HORMEL FOODS CORPORATION Executive Overview
Fiscal 2019: Sales for the year were$9.5 billion , a 1 percent decline from last year. Sales decreased primarily due to the divestiture of CytoSport. Organic net sales1 were up 1 percent. (1See explanation of non-GAAP financial measures in the Consolidated Results section). Pretax earnings increased 2 percent to$1,209.7 million . Profit growth from the value-added businesses inRefrigerated Foods and lower selling, general and administrative expenses more than offset a significant decline in commodity profits and lower equity in earnings of affiliates. A higher effective tax rate drove net earnings attributable to the Company lower by 3 percent to$978.8 million , compared to net earnings of$1,012.1 million last year. The effective tax rate in fiscal 2019 increased primarily due to the impact of the Tax Cuts and Jobs Act (Tax Act) recognized in fiscal 2018. Diluted earnings per share for fiscal 2019 were$1.80 , a 3 percent decrease compared to$1.86 per share last year.Refrigerated Foods segment results exceeded last year due to growth from the value-added businesses, including strong results from foodservice products such as Hormel® FirebraisedTM meats and pizza toppings. Retail sales of Hormel® Black Label® convenience bacon and Columbus® deli items also contributed to overall growth, helping to offset a significant decline in commodity profits. TheJennie-O Turkey Store segment was negatively impacted by lost retail distribution due to two voluntary product recalls in the first quarter of fiscal 2019 and low commodity prices resulting from continued industry oversupply. Grocery Products segment financial performance was down due to lower Skippy® peanut butter pricing and a reduction inMegaMex Foods, LLC (MegaMex) equity in earnings compared to fiscal 2018. International & Other segment results declined primarily by the impact of tariffs and global trade uncertainty affecting fresh pork exports. Our Company continued to reinvest into the business through capital expenditures while returning cash back to shareholders in the form of dividends and share repurchases. Capital expenditures were$293.8 million in fiscal 2019. Notable projects included the preliminary phases of the Burke pizza toppings plant expansion, a new dry sausage facility inNebraska , Project Orion, and many other items to support growth of branded products. The annual dividend for 2020 will be$0.93 per share and marks the 54th consecutive year of dividend increases, representing an increase of 11 percent after a 12 percent increase in fiscal 2019. We repurchased 4.3 million shares of common stock in fiscal 2019, spending$174.2 million . In December, the Company completed the sale of itsFremont, Nebraska , processing facility toWholestone Farms, LLC , for$30.6 million . Additionally, in April, the Company completed the sale of its CytoSport business to PepsiCo, Inc., for$479.8 million . Fiscal 2020 Outlook: We expect to grow sales and pretax profits in fiscal 2020. Our branded, value-added businesses withinRefrigerated Foods continue to be well-positioned for growth in the foodservice, retail, and deli channels. Positive momentum in brands such as Hormel® Bacon 1TM, Hormel® Natural Choice®, Applegate®, Columbus® and Hormel® Fire BraisedTM should help mitigate the risk of higher input prices and volatility due to African swine fever. Operational improvements, continued industry recovery, and regained lean ground turkey distribution atJennie-O Turkey Store are expected to return the segment to growth. The International & Other segment plans to grow sales and earnings while managing through challenges due to African swine fever and global trade uncertainty. We expect contributions from branded items such as the SPAM® family of products, Wholly® guacamole dips, Herdez® salsas and sauces, and Skippy® peanut butter to help offset the impact of the CytoSport sale to the Grocery Products segment in fiscal 2019. Additionally, we expect continued cost reductions from our supply chain organization and will begin implementation of Project Orion during fiscal 2020. We plan to support our numerous iconic brands with continued advertising in fiscal 2020. Strong cash flow, along with a solid balance sheet, will enable us to continue to return cash to shareholders while investing capital into our value-added businesses. We will open a new$150 million expansion at our Burke facility in the third quarter of fiscal 2020, which will provide much needed capacity to grow our pizza toppings business in foodservice.
Results of Operations
OVERVIEW
The Company is a processor of branded and unbranded food products for retail, foodservice, deli, and commercial customers. At the beginning of fiscal 2019, the Hormel Deli Solutions division combined all deli businesses, including theJennie-O Turkey Store deli division, into one division within theRefrigerated Foods segment. In addition, the ingredients business was realigned from the Grocery Products segment to theRefrigerated Foods segment. Periods presented herein have been recast to reflect this change. Periods presented have also been adjusted due to the adoption of Accounting Standards Update (ASU) 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). See Note A - Summary of Significant Accounting Policies for more information. 13
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The Company operates in the following four reportable segments:
Segment Business Conducted
Grocery Products This segment consists primarily of the processing, marketing,
and sale of shelf-stable food products sold predominantly in
the retail market, along with the sale of nutritional and
private label shelf-stable products to retail, foodservice,
and industrial customers. This segment also includes the
results from the Company's MegaMex Foods, LLC (MegaMex) joint
venture.
Refrigerated Foods This segment consists primarily of the processing, marketing,
and sale of branded and unbranded pork, beef, chicken, and
turkey products for retail, foodservice, deli, and commercial
customers.
Jennie-O Turkey Store This segment consists primarily of the processing, marketing,
and sale of branded and unbranded turkey products for retail,
foodservice, and commercial customers.
International & Other This segment includes Hormel Foods International , which
manufactures, markets, and sells Company products
internationally. This segment also includes the results from
the Company's international joint ventures and royalty
arrangements.
The Company's fiscal year consisted of 52 weeks in fiscal years 2019, 2018, and 2017.
FISCAL YEARS 2019 AND 2018 CONSOLIDATED RESULTS
Net Earnings and Diluted Earnings Per Share
Fourth Quarter Ended Year Ended
(in thousands, except
per share October 27, October 28, October 27, October 28,
amounts) 2019 2018 % Change 2019 2018 % Change
Net Earnings $ 255,503 $ 261,406 (2.3 ) $ 978,806 $ 1,012,140 (3.3 )
Diluted Earnings Per
Share 0.47 0.48 (2.1 ) 1.80 1.86 (3.2 )
Volume and Net Sales
Fourth Quarter Ended Year Ended
October 27, October 28, October 27, October 28,
(in thousands) 2019 2018 % Change 2019 2018 % Change
Volume (lbs.) 1,236,877 1,265,292 (2.2 ) 4,737,281 4,798,178 (1.3 )
Organic Volume(1) 1,236,877 1,226,641 0.8 4,737,281 4,721,637 0.3
Net Sales $ 2,501,513 $ 2,524,697 (0.9 ) $
9,497,317
(1) COMPARISON OF
The non-GAAP adjusted financial measurements of organic volume and organic net sales are presented to provide investors additional information to facilitate the comparison of past and present operations. 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 forU.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. 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 CytoSport divestiture (April 2019 ) in the Grocery Products and International & Other segments. The tables below show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures in the fourth quarter and year-to-date of fiscal 2019 and fiscal 2018. 14
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Reconciliation of Non-GAAP Measures
4th Quarter
Volume (lbs.)
