctuates due to climate conditions, production forecasts, and supply and demand conditions at local, regional, national, and worldwide markets. The Company attempts to manage some of its short-term exposure to fluctuations in feed prices by forward buying, using futures contracts, and pursuing pricing advances. However, these strategies may not be adequate to overcome sustained increases in market prices due to alternate uses for feed grains or other changes in these market conditions.
The Company may be subject to decreased availability or less favorable pricing for nuts, tomatoes, avocados, or other produce if poor growing conditions have a negative affect on agricultural productivity. Reductions in crop size or quality due to unfavorable growing conditions may have an adverse effect on the Company’s results.
The supplies of natural and organic proteins may impact the Company’s ability to ensure a continuing supply of these products. To mitigate this risk, the Company partners with multiple long-term suppliers.
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International trade barriers and other restrictions or disruptions could result in decreased foreign demand and increased domestic supply of proteins, thereby potentially lowering prices. The Company occasionally utilizes in-country production to limit this exposure.
Market demand for the Company’s products may fluctuate. The Company faces competition from producers of alternative meats and protein sources, including pork, beef, turkey, chicken, fish, nuts, nut butters, whey, and plant-based proteins. The factors on which the Company competes include:
▪price;
▪product quality and attributes;
▪brand identification;
▪breadth of product line; and
▪customer service.
Demand for the Company’s products is also affected by competitors’ promotional spending, the effectiveness of the Company’s advertising and marketing programs, and consumer perceptions. Failure to identify and react to changes in food trends such as sustainability of product sources and animal welfare could lead to, among other things, reduced demand for the Company’s brands and products. The Company may be unable to compete successfully on any or all of these factors in the future.
Legal and Regulatory Risks
The Company’s operations are subject to the general risks of litigation. The Company is involved on an ongoing basis in litigation arising in the ordinary course of business. Trends in litigation may include class actions involving employees, consumers, competitors, suppliers, shareholders, or others, and claims relating to product liability, contract disputes, antitrust regulations, intellectual property, advertising, labeling, wage and hour laws, employment practices or environmental matters. Neither litigation trends nor the outcomes of litigation can be predicted with certainty and adverse litigation trends and outcomes could negatively affect the Company’s financial results.
Government regulation, present and future, exposes the Company to potential sanctions and compliance costs that could adversely affect the Company’s business. The Company’s operations are subject to extensive regulation by the U.S. Department of Homeland Security, the U.S. Department of Agriculture, the U.S. Food and Drug Administration, federal and state taxing authorities and other federal, state, and local authorities which oversee workforce immigration, taxation, animal welfare, food safety, and the processing, packaging, storage, distribution, advertising, and labeling of the Company’s products. The Company’s manufacturing facilities and products are subject to ongoing inspection by federal, state and local authorities. Claims or enforcement proceedings could be brought against the Company in the future. The availability of government inspectors due to a government furlough could also cause disruption to the Company’s manufacturing facilities. Additionally, the Company is subject to new or modified laws, regulations, and accounting standards. The Company’s failure or inability to comply with such requirements could subject the Company to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions. A recent federal district court ruling has had a negative impact on harvest capacity and labor costs. Harvest facilities the Company uses are negotiating to resolve the situation and expect to reach a solution, but harvest capacity and labor costs will continue to be negatively impacted until a solution is reached. There can be no assurance a solution will be reached, in which case the negative impacts of the ruling would continue.
The Company is subject to stringent environmental regulation and potentially subject to environmental litigation, proceedings, and investigations. The Company’s past and present business operations and ownership and operation of real property are subject to stringent federal, state, and local environmental laws and regulations pertaining to the discharge of materials into the environment and the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment. Compliance with these laws and regulations, as well as any modifications, is material to the Company’s business. Some of the Company’s facilities have been in operation for many years and, over time, the Company and other prior operators of these facilities may have generated and disposed of wastes that now may be considered hazardous. Future discovery of contamination of property underlying or in the vicinity of the Company’s present or former properties or manufacturing facilities and/or waste disposal sites could require the Company to incur additional expenses related to additional investigation, assessment or other requirements. The occurrence of any of these events, the implementation of new laws and regulations or stricter interpretation of existing laws or regulations could adversely affect the Company’s financial results.
The Company’s foreign operations pose additional risks to the Company’s business. The Company operates its business and markets its products internationally. The Company’s foreign operations are subject to the risks described above, as well as risks related to fluctuations in currency values, foreign currency exchange controls, compliance with foreign laws, compliance with applicable U.S. laws, including the Foreign Corrupt Practices Act, and other economic or political uncertainties. International sales are subject to risks related to general economic conditions, imposition of tariffs, quotas, trade barriers and other restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws, and other economic and political uncertainties. All of these risks could result in increased costs or decreased revenues, which could adversely affect the Company’s financial results.
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Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
The Company's global headquarters are located in Austin, Minnesota. The Company has various processing plants, warehouses and operational facilities, mainly located in the United States. The Company maintains a national sales force through strategic placement of sales offices throughout the United States. Properties are also maintained internationally to support global processing and sales. The majority of Company property is owned. Leased property is used as needed for Company production and sales. Property leases range in duration from one to twelve years.
*Many of the Company's properties are utilized by more than one segment. These facilities are reflected in the principle segment for presentation purposes. Additionally, turkey growout facilities are excluded.
The Company believes its operating facilities are well maintained and suitable for current production volumes. The Company regularly engages in construction and other capital improvement projects with a focus on value-added capacity projects and automation. In fiscal 2021, the Company acquired the Planters® snack nut business which included three production facilities primarily reflected within the Grocery Products segment.
Item 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings related to the ongoing operation of its business, including claims both by and against the Company. At any time, such proceedings typically involve claims related to product liability, labeling, contracts, antitrust regulations, intellectual property, competition laws, employment practices, or other actions brought by employees, customers, consumers, competitors or suppliers. The Company establishes accruals for its potential exposure, as appropriate, for claims against the Company when losses become probable and reasonably estimable. However, future developments or settlements are uncertain and may require the Company to change such accruals as proceedings progress. Resolution of any currently known matters, either individually or in the aggregate, is not expected to have a material effect on the Company’s financial condition, results of operations, or liquidity.
The Company is a defendant in three sets of antitrust lawsuits broadly targeting the pork and turkey industries. None of these cases involve allegations of bid rigging or other criminal conduct. The Company has not established reserves as it does not believe it will have liability in any of these cases.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
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Information About Executive Officers
CURRENT OFFICE AND PREVIOUS
NAME AGE FIVE YEARS EXPERIENCE DATES
Senior Vice President and Chief Financial Officer 10/31/16 to 01/28/19
Group Vice President (Corporate Strategy) 04/05/21 to 12/31/21
Group Vice President/President Consumer Product Sales 10/26/15 to 10/27/19
Mark A. Coffey 59 Group Vice President (Supply Chain) 04/26/21 to Present
Senior Vice President (Supply Chain and Manufacturing) 03/28/17 to 04/25/21
Jeffery R. Frank 45 Group Vice President (Grocery Products) 11/01/21 to Present
Vice President (Grocery Products Marketing) 03/01/21 to 10/31/21
President & Chief Executive Officer (MegaMex) 10/28/13 to 04/29/18
Senior Vice President/President Jennie-O Turkey Store, Inc. 12/04/17 to 03/21/21
Luis G. Marconi 55 Group Vice President (Grocery Products) 10/31/16 to Present
Janet L. Hogan 57 Senior Vice President (Human Resources) 03/28/17 to Present
Senior Vice President (Human Resources), ProQuest LLC 10/10/16 to 01/17/17
Vice President (Corporate Communications) 04/13/15 to 10/31/21
Jana L. Haynes 49 Vice President and Controller 05/30/16 to Present
Gary L. Jamison 56 Vice President and Treasurer 05/30/16 to Present
No family relationship exists among the executive officers.
Executive officers are designated annually by the Board of Directors at the first meeting following the Annual Meeting of Stockholders. Vacancies may be filled and additional officers elected at any time. The Company's Chief Executive Officer has the authority to appoint and remove Vice Presidents (other than Executive Vice Presidents, Group Vice Presidents, and Senior Vice Presidents).
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PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUERPURCHASES OF EQUITY SECURITIES
Market Information
Hormel Foods Corporation’s common stock is traded on the New York Stock Exchange under the symbol HRL. The CUSIP number is 440452100.
Holders
There are approximately 12,300 record stockholders and 186,000 stockholders whose shares are held in street name by brokerage firms and financial institutions.
Issuer Purchases of Equity Securities
Fourth Quarter Ended October 31, 2021
1 On January 29, 2013, the Company's Board of Directors authorized the repurchase of 10,000,000 shares of its common stock with no expiration date. On January 26, 2016, the Board of Directors approved a two-for-one split of the Company’s common stock to be effective January 27, 2016. As part of the stock split resolution, the number of shares remaining to be repurchased was adjusted proportionately.
Dividends
The Company has paid dividends for 373 consecutive quarters. The annual dividend rate for fiscal 2022 was increased 6 percent to $1.04 per share, representing the 56th consecutive annual dividend increase. The Company is dedicated to returning excess cash flow to shareholders through dividend payments.
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Shareholder return performance graph
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend-reinvested basis, for the Company, the S&P 500 Index, and the S&P 500 Packaged Foods & Meats Index for the five years ended October 31, 2021. The graph assumes $100 was invested in each, as of the market close on October 31, 2016. Note that historic stock price performance is not necessarily indicative of future stock price performance.
