Table of Contents

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

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

 

For the quarterly period ended April 24, 2016

or

 

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

 

For the transition period from ___________________________________ to ________________________________________

 

Commission File Number: 1-2402

 

 

HORMEL FOODS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of incorporation or organization)

 

41-0319970
(I.R.S. Employer Identification No.)

 

1 Hormel Place
Austin, Minnesota
(Address of principal executive offices)

 

55912-3680
(Zip Code)

 

(507) 437-5611

(Registrant’s telephone number, including area code)

 

None

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

 

 

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

 

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

 

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

Large accelerated filer  X 

 

Accelerated filer    

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

 

Smaller reporting company     

 

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

 

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

 

Class

 

Outstanding at May 29, 2016

Common Stock

 

$.01465 par value    529,860,473

 

Common Stock Non-Voting

 

$.01 par value                          -0-

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION – April 24, 2016 and October 25, 2015

 

CONSOLIDATED STATEMENTS OF OPERATIONS – Three and Six Months Ended April 24, 2016 and April 26, 2015

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – Three and Six Months Ended April 24, 2016 and April 26, 2015

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT – Twelve Months Ended October 25, 2015 and Six Months Ended April 24, 2016

 

CONSOLIDATED STATEMENTS OF CASH FLOWS – Six Months Ended April 24, 2016 and April 26, 2015

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

Item 2.

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

 

CRITICAL ACCOUNTING POLICIES

 

RESULTS OF OPERATIONS

 

Overview

 

Consolidated Results

 

Segment Results

 

Related Party Transactions

 

LIQUIDITY AND CAPITAL RESOURCES

 

FORWARD-LOOKING STATEMENTS

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 6.

Exhibits

 

 

 

 

SIGNATURES

 

 

2



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands, except share and per share amounts)

 

 

 

April 24,

 

October 25,

 

 

2016

 

2015

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

379,881

 

 

$

347,239

 

Accounts receivable

 

548,497

 

 

605,689

 

Inventories

 

1,027,440

 

 

993,265

 

Income taxes receivable

 

-

 

 

6,132

 

Deferred income taxes

 

-

 

 

86,902

 

Prepaid expenses

 

13,908

 

 

14,383

 

Other current assets

 

5,356

 

 

9,422

 

TOTAL CURRENT ASSETS

 

1,975,082

 

 

2,063,032

 

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

23,164

 

 

-

 

 

 

 

 

 

 

 

GOODWILL

 

1,698,370

 

 

1,699,484

 

 

 

 

 

 

 

 

OTHER INTANGIBLES

 

823,130

 

 

827,219

 

 

 

 

 

 

 

 

PENSION ASSETS

 

140,990

 

 

132,861

 

 

 

 

 

 

 

 

INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES

 

254,949

 

 

258,998

 

 

 

 

 

 

 

 

OTHER ASSETS

 

145,730

 

 

146,498

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

 

Land

 

70,846

 

 

71,192

 

Buildings

 

821,303

 

 

815,643

 

Equipment

 

1,706,597

 

 

1,679,100

 

Construction in progress

 

132,975

 

 

79,964

 

 

 

2,731,721

 

 

2,645,899

 

Less allowance for depreciation

 

(1,682,791

)

 

(1,634,160

)

 

 

1,048,930

 

 

1,011,739

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

6,110,345

 

 

$

6,139,831

 

 

 

See Notes to Consolidated Financial Statements

 

3



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands, except share and per share amounts)

 

 

 

April 24,

 

October 25,

 

 

2016

 

2015

 

 

(Unaudited)

 

 

LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

Accounts payable

 

$

389,418

 

 

$

495,317

 

Short-term debt

 

-

 

 

185,000

 

Accrued expenses

 

71,013

 

 

71,777

 

Accrued workers compensation

 

37,828

 

 

37,009

 

Accrued marketing expenses

 

156,574

 

 

119,153

 

Employee related expenses

 

195,151

 

 

232,309

 

Taxes payable

 

10,096

 

 

6,764

 

Interest and dividends payable

 

77,304

 

 

66,696

 

TOTAL CURRENT LIABILITIES

 

937,384

 

 

1,214,025

 

 

 

 

 

 

 

 

LONG-TERM DEBT – less current maturities

 

250,000

 

 

250,000

 

 

 

 

 

 

 

 

PENSION AND POST-RETIREMENT BENEFITS

 

513,842

 

 

509,261

 

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

99,480

 

 

101,056

 

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

-

 

 

64,096

 

 

 

 

 

 

 

 

SHAREHOLDERS’ INVESTMENT *

 

 

 

 

 

 

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

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, par value $.01465 a share – authorized 1,600,000,000 shares;

 

 

 

 

 

 

issued 530,044,459 shares April 24, 2016

 

 

 

 

 

 

issued 528,411,628 shares October 25, 2015

 

7,765

 

 

7,741

 

Additional paid-in capital

 

11,287

 

 

-

 

Accumulated other comprehensive loss

 

(225,666

)

 

(225,668

)

Retained earnings

 

4,513,097

 

 

4,216,125

 

HORMEL FOODS CORPORATION SHAREHOLDERS’ INVESTMENT

 

4,306,483

 

 

3,998,198

 

NONCONTROLLING INTEREST

 

3,156

 

 

3,195

 

TOTAL SHAREHOLDERS’ INVESTMENT

 

4,309,639

 

 

4,001,393

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

$

6,110,345

 

 

$

6,139,831

 

 

* Shares and par values have been restated, as appropriate, to give effect to the two-for-one stock split distributed on February 9, 2016.