FY19 FY 2018
Reported Reported Organic Organic
(in thousands) (GAAP) (GAAP) Divestitures (Non-GAAP) % change
Grocery Products 313,489 346,214 (37,394 ) 308,820 1.5
Refrigerated Foods 598,474 592,298 - 592,298 1.0
Jennie-O Turkey Store 242,421 231,180 - 231,180 4.9
International & Other 82,493 95,600 (1,257 ) 94,343 (12.6 )
Total Volume 1,236,877 1,265,292 (38,651 ) 1,226,641 0.8
Net Sales
FY 2019 FY 2018
Reported Reported Organic Organic
(in thousands) (GAAP) (GAAP) Divestitures (Non-GAAP) % change
Grocery Products $ 584,085 $ 648,244 $ (71,415 ) $ 576,829 1.3
Refrigerated Foods 1,373,009 1,321,784 - 1,321,784 3.9
Jennie-O Turkey Store 398,512 388,278 - 388,278 2.6
International & Other 145,907 166,391 (2,233 ) 164,158 (11.1 )
Total Net Sales $ 2,501,513 $ 2,524,697 $ (73,648 ) $ 2,451,049 2.1
Full Year
Volume (lbs.)
FY 2019 FY 2018
Reported Reported Organic Organic
(in thousands) (GAAP) (GAAP) Divestitures (Non-GAAP) % change
Grocery Products 1,283,492 1,328,693 (73,915 ) 1,254,778 2.3
Refrigerated Foods 2,325,156 2,327,140 - 2,327,140 (0.1 )
Jennie-O Turkey Store 789,337 784,655 - 784,655 0.6
International & Other 339,296 357,690 (2,626 ) 355,064 (4.4 )
Total Volume 4,737,281 4,798,178 (76,541 ) 4,721,637 0.3
Net Sales
FY 2019 FY 2018
Reported Reported Organic Organic
(in thousands) (GAAP) (GAAP) Divestitures (Non-GAAP) % change
Grocery Products $ 2,369,317 $ 2,480,367 $ (141,401 ) $ 2,338,966 1.3
Refrigerated Foods 5,210,741 5,109,881 - 5,109,881 2.0
Jennie-O Turkey Store 1,323,783 1,331,013 - 1,331,013 (0.5 )
International & Other 593,476 624,439 (4,696 ) 619,743 (4.2 )
Total Net Sales $ 9,497,317 $ 9,545,700 $ (146,097 ) $ 9,399,603 1.0
The decrease in net sales for the fourth quarter of fiscal 2019 was related
primarily to the divestiture of CytoSport. Organic net sales increased 2 percent
as increased sales of whole-bird and commodity business at Jennie-O Turkey
Store , Hormel® Black Label® bacon, the SPAM® family of products, and
Hormel® Bacon 1TM cooked bacon more than offset lower retail sales at Jennie-O
Turkey Store and lower sales of Skippy® peanut butter.
For fiscal 2019, the decrease in net sales was related primarily to the
divestiture of CytoSport. Organic net sales grew 1 percent over last year driven
by strong value-added sales in Refrigerated Foods , led by Hormel® Bacon 1TM
cooked bacon, Hormel® Fire BraisedTM products, and Hormel® Natural Choice®
items, despite weak retail sales of Jennie-O Turkey Store products and declines
in international pork exports.
In fiscal 2020, the Company expects net sales growth with contributions from
value-added products and innovation. Momentum in Refrigerated Foods across the
foodservice and retail channels is expected to continue, with meaningful growth
coming from brands such as Hormel® Natural Choice®, Applegate®, Hormel® Bacon
1TM, and Hormel® Fire BraisedTM. The deli division is expected to continue to
grow the Columbus® brand. The International & Other segment plans to show growth
in China , Brazil , and through increased branded export sales of SPAM® luncheon
meat and Skippy® peanut butter. Jennie-O Turkey Store is expecting sales growth
due to increases in turkey commodity markets and regained distribution of
Jennie-O® branded products. Growth from products such as Wholly® guacamole dips,
Herdez® salsas and sauces, the SPAM® family of products, and Skippy® P.B. and
Jelly Minis in the Grocery Products segment should offset the impact of the
CytoSport divestiture.
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Cost of Products Sold
Fourth Quarter Ended Year Ended
October 27, October 28, October 27, October 28,
(in thousands) 2019 2018 % Change 2019 2018 % Change
Cost of Products Sold $ 2,007,790 $ 1,991,369 0.8 $ 7,612,669 $ 7,566,227 0.6
Cost of products sold for the fourth quarter and full year increased as higher raw material and operational costs more than offset the impact from the divestiture of CytoSport and supply chain cost savings.
Gross Profit
Fourth Quarter Ended Year Ended
October 27, October 28, October 27, October 28,
(in thousands) 2019 2018 % Change 2019 2018 % Change
Gross Profit $ 493,723 $ 533,328 (7.4 ) $ 1,884,648 $ 1,979,473 (4.8 )
Percentage of Net
Sales 19.7 % 21.1 % 19.8 % 20.7 %
Consolidated gross profit as a percentage of net sales declined in the fourth
quarter due to reduced commodity profitability in Refrigerated Foods and weaker
margins for the International & Other segment. For the full year, reduced
commodity profitability in Refrigerated Foods , weaker sales mix at Jennie-O
Turkey Store , and lower Skippy® peanut butter pricing in Grocery Products drove
the decline in gross profit as a percentage of net sales.
In fiscal 2020, protein input costs are expected to be higher and demonstrate
volatility. This could negatively impact the Refrigerated Foods , Grocery
Products, and International & Other segments until pricing can be passed
through. Positive mix shift and, higher pricing, if necessary, are expected to
mitigate higher input costs. Jennie-O Turkey Store should benefit from
improvements to operations, higher commodity markets, and improved sales mix.
The global trade environment, potential impact of African swine fever, and
market volatility pose the largest threats to the Company's profitability.