Item 6. RESERVED
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OFOPERATIONS
Executive Overview
Fiscal 2021: The Company achieved record sales of $11.4 billion, a 19 percent increase from fiscal 2020, driven by double-digit growth from all four business segments and from all four go-to-market channels (U.S. retail, U.S. foodservice, U.S. deli, and international). Organic volume and organic net sales1 increased 1 percent and 14 percent, respectively (1See explanation of non-GAAP financial measures in the Consolidated Results section). Strong growth from the foodservice businesses, higher pricing across all segments, and the inclusion of the Planters® snack nuts business were the primary drivers of net sales growth. Demand remained elevated across the domestic retail, domestic deli, and international channels, while the domestic foodservice business experienced a significant recovery after the sharp decline experienced last year as a result of the COVID-19 pandemic. Net earnings were in line with last year as improved volume and sales were unable to offset higher costs as a result of inflation on raw materials, freight, labor, and supplies. Diluted earnings per share for fiscal 2021 was $1.66, flat to last year. The net impact to after-tax earnings from one-time acquisition costs and accounting adjustments related to the acquisition of the Planters® snack nuts business were approximately $37 million, or six cents per share, for fiscal 2021.
Refrigerated Foods segment profit for the full year increased as higher earnings from the foodservice business and the impact of numerous pricing actions fully offset significantly higher raw material costs, increased freight expenses, and higher operational costs. Grocery Products segment profit increased due to the addition of the Planters® snack nuts business and improved organic sales. International & Other segment profit improved significantly for the full year, driven by gains from exports, higher income from the Company's partners in the Philippines, South Korea, and Europe, and strong results in China. Earnings for Jennie-O Turkey Store declined due primarily to higher feed costs and increased freight expenses. Volume, net sales, and segment profit for all business segments were constrained by production labor shortages and supply chain disruptions during the second half of the fiscal year.
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During fiscal 2021, the Company continued to prioritize investments to ensure the safety of all team members. For the full year, we absorbed approximately $21 million in direct incremental supply chain costs related to the COVID-19 pandemic to enhance safety measures in its production facilities related to the COVID-19 pandemic. The Company estimates most of these incremental supply chain costs are temporary and will eventually decline as the pandemic subsides. In addition to COVID-related investments, volume, net sales, and segment profit were negatively impacted by labor shortages and supply chain disruption.
The Company reinvested into the business through capital expenditures and returned a record amount of cash back to shareholders in the form of dividends. Capital expenditures in fiscal 2021 were $232 million, including investments in a pizza toppings expansion at our manufacturing facility in Nevada, Iowa, expanding capacity for Columbus® charcuterie in Omaha, Nebraska, significant progress on new production capabilities for retail and foodservice pepperoni, Project Orion, and many other projects to support growth of branded products. The annual dividend for 2022 will be $1.04 per share and marks the 56th consecutive year of dividend increases, representing an increase of 6 percent.
In June 2021, the Company acquired the Planters® snack nuts business for $3.4 billion in cash. Included in the acquisition were the Planters® , NUT-rition® , Planters® Cheez Balls and Corn Nuts® brands. This acquisition amplifies our scale in snacking and entertaining by complementing its other brands in the space, including Hormel® Gatherings®, Herdez®, Wholly®, SKIPPY®, and Columbus®.
Fiscal 2022 Outlook: The Company expects all four segments to deliver sales and earnings growth in fiscal 2022. On a consolidated basis, growth is expected in excess of our long-term growth algorithm due to strength in the Planters® snack nuts business, continued elevated demand across all businesses, improved production throughput, incremental capacity on high-growth categories such as pizza toppings and dry sausage, and the benefit from numerous pricing actions executed during fiscal 2021. The operating environment is expected to remain complex. Industry-wide labor shortages, incremental inflationary pressures, and further supply chain disruption pose the greatest risks to the outlook.
The Company remains in a strong financial position due to its consistent cash flow, liquidity, and strong balance sheet. We plan to continue to support the business through marketing and advertising investments for our leading brands as well as investments into our production capabilities, including new capacity for retail and foodservice pepperoni and a new production line for the SPAM® family of products. We also expect to benefit from the progress we have made on our Project Orion and One Supply Chain initiatives to transform our company and position it for long-term growth. Lastly, we remain committed to returning cash to shareholders in the form of dividends.
A detailed review of the Company's fiscal 2021 performance compared to fiscal 2020 appears in following section. A detailed review of the fiscal 2020 performance compared to fiscal 2019 is set forth in Part II, Item 7 of the Company's Form 10-K for the fiscal year ended October 25, 2020 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated herein by reference.
Results of Operations
Overview
The Company is a processor of branded and unbranded food products for retail, foodservice, deli, and commercial customers.
The Company operates in the following four reportable segments:
Segment Business Conducted
The Company’s fiscal year consisted of 53 weeks in fiscal year 2021 and 52 weeks in fiscal years 2020 and 2019. Fiscal 2022 will consist of 52 weeks.
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CONSOLIDATED RESULTS
Net Earnings and Diluted Earnings Per Share
Fourth Quarter Ended Year Ended
Volume and Net Sales
Fourth Quarter Ended Year Ended
(1) See the "Non-GAAP Financial Measures" section below for a description of the Company's use of measures not defined by Generally Accepted Accounting Principles (GAAP)
Net sales for the fourth quarter were an all-time record, benefiting from pricing actions across the entire portfolio, organic volume growth, and the inclusion of the Planters® snack nuts business. Results from the foodservice businesses in Refrigerated Foods and Jennie-O Turkey Store were particularly strong due to the continued recovery in the foodservice industry after a significant decline in net sales in the fourth quarter of 2020.
For fiscal 2021, net sales were an all-time record. Strong growth from the foodservice businesses, higher pricing across all segments, and the inclusion of the Planters® snack nuts business were the primary drivers.
In fiscal 2022, the Company expects net sales growth from all four business segments, driven primarily by the impact of higher pricing across the portfolio, volume growth from the value-added businesses, and the benefit of a full year of the Planters® snack nuts business. Offsetting a portion of this growth will be the impact from the new pork supply agreement, which is expected to have a negative cumulative impact on the Refrigerated Foods and International & Other business segments of approximately $350 million.
Cost of Products Sold
Fourth Quarter Ended Year Ended
October 31, October 25, October 31, October 25,
For fiscal 2021, cost of products sold for the fourth quarter and full year increased due to inflationary pressures stemming from raw materials, packaging, freight, labor, and many other inputs. The inclusion of the Planters® snack nuts business during the third quarter was also a driver of higher costs.
Direct incremental supply chain costs related to the COVID-19 pandemic for fiscal 2021 were approximately $21 million. This compares to approximately $80 million of higher operational costs related to the COVID-19 pandemic incurred during fiscal 2020.
In fiscal 2022, the Company expects cost of products sold to be higher due to the inclusion of the Planters® snack nuts business and continued inflation. Raw material input costs for pork, beef, turkey, and feed are anticipated to remain above historical levels.
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Gross Profit
Fourth Quarter Ended Year Ended
October 31, October 25, October 31, October 25,
Consolidated gross profit as a percentage of net sales for the fourth quarter and full year declined, driven primarily by broad-based inflationary pressures and a lag in mitigating pricing actions. Gross profit as a percentage of net sales for the fourth quarter of fiscal 2021 increased sequentially compared to the third quarter of fiscal 2021 as pricing actions across the entire portfolio became effective. Gross profit as a percentage of net sales declined for all four business segments in the fourth quarter and for the full year compared to fiscal 2020.
In fiscal 2022, the Company expects gross profit as a percentage of net sales to improve due to the impact of pricing actions taken across all business segments during fiscal 2021. Incremental cost inflation poses the largest risk to this assumption. The Company also expects to benefit in the first half of fiscal 2022 from the positive mix impact from the addition of the Planters® snack nuts business.
Selling, General, and Administrative (SG&A)
Fourth Quarter Ended Year Ended
October 31, October 25, October 31, October 25,
Percentage of Net Sales 6.7 % 7.9 % 7.5 % 7.9 %
SG&A expenses for the fourth quarter and full year increased due to the incremental and one-time acquisition-related costs related to the Planters® snack nuts business and higher employee-related expenses. As a percentage of sales, SG&A declined for both the fourth quarter and full year due to record net sales and disciplined expense management.
Advertising investments in the fourth quarter were $43 million compared to $29 million in fiscal 2020, an increase of 48 percent. Advertising investments increased 12 percent for the full year.
In fiscal 2022, the Company intends to continue investing in key brands including Planters®, SPAM®, SKIPPY®, Columbus®, Hormel® Black Label®, Hormel® pepperoni, and Jennie-O®.
Research and development continues to be a vital part of the Company's strategy to grow existing brands and expand into new branded items. Research and development expenses were $8.3 million and $33.6 million for the fiscal 2021 fourth quarter and year, respectively, compared to $8.4 million and $31.9 million for the corresponding periods in fiscal 2020.
Equity in Earnings of Affiliates
Fourth Quarter Ended Year Ended
October 31, October 25, October 31, October 25,
Equity in earnings of affiliates for the fourth quarter of fiscal 2021 increased due to improved earnings from the Company's joint venture in the Philippines. For the full year, equity in earnings of affiliates increased significantly due to strength at MegaMex and in the Philippines.
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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 receivables from other affiliates, are included in the Consolidated Statements of Financial Position as investments in and receivables from affiliates. The composition of this line item as of October 31, 2021, was as follows:
(in thousands) Investments/Receivables
Interest and Investment Income and Interest Expense
Fourth Quarter Ended Year Ended
October 31, October 25, October 31, October 25,
Effective Tax Rate
Fourth Quarter Ended Year Ended
October 31, October 25, October 31, October 25,
The effective tax rate for fiscal 2021 was impacted by stock-based compensation. The effective tax rate for fiscal 2020 was impacted by stock-based compensation and state tax settlements. For additional information, refer to Note N - Income Taxes.
