Edgar Filing: HORMEL FOODS CORP /DE/

Location on Consolidated Statements of
Financial Position

Carrying Amount of the Hedged
Assets/(Liabilities)

January 27, 2019

October 28, 2018

Accounts Payable

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended January 27, 2019

[ ] 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 every Interactive Data File required to be submitted 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 such files). X YES NO

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



Large accelerated filer X		Accelerated filer
Non-accelerated filer		Smaller reporting company
		Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

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



Class	Outstanding at March 3, 2019
Common Stock	$.01465 par value	535,675,778
Common Stock Non-Voting	$.01 par value	–0–

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TABLE OF CONTENTS



PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - January 27, 2019 and October 28, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS - Three Months Ended January 27, 2019 and January 28, 2018
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - Three Months Ended January 27, 2019 and January 28, 2018
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT - Three Months Ended January 28, 2018 and Three Months Ended January 27, 2019
CONSOLIDATED STATEMENTS OF CASH FLOWS - Three Months Ended January 27, 2019 and January 28, 2018
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

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands, except share and per share amounts)




	January 27, 2019			October 28, 2018
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	512,689		$	459,136
Accounts receivable	565,060			600,438
Inventories	994,428			963,527
Income taxes receivable	147			3,995
Prepaid expenses	23,601			16,342
Other current assets	4,761			6,662
TOTAL CURRENT ASSETS	2,100,686			2,050,100

GOODWILL	2,716,750			2,714,116

OTHER INTANGIBLES	1,204,991			1,207,219

PENSION ASSETS	200,448			195,153

INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES	277,837			273,153

OTHER ASSETS	171,005			189,951

PROPERTY, PLANT AND EQUIPMENT
Land	49,162			50,332
Buildings	958,884			956,260
Equipment	1,819,284			1,863,020
Construction in progress	302,929			332,205
Less: Allowance for depreciation	(1,646,578		)	(1,689,217		)
Net property, plant and equipment	1,483,681			1,512,600

TOTAL ASSETS	$	8,155,398		$	8,142,292

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands, except share and per share amounts)




	January 27, 2019			October 28, 2018
	(Unaudited)
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Accounts payable	$	505,617		$	618,830
Accrued expenses	50,361			48,298
Accrued workers compensation	25,215			24,594
Accrued marketing expenses	139,338			118,887
Employee related expenses	160,242			224,736
Taxes payable	63,791			2,490
Interest and dividends payable	116,370			101,079
Current maturities of long-term debt	374,878			—
TOTAL CURRENT LIABILITIES	1,435,812			1,138,914

LONG-TERM DEBT–less current maturities	250,000			624,840

PENSION AND POST-RETIREMENT BENEFITS	484,004			477,557

OTHER LONG-TERM LIABILITIES	100,134			99,070

DEFERRED INCOME TAXES	179,669			197,093

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–	7,826			7,825
authorized 1,600,000,000 shares;
issued 534,169,855 shares January 27, 2019
issued 534,135,484 shares October 28, 2018
Additional paid-in capital	130,196			106,528
Accumulated other comprehensive loss	(292,342		)	(243,498		)
Retained earnings	5,856,029			5,729,956
HORMEL FOODS CORPORATION SHAREHOLDERS’ INVESTMENT	5,701,709			5,600,811
NONCONTROLLING INTEREST	4,070			4,007
TOTAL SHAREHOLDERS’ INVESTMENT	5,705,779			5,604,818

TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT	$	8,155,398		$	8,142,292

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)



	Three Months Ended
	January 27, 2019			January 28, 2018 *
Net sales	$	2,360,355		$	2,331,293
Cost of products sold	1,872,021			1,832,997
GROSS PROFIT	488,334			498,296

Selling, general and administrative	193,544			219,872
Equity in earnings of affiliates	11,458			23,531

OPERATING INCOME	306,248			301,955

Other income and expense:
Interest and investment income	6,874			7,939
Interest expense	(6,147		)	(4,729		)

EARNINGS BEFORE INCOME TAXES	306,975			305,165

Provision for income taxes	65,456			1,954

NET EARNINGS	241,519			303,211
Less: Net earnings attributable to noncontrolling interest	94			104
NET EARNINGS ATTRIBUTABLE TO HORMEL FOODS CORPORATION	$	241,425		$	303,107

NET EARNINGS PER SHARE:
BASIC	$	0.45		$	0.57
DILUTED	$	0.44		$	0.56

WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC	534,495			529,453
DILUTED	547,118			543,482

*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 - General.