Selling, General and Administrative (SG&A)
Fourth Quarter Ended Year Ended
October 27, October 28, October 27, October 28,
(in thousands) 2019 2018 % Change 2019 2018 % Change
SG&A $ 183,795 $ 205,287 (10.5 ) $ 727,584 $ 841,205 (13.5 )
Percentage of Net
Sales 7.3 % 8.1 % 7.7 % 8.8 %
For the fourth quarter of fiscal 2019, SG&A expenses decreased primarily due to
the CytoSport divestiture. For fiscal 2019, SG&A expenses declined due to the
impacts from the CytoSport divestiture and a legal settlement. Selling expenses
were also favorable compared to fiscal 2018.
Due to the CytoSport divestiture, advertising investments in the fourth quarter and full year declined.
In fiscal 2020, the Company intends to continue building brand awareness through advertising investments in key brands such as Hormel® Natural Choice®, Hormel® Black Label®, SPAM®, Skippy®, Wholly®, Herdez®, and Jennie-O®. Research and development continues to be a vital part of the Company's strategy to extend existing brands and expand into new branded items. Research and development expenses were$8.4 million and$32.5 million for the fiscal 2019 fourth quarter and year, respectively, compared to$8.7 million and$33.8 million for the corresponding periods in fiscal 2018.
An impairment charge related to the CytoSport trademark totaling
Equity in Earnings of Affiliates
Fourth Quarter Ended Year Ended
October 27, October 28, October 27, October 28,
(in thousands) 2019 2018 % Change 2019 2018 % Change
Equity in
Earnings of
Affiliates $ 11,068 $ 8,814 25.6 $ 39,201 $ 58,972 (33.5 )
Results for the fourth quarter increased due to improved results from MegaMex.
For fiscal 2019, equity in earnings of affiliates was lower due to significantly
higher avocado costs negatively impacting MegaMex earnings in the third quarter
of 2019 and the effect of a non-operating tax benefit recognized in the first
quarter of fiscal 2018.
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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 atOctober 27, 2019 , was as follows: (in thousands) Investments/Receivables Country United States $ 218,592 Foreign 70,565 Total $ 289,157 Effective Tax Rate Fourth Quarter Ended Year Ended October 27, October 28, October 27, October 28, 2019 2018 2019 2018 Effective Tax Rate 21.0 % 18.7 % 19.1 % 14.3 % The effective tax rate for both the fourth quarter and fiscal year reflects the impact of The Tax Cuts and Jobs Act, signed into law onDecember 22, 2017 . Fiscal 2018 included a net tax benefit of$72.9 million representing a benefit of$81.2 million from re-measuring the Company's netU.S. deferred tax liabilities, partially offset by the Company's accrual for the transition tax and otherU.S. tax law changes of$8.3 million . In addition to tax reform, the tax impacts of the CytoSport divestiture and stock-based compensation were the main drivers of the Company's fiscal 2019 effective tax rates for the fourth quarter and fiscal year compared to the prior year. For additional information, refer to Note K - Income Taxes.
The Company expects the effective tax rate in fiscal 2020 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 27, October 28, October 27, October 28,
(in thousands) 2019 2018 % Change 2019 2018 % Change
Net Sales
Grocery Products $ 584,085 $ 648,244 (9.9 ) $ 2,369,317 $ 2,480,367 (4.5 )
Refrigerated Foods 1,373,009 1,321,784 3.9 5,210,741 5,109,881 2.0
Jennie-O Turkey Store 398,512 388,278 2.6 1,323,783 1,331,013 (0.5 )
International & Other 145,907 166,391 (12.3 ) 593,476 624,439 (5.0 )
Total Net Sales $ 2,501,513 $ 2,524,697 (0.9 ) $ 9,497,317 $ 9,545,700 (0.5 )
Segment Profit
Grocery Products $ 80,923 $ 79,082 2.3 $ 339,497 $ 353,266 (3.9 )
Refrigerated Foods 189,287 194,573 (2.7 ) 681,763 670,948 1.6
Jennie-O Turkey Store 41,031 38,744 5.9 117,962 131,846 (10.5 )
International & Other 17,455 24,802 (29.6 ) 75,513 88,953 (15.1 )
Total Segment Profit 328,696 337,201 (2.5 ) 1,214,735 1,245,013 (2.4 )
Net Unallocated
Expense 5,065 15,787 67.9 5,362 64,171 (91.6 )
Noncontrolling
Interest 63 90 (30.0 ) 342 442 (22.6 )
Earnings Before
Income Taxes $ 323,694 $ 321,504 0.7 $ 1,209,715 $ 1,181,284 2.4
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Grocery Products
Fourth Quarter Ended Year Ended
October 27, October 28, October 27, October 28,
(in thousands) 2019 2018 % Change 2019 2018 % Change
Volume (lbs.) 313,489 346,214 (9.5 ) 1,283,492 1,328,693 (3.4 )
Net Sales $ 584,085 $ 648,244 (9.9 ) $ 2,369,317 $ 2,480,367 (4.5 )
Segment Profit 80,923 79,082 2.3 339,497 353,266 (3.9 )
Net sales increases in the fourth quarter of MegaMex items, including Don
Miguel® branded items and Herdez® salsas and sauces, and from the SPAM® family
of products were unable to offset the impact of the CytoSport divestiture and
lower Skippy® peanut butter sales. For fiscal 2019, net sales declined due to
the CytoSport divestiture.
Segment profit for the fourth quarter improved due to positive performances from
the center store portfolio and MegaMex joint venture which offset lower pricing
on Skippy® peanut butter spreads and the divestiture of CytoSport. The segment
incurred a $17.3 million non-cash impairment in the fourth quarter of 2018
related to the CytoSport business. For fiscal year 2019, segment profit
decreased as a result of lower Skippy® peanut butter pricing and declines in
MegaMex earnings.
Looking ahead to fiscal 2020, the Company anticipates continued positive momentum from MegaMex, including Herdez® salsas and sauces and Wholly® guacamole dips, the center store portfolio, including the SPAM® family of products, and improvement from Skippy® peanut butter. These positive catalysts should help to partially offset the impact of the CytoSport divestiture.
