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Section 1: 10-Q (10-Q)

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 April 29, 2018
or
[     ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________________________ to ________________________________________
Commission File Number: 1-2402
HORMEL FOODS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
 
41-0319970
(I.R.S. Employer Identification No.)
1 Hormel Place
Austin, Minnesota
(Address of principal executive offices)
 
55912-3680
(Zip Code)
(507) 437-5611
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                    X   YES                         NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                X   YES                         NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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          
(Do not check if a smaller reporting company)
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 June 3, 2018
 
Common Stock
 
$.01465 par value      
530,506,904

 
Common Stock Non-Voting
 
$.01 par value                       -0-
 



Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands, except share and per share amounts)
 
 
 
 
 
April 29,
2018
 
October 29,
2017
 
(Unaudited)
 
 

ASSETS
 

 
 

CURRENT ASSETS
 

 
 

Cash and cash equivalents
$
261,571

 
$
444,122

Accounts receivable
551,392

 
618,351

Inventories
1,011,215

 
921,022

Income taxes receivable
2,930

 
22,346

Prepaid expenses
18,534

 
16,144

Other current assets
5,138

 
4,538

TOTAL CURRENT ASSETS
1,850,780

 
2,026,523

 
 
 
 
GOODWILL
2,731,956

 
2,119,813

 
 
 
 
OTHER INTANGIBLES
1,251,296

 
1,027,014

 
 
 
 
PENSION ASSETS
184,030

 
171,990

 
 
 
 
INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES
265,579

 
242,369

 
 
 
 
OTHER ASSETS
192,255

 
184,948

 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
Land
52,007

 
51,249

Buildings
900,139

 
866,855

Equipment
1,808,954

 
1,710,537

Construction in progress
226,119

 
148,064

Less: Allowance for depreciation
(1,633,366
)
 
(1,573,454
)
Net property, plant and equipment
1,353,853

 
1,203,251

 
 
 
 
TOTAL ASSETS
$
7,829,749

 
$
6,975,908

 
See Notes to Consolidated Financial Statements

3

Table of Contents

HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands, except share and per share amounts)
 
 
 
 
 
April 29,
2018
 
October 29,
2017
 
(Unaudited)
 
 
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
 

 
 

CURRENT LIABILITIES
 

 
 

Accounts payable
$
465,572

 
$
552,714

Short-term debt
185,000

 

Accrued expenses
62,635

 
76,966

Accrued workers compensation
25,702

 
26,585

Accrued marketing expenses
127,998

 
101,573

Employee related expenses
180,132

 
209,562

Taxes payable
1,432

 
525

Interest and dividends payable
99,990

 
90,287

TOTAL CURRENT LIABILITIES
1,148,461

 
1,058,212

 
 
 
 
LONG-TERM DEBT–less current maturities
624,763

 
250,000

 
 
 
 
PENSION AND POST-RETIREMENT BENEFITS
535,282

 
530,249

 
 
 
 
OTHER LONG-TERM LIABILITIES
104,185

 
99,340

 
 
 
 
DEFERRED INCOME TAXES
125,425

 
98,410

 
 
 
 
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–
7,766

 
7,741

authorized 1,600,000,000 shares;
 
 
 
issued 530,132,619 shares April 29, 2018
 
 
 
issued 528,423,605 shares October 29, 2017
 
 
 
Additional paid-in capital
10,971

 
13,670

Accumulated other comprehensive loss
(235,753
)
 
(248,075
)
Retained earnings
5,504,221

 
5,162,571

HORMEL FOODS CORPORATION SHAREHOLDERS’ INVESTMENT
5,287,205

 
4,935,907

NONCONTROLLING INTEREST
4,428

 
3,790

TOTAL SHAREHOLDERS’ INVESTMENT
5,291,633

 
4,939,697

 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT
$
7,829,749

 
$
6,975,908

 
See Notes to Consolidated Financial Statements

4

Table of Contents

HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
April 29,
2018
 
April 30,
2017
 
April 29,
2018
 
April 30,
2017
Net sales
$
2,330,568

 
$
2,187,309

 
$
4,661,861

 
$
4,467,536

Cost of products sold
1,833,882

 
1,700,389

 
3,662,996

 
3,428,336

GROSS PROFIT
496,686

 
486,920

 
998,865

 
1,039,200

 
 
 
 
 
 
 
 
Selling, general and administrative
203,799

 
181,009

 
422,921

 
391,226

Equity in earnings of affiliates
13,486

 
10,121

 
37,017

 
23,420

 
 
 
 