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)




	Three Months Ended
	January 27, 2019			January 28, 2018
NET EARNINGS	$	241,519		$	303,211
Other comprehensive income, net of tax:
Foreign currency translation	1,846			4,212
Pension and other benefits	3,439			2,486
Deferred hedging	(361		)	(650		)
TOTAL OTHER COMPREHENSIVE INCOME	4,924			6,048
COMPREHENSIVE INCOME	246,443			309,259
Less: Comprehensive income attributable to noncontrolling interest	63			253
COMPREHENSIVE INCOME ATTRIBUTABLE TO HORMEL FOODS CORPORATION	$	246,380		$	309,006

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT

(in thousands, except per share amounts)

(Unaudited)




	Three Months Ended January 28, 2018

			Hormel Foods Corporation Shareholders
	Common Stock					Treasury Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Non- controlling Interest			Total Shareholders’ Investment
	Shares		Amount			Shares		Amount
Balance at October 29, 2017	528,424		$	7,741		—		$	—		$	13,670		$	5,162,571		$	(248,075	)	$	3,790		$	4,939,697
Net earnings														303,107						104			303,211
Other comprehensive income (loss)																	5,899			149			6,048
Purchases of common stock						(738	)	(25,199		)													(25,199		)
Stock-based compensation expense											7,339												7,339
Exercise of stock options/restricted shares	2,302		34								23,421												23,455
Shares retired	(738	)	(11		)	738		25,199			(25,188		)										—
Declared cash dividends – $0.1875 per share														(99,177		)							(99,177		)
Balance at January 28, 2018	529,988		$	7,764		—		$	—		$	19,242		$	5,366,501		$	(242,176	)	$	4,043		$	5,155,374

	Three Months Ended January 27, 2019

			Hormel Foods Corporation Shareholders
	Common Stock					Treasury Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Non- controlling Interest			Total Shareholders’ Investment
	Shares		Amount			Shares		Amount
Balance at October 28, 2018	534,135		$	7,825		—		$	—		$	106,528		$	5,729,956		$	(243,498	)	$	4,007		$	5,604,818
Net earnings														241,425						94			241,519
Other comprehensive income (loss)																	4,955			(31		)	4,924
Purchases of common stock						(1,065	)	(44,809		)													(44,809		)
Stock-based compensation expense											7,946												7,946
Exercise of stock options/restricted shares	1,100		17								15,981												15,998
Shares retired	(1,065	)	(16		)	1,065		44,809			(259		)	(44,534		)							—
Cumulative effect adjustment from adoption of:
ASU 2016-16														(10,475		)							(10,475		)
ASU 2017-12														21			(21		)				—
ASU 2018-02														52,342			(53,778		)				(1,436		)
Declared cash dividends – $0.21 per share														(112,706		)							(112,706		)
Balance at January 27, 2019	534,170		$	7,826		—		$	—		$	130,196		$	5,856,029		$	(292,342	)	$	4,070		$	5,705,779

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



	Three Months Ended
	January 27, 2019			January 28, 2018
OPERATING ACTIVITIES
Net earnings	$	241,519		$	303,211
Adjustments to reconcile to net cash provided by operating activities:
Depreciation	36,848			35,867
Amortization of intangibles	3,170			3,256
Equity in earnings of affiliates	(11,458		)	(23,531		)
Distribution from equity method investees	—			23
Provision (benefit) for deferred income taxes	125			(68,856		)
Loss (gain) on property/equipment sales and plant facilities	450			(1,131		)
Non-cash investment activities	(9,516		)	(10,880		)
Stock-based compensation expense	7,946			7,339
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable	36,262			69,629
(Increase) decrease in inventories	(30,901		)	(21,255		)
(Increase) decrease in prepaid expenses and other current assets	(5,625		)	569
Increase (decrease) in pension and post-retirement benefits	4,237			2,132
(Decrease) increase in accounts payable and accrued expenses	(147,318		)	(58,077		)
Increase (decrease) in net income taxes payable	61,686			65,881
NET CASH PROVIDED BY OPERATING ACTIVITIES	187,425			304,177