The Company expects the effective tax rate in fiscal 2022 to be between 20.5 and 22.5 percent.
SEGMENT RESULTS
Net sales and operating profits for each of the Company’s reportable segments 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. Additional segment financial information can be found in Note P - Segment Reporting.
Fourth Quarter Ended Year Ended
October 31, October 25, October 31, October 25,
Net Sales
Segment Profit
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Grocery Products
Fourth Quarter Ended Year Ended
October 31, October 25, October 31, October 25,
Net sales for the fourth quarter of fiscal 2021 increased significantly due to the inclusion of the Planters® snack nuts business, higher pricing, and organic volume growth from the center store and Mexican foods portfolios. Growth from brands such as SPAM®, Hormel® Compleats®, Wholly®, and SKIPPY® contributed to the strong results. For fiscal 2021, net sales increased due to the contribution from the Planters® snack nuts business and the benefit of pricing actions across the portfolio, especially in the fourth fiscal quarter.
For the fourth quarter and full year, segment profit increased due to the addition of the Planters® snack nuts business and improved organic sales. Higher pricing across the portfolio helped mitigate inflationary pressure. Volume, net sales, and segment profit were constrained by production labor shortages and supply chain disruptions.
Looking ahead to fiscal 2022, Grocery Products expects to continue to benefit from the addition of the Planters® snack nuts business, pricing actions taken on most product lines, and strong demand for many of its leading retail and Mexican foods brands. Risks to profitability include additional inflationary pressures and labor shortages impacting production on key product lines.
Refrigerated Foods
Fourth Quarter Ended Year Ended
October 31, October 25, October 31, October 25,
The continued recovery in the foodservice industry, numerous pricing actions, and strong demand led to significant net sales growth in the fourth quarter of fiscal 2021. Compared to last year, the foodservice business delivered volume and net sales gains in every category. Retail and deli net sales benefited from higher pricing and continued elevated demand for products such as Columbus® grab-and-go items, Hormel® Gatherings® party trays, Hormel® Black Label® bacon, Hormel® pepperoni, and Applegate® natural and organic meats. For the full year, net sales increased due to strong growth from the retail, deli, and foodservice businesses within Refrigerated Foods, which benefited from pricing actions impacting the second half of the year.
Segment profit for the fourth quarter increased primarily due to higher foodservice sales. Higher pricing across the portfolio helped mitigate inflationary pressure. For fiscal 2021, higher earnings from the foodservice business and the impact of numerous pricing actions fully offset significantly higher raw material costs, increased freight expenses, and higher operational expenses. Volume, net sales, and segment profit were constrained by production labor shortages and supply chain disruptions.
In fiscal 2022, Refrigerated Foods is expecting continued net sales growth from the retail, deli, and foodservice businesses due to strong demand and pricing actions taken throughout fiscal 2021. Net sales will be negatively impacted by lower commodity sales due to the new pork supply contract. Profitability is expected to improve due to higher pricing and a more profitable product mix. Risks to profitability include additional inflationary pressures and labor shortages impacting production on key product lines.
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Jennie-O Turkey Store
Fourth Quarter Ended Year Ended
October 31, October 30, October 31, October 30,
For the fourth quarter of fiscal 2021, volume and sales increased as the continued recovery in foodservice, strong demand for Jennie-O® retail items, and higher prices across the portfolio more than offset the negative impact from shifting whole bird shipments to earlier in the year. For the full year, sales increased significantly due to favorable commodity prices and higher value-added volumes and pricing.
Segment profit for the fourth quarter and full year 2021 declined due primarily to higher feed costs and increased freight expenses.
Looking ahead to fiscal 2022, Jennie-O Turkey Store expects momentum from its value-added and commodity businesses to continue due to the benefit of improved pricing and strong demand. Segment profit is expected to improve in fiscal 2022 due to higher pricing. Increased feed, operational, and logistics costs are expected to weigh on profitability near-term, with improvement expected in the back half of the year.
International & Other
Fourth Quarter Ended Year Ended
October 31, October 25, October 31, October 25,
Net sales growth for the fourth quarter and full year was broad-based, driven by strong demand and higher prices for branded exports and improved results in China. Fresh pork export volume declined for the quarter and for the full year due to labor shortages.
For the fourth quarter of fiscal 2021, all areas of the business delivered growth in segment profits, led by higher export margins and China. Segment profit improved significantly for the full year, driven by gains from exports, higher income from the Company's partners in the Philippines, South Korea, and Europe, and strong results in China.
The International & Other segment anticipates business momentum to continue, led by growth in China, strong export demand, and the impact of higher prices in fiscal 2022. Net sales and profits will be modestly impacted by lower commodity sales due to the new pork supply contract. International shipping interruptions pose a risk to export sales and profit growth.
Unallocated Income and Expense
The Company does not allocate deferred compensation, investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at the corporate level. Equity in Earnings of Affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included in the segment table for the purpose of reconciling segment results to Earnings Before Income Taxes.
Fourth Quarter Ended Year Ended
October 31, October 25, October 31, October 25,
Net Unallocated Expense decreased for the fourth quarter of fiscal 2021 as favorable reserve adjustments more than offset higher interest expense and lower investment income. For the full year, Net Unallocated Expense increased significantly due to one-time acquisition costs and accounting adjustments related to the acquisition of the Planters® snack nuts business of $43 million and higher interest expense. These increases were partially offset by higher investment income.
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Non-GAAP Financial Measures
The non-GAAP adjusted financial measurements of adjusted operating income, adjusted selling, general, and administrative expenses, and adjusted diluted earnings per share are presented to provide investors with additional information to facilitate the comparison of past and present operations. These measurements exclude the impact of the acquisition-related expenses and accounting adjustments related to the acquisition of the Planters® snack nuts business. The tax impact was calculated using the effective tax rate for the quarter in which the expenses and accounting adjustments were incurred.
The non-GAAP adjusted financial measurements of organic net sales and organic volume are presented to provide investors with additional information to facilitate the comparison of past and present operations. Organic net sales and organic volume are defined as net sales and volume, excluding the impact of acquisitions and divestitures. Organic net sales and organic volume exclude the impacts of the acquisition of the Planters® snack nuts business (June 2021) in the Grocery Products, Refrigerated Foods, and International & Other segments and the Sadler's Smokehouse acquisition (March 2020) in the Refrigerated Foods segment.
The Company provides Earnings before interest and taxes (EBIT) and Earnings before interest, taxes, depreciation and amortization (EBITDA) because these measures are useful to management and investors as indicators of operating strength relative to prior years and are commonly used to benchmark the Company’s performance.
The Company believes these non-GAAP financial measurements provide useful information to investors because they are the measurements used to evaluate performance on a comparable year-over-year basis. Non-GAAP measurements are not intended to be a substitute for U.S. GAAP measurements in analyzing financial performance. These non-GAAP measurements are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.
The tables below show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures.
ADJUSTED DILUTED EARNINGS PER SHARE (NON-GAAP)
Year Ended
Less: Net Earnings Attributable to Noncontrolling Interest 301 — 301 272 10.7
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ORGANIC VOLUME (NON-GAAP)
Fourth Quarter Ended
Year Ended
ORGANIC NET SALES (NON-GAAP)
Fourth Quarter Ended
Year Ended
EBIT and EBITDA
Year Ended
EBIT:
Net Earnings Attributable to Hormel Foods Corporation $ 908,839 $ 908,082
EBITDA:
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LIQUIDITY AND CAPITAL RESOURCES
When assessing liquidity and capital resources, the Company evaluates cash and cash equivalents, short-term and long-term investments, income from operations, and borrowing capacity.
Cash Flow Highlights
Year Ended
Cash and Cash Equivalents $ 614 $ 1,714
Cash Provided By (Used in) Operating Activities 1,002 1,128
Cash Provided by (Used in) Investing Activities (3,626) (656)
Cash Provided by (Used in) Financing Activities 1,521 566
Cash and cash equivalents declined in fiscal 2021 as the Company made significant investments in the acquisition of the Planters® snack nuts business, dividend payments, repayment of long-term debt, and capital expenditures. Additional details related to significant drivers of cash flows are provided below.
Cash Provided by (Used in) Operating Activities
▪Cash flows from operating activities were largely impacted by changes in operating assets and liabilities.
–Accounts receivable increased $192 million in fiscal 2021 primarily due to increased sales and the incremental impact of the Planters® snack nuts business. The $120 million increase in fiscal 2020 is largely due to increased sales and the timing of collections.
–In fiscal 2021, inventory increased $145 million due to inflation in raw material and supplies and the acquisition of the Planters® snack nuts business.
–Accounts payable and accrued expenses increased $115 million in fiscal 2021 related to the incremental impact of the Planters® snack nuts business. In fiscal 2020, cash flows benefited from a $111 million increase due to the timing of payments.
Cash Provided by (Used in) Investing Activities
▪In fiscal 2021, the Company acquired the Planters® snack nuts business for $3.4 billion. In fiscal 2020, the Company acquired the assets of Sadler's Smokehouse for $271 million.
▪Capital expenditures were $232 million and $368 million in fiscal 2021 and 2020, respectively. Significant spending included several multi-year projects including the pizza toppings expansion at our manufacturing facility in Nevada, Iowa, a new dry sausage facility in Omaha, Nebraska, and Project Orion, as well as ongoing investments to support food and employee safety and the growth of branded products.
Cash Provided by (Used in) Financing Activities
▪The Company issued $2.3 billion and $1.0 billion of long-term debt in fiscal 2021 and 2020, respectively. Proceeds from these issuances, along with cash on hand, were used to fund the acquisition of the Planters® snack nuts business. See Note L - Long-term Debt and Other Borrowing Arrangements for more information.