 
 
 
 
OPERATING INCOME
306,373

 
316,032

 
612,961

 
671,394

 
 
 
 
 
 
 
 
Other income and expense:
 
 
 
 
 
 
 
Interest and investment (expense) income
(2,489
)
 
2,818

 
817

 
5,267

Interest expense
(7,001
)
 
(3,023
)
 
(11,730
)
 
(6,049
)
 
 
 
 
 
 
 
 
EARNINGS BEFORE INCOME TAXES
296,883

 
315,827

 
602,048

 
670,612

 
 
 
 
 
 
 
 
Provision for income taxes
59,361

 
104,941

 
61,315

 
224,423

 
 
 
 
 
 
 
 
NET EARNINGS
237,522

 
210,886

 
540,733

 
446,189

Less: Net earnings attributable to noncontrolling interest
138

 
(40
)
 
242

 
116

NET EARNINGS ATTRIBUTABLE TO HORMEL FOODS CORPORATION
$
237,384

 
$
210,926

 
$
540,491

 
$
446,073

 
 
 
 
 
 
 
 
NET EARNINGS PER SHARE:
 
 
 
 
 
 
 
BASIC
$
0.45

 
$
0.40

 
$
1.02

 
$
0.84

DILUTED
$
0.44

 
$
0.39

 
$
1.00

 
$
0.83

 
 
 
 
 
 
 
 
WEIGHTED-AVERAGE SHARES OUTSTANDING:
 
 
 
 
 
 
 
BASIC
529,799

 
528,712

 
529,626

 
528,649

DILUTED
542,811

 
539,635

 
543,146

 
539,850

 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE:
$
0.1875

 
$
0.1700

 
$
0.3750

 
$
0.3400

 
See Notes to Consolidated Financial Statements


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Table of Contents

HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
April 29,
2018
 
April 30,
2017
 
April 29,
2018
 
April 30,
2017
NET EARNINGS
$
237,522

 
$
210,886

 
$
540,733

 
$
446,189

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation
4,796

 
907

 
9,008

 
(7,180
)
Pension and other benefits
2,487

 
3,314

 
4,973

 
6,647

Deferred hedging
(613
)
 
(1,184
)
 
(1,263
)
 
(2,507
)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
6,670

 
3,037

 
12,718

 
(3,040
)
COMPREHENSIVE INCOME
244,192

 
213,923

 
553,451

 
443,149

Less: Comprehensive income (loss) attributable to noncontrolling interest
385

 
8

 
638

 
(76
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO HORMEL FOODS CORPORATION
$
243,807

 
$
213,915

 
$
552,813

 
$
443,225

 
See Notes to Consolidated Financial Statements


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Table of Contents

HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ INVESTMENT
(in thousands, except per share amounts)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hormel Foods Corporation Shareholders
 
 
 
 
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interest
 
Total
Shareholders’
Investment
Balance at October 30, 2016
$
7,742

 
$

 
$

 
$
4,736,567

 
$
(296,303
)
 
$
3,400

 
$
4,451,406

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
 
 
 
 
 
 
846,735

 
 
 
368

 
847,103

Other comprehensive income
 
 
 
 
 
 
 
 
48,228

 
22

 
48,250

Purchases of common stock
 
 
(94,487
)
 
 
 
 
 
 
 
 
 
(94,487
)
Stock-based compensation expense
1

 
 
 
15,590

 
 
 
 
 
 
 
15,591

Exercise of stock options/restricted shares
38

 
 
 
30,827

 
 
 
 
 
 
 
30,865

Shares retired
(40
)
 
94,487

 
(32,747
)
 
(61,700
)
 
 
 
 
 

Declared cash dividends – $0.68 per share
 
 
 
 
 
 
(359,031
)
 
 
 
 
 
(359,031
)
Balance at October 29, 2017
$
7,741

 
$

 
$
13,670

 
$
5,162,571

 
$
(248,075
)
 
$
3,790

 
$
4,939,697

Net earnings
 
 
 
 
 
 
540,491

 
 
 
242

 
540,733

Other comprehensive income
 
 
 
 
 
 
 
 
12,322

 
396

 
12,718

Purchases of common stock
 
 
(44,741
)
 
 
 
 
 
 
 
 
 
(44,741
)
Stock-based compensation expense
1

 
 
 
11,390

 
 
 
 
 
 
 
11,391

Exercise of stock options/restricted shares
43

 
 
 
30,633

 
 
 
 
 
 
 
30,676

Shares retired
(19
)
 
44,741

 
(44,722
)
 