INVESTING ACTIVITIES
Acquisitions of businesses/intangibles	—			(858,102		)
Purchases of property/equipment	(39,430		)	(53,694		)
Proceeds from sales of property/equipment	30,305			751
Decrease (increase) in investments, equity in affiliates, and other assets	7,302			2,718
Proceeds from company-owned life insurance	144			3,028
NET CASH USED IN INVESTING ACTIVITIES	(1,679		)	(905,299		)

FINANCING ACTIVITIES
Net proceeds from short-term debt	—			255,000
Proceeds from long-term debt	—			375,000
Repayments of long-term debt	38			(274		)
Dividends paid on common stock	(100,125		)	(89,814		)
Share repurchase	(44,809		)	(25,199		)
Proceeds from exercise of stock options	15,997			23,455
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES	(128,899		)	538,168

EFFECT OF EXCHANGE RATE CHANGES ON CASH	(3,294		)	4,607
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	53,553			(58,347		)
Cash and cash equivalents at beginning of year	459,136			444,122
CASH AND CASH EQUIVALENTS AT END OF QUARTER	$	512,689		$	385,775

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A - GENERAL

Basis of Presentation: The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year. The balance sheet at October 28, 2018, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 28, 2018.

Investments: The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. Under the plans, the participants can defer certain types of compensation and elect to receive a return on the deferred amounts based on the changes in fair value of various investment options, primarily a variety of mutual funds. The Company has corporate-owned life insurance policies on certain participants in the deferred compensation plans. The cash surrender value of the policies is included in other assets on the Consolidated Statements of Financial Position. The securities held by the trust are classified as trading securities. Therefore, unrealized gains and losses associated with these investments are included in the Company’s earnings. Securities held by the trust generated gains of $1.4 million for the three months ended January 27, 2019, compared to gains of $3.4 million for the three months ended January 28, 2018.

Supplemental Cash Flow Information: Non-cash investment activities presented on the Consolidated Statements of Cash Flows primarily consist of unrealized gains or losses on the Company’s rabbi trust. The noted investments are included in other assets on the Consolidated Statements of Financial Position. Changes in the value of these investments are 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 $2.4 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.

Reclassifications: Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. The reclassifications had no impact on net earnings or operating income, other than those related to the adoption of ASU 2017-07 as described within the new accounting pronouncements adopted in the current fiscal year.

Accounting Changes and Recent Accounting Pronouncements:

New Accounting Pronouncements Adopted in Current Fiscal Year

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This topic converges the guidance within U.S. GAAP and international financial reporting standards and supersedes ASC 605, Revenue Recognition. The 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 which were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. The new guidance is effective for annual reporting periods beginning after December 15, 2017. The updated guidance is to be applied either retrospectively or by using a cumulative effect adjustment. The Company adopted the provisions of the new standard using the full retrospective method at the beginning of fiscal 2019. The Company made the following policy elections upon adoption: to account for shipping and handling costs as contract fulfillment costs and to exclude taxes imposed on and collected from customers in revenue producing transactions (e.g., sales, use, and value added taxes) from the transaction price. The Company will account for variable consideration using the expected value method. The Company also applied the practical expedient to not capitalize contract costs to obtain contracts with a duration of one year or less, which are expensed and included in the Consolidated Statements of Operations. The Company did not have a cumulative effect adjustment as a result of adoption. Adoption of the

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new standard did not have a material impact on the Company’s results of operations. Additional qualitative disclosures have been provided in Note B - Revenue Recognition and further disaggregation of revenues provided in Note N - Segment Reporting.