 

See Notes to Consolidated Financial Statements

 

4



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

April 24,
2016

 

April 26,
2015*

 

April 24,
2016

 

April 26,
2015*

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 $

2,300,235

 

 

 $

2,279,345

 

 

 $

4,592,907

 

 

 $

4,674,418

 

Cost of products sold

 

1,773,876

 

 

1,819,789

 

 

3,508,537

 

 

3,770,257

 

GROSS PROFIT

 

526,359

 

 

459,556

 

 

1,084,370

 

 

904,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

211,144

 

 

189,733

 

 

421,092

 

 

370,032

 

Goodwill impairment charge

 

991

 

 

-

 

 

991

 

 

-

 

Equity in earnings of affiliates

 

9,593

 

 

7,874

 

 

21,068

 

 

9,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

323,817

 

 

277,697

 

 

683,355

 

 

543,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest and investment income (loss)

 

3,409

 

 

1,117

 

 

1,446

 

 

2,266

 

Interest expense

 

(3,029

)

 

(3,083

)

 

(6,436

)

 

(6,161

)

 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS BEFORE INCOME TAXES

 

324,197

 

 

275,731

 

 

678,365

 

 

539,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

108,813

 

 

95,296

 

 

227,814

 

 

186,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

215,384

 

 

180,435

 

 

450,551

 

 

352,865

 

Less: Net (loss) earnings attributable to noncontrolling interest

 

(13

)

 

234

 

 

93

 

 

946

 

NET EARNINGS ATTRIBUTABLE TO HORMEL FOODS CORPORATION

 

 $

215,397

 

 

 $

180,201

 

 

 $

450,458

 

 

 $

351,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

BASIC

 

 $

0.41

 

 

 $

0.34

 

 

 $

0.85

 

 

 $

0.67

 

DILUTED

 

 $

0.40

 

 

 $

0.33

 

 

 $

0.83

 

 

 $

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

BASIC

 

529,898

 

 

528,056

 

 

529,380

 

 

527,704

 

DILUTED

 

543,769

 

 

540,888

 

 

543,253

 

 

540,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE:

 

 $

0.145

 

 

 $

0.125

 

 

 $

0.290

 

 

 $

0.250

 

 

* Shares and per share figures have been restated to give effect to the two-for-one stock split distributed on February 9, 2016.

 

 

See Notes to Consolidated Financial Statements

 

5



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

April 24,
2016

 

April 26,
2015

 

April 24,
2016

 

April 26,
2015

 

 

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

 $

215,384

 

 

 $

180,435

 

 

 $

450,551

 

 

 $

352,865

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

893

 

 

(599

)

 

(1,722

)

 

178

 

Pension and other benefits

 

1,774

 

 

1,905

 

 

3,540

 

 

3,802

 

Deferred hedging

 

(650

)

 

(1,449

)

 

(1,948

)

 

3,557

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

 

2,017

 

 

(143

)

 

(130

)

 

7,537

 

COMPREHENSIVE INCOME

 

217,401

 

 

180,292

 

 

450,421

 

 

360,402

 

Less: Comprehensive (loss) income attributable to noncontrolling interest

 

(69

)

 

206

 

 

(39

)

 

935

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO HORMEL FOODS CORPORATION

 

 $

217,470

 

 

 $

180,086

 

 

 $

450,460

 

 

 $

359,467

 

 

 

See Notes to Consolidated Financial Statements

 

6



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Hormel Foods Corporation Shareholders

 

 

 

 

 

 

 

Common
Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Non-
controlling
Interest

 

Total
Shareholders’
Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 26, 2014

 

$  7,724

 

$           -

 

$           -

 

$ 3,805,654

 

$       (207,700

)

$    6,378

 

$   3,612,056

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

686,088

 

 

 

1,176

 

687,264

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(18,363

)

(229

)

(18,592

)

Purchases of common stock

 

 

 

(24,928

)

 

 

 

 

 

 

 

 

(24,928

)

Stock-based compensation expense

 

1

 

 

 

15,716

 

 

 

 

 

 

 

15,717

 

Exercise of stock options/nonvested shares

 

28

 

 

 

9,527

 

 

 

 

 

 

 

9,555

 

Purchase of additional ownership from noncontrolling interest

 

 

 

 

 

(11,881

)

 

 

395

 

(2,549

)

(14,035

)

Shares retired

 

(12

)

24,928

 

(13,362

)

(11,554

)

 

 

 

 

-

 

Distribution to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

(1,581

)

(1,581

)

Declared cash dividends – $.50 per share*

 

 

 

 

 

 

 

(264,063

)

 

 

 

 

(264,063

)

Balance at October 25, 2015

 

$  7,741

 

$           -

 

$           -

 

$ 4,216,125

 

$       (225,668

)

$    3,195

 

$   4,001,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

450,458

 

 

 

93

 

450,551

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

2

 

(132

)

(130

)

Purchases of common stock

 

 

 

(6,358

)

 

 

 

 

 

 

 

 

(6,358

)

Stock-based compensation expense

 

1

 

 

 

14,177

 

 

 

 

 

 

 

14,178

 

Exercise of stock options/nonvested shares

 

25

 

 

 

3,466

 

 

 

 

 

 

 

3,491

 

Shares retired

 

(2

)

6,358

 

(6,356

)

 

 

 

 

 

 

-

 

Declared cash dividends – $.29 per share

 

 

 

 

 

 

 

(153,486

)

 

 

 

 

(153,486

)

Balance at April 24, 2016

 

$    7,765

 

$             -

 

$    11,287

 

$  4,513,097

 

$   (225,666

)

$    3,156

 

$    4,309,639

 

 

* Per share figures have been restated to give effect to the two-for-one stock split distributed on February 9, 2016.