Fourth Quarter Ended Year Ended
October 27, October 28, October 27, October 28,
(in thousands) 2019 2018 % Change 2019 2018 % Change
Volume (lbs.) 598,474 592,298 1.0 2,325,156 2,327,140 (0.1 )
Net Sales $ 1,373,009 $ 1,321,784 3.9 $ 5,210,741 $ 5,109,881 2.0
Segment Profit 189,287 194,573 (2.7 ) 681,763 670,948 1.6
Volume and sales increased for the fourth quarter on strong demand for
foodservice items such as Hormel® Bacon 1TM cooked bacon, pizza toppings, and
Hormel® Fire BraisedTM products. Retail sales of Hormel® Black Label® bacon,
Applegate® products, Hormel® Natural Choice® products, Hormel Gatherings® party
trays, and Columbus® branded deli items also contributed to the increase. For
fiscal 2019, the value-added businesses drove growth, including foodservice
brands such as Hormel® FirebraisedTM and Hormel® Natural Choice®, Hormel® Black
Label® retail convenience bacon, and Columbus® branded deli items.
Segment profit declined for the fourth quarter as record value-added profits did not offset a 46 percent decline in commodity profits and higher operational expenses. For the full year, segment profit increased as value-added profit growth more than offset a significant decline in commodity profits.
In fiscal 2020, the Company anticipates value-added sales and profit growth in the foodservice, retail, and deli channels. Pork markets are expected to be volatile and pork input costs are expected to be higher due to the impact of African swine fever. This could lead to short-term periods of margin expansion or compression.Jennie-O Turkey Store Fourth Quarter Ended Year Ended
October 27, October 30, October 27, October 30,
(in thousands) 2019 2018 % Change 2019 2018 % Change
Volume (lbs.) 242,421 231,180 4.9 789,337 784,655 0.6
Net Sales $ 398,512 $ 388,278 2.6 $ 1,323,783 $ 1,331,013 (0.5 )
Segment Profit 41,031 38,744 5.9 117,962 131,846 (10.5 )
For the fourth quarter, volume and sales increased as growth from the whole-bird
and commodity businesses more than offset lower retail sales. Jennie-O® lean
ground turkey results improved during the fourth quarter due to the successful
execution of advertising and promotional activities in select markets. Net sales
for fiscal 2019 declined, as improved commodity and whole-bird sales did not
offset a decline in retail sales.
Segment profit for the fourth quarter increased, driven by operational
improvements and lower freight expense. For fiscal 2019, lower retail sales,
higher-than-expected plant startup expenses, and higher feed costs negatively
impacted profitability.
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International & Other
Fourth Quarter Ended Year Ended
October 27, October 28, October 27, October 28,
(in thousands) 2019 2018 % Change 2019 2018 % Change
Volume (lbs.) 82,493 95,600 (13.7 ) 339,296 357,690 (5.1 )
Net Sales $ 145,907 $ 166,391 (12.3 ) $ 593,476 $ 624,439 (5.0 )
Segment Profit 17,455 24,802 (29.6 ) 75,513 88,953 (15.1 )
Volume, sales, and profit for the fourth quarter of 2019 declined significantly
driven by weakness in branded and fresh pork exports and the Company's
multinational business in Brazil . Higher pork prices due to African swine fever
led to higher input costs in China and Brazil .
For fiscal 2019, volume, sales, and segment profit declined due to weak fresh
pork exports which were impact by tariffs and global trade uncertainty. This
more than offset strong results from the China business.
Looking ahead to 2020, the International & Other segment anticipates volume,
sales, and earnings growth driven by branded exports. Cost inflation in China
and Brazil as well as global trade uncertainty remain a risk.
Unallocated Income and Expense
The Company does not allocate 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 27, October 28, October 27, October 28,
(in thousands) 2019 2018 2019 2018
Net Unallocated Expense 5,065 15,787 5,362 64,171
Noncontrolling Interest 63 90 342
442
Net Unallocated Expense was lower for the fourth quarter due to lower employee related and interest expenses. Net Unallocated Expense for fiscal 2019 decreased due to a one-time gain resulting from the CytoSport divestiture, lower selling and employee-related expenses, and the benefit from a legal settlement.
FISCAL YEARS 2018 AND 2017
Periods presented have been adjusted due to the adoption of Accounting Standards Update (ASU) 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). See Note A - Summary of Significant Accounting Policies for more information.
Periods presented also reflect the segment reorganization announced at the beginning of fiscal 2019, which moved theJennie-O Turkey Store deli division from theJennie-O Turkey Store segment and the ingredients business from the Grocery Products segment to theRefrigerated Foods segment.
CONSOLIDATED RESULTS
Net Earnings and Diluted Earnings Per Share
Fourth Quarter Ended Year Ended
(in thousands, except
per share October 28, October 29, October 28, October 29,
amounts) 2018 2017 % Change 2018 2017 % Change
Net Earnings $ 261,406 $ 218,154 19.8 $ 1,012,140 $ 846,735 19.5
Diluted Earnings Per
Share 0.48 0.41 17.1 1.86 1.57 18.5
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Table of Contents Volume andNet Sales Fourth Quarter Ended Year Ended October 28, October 29, October 28, October 29, (in thousands) 2018 2017 % Change 2018 2017 % Change Volume (lbs.) 1,265,292 1,275,270 (0.8 ) 4,798,178 4,770,485 0.6 Organic Volume(1) 1,232,728 1,275,270 (3.3 ) 4,622,170 4,690,031 (1.4 ) Net Sales$ 2,524,697 $ 2,492,608 1.3 $
9,545,700
(1) COMPARISON OF