▪Cash dividends paid to the Company’s shareholders continues to be an ongoing financing activity for the Company with payments totaling $523 million in fiscal 2021 and $487 million in fiscal 2020. The dividend rate was $0.98 per share in fiscal 2021, which reflected a 5 percent increase over the fiscal 2020 rate of $0.93 per share.
▪The Company repaid $250 million of its senior unsecured notes upon maturity in fiscal 2021.
Sources and Uses of Cash
The Company believes its balanced business model, with diversification across raw material inputs, channels, and categories, provides stability in ever changing economic environments. The Company applies a waterfall approach to capital resource allocation, which focuses first on required uses of cash such as capital expenditures to maintain facilities, dividend returns to investors, and mandatory debt repayments. Next, the Company looks to strategic items in support of growth initiatives such as acquisitions and innovation investments, which is followed by opportunistic uses including incremental debt repayment and share repurchases. The Company believes its anticipated income from operations, cash on hand, and borrowing capacity under the current credit facility will be adequate to meet all short-term and long-term commitments. The Company's ability to leverage its balance sheet through the issuance of debt provides the flexibility to take advantage of strategic opportunities which may require additional funding.
Capital expenditures for fiscal 2022 are estimated to be $310 million. The largest projects are expected to include new capacity for retail and foodservice pepperoni and a new production line for the SPAM® family of products.
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The Company remains committed to providing a return to investors through cash dividends. The annual dividend rate for fiscal 2022 was increased 6 percent to $1.04 per share, representing the 56th consecutive annual dividend increase.
The following table shows the Company's other material cash commitments as of October 31, 2021:
(in millions) Payments Due by Periods
Total Less than 1 year 1-3 years 3-5 years More than 5 years
Pension & Other Post-retirement Benefit Payments(3) 322 31 64 65 161
(1)The Company commits to purchase quantities of livestock, grain, and other raw materials to ensure a steady supply of production inputs. The Company uses hedging programs to manage price risk associated with a portion of the future grain and hog commitments. The purchase commitments listed above do not reflect the impact of the hedging instruments that manage the risk of fluctuating commodity markets. See Note F - Derivatives and Hedging and Note J - Commitments and Contingencies for more information.
(2) As of October 31, 2021, the Company’s outstanding debt included unsecured senior notes due in fiscal 2024, 2028, 2030, and 2051. The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of October 31, 2021, the Company was in compliance with all debt covenants. See Note L - Long-term Debt and Other Borrowing Arrangements for additional details.
(3) Represents pension and other post-retirement benefit payments related to the Company's unfunded defined benefit plans. Benefit payments reflect expectations for the next ten years as estimates are not readily available beyond that point. See Note G - Pension and Other Post-retirement Benefits for additional details.
(4) For more information on the Company's lease obligations, see Note K - Leases.
As of October 31, 2021, the Company had $47.3 million of standby letters of credit issued on its behalf. The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs. However, this amount includes revocable standby letters of credit totaling $3.1 million for obligations of an affiliated party that may arise under workers compensation claims. Letters of credit are not reflected in the Company’s Consolidated Statements of Financial Position.
CRITICAL ACCOUNTING ESTIMATES
This discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. See Note A - Summary of Significant Accounting Policies for additional information.
Critical accounting estimates are defined as those reflective of significant judgments, estimates and uncertainties, which may result in materially different results under different assumptions and conditions. As conditions resulting from the COVID-19 pandemic continue to evolve, the Company expects these judgments and estimates may be subject to change, which could materially impact future periods. The Company believes the following are its critical accounting estimates:
Revenue Recognition
Description: The Company recognizes sales at the point in time when the performance obligation has been satisfied and control of the product has transferred to the customer. Obligations for the Company are usually fulfilled once shipped product is received or picked up by the customer. Revenue is recorded net of applicable provisions for discounts, returns, and allowances.
Judgments and Uncertainties: The Company offers various sales incentives to customers and consumers. Incentives offered off-invoice include prompt pay allowances, will call allowances, spoilage allowances, and temporary price reductions. These incentives are recognized as reductions of revenue at the time control is transferred. Coupons are used as an incentive for consumers to purchase various products. The coupons reduce revenues at the time they are offered, based on estimated redemption rates. Promotional contracts are performed by customers to promote the Company’s products to consumers. These incentives reduce revenues at the time of performance through direct payments and accrued promotional funds. Accrued promotional funds are unpaid liabilities for promotional contracts in process or completed at the end of a quarter or fiscal year. Accruals with customers are based on defined performance.
Sensitivity of Estimate to Change: The liability relating to these agreements is based on a review of the outstanding contracts on which performance has taken place but which the promotional payments relating to such contracts remain unpaid as of the
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end of the fiscal year. The level of customer performance and the historical spend rate versus contracted rates are estimates used to determine these liabilities.
Income Taxes
Description: The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur.
Judgments and Uncertainties: The Company computes its provision for income taxes based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it operates. Judgment is required in evaluating the Company’s tax positions and determining its annual tax provision.
Sensitivity of Estimate to Change: While the Company considers all of its tax positions fully supportable, the Company is occasionally challenged by various tax authorities regarding the amount of taxes due. The Company recognizes a tax position in its financial statements when it is more likely than not the position will be sustained upon examination, based on its technical merits. The position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. A change in judgment related to the expected ultimate resolution of uncertain tax positions will be recognized in earnings in the quarter of such change. As of October 31, 2021, the Company had $27.1 million of unrecognized tax benefits, including interest and penalties, recorded in Other Long-term Liabilities.
Business Combinations
Description: The Company accounts for business combinations using the acquisition method of accounting. The Company allocates the purchase price of an acquired business to the assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date with the excess recorded as Goodwill.
Judgments and Uncertainties: The acquisition method of accounting requires the Company to make significant estimates and assumptions regarding the fair value of the acquired assets. Fair value of the assets and liabilities acquired is determined through established valuation techniques, such as the income, cost or market approach. The Company may utilize third-party valuation experts to assist in the fair value determination. The fair value measurements of identifiable intangibles are based on available historical information and expectations and assumptions about the future. Significant assumptions used to value identifiable intangible assets may include projected revenue growth, estimated cash flows, discount rates, royalty rates, and other factors.
Determining the useful life of an intangible asset also requires judgment. Certain acquired brands are expected to have indefinite lives based on their history and the Company’s intent to continue to support and build the brands. Other acquired assets, such as customer relationships, are expected to have determinable useful lives.
Sensitivity of Estimate to Change: On June 7, 2021 the Company acquired the Planters® snack nuts business for $3.4 billion and used a third-party valuation specialist to perform the valuation of the assets acquired. Refer to Note B - Acquisitions and Divestitures for more information. The Company acquired tradenames which were determined to have a fair value of $712.0 million. Key assumptions used to calculate the fair value of the tradenames using a relief from royalty model included revenue projections, royalty rates, and discount rates. The Company also identified customer relationships which were assigned a fair value of $51.0 million using the distributor method under the income approach. Assumptions in valuing this asset included future earnings projections, customer attrition rate, and discount rate, among others. The Company believes the estimates applied to be based on reasonable assumptions, but which are inherently uncertain. As a result, actual results may differ from the assumptions and judgments used to determine fair value of the assets acquired, which could result in material impairment losses in the future.
Goodwill and Other Indefinite-Lived Intangibles
Description: Other indefinite-lived intangible assets primarily include tradenames obtained through business acquisitions which are originally recorded at their estimated fair values at the date of acquisition. Goodwill is the residual after allocating the purchase price to net assets acquired and is allocated across the Company’s reporting units: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International. Goodwill and indefinite-lived intangible assets are not amortized but tested annually for impairment, or more frequently if impairment indicators arise. If the carrying value of these assets exceeds the estimated fair value, the asset is considered impaired which requires a reduction to earnings. See Note A - Summary of Significant Accounting Policies for additional details regarding the Company’s procedures.
Judgments and Uncertainties: Determining whether impairment indicators exist and estimating the fair value of the Company’s goodwill reporting units and intangible assets for impairment testing requires significant judgment. Indefinite-lived tradenames are evaluated for impairment using an income approach utilizing the relief from royalty method. Significant assumptions include
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royalty rate, annual projected revenue, discount rate, and estimated long term growth rate. Estimating the fair value of goodwill reporting units using the discounted cash flow model requires management to make assumptions and projections of future cash flows, revenues, earnings, discount rates, long term growth rates, and other factors.
Sensitivity of Estimate to Change: The assumptions used to assess impairment consider historical trends, macroeconomic conditions, and projections consistent with the Company’s operating strategy. Changes in these estimates can have a significant impact on the assessment of fair value which could result in material impairment losses.
During the fourth quarter of fiscal 2021, the Company elected to perform a quantitative assessment of goodwill. No goodwill impairment charges were recorded as a result of the testing and the estimated fair value of each goodwill reporting unit exceeded the calculated carrying value by more than 50 percent. A 10 percent decline in projected cash flows or 10 percent increase in the discount rate would not result in an impairment.
The Company also elected to perform quantitative impairment testing for indefinite-lived intangible assets. The estimated fair value of each indefinite-lived intangible asset exceeded the carrying value by more than 10 percent as such no impairment charges were recorded. A 10 percent decline in forecasted revenue or 10 percent increase in the discount rate would not result in a material impairment.
Pension and Other Post-Retirement Benefits
Description: The Company sponsors several defined benefit pension and post-retirement health care benefit plans and recognizes the associated expenses, assets, and liabilities.