 

 

See Notes to Consolidated Financial Statements

 

7



Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

April 24,
2016

 

 

April 26,
2015

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net earnings

$

450,551

 

 

$

352,865

 

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

59,863

 

 

 

61,760

 

Amortization of intangibles

 

4,045

 

 

 

3,967

 

Goodwill impairment charge

 

991

 

 

 

-

 

Equity in earnings of affiliates, net of dividends

 

(6,524

)

 

 

487

 

Provision for deferred income taxes

 

(2,397

)

 

 

13,441

 

Loss (gain) on property/equipment sales and plant facilities

 

88

 

 

 

(5,129

)

Non-cash investment activities

 

(375

)

 

 

(2,256

)

Stock-based compensation expense

 

14,178

 

 

 

12,549

 

Excess tax benefit from stock-based compensation

 

(36,456

)

 

 

(10,760

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Decrease in accounts receivable

 

57,191

 

 

 

27,316

 

(Increase) decrease in inventories

 

(34,052

)

 

 

90,131

 

Decrease in prepaid expenses and other current assets

 

8,913

 

 

 

17,714

 

Increase in pension and post-retirement benefits

 

2,346

 

 

 

1,191

 

Decrease in accounts payable and accrued expenses

 

(109,227

)

 

 

(118,875

)

Other

 

-

 

 

 

1,336

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

409,135

 

 

 

445,737

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Purchases of property/equipment

 

(99,852

)

 

 

(54,984

)

Proceeds from sales of property/equipment

 

2,709

 

 

 

11,050

 

Decrease in investments, equity in affiliates, and other assets

 

12,178

 

 

 

5,379

 

NET CASH USED IN INVESTING ACTIVITIES

 

(84,965

)

 

 

(38,555

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Principal payments on short-term debt

 

(185,000

)

 

 

-

 

Dividends paid on common stock

 

(142,878

)

 

 

(118,715

)

Share repurchase

 

(6,358

)

 

 

-

 

Proceeds from exercise of stock options

 

8,370

 

 

 

5,999

 

Excess tax benefit from stock-based compensation

 

36,456

 

 

 

10,760

 

Payment to noncontrolling interest

 

-

 

 

 

(11,702

)

Distribution to noncontrolling interest

 

-

 

 

 

(1,581

)

NET CASH USED IN FINANCING ACTIVITIES

 

(289,410

)

 

 

(115,239

)

 

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

(2,118

)

 

 

(1,722

)

INCREASE IN CASH AND CASH EQUIVALENTS

 

32,642

 

 

 

290,221

 

Cash and cash equivalents at beginning of year

 

347,239

 

 

 

334,174

 

CASH AND CASH EQUIVALENTS AT END OF QUARTER

$

379,881

 

 

$

624,395

 

 

 

See Notes to Consolidated Financial Statements

 

8



Table of Contents

 

HORMEL FOODS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE A                                               GENERAL

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.  The balance sheet at October 25, 2015, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 25, 2015.  Fiscal 2016 is a 53-week year as compared with fiscal 2015, which was 52 weeks, with the additional week occurring in the fourth quarter of fiscal 2016.

 

Stock Split

 

On November 25, 2015, the Company’s Board of Directors authorized a two-for-one split of the Company’s voting common stock, which was subsequently approved by shareholders at the Company’s Annual Meeting on January 26, 2016, and effected on January 27, 2016.  The Company’s voting common stock was reclassified by reducing the par value from $.0293 per share to $.01465 per share and the number of authorized shares was increased from 800,000,000 to 1,600,000,000 shares, in order to effect the two-for-one stock split.  The Company distributed the additional shares of $.01465 par value common stock on February 9, 2016, and the shares began trading at the post-split price on February 10, 2016.

 

Unless otherwise noted, all prior year share amounts and per share calculations throughout this Quarterly Report on Form 10-Q have been restated to reflect the impact of this split, and to provide data on a basis comparable to fiscal 2015.  Such restatements include calculations regarding the Company’s weighted average shares, earnings per share, and dividends per share, as well as disclosures regarding the Company’s stock-based compensation plans and share repurchase activity.

 

Assets Held For Sale

 

The Company classifies assets as held for sale when management approves and commits to a formal plan of sale with the expectation the sale will be completed within one year.  The net assets of the business held for sale are then recorded at the lower of their current carrying value or the fair market value, less costs to sell.  See additional discussion regarding the Company’s assets held for sale in Note E.

 

Investments

 

The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans, which is included in other assets on the Consolidated Statements of Financial Position.  The securities held by the trust are classified as trading securities and consist mainly of fixed return investments.  Therefore, unrealized gains and losses associated with these investments are included in the Company’s earnings.  Securities held by the trust generated gains of $2.9 million and $1.2 million for the second quarter and six months ended April 24, 2016, respectively, compared to gains of $1.5 million and $3.0 million for the second quarter and six months ended April 26, 2015.

 

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Supplemental Cash Flow Information

 

Non-cash investment activities presented on the Consolidated Statements of Cash Flows generally consist of unrealized gains or losses on the Company’s rabbi trust.  The noted investments are included in other assets on the Consolidated Statements of Financial Position.  Changes in the value of these investments are included in the Company’s net earnings and are presented in the Consolidated Statements of Operations as either interest and investment income (loss) or interest expense, as appropriate.

 

Guarantees

 

The Company enters into various agreements guaranteeing specified obligations of affiliated parties.  The Company’s guarantees either terminate in one year or remain in place until such time as the Company revokes the agreement.  The Company currently provides revocable standby letters of credit totaling $4.0 million to guarantee obligations that may arise under workers compensation claims of an affiliated party.  This potential obligation is not reflected in the Company’s Consolidated Statements of Financial Position.

 

New Accounting Pronouncements

 

In January 2014, the FASB updated the guidance within ASC 323, Investments-Equity Method and Joint Ventures.  The update provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit.  The amendments modify the conditions that a reporting entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments.  If the modified conditions are met, the amendments permit an entity to make an accounting policy election to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). Additionally, the amendments introduce new recurring disclosures about all investments in qualified affordable housing projects irrespective of the method used to account for the investments.  The updated guidance is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted.  The Company adopted the new provisions of this accounting standard at the beginning of fiscal year 2016, and adoption did not have a material impact on its consolidated financial statements.