In October 2016, the FASB issued ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). The updated guidance requires the recognition of the income tax consequences of an intra-entity asset transfer, other than transfers of inventory, when the transfer occurs. For intra-entity transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The updated guidance is effective for reporting periods beginning after December 15, 2017, with early adoption permitted only within the first interim period of a fiscal year. The guidance is required to be applied on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted the updated provisions at the beginning of fiscal 2019, resulting in a reclassification from prepaid tax assets to deferred tax assets. In addition, due to impact of the lower tax rate on deferred tax balances resulting from the Tax Cuts and Jobs Act (Tax Act), the Company recognized a cumulative effect adjustment to retained earnings of $10.5 million.

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). The updated guidance requires an employer to report the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in the same line item as other compensation costs. Other components of net periodic pension cost and net periodic post-retirement benefit cost must be presented in the income statement separately from the service cost component and outside income from operations. Additionally, only the service cost component is eligible for capitalization. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The updated guidance should be applied retrospectively for the presentation of components of net benefit cost and prospectively, for the capitalization of the service cost component of net benefit cost. The Company adopted the updated provisions at the beginning of fiscal 2019. The Company elected to utilize a practical expedient which allows the Company to use historical amounts disclosed in the Pension and Other Post-retirement Benefits footnote as an estimation basis for retrospectively applying the requirements to separately report the other components in the income statement. Due to the retrospective adoption, the Company reclassified $4.6 million of non-service cost components of net periodic benefit costs out of operating income to interest and investment income on the Consolidated Statements of Operations for the three months ended January 28, 2018.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities (Topic 815). The updated guidance expands an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. Entities will apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements apply prospectively. The updated guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim or annual period. The Company early adopted the updated guidance at the beginning of fiscal 2019, therefore eliminating the requirement to separately measure and report hedge ineffectiveness. The Company applied the amendment to cash flow hedge relationships existing on the date of adoption using a modified retrospective approach.

Presentation and disclosure requirements were applied on a prospective basis. The adoption resulted in an immaterial adjustment from retained earnings to accumulated other comprehensive income.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). The updated guidance allows entities to reclassify stranded income tax effects resulting from the Tax Act from accumulated other comprehensive income to retained earnings in their consolidated financial statements. Under the Tax Act, deferred taxes were adjusted to reflect the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate, which left the tax effects on items within accumulated other comprehensive income stranded at an inappropriate tax rate. The updated guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim period and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company early adopted the updated provisions at the beginning of fiscal 2019, resulting in a reclassification of $53.8 million to accumulated other comprehensive loss.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Topic 350). The amendments in the update align the requirements for capitalizing implementation costs incurred in a hosting arrangement

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that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years and is to be applied either retrospectively or prospectively to all implementation costs incurred after the adoption date. Early adoption is permitted, including adoption in any interim period. The Company early adopted the updated provisions on a prospective basis at the beginning of fiscal 2019. The impact related to adoption was immaterial in the first quarter and the Company will continue to evaluate in future quarters.

New Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement, and presentation of expenses will depend on the classification as a finance or operating lease. The update also requires certain quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. In July 2018, the FASB issued ASU 2018-11, which provides an optional transition method in addition to the existing modified retrospective transition method allowing entities to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The requirements of the new standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt the provisions of this new accounting standard at the beginning of fiscal 2020 and is in the process of evaluating the impact of adoption on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 958). The update provides guidance on the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The amendment replaces the current incurred loss impairment methodology with a methodology to reflect expected credit losses and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The updated guidance is to be applied on a modified retrospective approach and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, and interim periods therein. The Company is currently assessing the timing and impact of adopting the updated provisions.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements. This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification (ASC). The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance of ASU 2018-09. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018. The Company is currently assessing the impact of adoption on its consolidated financial statements, results of operations, and cash flows.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans (Topic 715). The updated guidance improves disclosure requirements for employers who sponsor defined benefit pension or other postretirement plans. The amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company is currently assessing the timing and impact of adopting the updated provisions.

Any other recently issued accounting standards or pronouncements not disclosed above have been excluded as they either are not relevant to the Company, or they are not expected to have a material effect on its business practices, financial condition, results of operations, or disclosures.