Judgments and Uncertainties: In accounting for these employment costs and the associated benefit obligations, management must make a variety of assumptions and estimates including mortality rates, discount rates, compensation increases, expected return on plan assets, and health care cost trend rates. The Company considers historical data as well as current facts and circumstances when determining these estimates. Expected long-term rate of return on plan assets is based on fair value, composition of the asset portfolio, historical long-term rates of return, and estimates of future performance. Mortality and discount rates used are based on actuarial tables elected at each fiscal year-end. The Company uses third-party specialists to assist in the determination of these estimates and the calculation of certain employee benefit expenses and the outstanding obligation.
Benefit plan assets are stated at fair value. Due to the lack of readily available market prices, private equity investments are valued by models using a combination of available market data and unobservable inputs that consider earnings multiples, discounted cash flows, and other qualitative and quantitative factors. Other benefit plan investments are measured at Net Asset Value (NAV) per share of the fund's underlying investments as a practical expedient.
Sensitivity of Estimate to Change: The assumed discount rate, expected long-term rate of return on plan assets, rate of future compensation increase, and health care cost trend rate have a significant impact on the amounts reported for the benefit plans. For the year ended October 31, 2021, the Company had $1,712.0 million and $274.7 million in pension benefit obligation and post-retirement benefit obligation, respectively. For fiscal 2022, the Company expects a credit of $6.6 million in pension benefit costs and an expense of $10.5 million in post-retirement benefit costs. A one-percentage-point change in these rates would have the following effects:
1-Percentage-Point
Benefit Cost Benefit Obligation
(in millions) Increase Decrease Increase Decrease
Pension Benefits
Expected Long-term Rate of Return on Plan Assets (16.7) 16.7 — —
Rate of Future Compensation Increase 5.9 (5.2) 16.3 (14.6)
Post-retirement Benefits
As of October 31, 2021, the Company had $109.4 million and $821.8 million of private equity and NAV investments, respectively. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements. The Company also holds quarterly meetings with the investment adviser to review fund performance, which include comparisons to the relevant indices. On an annual basis, the Company performs pricing tests on certain underlying investments to gain additional assurance of the reliability of values received from the fund manager.
See Note G - Pension and Other Post-retirement Benefits for additional information.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Hog Markets: The Company’s earnings are affected by fluctuations in the live hog market. To minimize the impact on earnings and ensure a steady supply of quality hogs, the Company has entered into contracts with producers for the purchase of hogs at formula-based prices over periods of up to 10 years. Hogs purchased under contract accounted for 96 percent and 95 percent of the total hogs purchased by the Company during fiscal 2021 and 2020, respectively. The majority of these contracts use market-based formulas based on hog futures, hog primal values, or industry reported hog markets. Other contracts use a formula based on the cost of production, which can fluctuate independently from hog markets. The Company’s value-added, branded portfolio helps mitigate changes in hog and pork market prices. Therefore, a hypothetical 10 percent change in the cash hog market would have had an immaterial effect on the Company’s results of operations.
The Company utilizes a hedge program to reduce exposure and offset the fluctuations in the Company’s future direct hog purchases. This program utilizes lean hog futures which are accounted for under cash flow hedge accounting. The fair value of the Company’s open futures contracts in this program as of October 31, 2021, was $(0.2) million compared to $3.1 million as of October 25, 2020. The Company measures its market risk exposure on its lean hog futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for lean hogs. A 10 percent decrease in the market price for lean hogs would have negatively impacted the fair value of the Company’s October 31, 2021, open lean hog contracts by $7.9 million, which in turn would lower the Company’s future cost on purchased hogs by a similar amount.
Turkey Production Costs: The Company raises or contracts for live turkeys to meet the majority of its raw material supply requirements. Production costs in raising turkeys are subject primarily to fluctuations in feed prices and, to a lesser extent, fuel costs. Under normal, long-term market conditions, changes in the cost to produce turkeys are offset by proportional changes in the turkey market.
The Company utilizes a hedge program to reduce exposure and offset the fluctuation in the Company’s future direct grain purchases. This program utilizes grain futures, swaps, and options for Jennie-O Turkey Store, and these contracts are accounted for under cash flow hedge accounting. The fair value of the Company’s open grain contracts as of October 31, 2021, was $25.5 million compared to $(0.1) million as of October 25, 2020. The Company measures its market risk exposure on its grain contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for grain. A 10 percent decrease in the market price for grain would have negatively impacted the fair value of the Company’s October 31, 2021, open grain contracts by $14.5 million, which in turn would lower the Company’s future cost on purchased grain by a similar amount.
Other Input Costs: The costs of raw materials, packaging materials, freight, fuel, and energy may cause the Company's results to fluctuate significantly. To manage input cost volatility, the Company pursues cost saving measures, forward pricing, derivatives, and pricing actions when necessary.
Investments: The Company has corporate-owned life insurance policies classified as trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. As of October 31, 2021, the balance of these securities totaled $203.0 million compared to $173.1 million as of October 25, 2020. The rabbi trust is invested primarily in fixed income funds. The Company is subject to market risk due to fluctuations in the value of the remaining investments as unrealized gains and losses associated with these securities are included in the Company’s net earnings on a mark-to-market basis. A 10 percent decline in the value of the investments not held in fixed income funds would have a negative impact to the Company’s pretax earnings of approximately $10.0 million, while a 10 percent increase in value would have a positive impact of the same amount.
International Assets: The fair values of certain Company assets are subject to fluctuations in foreign currencies. The Company’s net asset position in foreign currencies as of October 31, 2021, was $657.2 million, compared to $541.2 million as of October 25, 2020, with most of the exposure existing in Chinese yuan and Brazilian real. Changes in currency exchange rates impact the fair values of the Company assets either currently through the Consolidated Statements of Operations within Interest and Investment Income or through the Consolidated Statements of Financial Position within Accumulated Other Comprehensive Loss.
The Company measures its foreign currency exchange risk by using a 10 percent sensitivity analysis on the Company’s primary foreign net asset position, the Chinese yuan and the Brazilian real, as of October 31, 2021. A 10 percent strengthening in the value of the Chinese yuan relative to the U.S. dollar would result in other comprehensive income of approximately $43.3 million pretax. A 10 percent weakening in the value of the Chinese yuan relative to the U.S. dollar would result in other comprehensive loss of approximately $35.4 million pretax. A 10 percent strengthening in the value of the Brazilian real relative to the U.S. dollar would result in other comprehensive income of approximately $11.7 million pretax. A 10 percent weakening in the value of the Brazilian real relative to the U.S. dollar would result in other comprehensive loss of approximately $9.6 million pretax.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Report of Management
Management’s Responsibility for Financial Statements
The accompanying financial statements were prepared by the management of Hormel Foods Corporation which is responsible for their integrity and objectivity. These statements have been prepared in accordance with U.S. generally accepted accounting principles appropriate in the circumstances and, as such, include amounts that are based on our best estimates and judgments.
Hormel Foods Corporation has developed a system of internal controls designed to assure that the records reflect the transactions of the Company and that the established policies and procedures are adhered to. This system is augmented by well-communicated written policies and procedures, a strong program of internal audit and well-qualified personnel.
These financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm, and their report is included herein. The audit was conducted in accordance with the standards of the U.S. Public Company Accounting Oversight Board and includes a review of the Company’s accounting and financial controls and tests of transactions.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the independent auditors, management, and the internal auditors to assure that each is carrying out its responsibilities. Both Ernst & Young LLP and our internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the results of their audit work and their opinions on the adequacy of internal controls and the quality of financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of Hormel Foods Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rule 13a–15(f). The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting standards. Under the supervision, and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
On June 7, 2021, the Company acquired the Planters®snack nuts business. In conducting its assessment of the effectiveness of the Company's internal control over financial reporting at October 31, 2021, management has excluded the acquired business from the assessment. The Planters® snack nuts business represented approximately 4 percent and 4 percent of the Company’s consolidated Net Sales and Total Assets, respectively, for the fiscal year ended October 31, 2021. The acquired business is in process of being fully integrated into the Company's existing operations. Based on our evaluation under the framework in Internal Control - Integrated Framework, we concluded that our internal control over financial reporting was effective as of October 31, 2021. Our internal control over financial reporting as of October 31, 2021, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
/s/ James P. Snee /s/ James N. Sheehan
Chairman of the Board, Executive Vice President
President and Chief Executive Officer and Chief Financial Officer
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hormel Foods Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Hormel Foods Corporation’s internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hormel Foods Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of October 31, 2021, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal controls over financial reporting did not include the internal controls of the Planters® snack nuts business, which is included in the 2021 consolidated financial statements of the Company and constituted 4% of total assets as of October 31, 2021 and 4% of revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include the evaluation of the internal control over financial reporting of the Planters® snack nuts business.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated statements of financial position of the Company as of October 31, 2021 and October 25, 2020, the related consolidated statements of operations, comprehensive income, changes in shareholders’ investment, and cash flows for each of the three years in the period ended October 31, 2021 and the related notes and financial statement schedule listed in the index at Item 15 and our report dated December 10, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
December 10, 2021
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hormel Foods Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Hormel Foods Corporation (the Company) as of October 31, 2021 and October 25, 2020, the related consolidated statements of operations, comprehensive income, changes in shareholders’ investment, and cash flows for each of the three years in the period ended October 31, 2021 and the related notes and financial statement schedule listed in the index at Item 15 (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 31, 2021 and October 25, 2020, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated December 10, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Alternative Investments - Pension Assets
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Valuation of Alternative Investments - Pension Assets
Valuation of acquired intangible assets - trade names
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1931.