 

In May 2014, the FASB issued ASC 606, Revenue from Contracts with Customers.  This topic converges the guidance within U.S. generally accepted accounting principles and international financial reporting standards and supersedes ASC 605, Revenue Recognition.  The new 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 new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements.  On July 8, 2015, the FASB approved a one-year deferral of the effective date.  The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and early adoption is permitted for annual reporting periods beginning after December 15, 2016.  Accordingly, the Company expects to adopt the provisions of this new accounting standard at the beginning of fiscal year 2019, and is currently assessing the impact on its consolidated financial statements.

 

In April 2015, the FASB updated the guidance within ASC 835, Interest.  The update provides guidance on simplifying the presentation of debt issuance costs.  The amendments require debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.  The updated guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted.  The Company expects to adopt the new provisions of this accounting standard at the beginning of fiscal year 2017, and adoption is not expected to have a material impact on its consolidated financial statements.

 

In April 2015, the FASB updated the guidance within ASC 715, Compensation-Retirement Benefits.  The update provides guidance on simplifying the measurement date for defined benefit plan assets and obligations.  The amendments allow employers with fiscal year ends that do not coincide with a calendar month end to make an

 

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accounting policy election to measure defined benefit plan assets and obligations as of the end of the month closest to their fiscal year ends.  The updated guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted.  The Company adopted the new provisions of this accounting standard at the beginning of fiscal year 2016, with no accounting policy change elected.

 

In May 2015, the FASB updated the guidance within ASC 820, Fair Value Measurements and Disclosures.  The update provides guidance on the disclosures for investments in certain entities that calculate net asset value (NAV) per share (or its equivalent).  The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share (or its equivalent) as a practical expedient.  The updated guidance is to be applied retrospectively and is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted.  The Company adopted the new provisions of this accounting standard at the beginning of fiscal year 2016, and adoption will impact year-end disclosures only and did not have a material impact on its consolidated financial statements.

 

In November 2015, the FASB updated the guidance within ASC 740, Balance Sheet Classification of Deferred Taxes.  The update requires all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet.  The updated guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted.  The Company adopted the new provisions of this accounting standard prospectively at the beginning of fiscal year 2016, and adoption did not have a material impact on its consolidated financial statements.

 

In February 2016, the FASB updated the guidance within ASC 842, Leases.  The update requires lessees to put most leases on their balance sheets while recognizing expenses on their income statements in a manner similar to current GAAP.  The guidance also eliminates current real estate-specific provisions for all entities.  For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases.  The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Accordingly, the Company expects to adopt the new provisions of this accounting standard at the beginning of fiscal year 2020, and is currently assessing the impact on its consolidated financial statements.

 

In March 2016, the FASB updated the guidance within ASC 718, Compensation-Stock Compensation.  The update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  Early adoption is permitted in any interim or annual period, with adjustments reflected as of the beginning of the fiscal year.  The Company is currently assessing the timing and impact of adopting the updated provisions.

 

 

NOTE B                                               ACQUISITIONS

 

On July 13, 2015, the Company acquired Applegate Farms, LLC (Applegate) of Bridgewater, New Jersey for a final purchase price of $774.1 million in cash.  The purchase price was funded by the Company with cash on hand and by utilizing short-term financing.

 

Applegate® is the No. 1 brand in natural and organic value-added prepared meats and this acquisition will allow the Company to expand the breadth of its protein offerings to provide consumers more choice in that fast growing category.

 

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The acquisition was accounted for as a business combination using the acquisition method.  The Company obtained an independent appraisal.  A final allocation of the purchase price to the acquired assets, liabilities, and goodwill is presented in the table below.

 

(in thousands)

 

 

Accounts receivable

$

25,574

Inventory

 

22,212

Prepaid and other assets

 

2,916

Property, plant and equipment

 

3,463

Intangible assets

 

275,900

Goodwill

 

488,353

Current liabilities

 

(23,420)

Deferred taxes

 

(20,935)

Purchase price

$

774,063

 

Goodwill is calculated as the excess of the purchase price over the fair value of the net assets recognized.  The goodwill recorded as part of the acquisition primarily reflects the value of the potential to expand presence in the natural and organic channels and the supply chain for natural and organic products.  A portion of the goodwill balance is expected to be deductible for income tax purposes.  The goodwill and intangible assets have been allocated to the Refrigerated Foods segment.

 

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 presented, as the acquisition was not considered material to the consolidated Company.

 

On May 2, 2016, subsequent to the end of the second quarter, the Company entered into a definitive agreement to acquire Justin’s, LLC (Justin’s) for a preliminary purchase price of $286.0 million.  The transaction is structured to provide an ongoing cash flow benefit as a result of tax amortization of the stepped-up basis of assets, the net present value of which is approximately $70.0 million.

 

Justin’s is a pioneer in nut butter-based snacking and this acquisition will allow the Company to enhance its presence in the specialty natural and organic nut butter category, complementing the Company’s SKIPPY peanut butter products.

 

Operating results for this acquisition will be included in the Company’s Consolidated Statements of Operations from the date of acquisition (i.e. beginning in the third quarter) and will be reflected in the Grocery Products segment.

 

 

NOTE C                                               INVENTORIES

 

Principal components of inventories are:

 

(in thousands)

April 24,

2016

 

October 25,

2015

Finished products

$

608,474

 

$

553,298

Raw materials and work-in-process

 

233,039

 

 

239,174

Materials and supplies

 

185,927

 

 

200,793

Total

$

1,027,440

 

$

993,265

 

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NOTE D                                               GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill for the second quarter and six months ended April 24, 2016, are presented in the table below.  Impairment charges during the second quarter are related to the Company’s assets held for sale.  See additional discussion regarding the Company’s assets held for sale in Note E.  Purchase accounting adjustments for Applegate reduced the first six months.