The non-GAAP adjusted financial measurements of organic volume and organic net sales are presented to provide investors additional information to facilitate the comparison of past and present operations. 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 forU.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. 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 ofColumbus Craft Meats (November 2017 ), the acquisition of Fontanini Italian Meats and Sausages (August 2017 ), and the divestiture of Farmer John (January 2017 ) inRefrigerated Foods and the acquisition of Ceratti (August 2017 ) in International & Other. The tables below show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in the fourth quarter and full year of fiscal 2018. Adjusted segment profit and adjusted earnings per share exclude the impact of a non-cash impairment charge associated with the CytoSport business which was recognized in the Grocery Products segment. The tables below show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in the fourth quarter and full year of fiscal 2018. The effective tax rate was used to determine the tax effect of the impairment. 4th Quarter Volume (lbs.) FY 2018 FY 2017 Reported Organic Reported Organic (in thousands) (GAAP) Acquisitions (Non-GAAP) (GAAP) % Change Grocery Products 346,214 - 346,214 359,976 (3.8 ) Refrigerated Foods 592,298 (22,757 ) 569,541 583,526 (2.4 ) Jennie-O Turkey Store 231,180 - 231,180 240,354 (3.8 ) International & Other 95,600 (9,807 ) 85,793 91,414 (6.1 ) Total Volume 1,265,292 (32,564 ) 1,232,728 1,275,270 (3.3 ) Net Sales FY 2018 FY 2017 Reported Organic Reported Organic (in thousands) (GAAP) Acquisitions (Non-GAAP) (GAAP) % Change Grocery Products$ 648,244 $ -$ 648,244 $ 671,689 (3.5 ) Refrigerated Foods 1,321,784 (102,262 ) 1,219,522 1,262,051 (3.4 ) Jennie-O Turkey Store 388,278 - 388,278 403,738 (3.8 ) International & Other 166,391 (15,030 ) 151,361 155,130 (2.4 ) Total Net Sales$ 2,524,697 $ (117,292 ) $ 2,407,405 $ 2,492,608 (3.4 ) Full Year Volume (lbs.) FY 2018 FY 2017 Reported Organic Reported Organic Organic (in thousands) (GAAP) Acquisitions (Non-GAAP)
(GAAP) Divestitures (Non-GAAP) % Change Grocery Products 1,328,693
- 1,328,693 1,352,108 - 1,352,108 (1.7 )
- 784,655 778,230 - 778,230 0.8
International & Other 357,690 (45,707 ) 311,983 324,895 - 324,895 (4.0 )
Total Volume 4,798,178 (176,008 ) 4,622,170 4,770,485 (80,454 ) 4,690,031 (1.4 )
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Table of ContentsNet Sales FY 2018 FY 2017 Reported Organic Reported Organic Organic (in thousands) (GAAP) Acquisitions (Non-GAAP)
(GAAP) Divestitures (Non-GAAP) % Change
Grocery Products
- $ 2,480,367 $ 2,507,503 $ - $ 2,507,503 (1.1 )
Refrigerated Foods 5,109,881 (485,960 ) 4,623,921 4,759,839 (100,231 ) 4,659,608 (0.8 )
Jennie-O Turkey Store 1,331,013 - 1,331,013 1,355,163 - 1,355,163 (1.8 )
International & Other 624,439 (74,899 ) 549,540 545,014 - 545,014 0.8
Total Net Sales $ 9,545,700 $ (560,859 ) $ 8,984,841 $ 9,167,519 $ (100,231 ) $ 9,067,288 (0.9 )
4th Quarter and Full Year
Segment Profit and Diluted Earnings Per Share
FY 2018
Grocery Products
(in thousands) 4th Quarter Full Year
Non-GAAP Adjusted Segment Profit $ 96,361 $ 370,545
CytoSport Impairment (17,279 ) (17,279 )
GAAP Segment Profit $ 79,082 $ 353,266
Total Company
4th Quarter Full Year
Non-GAAP Adjusted Diluted EPS
(0.03 ) (0.03 )
GAAP Diluted EPS $ 0.48 $ 1.86
The increase in net sales for the fourth quarter of fiscal 2018 was driven by
the inclusion of sales from the acquisitions of the Columbus, Fontanini, and
Ceratti. Higher sales of Wholly® guacamole dips, Hormel® Natural Choice®
products, Hormel® pepperoni, and foodservice sales of Jennie-O® turkey breast
and Austin Blues® smoked barbecue products were more than offset by declines due
to lower whole bird sales at Jennie-O Turkey Store , declines in the Company's
contract manufacturing business in Grocery Products, and lower hog harvest
volumes.
For fiscal 2018, the increase in net sales was primarily related to the
inclusion of the Columbus, Fontanini, and Ceratti acquisitions, more than
offsetting declines at Jennie-O Turkey Store , the Company's contract
manufacturing business and CytoSport in Grocery Products.
Cost of Products Sold
Fourth Quarter Ended Year Ended
October 28, October 29, October 28, October 29,
(in thousands) 2018 2017 % Change 2018 2017 % Change
Cost of Products Sold $ 1,991,369 $ 1,981,681 0.5 $ 7,566,227 $ 7,170,883 5.5
The cost of products sold for the fourth quarter and fiscal year of fiscal 2018
were higher as a result of the inclusion of the Columbus, Fontanini, and Ceratti
acquisitions along with higher freight costs, especially in the Refrigerated
Foods and Jennie-O Turkey Store segments.
Gross Profit
Fourth Quarter Ended Year Ended
October 28, October 29, October 28, October 29,
(in thousands) 2018 2017 % Change 2018 2017 % Change
Gross Profit $ 533,328 $ 510,927 4.4 $ 1,979,473 $ 1,996,636 (0.9 )
Percentage of Net
Sales 21.1 % 20.5 % 20.7 % 21.8 %
Consolidated gross profit as a percentage of net sales declined due to reduced commodity profitability, higher freight costs, and input cost volatility.
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Selling, General and Administrative (SG&A)
Fourth Quarter Ended Year Ended
October 28, October 29, October 28, October 29,
(in thousands) 2018 2017 % Change 2018 2017 % Change
SG&A $ 205,287 $ 193,949 5.8 $ 841,205 $ 759,304 10.8
Percentage of Net
Sales 8.1 % 7.8 % 8.8 % 8.3 %
For the fourth quarter and fiscal 2018, SG&A expenses increased due to the inclusion of the Columbus, Fontanini, and Ceratti acquisitions, higher advertising investments, and higher employee-related expenses.
Research and development expenses were$8.7 million and$33.8 million for the fiscal 2018 fourth quarter and year, respectively, compared to$8.2 million and$34.2 million for the corresponding periods in fiscal 2017.
An impairment charge related to the CytoSport trademark totaling$17.3 million was recorded in the fourth quarter of fiscal 2018. Impairment charges related to an indefinite-lived intangible asset of$0.2 million were recorded in the fourth quarter of fiscal 2017.
Equity in Earnings of Affiliates
Fourth Quarter Ended Year Ended
October 28, October 29, October 28, October 29,
(in thousands) 2018 2017 % Change 2018 2017 % Change
Equity in
Earnings of
Affiliates $ 8,814 $ 12,214 (27.8 ) $ 58,972 $ 39,590 49.0
Results for the fourth quarter and fiscal 2018 were negatively impacted by
increases in advertising and freight costs at MegaMex. For fiscal 2018, strong
MegaMex results and tax reform drove the significant increase over the prior
year.