 
 
 
 
 

Declared cash dividends – $0.375 per share
 
 
 
 
 
 
(198,841
)
 
 
 
 
 
(198,841
)
Balance at April 29, 2018
$
7,766

 
$

 
$
10,971

 
$
5,504,221

 
$
(235,753
)
 
$
4,428

 
$
5,291,633

 
See Notes to Consolidated Financial Statements


7

Table of Contents

HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Six Months Ended
 
April 29,
2018
 
April 30,
2017
OPERATING ACTIVITIES
 

 
 

Net earnings
$
540,733

 
$
446,189

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
Depreciation
74,081

 
59,185

Amortization of intangibles
6,235

 
4,143

Equity in earnings of affiliates
(37,017
)
 
(23,420
)
Distribution from equity method investees
10,024

 
12,522

(Benefit) provision for deferred income taxes
(74,486
)
 
11,336

(Gain) loss on property/equipment sales and plant facilities
(1,384
)
 
1,285

Non-cash investment activities
(8,451
)
 
(2,618
)
Stock-based compensation expense
11,391

 
11,861

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Decrease in accounts receivable
87,141

 
40,728

Increase in inventories
(59,094
)
 
(47,792
)
Increase in prepaid expenses and other current assets
(3,926
)
 
(21,790
)
Increase in pension and post-retirement benefits
1,525

 
6,468

Decrease in accounts payable and accrued expenses
(122,847
)
 
(215,253
)
Increase (decrease) in net income taxes payable
19,416

 
(2,292
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
443,341

 
280,552

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Proceeds from sale of business

 
135,944

Acquisitions of businesses/intangibles
(857,673
)
 

Purchases of property/equipment
(141,160
)
 
(76,975
)
Proceeds from sales of property/equipment
6,439

 
1,157

Decrease (increase) in investments, equity in affiliates, and other assets
2,906

 
(1,028
)
   Proceeds from company-owned life insurance
3,028

 
5,005

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(986,460
)
 
64,103

 
 
 
 
FINANCING ACTIVITIES
 
 
 
Net proceeds from short-term debt
185,000

 

Proceeds from long-term debt
375,000

 

Principal payments on long-term debt
(237
)
 

Dividends paid on common stock
(189,139
)
 
(166,507
)
Share repurchase
(44,741
)
 
(49,583
)
Proceeds from exercise of stock options
29,978

 
8,879

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
355,861

 
(207,211
)
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
4,707

 
(3,686
)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(182,551
)
 
133,758

Cash and cash equivalents at beginning of year
444,122

 
415,143

CASH AND CASH EQUIVALENTS AT END OF QUARTER
$
261,571

 
$
548,901


See Notes to Consolidated Financial Statements

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Table of Contents

HORMEL FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE A                GENERAL
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.  The balance sheet at October 29, 2017, 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 29, 2017.
 
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 losses of $2.2 million and gains of $1.2 million for the second quarter and six months ended April 29, 2018, compared to gains of $1.8 million and $3.3 million for the second quarter and six months ended April 30, 2017.
 
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 $2.3 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 cash flows as previously reported, other than those related to the adoption of ASU 2016-15 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 July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330). The updated guidance requires that inventory be measured at the lower of cost and net realizable value. The guidance is limited to inventory measured using the first-in, first-out (FIFO) or average cost methods and excludes inventory measured using last-in, first-out (LIFO) or retail inventory methods.

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Table of Contents

Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company adopted the updated provisions on a prospective basis at the beginning of fiscal 2018. The adoption did not have a material impact on its consolidated financial statements, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718). The update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted in any interim or annual period, with adjustments reflected as of the beginning of the fiscal year. Accordingly, the Company adopted the provisions of this new accounting standard at the beginning of fiscal 2018. This resulted in the excess tax benefits (“windfalls”) and tax deficiencies (“shortfalls”) realized upon exercise or vesting of stock-based awards being recorded in its Consolidated Statements of Operations instead of additional paid-in capital within its Consolidated Statements of Financial Position. The amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement have been applied prospectively. Excess tax benefits of $3.6 million and $15.4 million were recorded as a reduction of income tax expense for the second quarter and six months ended April 29, 2018, respectively. The effective tax rate was reduced by 1.2 percent and 2.6 percent for the second quarter and six months ended April 29, 2018, respectively, as a result of the exercise activity. The Company applied the amendments related to the presentation of excess tax benefits on the Consolidated Statement of Cash Flows using a retrospective transition method, and as a result, realized windfalls were reclassified from financing activities to operating activities in its Consolidated Statements of Cash Flows. In accordance with ASU 2016-09, the Company has made the accounting policy election to estimate forfeitures and adjust as actual forfeitures occur.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230). The update makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted provided all amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company early adopted the provisions of the new accounting standard at the beginning of fiscal 2018 and elected to account for distributions received from equity method investees as cash flows from operating activities using the nature of distribution approach accounting policy. Under the nature of the distribution approach, distributions are classified based on the nature of the activity that generated them. The guidance requires cash proceeds from the settlement of corporate-owned life insurance policies to be classified as investing activities. Accordingly, the Company classified the cash proceeds received from corporate-owned life insurance policies as cash flows from investing activities. The adoption did not have a material impact on its consolidated financial statements.