 

(in thousands)

 

Grocery
Products

 

Refrigerated
Foods

 

JOTS

 

Specialty
Foods

 

International
& Other

 

Total

 

Balance as of January 24, 2016

 

  $

322,421

 

  $

584,561

 

  $

203,214

 

  $

456,416

 

  $

132,749

 

  $

1,699,361

 

Impairment charge

 

-

 

-

 

-

 

(991)

 

-

 

(991

)

Balance as of April 24, 2016

 

  $

322,421

 

  $

584,561

 

  $

203,214

 

  $

455,425

 

  $

132,749

 

  $

1,698,370

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Grocery
Products

 

Refrigerated
Foods

 

JOTS

 

Specialty
Foods

 

International
& Other

 

Total

 

Balance as of October 25, 2015

 

  $

322,421

 

  $

584,684

 

  $

203,214

 

  $

456,416

 

  $

132,749

 

  $

1,699,484

 

Purchase adjustments

 

-

 

(123)

 

-

 

-

 

-

 

(123

)

Impairment charge

 

-

 

-

 

-

 

(991)

 

-

 

(991

)

Balance as of April 24, 2016

 

  $

322,421

 

  $

584,561

 

  $

203,214

 

  $

455,425

 

  $

132,749

 

  $

1,698,370

 

 

The gross carrying amount and accumulated amortization for definite-lived intangible assets are presented in the table below.

 

(in thousands)

 

April 24, 2016

 

October 25, 2015

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

Customer lists/relationships

  $

83,190

 

  $

(17,450)

 

  $

83,190

 

  $

 (13,939)

Formulas and recipes

2,190

 

(1,866)

 

7,490

 

(6,865)

Proprietary software and technology

1,010

 

(901)

 

7,010

 

(6,901)

Other intangibles

2,120

 

(1,222)

 

2,370

 

(1,195)

Total

  $

88,510

 

  $

(21,439)

 

  $

100,060

 

  $

  (28,900)

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense was $1.9 million and $4.0 million for the second quarter and six months ended April 24, 2016, respectively, compared to $1.9 million and $4.0 million for the second quarter and six months ended April 26, 2015.

 

Estimated annual amortization expense for the five fiscal years after October 25, 2015, is as follows:

 

(in millions)

 

 

2016

 

$ 8.2

2017

 

7.6

2018

 

7.0

2019

 

7.0

2020

 

6.8

 

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

 

(in thousands)

April 24, 2016

 

October 25, 2015

Brands/tradenames/trademarks

  $

748,075

 

  $

748,075

Other intangibles

7,984

 

7,984

Total

  $

756,059

 

  $

756,059

 

 

 

 

 

 

 

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Table of Contents

 

NOTE E                                               ASSETS HELD FOR SALE

 

In fiscal year 2015, the Company began actively marketing a portion of Diamond Crystal Brands (DCB).  Through this process, the Company identified the specific assets and liabilities to be sold and allocated goodwill based on the relative fair values of the assets held for sale and the assets that will be retained by the Company.  In April 2016, the Company entered into an agreement for the sale, which completed subsequent to the end of the second quarter.  As a result of the expected sale, the Company reallocated goodwill based on the relative fair values of the assets held for sale and the assets that will be retained for the Company.  An impairment charge of $1.0 million was recorded based on the valuation of these assets as implied by the agreed-upon sales price.  This impairment is recorded on the Company’s Consolidated Statements of Operations on the line item “Goodwill impairment charge.”  DCB is reported within the Company’s Specialty Foods segment.  The portion of the business held for sale is not material to the Company’s annual net sales, net earnings, or earnings per share.

 

Amounts classified as assets and liabilities held for sale at April 24, 2016 are presented on the Company’s Consolidated Statement of Financial Position within their respective accounts, and include the following:

 

Assets held for sale (in thousands)

 

 

 

Current assets

 

$

26,312

Goodwill

 

 

50,134

Intangibles

 

 

5,389

Property, plant and equipment

 

 

32,177

Total assets held for sale

 

$

114,012

 

 

 

 

Liabilities held for sale (in thousands)

 

 

 

Total current liabilities held for sale

 

$

3,507

 

 

 

 

 

 

NOTE F                                                PENSION AND OTHER POST-RETIREMENT BENEFITS

 

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

 

 

Pension Benefits

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 24, 2016

 

April 26, 2015

 

April 24, 2016

 

April 26, 2015

Service cost

$

6,680

 

$

7,199

 

$

13,360

 

$

14,398

Interest cost

 

13,678

 

 

13,130

 

 

27,356

 

 

26,261

Expected return on plan assets

 

(21,678)

 

 

(22,198)

 

 

(43,355)

 

 

(44,396)

Amortization of prior service cost

 

(1,066)

 

 

(1,219)

 

 

(2,132)

 

 

(2,439)

Recognized actuarial loss

 

4,586

 

 

4,625

 

 

9,171

 

 

9,226

Net periodic cost

$

2,200

 

$

1,537

 

$

4,400

 

$

3,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Post-retirement Benefits

 

Three Months Ended

 

Six Months Ended

(in thousands)

April 24, 2016

 

April 26, 2015

 

April 24, 2016

 

April 26, 2015

Service cost

$

317

 

$

443

 

$

633

 

$

885

Interest cost

 

3,236

 

 

3,336

 

 

6,472

 

 

6,672

Amortization of prior service cost

 

(1,051)

 

 

(334)

 

 

(2,101)

 

 

(668)

Recognized actuarial loss (gain)

 

392

 

 

(1)

 

 

784

 

 

(1)

Net periodic cost

$

2,894

 

$

3,444

 

$

5,788

 

$

6,888

 

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NOTE G                                              DERIVATIVES AND HEDGING

 

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

 