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 at
October 28, 2018 , was as follows:
(in thousands) Investments/Receivables
Country
United States $ 205,148
Foreign 68,005
Total $ 273,153
Effective Tax Rate
Fourth Quarter Ended Year Ended
October 28, October 29, October 28, October 29,
2018 2017 2018 2017
Effective Tax Rate 18.7 % 33.8 % 14.3 % 33.7 %
The lower effective tax rate for both the fourth quarter and fiscal year
reflects the impact of The Tax Cuts and Jobs Act, signed into law on December
22, 2017 . For fiscal 2018, the Company recorded a net tax benefit of $72.9
million . This provisional net tax benefit arises from a benefit of $81.2 million
from re-measuring the Company's net U.S. deferred tax liabilities, partially
offset by the Company's accrual for the transition tax and other U.S. tax law
changes of $8.3 million . These one-time tax events and reduction in the federal
statutory tax rate were the main drivers of the Company's effective tax rates
for the fourth quarter and fiscal year of 18.7 percent and 14.3 percent,
respectively, compared to 33.8 percent and 33.7 percent for the respective
periods last year. For additional information, refer to Note K - Income Taxes.
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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 28, October 29, October 28, October 29,
(in thousands) 2018 2017 % Change 2018 2017 % Change
Net Sales
Grocery Products $ 648,244 $ 671,689 (3.5 ) $ 2,480,367 $ 2,507,503 (1.1 )
Refrigerated Foods 1,321,784 1,262,051 4.7 5,109,881 4,759,839 7.4
Jennie-O Turkey Store 388,278 403,738 (3.8 ) 1,331,013 1,355,163 (1.8 )
International & Other 166,391 155,130 7.3 624,439 545,014 14.6
Total Net Sales $ 2,524,697 $ 2,492,608 1.3 $ 9,545,700 $ 9,167,519 4.1
Segment Profit
Grocery Products $ 79,082 $ 100,457 (21.3 ) $ 353,266 $ 373,330 (5.4 )
Refrigerated Foods 194,573 166,253 17.0 670,948 666,125 0.7
Jennie-O Turkey Store 38,744 54,121 (28.4 ) 131,846 183,433 (28.1 )
International & Other 24,802 23,113 7.3 88,953 85,304 4.3
Total Segment Profit 337,201 343,944 (2.0 ) 1,245,013 1,308,192 (4.8 )
Net Unallocated
Expense 15,787 14,144 11.6 64,171 29,915 114.5
Noncontrolling
Interest 90 209 (56.9 ) 442 368 20.1
Earnings Before
Income Taxes $ 321,504 $ 330,009 (2.6 ) $ 1,181,284 $ 1,278,645 (7.6 )
Grocery Products
Fourth Quarter Ended Year Ended
October 28, October 29, October 28, October 29,
(in thousands) 2018 2017 % Change 2018 2017 % Change
Volume (lbs.) 346,214 359,976 (3.8 ) 1,328,693 1,352,108 (1.7 )
Net Sales $ 648,244 $ 671,689 (3.5 ) $ 2,480,367 $ 2,507,503 (1.1 )
Segment Profit 79,082 100,457 (21.3 ) 353,266 373,330 (5.4 )
Net sales improvement in Wholly® guacamole dips and Herdez® salsas in the fourth
quarter of fiscal 2018 were unable to offset declines in contract manufacturing.
For fiscal 2018, the net sales decrease was driven by declines across the
Company's contract manufacturing business and the CytoSport portfolio.
For the fourth quarter and fiscal year, segment profit decreased as a result of
declines in contract manufacturing, a $17.3 million impairment of the CytoSport
trademark, and increased freight.
Fourth Quarter Ended Year Ended
October 28, October 29, October 28, October 29,
(in thousands) 2018 2017 % Change 2018 2017 % Change
Volume (lbs.) 592,298 583,526 1.5 2,327,140 2,315,252 0.5
Net Sales $ 1,321,784 $ 1,262,051 4.7 $ 5,109,881 $ 4,759,839 7.4
Segment Profit 194,573 166,253 17.0 670,948 666,125 0.7
For the fourth quarter and fiscal 2018, volume and net sales increases were
driven by the Columbus and Fontanini acquisitions in addition to strong retail
sales of Hormel® pepperoni, Applegate® natural and organic products, and Hormel®
Natural Choice® products, and foodservice sales of Austin Blues® authentic
barbecue products. Lower hog harvest volumes offset some of these gains.
For the fourth quarter and fiscal year, Refrigerated Foods delivered increases
in segment profit as the benefit from acquisitions and strong performances from
the value-added businesses overcame significant declines in commodity profits, a
double-digit increase in per-unit freight costs, and higher advertising
investments.
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Table of ContentsJennie-O Turkey Store Fourth Quarter Ended Year Ended
October 28, October 29, October 28, October 29,
(in thousands) 2018 2017 % Change 2018 2017 % Change
Volume (lbs.) 231,180 240,354 (3.8 ) 784,655 778,230 0.8
Net Sales $ 388,278 $ 403,738 (3.8 ) $ 1,331,013 $ 1,355,163 (1.8 )
Segment Profit 38,744 54,121 (28.4 ) 131,846 183,433 (28.1 )
For the fourth quarter and fiscal 2018, volume and sales decreased primarily due to lower whole bird sales.
Segment profit for the fourth quarter and 2018 decreased as a result of lower profits from whole bird and commodity sales, increased freight costs, and increased advertising investments.
International & Other
Fourth Quarter Ended Year Ended
October 28, October 29, October 28, October 29,
(in thousands) 2018 2017 % Change 2018 2017 % Change
Volume (lbs.) 95,600 91,414 4.6 357,690 324,895 10.1
Net Sales $ 166,391 $ 155,130 7.3 $ 624,439 $ 545,014 14.6
Segment Profit 24,802 23,113 7.3 88,953 85,304 4.3
Volume and sales increases for the quarter and fiscal year were driven by the
addition of the Ceratti business and stronger branded exports, partially offset
by lower fresh pork exports due to tariffs.
Segment profit increased for both the fourth quarter and fiscal year primarily
reflecting improved profitability for the China business due to favorable input
costs, the inclusion of the Ceratti business, and stronger exports of branded
items. Global trade uncertainty negatively impacted the profitability of pork
exports.
Unallocated Income and Expense
The Company does not allocate 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 28, October 29, October 28, October 29,
(in thousands) 2018 2017 2018 2017
Net Unallocated Expense 15,787 14,144 64,171 29,915
Noncontrolling Interest 90 209 442
368
Net unallocated expense was higher for the fourth quarter and fiscal year, primarily due to the additional debt related to the Columbus acquisition, higher employee related expenses, and the universal stock option grant.