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NOTE B - REVENUE RECOGNITION

Revenue from Contracts with Customers: Effective October 29, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers using the full retrospective adoption method. The impact of adopting this guidance was immaterial to the Company’s financial statements and related disclosures. Under ASC 606, a contract with a customer is an agreement which both parties have approved, that creates enforceable rights and obligations, has commercial substance, where payment terms are identified, and collectability is probable. The Company’s customer contracts predominantly contain a single performance obligation to fulfill customer orders for the purchase of specified products. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Revenue from product sales is primarily identified by purchase orders (“contracts”) which in some cases are governed by a master sales agreement. The purchase orders in combination with the invoice typically specify quantity and product(s) ordered, shipping terms, and certain aspects of the transaction price including discounts. Contracts are at standalone pricing or governed by pricing lists or brackets. Revenue is recognized as control of the promised good transfers to the customer in an amount reflective of the consideration the Company expects to receive in exchange for those goods. The Company’s revenue is recognized at a point in time when obligations under the terms of the agreement are satisfied once the shipped product is received or picked up by the customer. Revenues are recognized at the net consideration the Company expects to receive in exchange for the goods. The amount of net consideration recognized includes estimates of variable consideration, including costs for trade promotion programs, consumer incentives, and allowances and discounts associated with distressed or potentially unsaleable products.

A majority of the Company’s revenue is short-term in nature with shipments within one year from order date. The Company's payment terms generally range between 7 to 45 days and vary by sales channel and other factors.

The Company promotes products through advertising, consumer incentives, and trade promotions. These programs include discounts, slotting fees, coupons, rebates, and in-store display incentives. Customer trade promotion and consumer incentive activities are recorded as a reduction to the sale price based on amounts estimated as variable consideration. The Company estimates variable consideration at the expected value method to determine the total consideration which the Company expects to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of anticipated performance and all information (historical, current and forecasted) that is reasonably available.

The Company elected to account for shipping and handling costs as contract fulfillment costs, and exclude taxes imposed on and collected from customers in revenue producing transactions (e.g., sales, use, and value added taxes) from the transaction price.

Disaggregation of Revenue: The Company discloses revenue by reportable segment. A reconciliation of these disaggregated revenues is provided in Note N - Segment Reporting.

Contract Balances: The Company does not have significant deferred revenue or unbilled receivable balances as a result of transactions with customers.

Contract Costs: The Company elected to apply the practical expedient to not capitalize contract costs to obtain contracts with duration of one year or less, which are expensed and included in the Consolidated Statements of Operations.

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NOTE C - ACQUISITIONS

On November 27, 2017, the Company acquired Columbus Manufacturing, Inc. (Columbus), an authentic premium deli meat and salami company, from Chicago-based Arbor Investments for a final purchase price of $857.4 million. The transaction was funded with cash on hand and by borrowing $375.0 million under a term loan facility and $375.0 million under a revolving credit facility.

Columbus specializes in authentic premium deli meat and salami. This acquisition allows the Company to enhance its scale in the deli by broadening its portfolio of products, customers, and consumers.

The acquisition was accounted for as a business combination using the acquisition method. The Company obtained an independent appraisal and completed purchase accounting for the acquisition in the fourth quarter of fiscal 2018. A final allocation of the purchase price to the acquired assets, liabilities, and goodwill is presented in the table below.



(in thousands)
Accounts receivable	$	21,199
Inventory	32,817
Prepaid and other assets	881
Other assets	936
Property, plant and equipment	83,662
Intangible assets	223,704
Goodwill	610,602
Current liabilities	(21,366		)
Deferred taxes	(95,077		)
Purchase price	$	857,358

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 deli channel and serve as the catalyst for uniting all of the Company's deli businesses into one customer-facing organization. The goodwill balance is not 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.

NOTE D - INVENTORIES

Principal components of inventories are:



(in thousands)	January 27, 2019		October 28, 2018
Finished products	$	551,487	$	525,628
Raw materials and work-in-process	245,422		247,495
Operating supplies	134,912		126,644
Maintenance materials and parts	62,607		63,760
Total	$	994,428	$	963,527

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NOTE E - GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amounts of goodwill for the three months ended January 27, 2019, are presented in the table below. Beginning balances have been reclassified to conform to the current year presentation between segments. See Note N - Segment Reporting for additional information.