Cash Flow Hedges:  The Company currently utilizes corn futures to offset the price fluctuation in the Company’s future direct grain purchases, and has historically entered into various swaps to hedge the purchases of grain at certain locations.  The financial instruments are designated and accounted for as cash flow hedges, and the Company measures the effectiveness of the hedges at least quarterly.  Effective gains or losses related to these cash flow hedges are reported in accumulated other comprehensive loss (AOCL) and reclassified into earnings, through cost of products sold, in the period or periods in which the hedged transactions affect earnings.  Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold.  The Company typically does not hedge its grain exposure beyond the next two upcoming fiscal years.  As of April 24, 2016, and October 25, 2015, the Company had the following outstanding commodity futures contracts that were entered into to hedge forecasted purchases:

 

 

 

Volume

Commodity

 

April 24, 2016

 

October 25, 2015

Corn

 

26.4 million bushels

 

20.1 million bushels

 

As of April 24, 2016, the Company has included in AOCL, hedging losses of $2.1 million (before tax) relating to these positions, compared to gains of $1.0 million (before tax) as of October 25, 2015.  The Company expects to recognize the majority of these losses over the next 12 months.

 

Fair Value Hedges:  The Company utilizes futures to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers.  The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery.  The futures contracts are designated and accounted for as fair value hedges, and the Company measures the effectiveness of the hedges at least quarterly.  Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and are recorded on the Consolidated Statements of Financial Position as a current asset and liability, respectively.  Effective gains or losses related to these fair value hedges are recognized through cost of products sold in the period or periods in which the hedged transactions affect earnings.  Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold.  As of April 24, 2016, and October 25, 2015, the Company had the following outstanding commodity futures contracts designated as fair value hedges:

 

 

 

Volume

Commodity

 

April 24, 2016

 

October 25, 2015

Corn

 

1.0 million bushels

 

5.3 million bushels

Lean hogs

 

0.2 million cwt

 

0.4 million cwt

 

Other Derivatives:  The Company holds certain futures and options contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets.  The Company has not applied hedge accounting to these positions.

 

As of April 24, 2016, and October 25, 2015, the Company had the following outstanding futures related to these programs:

 

 

 

Volume

Commodity

 

April 24, 2016

 

October 25, 2015

Corn

 

3.9 million bushels

 

2.6 million bushels

Soybean meal

 

17,900 tons

 

11,500 tons

 

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Table of Contents

 

Fair Values:  The fair values of the Company’s derivative instruments (in thousands) as of April 24, 2016, and October 25, 2015, were as follows:

 

 

 

 

 

Fair Value (1)

 

 

Location on Consolidated

Statements of Financial
Position

 

April 24,

2016

 

October 25,

2015

Asset Derivatives:

 

 

 

 

 

 

Derivatives Designated as Hedges:

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

(3,370)

 

$

305

 

 

 

 

 

 

 

Derivatives Not Designated as Hedges:

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

319 

 

248

 

 

 

 

 

 

 

Total Asset Derivatives

 

 

 

$

(3,051)

 

$

553

 

 

 

 

 

 

 

 

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

 

Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the second quarter ended April 24, 2016, and April 26, 2015, were as follows:

 

 

 

 

Gain/(Loss)

Recognized in AOCL

(Effective Portion) (1)

 

Location on

Consolidated
Statements

of Operations

 

 

Gain/(Loss)

Reclassified from

AOCL into Earnings

(Effective Portion) (1)

 

Gain/(Loss)

Recognized in
Earnings (Ineffective

Portion) (2) (4)

 

 

Three Months Ended

 

 

Three Months Ended

 

Three Months Ended

Cash Flow Hedges:

 

April 24,
2016

April 26,
2015

 

 

April 24,
2016

April 26,
2015

 

April 24,
2016

April 26,
2015

Commodity contracts

 

$

(1,620)   

$

(5,033)   

 

Cost of products sold

 

$

(577)   

$

(2,705)   

 

$

(29)   

$

-   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location on

Consolidated
Statements

of Operations

 

Gain/(Loss)

Recognized in
Earnings (Effective
Portion)
(3)

 

Gain/(Loss)

Recognized in
Earnings (Ineffective

Portion) (2) (5)

 

 

 

 

 

Three Months Ended

 

Three Months Ended

Fair Value Hedges:

 

 

 

 

 

April 24,
2016

April 26,
2015

 

April 24,
2016

April 26,
2015

Commodity contracts

 

 

 

 

Cost of products sold

 

$

664   

$

(3,769)   

 

$

13   

$

203   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location on

Consolidated
Statements

of Operations

 

Gain/(Loss)

Recognized

in Earnings

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Derivatives Not

Designated as Hedges:

 

 

 

 

 

April 24,
2016

April 26,
2015

 

 

 

Commodity contracts

 

 

 

 

Cost of products sold

 

$

50   

$

(264)   

 

 

 

 

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Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the six months ended April 24, 2016, and April 26, 2015, were as follows:

 

 

 

 

 

 

Gain/(Loss)

Recognized in AOCL

(Effective Portion) (1)

 

Location on

Consolidated
Statements

of Operations

 

Gain/(Loss)

Reclassified from

AOCL into Earnings

(Effective Portion) (1)

 

Gain/(Loss)

Recognized in
Earnings (Ineffective

Portion) (2) (4)

 

 

Six Months Ended

 

 

Six Months Ended

 

Six Months Ended

Cash Flow Hedges:

 

April 24,
2016

April 26,
2015

 

 

April 24,
2016

April 26,
2015

 

April 24,
2016

April 26,
2015

Commodity contracts

 

$

(4,468)   

$

(1,370)   

 

Cost of products sold

 

$

(1,344)   

$

(7,084)   

 

$

(28)   

$

-   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location on

Consolidated
Statements

of Operations

 

Gain/(Loss)

Recognized in
Earnings (Effective
Portion)
(3)

 

Gain/(Loss)

Recognized in
Earnings (Ineffective

Portion) (2) (5)

 

 

 

 

 

Six Months Ended

 

Six Months Ended

Fair Value Hedges:

 

 

 

 

 

April 24,
2016

April 26,
2015

 

April 24,
2016

April 26,
2015

Commodity contracts

 

 

 

 

Cost of products sold

 

$

1,906   

$

(3,937)   

 

$

(239)   

$

93   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location on

Consolidated
Statements

of Operations

 

Gain/(Loss)

Recognized

in Earnings

 

 

 

 

 

 

 

 

Six Months Ended

 

 

Derivatives Not

Designated as Hedges:

 

 

 

 

 

April 24,
2016

April 26,
2015

 

 

 

Commodity contracts

 

 

 

 

Cost of products sold

 

$

(430)   

$

(135)   

 

 

 

 

(1)  Amounts represent gains or losses in AOCL before tax.  See Note I “Accumulated Other Comprehensive Loss” or the Consolidated

Statements of Comprehensive Income for the after-tax impact of these gains or losses on net earnings.