Liquidity and Capital Resources
Cash and Cash Equivalents were
During fiscal 2019, cash provided by operating activities was$923.0 million compared to$1,241.7 million in fiscal 2018 and$1,033.9 million in fiscal 2017. The decrease in fiscal 2019 was primarily due to an increase in working capital and a higher tax rate. Cash provided by investing activities was$220.2 million in fiscal 2019 compared to cash used in investing activities of$1,235.4 million in fiscal 2018 and$587.2 million in fiscal 2017. Fiscal 2019 included$479.8 million from the sale of CytoSport and$30.6 million from the sale of theFremont, Nebraska , processing facility. Fiscal 2018 included$857.4 million to purchase Columbus. Fiscal 2017 included$520.5 million to purchase Fontanini and Ceratti, partially offset by the sale of Farmer John for$135.9 million . Capital expenditures in fiscal 2019, 2018, and 2017 were$293.8 million ,$389.6 million , and$221.3 million , respectively. Projects in fiscal 2019 included the preliminary phases of the Burke pizza toppings plant expansion, a new dry sausage facility inNebraska , Project Orion, and many other items to support growth of branded products. Projects in fiscal 2018 included the expansion of value-added capacity atDold Foods inWichita, Kansas , a highly automated whole bird facility inMelrose, Minnesota , as well as ongoing investments for food and employee safety. Projects in fiscal 2017 included completion of the Company's plant in Jiaxing,China , theJennie-O Turkey Store whole bird facility inMelrose, Minnesota , and the bacon expansion 24
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inWichita, Kansas . Capital expenditures for fiscal 2020 are estimated to be approximately$360.0 million . The largest projects expected in fiscal 2020 include a new dry sausage production facility inNebraska , Project Orion, and the completion of the Burke pizza toppings plant. Cash used in financing activities was$926.2 million in fiscal 2019 compared to cash provided by financing activities of$11.6 million in fiscal 2018 and cash used in financing activities of$418.8 million in fiscal 2017. Cash used in financing activities in fiscal 2019 included repayment of the$375.0 million term loan used to fund the acquisition of Columbus in fiscal 2018. The Company repurchased$174.2 million of its common stock in fiscal 2019 compared to$46.9 million and$94.5 million repurchased during fiscal 2018 and 2017, respectively. During fiscal 2019, the Company repurchased 4.3 million shares of its common stock at an average price per share of$40.44 . For additional information pertaining to the Company's share repurchase plan, see Part II, Item 5 "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities ". Cash dividends paid to the Company's shareholders continues to be an ongoing financing activity for the Company, with$437.1 million in dividends paid in fiscal 2019 compared to$388.1 million in the fiscal 2018 and$346.0 million in fiscal 2017. The dividend rate was$0.84 per share in fiscal 2019, which reflected a 12.0 percent increase over the fiscal 2018 rate of$0.75 per share. The Company has paid dividends for 365 consecutive quarters. The annual dividend rate for fiscal 2020 was increased 11% percent to$0.93 per share, representing the 54th consecutive annual dividend increase. Cash flows from operating activities continue to provide the Company with its principal source of liquidity. The Company does not anticipate a significant risk to cash flows from this source in the foreseeable future because the Company operates in a relatively stable industry and has strong brands across many categories and channels. The Company is dedicated to returning excess cash flow to shareholders through dividend payments. Growing the business through innovation and evaluating opportunities for strategic acquisitions remains a focus for the Company. Reinvestments in the business to ensure employee and food safety are a top priority. Capital spending to enhance and expand current operations will also be a significant cash outflow in fiscal 2020. Contractual Obligations and Commercial Commitments The following table outlines the Company's future contractual financial obligations as ofOctober 27, 2019 , (for additional information regarding these obligations, see Note F - Long-term Debt and Other Borrowing Arrangements and Note N - Commitments and Contingencies): Payments Due by
Periods
Contractual Obligations (in Less Than More Than thousands) Total 1 Year 1-3 Years 3-5 Years 5 Years Purchase Obligations: Hog, turkey, and raw material commitments(1)$ 2,919,870 $ 719,995 $ 1,091,856 $ 772,202 $ 335,817 Grain commitments(1) 117,641 109,517 8,124 - - Turkey grow-out contracts(2) 175,926 21,957 40,267 34,630 79,072 Current and Long-term Debt 250,000 - 250,000 - - Interest Payments on Long-term Debt(3) 15,072 10,312 4,760 - - Capital Leases 22,563 1,834 3,496 3,418 13,815 Operating Leases 67,590 15,603 18,421 11,793 21,773 Other Long-term Liabilities(4) (5) 66,493 6,194 12,077 11,349 36,873 Total Contractual Cash Obligations$ 3,635,155 $ 885,412 $ 1,429,001 $ 833,392 $ 487,350 (1) In the normal course of business, the Company commits to purchase fixed quantities of livestock, grain, and raw materials from producers to ensure a steady supply of production inputs. Some of these contracts are based on market prices at the time of delivery, for which the Company has estimated the purchase commitment using current market prices as ofOctober 27, 2019 . (2) The Company utilizes grow-out contracts with independent farmers to raise turkeys for the Company. Under these contracts, the turkeys, feed, and other supplies are owned by the Company. The farmers provide the required labor and facilities and receive a fee per pound when the turkeys are delivered. Some of the facilities are sub-leased by the Company to the independent farmers. As ofOctober 27, 2019 , the Company had approximately 100 active contracts ranging from one to twenty-five years in duration. The grow-out activity is assumed to continue through the term of these active contracts. Amounts in the table represent the Company's obligation based on turkeys expected to be delivered from these farmers.
(3) See Note F - Long-term Debt and Other Borrowing Arrangements.
(4) Other Long-term Liabilities represent payments under the Company's deferred compensation plans. Excluded from the table above are payments under the Company's defined benefit pension and other post-retirement benefit plans. (See estimated benefit payments for the next ten fiscal years in Note G -Pension and Other Post -retirement Benefits) (5) As discussed in Note K - Income Taxes, the total liability for unrecognized tax benefits, including interest and penalties, atOctober 27, 2019 , was$22.5 million , which is not included in the table above as the ultimate amount or timing of settlement of the Company's reserves for income taxes cannot be reasonably estimated.
The Company believes its financial resources, including a revolving credit
facility for
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Off-Balance Sheet Arrangements As ofOctober 27, 2019 , the Company had$44.8 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$2.7 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.
Trademarks
References to the Company's brands or products in italics within this report
represent valuable trademarks owned or licensed by
Critical Accounting Policies
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 withU.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 for a discussion of significant accounting policies.