Minneapolis, Minnesota
December 10, 2021
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Consolidated Statements of Financial Position
October 31, October 25,
(in thousands, except share and per share amounts) 2021 2020
Assets
Current Assets
Investments In and Receivables from Affiliates 299,019 308,372
Property, Plant, and Equipment
Liabilities and Shareholders’ Investment
Current Liabilities
Shareholders’ Investment
See Notes to Consolidated Financial Statements
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Consolidated Statements of Operations
Fiscal Year Ended
October 31, October 25, October 27,
Other Income and Expense:
Less: Net Earnings Attributable to Noncontrolling Interest 301 272 342
Net Earnings Per Share:
Weighted-average Shares Outstanding:
See Notes to Consolidated Financial Statements
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Consolidated Statements of Comprehensive Income
Fiscal Year Ended
October 31, October 25, October 27,
Other Comprehensive Income (Loss), Net of Tax:
Less: Comprehensive Income Attributable to Noncontrolling Interest 700 624 70
See Notes to Consolidated Financial Statements
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Consolidated Statements of Changes in Shareholders’ Investment
Hormel Foods Corporation Shareholders
share amounts) Shares Amount Shares Amount
Cumulative Effect Adjustment from the Adoption of:
Contribution from Non-controlling Interest 77 77
See Notes to Consolidated Financial Statements
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Consolidated Statements of Cash Flows
Fiscal Year Ended
October 31, October 25, October 27,
Operating Activities
Adjustments to Reconcile to Net Cash Provided by Operating Activities:
Loss (Gain) on Property/Equipment Sales and Plant Facilities 3,731 1,793 (811)
Gain on Sale of Business — — (16,469)
Changes in Operating Assets and Liabilities, Net of Acquisitions:
Investing Activities
Proceeds from Sale of Business — — 479,806
Acquisitions of Businesses and Intangibles (3,396,246) (270,789) —
Financing Activities
Proceeds from Noncontrolling Interest — 77 —
See Notes to Consolidated Financial Statements
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Notes to Consolidated Financial Statements
Note A
Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the accounts of Hormel Foods Corporation (the Company) and all of its majority-owned subsidiaries after elimination of intercompany accounts, transactions, and profits.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. These estimates and assumptions take into account historical and forward looking factors, including but not limited to the potential impacts arising from COVID-19 and related public and private sector policies and initiatives.
Rounding: Certain amounts in the Consolidated Financial Statements and associated notes may not foot due to rounding. All percentages have been calculated using unrounded amounts.
Fiscal Year: The Company’s fiscal year ends on the last Sunday in October. Fiscal 2021 consisted of 53 weeks. Fiscal years 2020 and 2019 consisted of 52 weeks. Fiscal 2022 will consist of 52 weeks.
Cash and Cash Equivalents: The Company considers all investments with an original maturity of three months or less on their acquisition date to be cash equivalents. The Company’s cash equivalents as of October 31, 2021, and October 25, 2020, consisted primarily of bank deposits, money market funds rated AAA, or other highly liquid investment accounts. The Net Asset Value (NAV) of the Company’s money market funds is based on the market value of the securities in the portfolio.
Fair Value Measurements: Pursuant to the provisions of Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (ASC 820), the Company measures certain assets and liabilities at fair value or discloses the fair value of certain assets and liabilities recorded at cost in the consolidated financial statements. Fair value is calculated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). ASC 820 establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of three levels based on the inputs used in the valuation. The Company classifies assets and liabilities in their entirety based on the lowest level of input significant to the fair value measurement. The three levels are defined as follows:
Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Observable inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.
Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.
See additional discussion regarding the Company’s fair value measurements in Note F - Derivatives and Hedging, Note G - Pension and Other Post-retirement Benefits, and Note I - Fair Value Measurements.
Compensation: The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred compensation plans. Under the plans, participants can defer certain types of compensation and elect to receive a return on the deferred amounts based on the changes in fair value of various investment options, primarily a variety of mutual funds. The Company has corporate-owned life insurance policies on certain participants in the deferred compensation plans. The cash surrender value of the policies is included in Other Assets on the Consolidated Statements of Financial Position. The securities held by the trust are classified as trading securities. Therefore, unrealized losses and gains associated with these investments are included in the Company’s earnings. Securities held by the trust generated gains (losses) of $21.2 million, $7 million, and $8.3 million for fiscal years 2021, 2020, and 2019, respectively.
Inventories: Inventories are stated at the lower of cost or net realizable value. Cost is determined principally under the average cost method. Adjustments to the Company’s lower of cost or net realizable value inventory reserve are reflected in Cost of Products Sold in the Consolidated Statements of Operations.
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Property, Plant, and Equipment: Property, Plant, and Equipment are stated at cost. The Company uses the straight-line method in computing depreciation. The annual provisions for depreciation have been computed principally using the following ranges of asset lives: buildings 20 to 40 years, and equipment 3 to 14 years.
Leases: The Company determines if an arrangement contains a lease at inception. Right-of-use assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at the commencement date. Leases with an initial term of twelve months or less are not recorded on the Consolidated Statements of Financial Position. The Company combines lease and non-lease components together in determining the minimum lease payments for all leases.
The length of the lease term used in recording right-of-use assets and lease liabilities is based on the contractually required lease term adjusted for any options to renew, early terminate, or purchase the lease that are reasonably certain of being exercised. Most leases include one or more options to renew or terminate. The exercise of lease renewal and termination options is at the Company’s discretion and generally is not reasonably certain at lease commencement. The Company’s lease agreements typically do not contain material residual value guarantees. The Company has one lease with an immaterial residual value guarantee that is included in the minimum lease payments.
Certain lease agreements include rental payment increases over the lease term that can be fixed or variable. Fixed payment increases and variable payment increases based on an index or rate are included in the initial lease liability using the index or rate at commencement date. Variable payment increases not based on an index or rate are recognized as incurred.
If the rate implicit in the lease is not readily determinable, the Company used its periodic incremental borrowing rate, based on the information available at commencement date, to determine the present value of future lease payments. Leases and right-of-use assets that existed prior to the adoption of ASU 2016-02, Leases (Topic 842) were valued using the incremental borrowing rate on October 28, 2019.
Impairment of Long-Lived Assets and Definite-Lived Intangible Assets: Definite-lived intangible assets are amortized over their estimated useful lives. The Company reviews long-lived assets and definite-lived intangible assets for impairment annually, or more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets and any related goodwill, the carrying value is reduced to the estimated fair value. The Company recorded no material impairment charges for long-lived or definite-lived assets in fiscal years 2021, 2020, or 2019.
Goodwill and Other Indefinite-Lived Intangibles: Indefinite-lived intangible assets are originally recorded at their estimated fair values at date of acquisition and the residual of the purchase price is recorded to goodwill. Acquired goodwill and other indefinite-lived intangible assets are allocated to reporting units that will receive the related benefits. Goodwill and indefinite-lived intangible assets are tested annually for impairment during the fourth quarter following the annual planning process or more frequently if impairment indicators arise. See additional discussion regarding the Company’s goodwill and intangible assets in Note C - Goodwill and Intangible Assets.
Goodwill
In conducting the annual impairment test for goodwill, the Company has the option to first assess qualitative factors to determine whether it is more likely than not (> 50 percent likelihood) the fair value of any reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines an impairment is more likely than not, the Company is required to perform a quantitative impairment test. Otherwise, no further analysis is required. Alternatively, the Company may elect to proceed directly to the quantitative impairment test.
In conducting a qualitative assessment, the Company analyzes actual and projected growth trends for net sales, gross margin and segment profit for each reporting unit, as well as historical performance versus plan and the results of prior quantitative tests. Additionally, the Company assesses factors that may impact the business's financial results such as macroeconomic conditions and the related impact, market-related exposures, plans to market for sale all or a portion of the business, competitive changes, new or discontinued product lines, and changes in key personnel.
If performed, the quantitative goodwill impairment test is performed at the reporting unit level. First, the fair value of each reporting unit is compared to its corresponding carrying value, including goodwill. The fair value of each reporting unit is estimated using discounted cash flow valuations (Level 3), which incorporate assumptions regarding future growth rates, terminal values and discount rates. The estimates and assumptions used consider historical performance and are consistent with the assumptions used in determining future profit plans for each reporting unit, which are approved by the Company’s Board of Directors. If the quantitative assessment results in the carrying value exceeding the fair value of any reporting unit, the results from the quantitative analysis will be relied upon to determine both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.
During the fourth quarter of fiscal 2021, the Company completed its annual goodwill impairment tests and performed quantitative assessments. No impairment charges were recorded as a result of the testing performed during fiscal 2021. The Company performed qualitative assessments in fiscal years 2020 and 2019 with no impairment charges in either year.
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Indefinite-Lived Intangibles
In conducting the annual impairment test for its indefinite-lived intangible assets, the Company first performs a qualitative assessment to determine whether it is more likely than not (> 50 percent likelihood) an indefinite-lived intangible asset is impaired. If the Company concludes this is the case, a quantitative test for impairment must be performed. Otherwise, the Company does not need to perform a quantitative test.
In conducting the qualitative assessment, the Company analyzes growth rates for historical and projected net sales and the results of prior quantitative tests. Additionally, each operating segment assesses items that may impact the value of their intangible assets or the applicable royalty rates to determine if impairment may be indicated.
If performed, the quantitative impairment test compares the fair value and carrying amount of the indefinite-lived intangible asset. The fair value of indefinite-lived intangible assets is primarily determined on the basis of estimated discounted value using the relief from royalty method (Level 3), which incorporates assumptions regarding future sales projections, discount rates and royalty rates. If the carrying amount exceeds fair value, the indefinite-lived intangible asset is considered impaired and an impairment charge is recorded for the difference. Even if not required, the Company may elect to perform the quantitative test in order to gain further assurance in the qualitative assessment.