(2)  There were no gains or losses excluded from the assessment of hedge effectiveness during the second quarter or first six months.

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

(4)  There were no gains or losses resulting from the discontinuance of cash flow hedges during the second quarter or first six months.

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

the second quarter or first six months.

 

 

NOTE H                                              INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES

 

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

 

Investments in and receivables from affiliates consists of the following:

 

 

(in thousands)

 

Segment

 

 

% Owned

 

April 24,
2016

 

October 25,
2015

MegaMex Foods, LLC

Grocery Products

 

 50%

$

193,659

 

$

200,110

Foreign Joint Ventures

International & Other

 

Various (26-40%)

61,290

 

58,888

Total

 

 

 

$

254,949

 

$

258,998

 

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Equity in earnings of affiliates consists of the following:

 

 

 

 

Three Months Ended

 

Six Months Ended

(in thousands)

 

Segment

 

April 24,
2016

 

April 26,
2015

 

April 24,
2016

 

April 26,
2015

MegaMex Foods, LLC

Grocery Products

 

$

8,568

 

$

7,157

 

$

15,773

 

$

15,214 

Foreign Joint Ventures

International & Other

 

1,025

 

 717

 

5,295

 

(5,680)

Total

 

 

$

9,593

 

$

7,874

 

$

21,068

 

$

9,534 

 

Dividends received from affiliates for the three and six months ended April 24, 2016, were $9.5 million and $14.5 million, respectively, compared to $10.0 million dividends received for both the three and six months ended April 26, 2015.  Equity in earnings in the first six months of fiscal 2015 included nonrecurring charges related to the exit from international joint venture businesses.

 

The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $15.7 million is remaining as of April 24, 2016.  This difference is being amortized through equity in earnings of affiliates.

 

 

NOTE I                                                   ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Components of accumulated other comprehensive loss are as follows:

 

(in thousands)

Foreign
Currency
Translation

 

Pension &
Other
Benefits

 

Deferred
Gain (Loss) -
Hedging

 

Accumulated
Other
Comprehensive
Loss

Balance at January 24, 2016

$

 (1,570)

 

$

 (225,500)

 

$

(669)

 

$

 (227,739)

Unrecognized gains:

 

 

 

 

 

 

 

Gross

949

 

 

 

(1,620)

 

(671)

Tax effect

 

 

(1)

 

610

 

609

Reclassification into net earnings:

 

 

 

 

 

 

 

Gross

 

 

2,861

(1)

577

(2)

3,438

Tax effect

 

 

(1,086)

 

(217)

 

(1,303)

Net of tax amount

949

 

1,774

 

(650)

 

2,073

Balance at April 24, 2016

$

(621)

 

$

 (223,726)

 

$

(1,319)

 

$

 (225,666)

 

 

 

 

 

 

 

 

(in thousands)

Foreign
Currency
Translation

 

Pension &
Other
Benefits

 

Deferred
Gain (Loss) -
Hedging

 

Accumulated
Other
Comprehensive
Loss

Balance at October 25, 2015

$

969

 

$

(227,266)

 

$

629

 

$

(225,668)

Unrecognized gains:

 

 

 

 

 

 

 

Gross

(1,590)

 

(16)

 

(4,468)

 

(6,074)

Tax effect

 

 

5

 

1,682

 

1,687

Reclassification into net earnings:

 

 

 

 

 

 

 

Gross

 

 

5,722

(1)

1,344

(2)

7,066

Tax effect

 

 

(2,171)

 

(506)

 

(2,677)

Net of tax amount

(1,590)

 

3,540

 

(1,948)

 

2

Balance at April 24, 2016

$

(621)

 

$

(223,726)

 

$

(1,319)

 

$

(225,666)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

 

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NOTE J                                                 INCOME TAXES

 

The amount of unrecognized tax benefits, including interest and penalties, at April 24, 2016, recorded in other long-term liabilities was $28.1 million, of which $18.3 million would impact the Company’s effective tax rate if recognized.  The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense, with $0.7 million and $0.4 million of accrued interest and penalty benefits included in the second quarter and first six months, respectively of fiscal 2016.  The amount of accrued interest and penalties at April 24, 2016, associated with unrecognized tax benefits was $2.9 million.

 

The Company is regularly audited by federal and state taxing authorities.  The United States Internal Revenue Service (I.R.S.) is currently examining fiscal years 2013 and 2014.  The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years 2015 and 2016.  The objective of CAP is to contemporaneously work with the I.R.S. to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return.  The Company may elect to continue participating in CAP for future tax years; the Company may withdraw from the program at any time.

 

The Company is in various stages of audit by several state taxing authorities on a variety of fiscal years, as far back as 2010.  While it is reasonably possible that one or more of these audits may be completed within the next 12 months and that the related unrecognized tax benefits may change, based on the status of the examinations it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.