Critical accounting policies are defined as those reflective of significant judgments, estimates, and uncertainties, which may result in materially different results under different assumptions and conditions. The Company believes the following are its critical accounting policies:
Revenue Recognition: 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. 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 title passes. 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. Promotional contractual accruals are based on agreements with customers for defined performance. 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 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. Inventory Valuation: The Company values inventories at the lower of cost or net realizable value. For pork inventories, when the carcasses are disassembled and transferred from primal processing to various manufacturing departments, the primal values, as adjusted by the Company for product specifications and further processing, become the basis for calculating inventory values.Turkey raw materials are represented by the deboned meat quantities. The Company values these raw materials using a concept referred to as the "meat cost pool." The meat cost pool is determined by combining the cost to grow turkeys with processing costs, less any net sales revenue from by-products created from the processing and not used in producing Company products. The Company has developed a series of ratios using historical data and current market conditions (which themselves involve estimates and judgment determinations by the Company) to allocate the meat cost pool to each meat component. Substantially all inventoriable expenses, meat, packaging, and supplies are valued by the average cost method.Goodwill and Other Indefinite-Lived Intangibles: Estimating the fair value of the Company's goodwill reporting units and intangible assets requires significant judgment upon initial valuation. 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 plans to continue to support and build the brands. Other acquired assets such as customer relationships, are expected to have determinable useful lives. Indefinite-lived intangible assets are originally recorded at their estimated fair values at the date of acquisition and the residual of the purchase price is recorded to goodwill.Goodwill and other indefinite-lived intangible assets are allocated to reporting units that will receive the related sales and income.Goodwill and indefinite-lived intangible assets are tested annually for impairment, or more frequently if impairment indicators arise. 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% likelihood) the fair value of any reporting unit is less than its carrying amount. If a qualitative assessment 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 not to perform the qualitative assessment and proceed directly to the quantitative impairment test. 26
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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 performed. Additionally, the Company assesses critical areas that may impact its business, including macroeconomic conditions and the related impact, market-related exposures, any plans to market for sale all or a portion of their business, competitive changes, new or discontinued product lines, changes in key personnel, or any potential risks to their projected financial results. 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, then 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 2019, the Company completed its annual goodwill impairment tests and elected to perform a qualitative assessment. As a result of the qualitative testing no goodwill impairment charges were recorded. No goodwill impairment charges were recorded during fiscal years 2018 and 2017. 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% likelihood) that an indefinite-lived intangible asset is impaired. If the Company concludes this is the case, then a quantitative test for impairment must be performed. Otherwise, the Company does not need to perform a quantitative test. In conducting the initial qualitative assessment, the Company analyzes growth rates for historical and projected net sales and the results of prior quantitative tests performed. Additionally, the Company assesses critical areas that may impact its intangible assets or the applicable royalty rates to determine if there are factors that could indicate impairment of the asset. If performed, the quantitative impairment test compares the fair value to the carrying value 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). This method incorporates assumptions regarding future sales projections, discount rates, and royalty rates. If the carrying value exceeds fair value, the indefinite-lived intangible asset is considered impaired and an impairment charge is recorded. Even if not required, the Company periodically elects to perform the quantitative test in order to confirm the qualitative assessment. During the fourth quarter of fiscal 2019, the Company completed its annual indefinite-live impairment tests and elected to perform a qualitative assessment. During the qualitative review, it was revealed that further assessment in the form of a quantitative test was necessary for certain indefinite-lived intangible assets with a combined carrying value less than$100 million . No impairment charges were recorded for 2019, however, these assets were determined to have fair values exceeding their carrying value by less than a 10 percent margin. Management has implemented strategies to address the nominal excess value, however, adverse events in the future could result in a decline in fair value that could trigger a future impairment charge for a portion of these indefinite-lived intangible assets. A 10 percent decline in sales or a 10 percent increase in the discount rate would result in an immaterial impairment. During fiscal 2018, a$17.3 million intangible asset impairment charge was recorded for the CytoSport trademark. See additional discussion regarding the Company's goodwill and intangible assets in Note E -Goodwill and Intangible Assets. During fiscal years 2018 and 2017, there were no other material impairment charges recorded.Pension and Other Post -retirement Benefits: The Company incurs expenses relating to employee benefits, such as noncontributory defined benefit pension plans and post-retirement health care benefits. In accounting for these employment costs and the associated liabilities, 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. The Company uses third-party specialists to assist management 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. 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 for reasonableness. 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 27
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received from the fund manager. See Note G -
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. 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. 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 the technical merits of the position. This 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. Contingent Liabilities: At any time, 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, wage and hour laws, employment practices, or other actions brought by employees, consumers, competitors, or suppliers. The Company routinely assesses the likelihood of any adverse outcomes related to these matters on a case by case basis, as well as the potential ranges of losses and fees. The Company establishes accruals for its potential exposure, as appropriate, for claims against the Company 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 and range of loss for claims against the Company when losses are reasonably possible and material. These accruals and disclosures are determined based on the facts and circumstances related to the individual cases and require estimates and judgments regarding the interpretation of facts and laws, as well as the effectiveness of strategies or factors beyond our control.
Forward-Looking Statements
This report contains "forward-looking" information within the meaning of the federal securities laws. The "forward-looking" information may include statements concerning the Company's outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts.
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information. The Company is filing this cautionary statement in connection with the Reform Act. When used in the Company's Annual Report to Stockholders, other filings by the Company with theU.S. Securities and Exchange Commission , the Company's press releases, and oral statements made by the Company's representatives, the words or phrases "should result," "believe," "intend," "plan," "are expected to," "targeted," "will continue," "will approximate," "is anticipated," "estimate," "project," or similar expressions are intended to identify forward-looking statements within the meaning of the Reform Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected. In connection with the "safe harbor" provisions of the Reform Act, the Company is identifying risk factors that could affect financial performance and cause the Company's actual results to differ materially from opinions or statements expressed with respect to future periods. The following discussion of risk factors contains certain cautionary statements regarding the Company's business, which should be considered by investors and others. Such risk factors should be considered in conjunction with any discussions of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the Company. In making these statements, the Company is not undertaking, and specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the Company's business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the Company has attempted to list comprehensively these important cautionary risk factors, the Company wishes to caution investors and others that other factors may in the future prove to be important in affecting the Company's business or results of operations. The Company cautions readers not to place undue reliance on forward-looking statements, which represent current views as of the date made. Forward-looking statements are inherently at risk to any changes in the national and worldwide economic environment, which could include, among other things, economic conditions, political developments, currency exchange rates, interest and inflation rates, accounting standards, taxes, and laws and regulations affecting the Company and its markets. 28
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