During the fourth quarter of fiscal 2021, the Company completed its annual indefinite-lived asset impairment tests by performing quantitative assessments. No impairment charges were recorded as a result of the testing during fiscal year 2021. The Company performed qualitative assessments of indefinite-lived intangible assets in fiscal year 2020. During fiscal 2019, the Company elected to quantitatively test two indefinite-lived intangible assets and to perform a qualitative assessment for the remaining assets. No impairment charges were recorded as a result of the qualitative and quantitative testing during fiscal years 2020 and 2019.
Pension and Other Post-retirement Benefits: The Company has elected to use the corridor approach to recognize expenses related to its defined benefit pension and other post-retirement benefit plans. Under the corridor approach, actuarial gains or losses resulting from experience and changes in assumptions are deferred and amortized over future periods. For the defined benefit pension plans, the unrecognized gains and losses are amortized when the net gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the fair value of plan assets at the beginning of the year. For the other post-retirement plans, the unrecognized gains and losses are amortized when the net gain or loss exceeds 10 percent of the accumulated pension benefit obligation at the beginning of the year. For plans with active employees, net gains or losses in excess of the corridor are amortized over the average remaining service period of participating employees expected to receive benefits under those plans. For plans with only retiree participants, net gains or losses in excess of the corridor are amortized over the average remaining life of the retirees receiving benefits under those plans.
Contingent Liabilities: The Company may be subject to investigations, legal proceedings, or claims related to the ongoing operation of its business, including claims both by and against the Company. Such proceedings typically involve claims related to product liability, contract disputes, antitrust regulations, wage and hour laws, employment practices, or other actions brought by employees, consumers, competitors or suppliers. The Company establishes accruals for its potential exposure for claims when losses become probable and reasonably estimable. Where the Company is able to reasonably estimate a range of potential losses, the Company records the amount within that range which constitutes the Company’s best estimate. The Company also discloses the nature of and range of loss for claims against the Company when losses are reasonably possible and material.
Foreign Currency Translation: Assets and liabilities denominated in foreign currency are translated at the current exchange rate as of the date of the Consolidated Statements of Financial Position. Amounts in the Consolidated Statements of Operations are translated at the average monthly exchange rate. Translation adjustments resulting from fluctuations in exchange rates are recorded as a component of Accumulated Other Comprehensive Loss in Shareholders’ Investment.
When calculating foreign currency translation, the Company deemed its foreign investments to be permanent in nature and has not provided for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars.
Derivatives and Hedging Activity: The Company uses commodity positions to manage its exposure to price fluctuations in those markets. The contracts are recorded at fair value on the Consolidated Statements of Financial Position within Other Current Assets or Accounts Payable. Additional information on hedging activities is presented in Note F - Derivatives and Hedging.
Equity Method Investments: The Company has a number of investments in joint ventures where its voting interests are in excess of 20 percent but not greater than 50 percent and for which there are no other indicators of control. The Company accounts for such investments under the equity method of accounting and its underlying share of each investee’s equity is reported in the Consolidated Statements of Financial Position as part of Investments In and Receivables from Affiliates.
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The Company regularly monitors and evaluates the fair value of its equity investments. If events and circumstances indicate that a decline in the fair value of these assets has occurred and is other than temporary, the Company will record a charge in Equity in Earnings of Affiliates in the Consolidated Statements of Operations. During the fourth quarter of fiscal 2021, the Company completed its annual assessment of its equity investments. The Company did not record an impairment charge on any of its equity investments in fiscal years 2021, 2020, or 2019. See additional discussion regarding the Company’s equity method investments in Note D - Investments In and Receivables From Affiliates.
Revenue Recognition: The Company’s customer contracts predominantly contain a single performance obligation to fulfill customer orders for the purchase of specified products. Revenue from product sales is primarily identified by purchase orders (“contracts”) which in some cases are governed by a master sales agreement. The purchase orders in combination with the invoice typically specify quantity and product(s) ordered, shipping terms, and certain aspects of the transaction price including discounts. Contracts are at standalone pricing or governed by pricing lists or brackets. The Company's revenue is recognized at the point in time when performance obligations have been satisfied and control of the product has transferred to the customer. This is typically once the shipped product is received or picked up by the customer. Revenues are recognized at the net consideration the Company expects to receive in exchange for the goods. The amount of net consideration recognized includes estimates of variable consideration, including costs for trade promotion programs, consumer incentives, and allowances and discounts associated with distressed or potentially unsaleable products.
A majority of the Company’s revenue is short-term in nature with shipments within one year from order date. The Company's payment terms generally range between 7 to 45 days and vary by sales channel and other factors. The Company accounts for shipping and handling costs as contract fulfillment costs and excludes taxes imposed on and collected from customers in revenue producing transactions from the transaction price. The Company does not have significant deferred revenue or unbilled receivable balances as a result of transactions with customers. Costs to obtain contracts with a duration of one year or less are expensed and included in the Consolidated Statements of Operations.
The Company promotes products through advertising, consumer incentives, and trade promotions. These programs include discounts, slotting fees, coupons, rebates, and in-store display incentives. Customer trade promotion and consumer incentive activities are recorded as a reduction to the sale price based on amounts estimated as variable consideration. The Company estimates variable consideration at the expected value method to determine the total consideration which the Company expects to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of anticipated performance and all information (historical, current,and forecasted) that is reasonably available.
The Company discloses revenue by reportable segment, sales channel, and class of similar product in Note P - Segment Reporting.
Allowance for Doubtful Accounts: The Company estimates the Allowance for Doubtful Accounts based on a combination of factors, evaluations, and professional judgments of historical data while considering current and future economic conditions alongside management’s input.
Advertising Expenses: Advertising costs are included in Selling, General, and Administrative and expensed when incurred. Advertising expenses include all media advertising but exclude the costs associated with samples, demonstrations, and market research. Advertising costs for fiscal years 2021, 2020, and 2019 were $138.5 million, $123.6 million, and $131.1 million, respectively.
Shipping and Handling Costs: The Company’s shipping and handling expenses are included in Cost of Products Sold on the Consolidated Statements of Operations.
Research and Development Expenses: Research and development costs are expensed as incurred and are included in Selling, General, and Administrative expenses on the Consolidated Statements of Operations. Research and development expenses incurred for fiscal years 2021, 2020, and 2019 were $33.6 million, $31.9 million, and $32.5 million, respectively.
Income Taxes: The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur.
In accordance with ASC 740, Income Taxes, the Company recognizes a tax position in its financial statements when it is more likely than not that the position will be sustained upon examination based on the technical merits of the position. That position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
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Stock-Based Compensation: The Company records stock-based compensation expense in accordance with ASC 718, Compensation – Stock Compensation. For options subject to graded vesting, the Company recognizes stock-based compensation expense ratably over the shorter of the vesting period or the individual's retirement eligibility date. The Company estimates forfeitures at the time of grant based on historical experience and revises in subsequent periods if actual forfeitures differ.
Share Repurchases: The Company may purchase shares of its common stock through open market and privately negotiated transactions at prices deemed appropriate by management. The timing and amount of repurchase transactions under the repurchase authorization depend on market conditions as well as corporate and regulatory considerations. For additional share repurchases information, see Part II, Item 5 - Market for Registrants' Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Supplemental Cash Flow Information: Non-cash investment activities presented on the Consolidated Statements of Cash Flows primarily consist of unrealized gains or losses on the Company’s rabbi trust. The noted investments are included in Other Assets on the Consolidated Statements of Financial Position. Changes in the value of these investments are presented in the Consolidated Statements of Operations as Interest and Investment Income.
Accounting Changes and Recent Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
Fiscal 2021
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). The update provides guidance on the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The amendment replaces the current incurred loss impairment approach with a methodology to reflect expected credit losses and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The updated guidance is to be applied on a modified retrospective approach and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2021. The adoption did not have a material impact on the Company's consolidated financial statements, thus no cumulative-effect adjustment to retained earnings was necessary.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance requires entities to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Amendments in this guidance also require disclosure of transfers into and out of Level 3 of the fair value hierarchy, purchases and issues of Level 3 assets and liabilities, and clarify that the measurement uncertainty disclosure is as of the reporting date. The guidance removes requirements to disclose the amounts and reasons for transfers between Level 1 and Level 2, policy for timing between of transfers between levels, and the valuation processes for Level 3 fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2021. Presentation and disclosure requirements were applied prospectively and retrospectively as required by the amendments. The adoption did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans (Topic 715). The updated guidance requires additional disclosures of weighted-average interest crediting rates for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation. Amendments in the guidance also clarify the requirement to disclose the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets. The same disclosure is needed for the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The guidance removes certain previous disclosure requirements no longer considered cost beneficial. The amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2021. Presentation and disclosure requirements were applied retrospectively to all periods presented. The adoption did not have a material impact on the Company’s consolidated financial statements.
Fiscal 2020
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than twelve months. Recognition, measurement, and presentation of expenses will depend on the classification as a finance or operating lease. The update also requires expanded quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The requirements of the new standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2020. For transition purposes, the
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Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. The Company elected the comparative periods practical expedient, and as a result, the Company did not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date. Upon adoption, the Company recognized right-of-use assets of $112.7 million and lease liabilities of $114.1 million in the Consolidated Statements of Financial Position as of October 28, 2019. The new standard did not have a material impact on the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.
Fiscal 2019
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This topic converges the guidance within U.S. GAAP and international financial reporting standards and supersedes ASC 605, Revenue Recognition. The standard requires companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. The standard provides enhanced disclosures about revenue, guidance for transactions which were not previously addressed, and improves guidance for multiple-element arrangements. The guidance was effective for annual reporting periods beginning after December 15, 2017. The updated guidance is to be applied either retrospectively or by using a cumulative effect adjustment. The Company adopted the provisions of the new standard using the full retrospective method at the beginning of fiscal 2019.