 

 

NOTE K                                              STOCK-BASED COMPENSATION

 

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

 

A reconciliation of the number of options outstanding and exercisable (in thousands) as of April 24, 2016, and changes during the six months then ended, is as follows:

 

 

Shares

Weighted-
Average
Exercise  Price

Weighted-
Average
Remaining
Contractual
Term

Aggregate
Intrinsic Value

Outstanding at October 25, 2015

34,397

$ 13.83

 

 

Granted

2,104

38.31

 

 

Exercised

3,374

9.52

 

 

Forfeited

15

18.90

 

 

Outstanding at April 24, 2016

33,112

$ 15.83

5.2 years

$ 724,297

Exercisable at April 24, 2016

26,212

$ 12.73

4.3 years

$ 653,461

 

 

The weighted-average grant date fair value of stock options granted and the total intrinsic value of options exercised (in thousands) during the second quarter and first six months of fiscal years 2016 and 2015, are as follows:

 

 

Three Months Ended

 

Six Months Ended

 

April 24,
2016

 

April 26,
2015

 

April 24,
2016

 

April 26,
2015

Weighted-average grant date fair value

$

8.36

 

$

9.00

 

$

7.82

 

$

9.84

Intrinsic value of exercised options

$

45,081

 

$

23,409

 

$

103,216

 

$

32,601

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 24,
2016

 

April 26,
2015

 

April 24,
2016

 

April 26,
2015

 

Risk-free interest rate

 

1.9%

 

 

1.6%

 

 

2.1%

 

 

2.1%

 

 

Dividend yield

 

1.4%

 

 

1.9%

 

 

1.5%

 

 

1.9%

 

 

Stock price volatility

 

19.0%

 

 

19.0%

 

 

19.0%

 

 

19.0%

 

 

Expected option life

 

8 years

 

 

8 years

 

 

8 years

 

 

8 years

 

 

 

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

 

The Company’s nonvested shares granted between September 27, 2010, and July 27, 2014, vest after one year.  Nonvested shares granted on or after July 28, 2014, vest on the earlier of the day before the Company’s next annual meeting date or one year.  A reconciliation of the nonvested shares (in thousands) as of April 24, 2016, and changes during the six months then ended, is as follows:

 

 

 

Shares

 

Weighted-
Average Grant-
Date Fair Value

 

Nonvested at October 25, 2015

 

74

 

 

$

25.87

 

Granted

 

47

 

 

 

41.01

 

Vested

 

74

 

 

 

25.87

 

Nonvested at April 24, 2016

 

47

 

 

$

41.01

 

 

The weighted-average grant date fair value of nonvested shares granted, the total fair value (in thousands) of nonvested shares granted, and the fair value (in thousands) of shares that have vested during the first six months of fiscal years 2016 and 2015, are as follows:

 

 

 

Six Months Ended

 

 

 

April 24,
2016

 

April 26,
2015

 

Weighted-average grant date fair value

 

$  41.01

 

$  25.87

 

Fair value of nonvested shares granted

 

$  1,920

 

$  1,920

 

Fair value of shares vested

 

$  1,920

 

$  2,347

 

 

Stock-based compensation expense, along with the related income tax benefit, for the second quarter and first six months of fiscal years 2016 and 2015 is presented in the table below.

 

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

 

April 24,
2016

 

April 26,
2015

 

April 24,
2016

 

April 26,
2015

 

Stock-based compensation expense recognized

 

  $

7,016

 

  $

7,025

 

  $

14,178

 

  $

12,549

 

Income tax benefit recognized

 

(2,662)

 

(2,668)

 

(5,379)

 

(4,765)

 

After-tax stock-based compensation expense

 

  $

4,354

 

  $

4,357

 

  $

8,799

 

  $

7,784

 

 

At April 24, 2016, there was $13.4 million of total unrecognized compensation expense from stock-based compensation arrangements granted under the plans.  This compensation is expected to be recognized over a weighted-average period of approximately 2.9 years.  During the second quarter and six months ended April 24, 2016, cash received from stock option exercises was $4.9 million and $8.4 million, respectively, compared to $3.9

 

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million and $6.0 million for the second quarter and six months ended April 26, 2015.  The total tax benefit to be realized for tax deductions from these option exercises for the second quarter and six months ended April 24, 2016, was $17.2 million and $39.2 million, respectively, compared to $8.9 million and $12.4 million in the comparable periods of fiscal 2015.

 

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

 

 

NOTE L                FAIR VALUE MEASUREMENTS

 

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

 

Level 1:  Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2: Observable inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.

 

Level 3:  Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.

 

The Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of April 24, 2016, and October 25, 2015, and their level within the fair value hierarchy, are presented in the tables below.

 

 

 

Fair Value Measurements at April 24, 2016

 

(in thousands)

 

Fair Value at
April 24,
2016

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets at Fair Value:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (1)

 

  $

379,881

 

  $

379,881

 

  $

-

 

  $

-

 

Other trading securities (2)

 

120,820

 

39,429

 

81,391

 

-

 

Commodity derivatives (3)

 

2,666

 

2,666

 

-

 

-

 

Total Assets at Fair Value

 

  $

503,367

 

  $

421,976

 

  $

81,391

 

  $

-

 

 

 

 

 

 

 

 

 

 

 

Liabilities at Fair Value:

 

 

 

 

 

 

 

 

 

Deferred compensation (2)

 

  $

56,982

 

  $

26,131

 

  $

30,851

 

  $

-

 

Total Liabilities at Fair Value

 

  $

56,982

 

  $

26,131

 

  $

30,851

 

  $

-

 

 

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Fair Value Measurements at October 25, 2015

 

(in thousands)

 

Fair Value at
October 25,
2015

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets at Fair Value:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (1)

 

  $

347,239

 

  $

347,239

 

  $

-

 

  $

-

 

Other trading securities (2)

 

119,668

 

39,329

 

80,339

 

-

 

Commodity derivatives (3)

 

6,485

 

6,485

 

-

 

-

 

Total Assets at Fair Value

 

  $

473,392

 

  $

393,053

 

  $

80,339

 

  $

-