(in thousands)	Grocery Products			Refrigerated Foods		JOTS			International & Other		Total
Reported balance at October 28, 2018	$	882,582		$	1,406,897	$	203,214		$	221,423	$	2,714,116
Segment reclassification	(25,209		)	51,795		(26,586		)	—		—
Adjusted balance at October 28, 2018	857,373			1,458,692		176,628			221,423		2,714,116
Foreign currency translation	—			—		—			2,634		2,634
Balance at January 27, 2019	$	857,373		$	1,458,692	$	176,628		$	224,057	$	2,716,750

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



(in thousands)	January 27, 2019			October 28, 2018
Brands/tradenames/trademarks	$	1,107,651		$	1,108,122
Other intangibles	184			184
Foreign currency translation	(2,937		)	(3,484		)
Total	$	1,104,898		$	1,104,822

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



	January 27, 2019					October 28, 2018
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Customer lists/relationships	$	137,039	$	(39,236	)	$	137,039	$	(36,367	)
Other intangibles	6,626		(1,848		)	6,155		(1,547		)
Foreign currency translation	—		(2,488		)	—		(2,883		)
Total	$	143,665	$	(43,572	)	$	143,194	$	(40,797	)

Amortization expense was $3.2 million and $3.3 million for the quarters ended January 27, 2019 and January 28, 2018, respectively.

Estimated annual amortization expense for the five fiscal years after October 28, 2018, is as follows:



(in millions)
2019	$12.7
2020	12.7
2021	12.8
2022	12.5
2023	11.6

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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						Post-retirement Benefits
	Three Months Ended						Three Months Ended
(in thousands)	January 27, 2019			January 28, 2018			January 27, 2019			January 28, 2018
Service cost	$	6,510		$	7,903		$	174		$	320
Interest cost	15,097			14,049			3,165			2,832
Expected return on plan assets	(23,125		)	(24,770		)	—			—
Amortization of prior service cost	(698		)	(617		)	(669		)	(710		)
Recognized actuarial loss	3,701			4,539			—			44
Curtailment loss (gain)	2,825			—			(620		)	—
Net periodic cost	$	4,310		$	1,104		$	2,050		$	2,486

Non-service cost components of net pension and postretirement benefit cost are presented within interest and investment income on the Consolidated Statements of Operations.

Curtailments were recognized in the first quarter of fiscal 2019 due to the sale of the Fremont facility.

NOTE G - DERIVATIVES AND HEDGING

The Company uses hedging programs to manage price risk associated with commodity purchases. These programs utilize futures and options contracts to manage the Company’s exposure to price fluctuations in the commodities markets. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Effectiveness testing is performed on a quarterly basis to ascertain a high level of effectiveness for cash flow and fair value hedging programs.

Cash Flow Hedges: The Company designates corn and lean hog futures and options used to offset price fluctuations in the Company’s future direct grain and hog purchases as cash flow hedges. 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. The Company typically does not hedge its grain exposure beyond the next two upcoming fiscal years and its hog exposure beyond the next fiscal year.

Fair Value Hedges: The Company designates the futures it uses to minimize the price risk assumed when fixed forward priced contracts are offered to the Company’s commodity suppliers as fair value hedges. 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. 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.

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. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.

Volume: As of January 27, 2019, and October 28, 2018, the Company had the following outstanding commodity futures and options contracts related to its hedging programs:



	Volume
Commodity Contracts	January 27, 2019	October 28, 2018
Corn	20.8 million bushels	23.0 million bushels
Lean hogs	4.0 million cwt	0.6 million cwt

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Fair Value of Derivatives: The fair values of the Company’s derivative instruments (in thousands) as of January 27, 2019,

and October 28, 2018, were as follows:



		Fair Value (1)
Derivatives Designated as Hedges:	Location on Consolidated Statements of Financial Position	January 27, 2019		October 28, 2018
Commodity contracts	Other current assets	$	1,730	$	(30	)

(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.