In October 2016, the FASB issued ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). The updated guidance requires the recognition of the income tax consequences of an intra-entity asset transfer, other than transfers of inventory, when the transfer occurs. For intra-entity transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The updated guidance was effective for reporting periods beginning after December 15, 2017, with early adoption permitted only within the first interim period of a fiscal year. The guidance is required to be applied on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted the updated provisions at the beginning of fiscal 2019, resulting in a reclassification from prepaid tax assets to deferred tax assets. In addition, due to the impact of the lower tax rate on deferred tax balances resulting from the Tax Cuts and Jobs Act (Tax Act), the Company recognized a cumulative effect adjustment to Retained Earnings of $10.5 million in fiscal 2019.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). The updated guidance requires an employer to report the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in the same line item as other compensation costs. Other components of net periodic pension cost and net periodic post-retirement benefit cost must be presented in the income statement separately from the service cost component and outside income from operations. Additionally, only the service cost component is eligible for capitalization. This guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The updated guidance should be applied retrospectively for the presentation of components of net benefit cost and prospectively for the capitalization of the service cost component of net benefit cost. The Company adopted the updated provisions at the beginning of fiscal 2019. The Company elected to utilize a practical expedient which allows the Company to use historical amounts disclosed in the Pension and Other Post-retirement Benefits footnote as an estimation basis for retrospectively applying the requirements to separately report the other components in the Consolidated Statements of Operations. Due to the retrospective adoption, the Company reclassified $19.0 million of non-service cost components of net periodic benefit costs from Operating Income to Interest and Investment Income on the Consolidated Statements of Operations for the year ended October 28, 2018.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities (Topic 815). The updated guidance expands an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. Entities will apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements apply prospectively. The updated guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim or annual period. The Company early adopted the updated guidance at the beginning of fiscal 2019; therefore, eliminating the requirement to separately measure and report hedge ineffectiveness. The Company applied the amendment to cash flow hedge relationships existing on the date of adoption using a modified retrospective approach. Presentation and disclosure requirements were applied on a prospective basis. The adoption resulted in an immaterial adjustment from Retained Earnings to Accumulated Other Comprehensive Loss.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). The updated guidance allows entities to reclassify stranded income tax effects resulting from the Tax Act from Accumulated Other comprehensive income to retained earnings in their consolidated financial statements. Under the Tax Act, deferred taxes were adjusted to reflect the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate, which left the tax effects on items within Accumulated Other Comprehensive Loss stranded at an inappropriate tax rate. The updated
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guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim period and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company early adopted the updated provisions at the beginning of fiscal 2019, resulting in a reclassification of $53.8 million from Accumulated Other Comprehensive Loss to Retained Earnings.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification (ASC). The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and are effective upon issuance of ASU 2018-09. The amendments effective upon issuance did not have a material impact on the Company's consolidated financial statements. A majority of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018. The Company early adopted the remaining amendments in the fourth quarter of fiscal 2019. The adoption did not have an impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Topic 350). The amendments in the update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years and is to be applied either retrospectively or prospectively to all implementation costs incurred after the adoption date. Early adoption is permitted, including adoption in any interim period. The Company early adopted the updated provisions on a prospective basis at the beginning of fiscal 2019.
New Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions in Topic 740 and clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company will adopt the provisions of this new accounting standard at the beginning of fiscal 2022 and does not expect adoption to have a material impact on its consolidated financial statements.
Recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not relevant to the Company.
Note B
Acquisitions and Divestitures
Acquisitions: On June 7, 2021, the Company acquired the Planters®snack nuts business from The Kraft Heinz Company. The acquisition includes the Planters®, NUT-rition®, Planters®Cheez Balls, and Corn Nuts®brands. The final purchase price, including working capital adjustments, was $3.4 billion. The transaction was funded with the Company’s cash on hand and from the issuance of long-term debt. See Note L - Long-term Debt and Other Borrowing Arrangements for additional details.
Planters®is an iconic snack brand and this acquisition significantly expands the Company's presence, and should broaden the scope for future acquisitions, in the growing snacking space. Operating results for this acquisition have been included in the Company's Consolidated Statements of Operations from the date of acquisition and are reflected in the Grocery Products, Refrigerated Foods, and International & Other segments. The acquisition contributed $410.8 million of net sales since the date of acquisition. As the acquisition has been integrated within the Company's existing operations, post-acquisition net income is not discernible. Acquisition-related costs were $30.3 million for the fiscal year ended October 31, 2021, which are reflected in the Consolidated Statements of Operations as Selling, General, and Administrative. Additional one-time adjustments related to the revaluation of acquired inventory of $12.9 million were recognized in the Consolidated Statements of Operations as Cost of Products Sold for the fiscal year ended October 31, 2021. The combined impact of these one-time acquisition costs and accounting adjustments was $43.2 million for the fiscal year ended October 31, 2021.
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The acquisition was accounted for as a business combination using the acquisition method. The Company determined the acquisition date fair values of the assets acquired using independent appraisals. The Company completed purchase accounting allocations in the fourth quarter of fiscal 2021. Allocations of the purchase price to acquired assets, including goodwill and intangibles assets, are presented in the table below.
(in thousands) Purchase Allocation
Property, Plant and Equipment 170,958
Other Intangibles:
Customer Relationships 51,000
Goodwill is calculated as the excess of the purchase price over the fair values of the identifiable net assets acquired and is expected to be deductible for tax purposes. The goodwill recorded as part of the acquisition primarily reflects the value of the potential to expand the Company's presence in the growing snacking space and serve as a platform for innovation.
The following unaudited pro forma financial information presents the combined results of operations as if the acquisition of the Planters® snack nuts business had occurred on October 27, 2019. These unaudited pro forma results do not necessarily reflect the actual results of operations that would have been achieved had the acquisition occurred on that date, nor are they necessarily indicative of future results of operations.
Fiscal Year Ended
Pro Forma Net Earnings Attributable to Hormel Foods Corporation 985,881 934,783
The pro forma results include charges for depreciation and amortization of acquired assets and interest expense on debt issued to finance the acquisition, as well as the related income taxes. The pro forma results for the fiscal year ended October 25, 2020 also include nonrecurring adjustments relating to the recognition of transaction costs incurred and revaluation of inventory acquired, along with the related income tax effects, which in the aggregate reduce pro forma net earnings by $41.1 million. The pro forma results for the fiscal year ended October 31, 2021 include an adjustment to add back the transaction costs incurred and revaluation of inventory acquired in those periods, along with the related income tax effects, since those costs are reflected in the preceding fiscal year on a pro forma basis.
On March 2, 2020, the Company acquired the assets comprising the Sadler's Smokehouse business (Sadler's) for a final purchase price of $270.8 million. Sadler's is an authentic, pit-smoked meats business based in Henderson, Texas. This acquisition strengthens the Company's foodservice position and provides an opportunity to further extend the Sadler's product line into the retail and deli channels.
The transaction was funded with cash on hand and accounted for as a business combination using the acquisition method. The Company completed an allocation of the fair value of the assets acquired utilizing third-party valuation appraisals during fiscal 2020.
Operating results for this acquisition have been included in the Company's Consolidated Statements of Operations from the date of acquisition and are reflected in the Refrigerated Foods segment. Pro forma results are not material for inclusion.
See Note C - Goodwill and Intangible Assets for amounts assigned to goodwill and intangible assets.
Divestiture: On April 15, 2019, the Company completed the sale of CytoSport, Inc. (CytoSport), which includes the Muscle Milk® and Evolve® brands, to PepsiCo, Inc., and received final proceeds of $479.8 million. The divestiture resulted in a pretax gain of $16.5 million recognized in Selling, General, and Administrative expense and a tax benefit of $17.0 million recognized within the Provision for Income Taxes on the Consolidated Statements of Operations.
CytoSport's results of operations through the date of divestiture are included within Earnings Before Income Taxes in the Consolidated Statements of Operations and are reflected within the Grocery Products and International & Other segments.
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Note C
Goodwill and Intangible Assets
Goodwill: The changes in the carrying amount of goodwill for the fiscal years ended October 31, 2021, and October 25, 2020, are:
Foreign Currency Translation — — — (17,232) (17,232)
Foreign Currency Translation — — — 3,311 3,311
The increase in goodwill during fiscal 2021 represents the allocation of goodwill to reportable segments as part of the acquisition of the Planters® snack nuts business. The increase to goodwill during fiscal 2020 is due to the acquisition of Sadler's. See Note B - Acquisitions and Divestitures for additional information.
Intangible Assets:The carrying amounts for indefinite-lived intangible assets are:
October 31, October 25,
Foreign Currency Translation (6,646) (6,923)
The increase in Brands/Tradenames/Trademarks represents the fair value of indefinite-lived assets acquired as part of the acquisition of the Planters® snack nuts business. See Note B - Acquisitions and Divestitures for additional information.
The gross carrying amount and accumulated amortization for definite-lived intangible assets are:
Gross Weighted- Gross Weighted-
Carrying Accumulated Avg Life Carrying Accumulated Avg Life
(in thousands) Amount Amortization (in Years) Amount Amortization (in Years)
Foreign Currency Translation — (4,534) — — (4,760) —
The increase in Customer Lists/Relationships represents the fair value of definite-lived assets acquired as part of the acquisition of the Planters® snack nuts business. See Note B - Acquisitions and Divestitures for additional information.
Amortization expense for the last three fiscal years was:
(in thousands)
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Estimated annual amortization expense for the five fiscal years after October 31, 2021, is as follows:
(in thousands)
During the fourth quarter of fiscal years 2021, 2020, and 2019, the Company completed the required annual impairment tests of indefinite-lived intangible assets and goodwill. No impairment was indicated. Useful lives of intangible assets were also reviewed during this process with no material changes identified.
Note D
Investments In and Receivables From Affiliates