Fair Value Hedge - Assets(Liabilities): The carrying amount of the Company's fair value hedge liabilities (in thousands) as of January 27, 2019, and October 28, 2018, were as follows:

AOCL Impact: In fiscal 2019, the Company adopted the amended guidance of Topic 815. As a result, hedge ineffectiveness related to effective relationships is now deferred in AOCL until the hedged item impacts earnings. Prior to fiscal 2019, gains or losses on the derivative instrument in excess of the cumulative change in the cash flows of the hedged item, if any (i.e, the ineffective portion) were recognized in the Consolidated Statements of Operations during the current period. As of January 27, 2019, the Company has included in AOCL, hedging losses of $1.0 million (before tax) relating to its positions. The Company expects to recognize the majority of these losses over the next 12 months.

The effect of AOCL for gains or losses (before tax, in thousands) related to the Company's derivative instruments for the three months ended January 27, 2019, and January 28, 2018, were as follows:



	Gain/(Loss) Recognized in AOCL (1)						Location on Consolidated Statements of Operations	Gain/(Loss) Reclassified from AOCL into Earnings (1)					Gain/(Loss) Recognized in Earnings (Ineffective Portion)
	Three Months Ended							Three Months Ended					Three Months Ended
Cash Flow Hedges:	January 27, 2019			January 28, 2018				January 27, 2019			January 28, 2018		January 27, 2019		January 28, 2018
Commodity Contracts (2)	$	(843	)	$	(387	)	Cost of products sold	$	(1,243	)	$	608	$	—	$	(90	)
Excluded Component (3)	$	(687	)

(1) See Note I - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on net earnings.

(2) Loss recognized in AOCL for three month ended January 27, 2019, includes an immaterial adjustment due to early adoption of ASU 2017-12.

(3) Represents the time value amount of lean hog options excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in AOCL.

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Consolidated Statement of Operations Impact: The effect on the Consolidated Statements of Operations for gains or losses (before tax, in thousands) related to the Company's derivative instruments for the three months ended January 27, 2019, and January 28, 2018, were as follows:



	Cost of Products Sold
	Three Months Ended
	January 27, 2019			January 28, 2018
Consolidated Statements of Operations	$	1,872,021		$	1,832,997


Cash Flow Hedges - Commodity Contracts
Gain (loss) reclassified from AOCL	$	(1,243	)	$	608
Amortization of excluded component from options	(1,358		)	—
Gain (loss) due to ineffectiveness	—			(90		)

Fair Value Hedges - Commodity Contracts
Gain (loss) on commodity futures (1)	932			557
Gain (loss) due to ineffectiveness	—			(249		)

Total gain (loss) recognized in earnings	$	(1,669	)	$	826

(1)Amounts represent losses on commodity contracts designated as fair value hedges that were closed during the quarter, which were offset by a corresponding gain on the underlying hedged purchase commitment. Additional gains or losses related to changes in the fair value of open commodity contract, 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.

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	January 27, 2019		October 28, 2018
MegaMex Foods, LLC	Grocery Products	50%	$	207,589	$	205,148
Foreign Joint Ventures	International & Other	Various (26-40%)	70,248		68,005
Total			$	277,837	$	273,153

Equity in earnings of affiliates consists of the following:



		Three Months Ended
(in thousands)	Segment	January 27, 2019		January 28, 2018
MegaMex Foods, LLC	Grocery Products	$	10,502	$	19,588
Foreign Joint Ventures	International & Other	956		3,943
Total		$	11,458	$	23,531

For the three months ended January 27, 2019, no dividends were received from affiliates, compared to $0.023 million of dividends received for the three months ended January 28, 2018.

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The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $13.4 million is remaining as of January 27, 2019. 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
Reported balance at October 28, 2018	$	(44,854	)	$	(197,613	)		$	(1,031	)		$	(243,498	)
Impact of adoption of ASU
ASU 2017-12								(21		)	(1)	(21		)
ASU 2018-02				(53,778		)	(1)					(53,778		)
Adjusted balance at October 28, 2018	(44,854		)	(251,391		)		(1,052		)		(297,297		)
Unrecognized gains (losses)
Gross	1,877			2,203				(1,509		)		2,571
Tax effect				(533		)		204				(329		)
Reclassification into net earnings
Gross				2,334			(2)	1,243			(3)	3,577
Tax effect				(565		)		(299		)		(864		)
Net of tax amount	1,877			3,439				(361		)		4,955
Balance at January 27, 2019	$	(42,977	)	$	(247,952	)		$	(1,413	)		$	(292,342	)

(1) Cumulative effect from the adoption of Accounting Standards Update. See Note A - General for additional details.

(2) Included in the computation of net periodic cost. See Note F - Pension and Other Post-Retirement Benefits for additional details.

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

NOTE J - INCOME TAXES

The Company's tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter. The effects of tax legislation are recognized in the period in which the law is enacted. The deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years the related temporary differences are anticipated to reverse.

On December 22, 2017, the United States (U.S.) enacted comprehensive tax legislation into law, H.R. 1, commonly referred to as the Tax Act. Except for certain provisions, the Tax Act is effective for tax years beginning on or after January 1, 2018. As a fiscal year U.S. taxpayer, the majority of the provisions, such as eliminating the domestic manufacturing deduction, creating new taxes on certain foreign sourced income, and introducing new limitations on certain business deductions, will now apply to the Company in fiscal 2019. In addition, for fiscal 2019 and effective in the first quarter, the U.S. federal corporate income tax rate was reduced from a blended rate of 23.4 percent for fiscal 2018, to 21.0 percent in fiscal 2019 and beyond.

The Company's effective tax rate for the first three months of fiscal 2019 was 21.3 percent compared to 0.6 percent for the respective period last year. The lower effective tax rate in the prior year is primarily related to deferred tax remeasurements in fiscal 2018 as a result of the Tax Act. The Company expects a full-year effective tax rate between 20.5 percent and 23.0 percent for fiscal 2019.

In March 2018, the FASB issued ASU 2018-05, which provides guidance for companies related to the Tax Act. ASU 2018-05 allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Based on current interpretation of the Tax Act, the Company made reasonable estimates to record provisional adjustments during fiscal 2018, as described above. The Company continued to evaluate such amounts within the first quarter of fiscal 2019 and determined no adjustments were required within the remaining portion of the measurement period. As of January 27, 2019, the Company has completed the accounting for the tax effects of the Tax Act.

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During fiscal 2018, the Company provisionally recorded the transition tax on its foreign earnings. Those foreign earnings have been deemed repatriated for U.S. federal tax purposes. The Company maintains all earnings are permanently reinvested. Accordingly, no additional income taxes have been provided for withholding tax, state tax, or other taxes.

The amount of unrecognized tax benefits, including interest and penalties, is recorded in other long-term liabilities. If recognized as of January 27, 2019, and January 28, 2018, $27.2 million and $25.7 million, respectively, would impact the Company’s effective tax rate. The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense. Interest and penalties included in income tax expense was immaterial for the first three months of fiscal 2019 and fiscal 2018. The amount of accrued interest and penalties at January 27, 2019, and January 28, 2018, associated with unrecognized tax benefits was $6.5 million and $7.3 million, respectively.

The Company is regularly audited by federal and state taxing authorities. The United States Internal Revenue Service (I.R.S.) is in the final stages of examination with respect to fiscal 2017. The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years 2018 through 2020. 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 2011. While it is reasonably possible that one or more of these audits may be completed within the next 12 months and 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 restricted 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.

During the third quarter of fiscal 2018, the Company made a one-time grant of 200 stock options to each active, full-time employee and 100 stock options to each active, part-time employee of the Company on April 30, 2018. The options vest in five years and expire ten years after the grant date.

A reconciliation of the number of options outstanding and exercisable (in thousands) as of January 27, 2019, and changes during the three months then ended, is as follows:



	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at October 28, 2018	29,536	$	23.55
Granted	1,474	44.91
Exercised	1,097	14.60
Forfeited	383	36.17
Outstanding at January 27, 2019	29,530	$	24.78	5.4	$	497,495
Exercisable at January 27, 2019	21,031	$	19.69	4.0	$	457,942

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