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Table of Contents

The following table reconciles the Consolidated Statements of Cash Flows line items impacted by the adoption of these standards at April 30, 2017:
 
Reported April 30, 2017
 
ASU 2016-09
 
ASU 2016-15
 
Adjusted April 30, 2017
Operating Activities
 
 
 
 
 
 
 
Equity in earnings of affiliates
$
(10,898
)
 
$

 
$
(12,522
)
 
$
(23,420
)
Distributions received from equity method investees

 

 
12,522

 
12,522

Excess tax benefit from stock-based compensation
(20,704
)
 
20,704

 

 

Decrease in accounts receivable
42,036

 

 
(1,308
)
 
40,728

Net Cash Provided by Operating Activities
$
261,156

 
$
20,704

 
$
(1,308
)
 
$
280,552

 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
Decrease in investments, equity in affiliates, and other assets
$
2,669

 
$

 
$
(3,697
)
 
$
(1,028
)
Proceeds from company-owned life insurance

 

 
5,005

 
5,005

Net Cash Provided by Investing Activities
$
62,795

 
$

 
$
1,308

 
$
64,103

 
 
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
 
 
Excess tax benefit from stock-based compensation
$
20,704

 
$
(20,704
)
 
$

 
$

Net Cash Used in Financing Activities
$
(186,507
)
 
$
(20,704
)
 
$

 
$
(207,211
)

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The update provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the “Tax Act”). SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The Company’s accounting for certain income tax effects are incomplete; however, reasonable estimates have been determined for those tax effects. The estimates were recorded as provisional amounts in the consolidated financial statements as of January 28, 2018, and remain provisional as of April 29, 2018. The Company recognized a measurement-period adjustment during the three months ended April 29, 2018, and expects to have all provisional amounts related to the effects of the Tax Act finalized within the one year measurement period. Refer to Note I for further details regarding the Tax Act.
New Accounting Pronouncements not yet adopted
 
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. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year allowing early adoption as of the original effective date of December 15, 2016. In 2016 and 2017, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, ASU 2017-13, and ASU 2017-14 to clarify, among other things, the implementation guidance related to principal versus agent considerations, identifying performance obligations and accounting for licenses of intellectual property. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and early adoption is permitted for annual reporting periods beginning after December 15, 2016. The updated guidance is to be applied either retrospectively or by using a cumulative effect adjustment. The Company will adopt the provisions of this new accounting standard at the beginning of fiscal 2019. The Company has completed a significant portion of its detailed assessments relating to revenue streams and customer arrangements, and is focused on controls to support recognition and

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disclosure requirements under the new guidance. Based on the assessment to date, the Company does not expect the adoption of the new standard to have a material impact on its results of operations.
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update requires lessees to put most leases on their balance sheets while recognizing expenses on their income statements in a manner similar to current U.S. GAAP. The guidance also eliminates current real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. In 2018, the FASB issued ASU 2018-01, which permits an entity to elect an optional transition practical expedient to not evaluate land easements existing or expiring before the entity’s adoption of ASC 842 and not previously accounted for as leases under ASC 840. The updated guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Currently, the updated guidance is to be applied using modified retrospective method and early adoption is permitted. The FASB recently proposed a practical expedient allowing for entities to apply the provisions of the updated lease guidance at the effective date, without adjusting the comparative periods presented. The Company expects to 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 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 will adopt the provisions of the new accounting standard at the beginning of fiscal 2019, which will result 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 Act, the Company expects to recognize a cumulative effect adjustment to retained earnings of approximately $10.0 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 or items as other compensation costs. The updated guidance also requires the other components of net periodic pension cost and net periodic post-retirement benefit cost to 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, when applicable. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The updated guidance should be applied retrospectively for the presentation of the service cost component and other components of net benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net benefit cost. The Company will adopt the provisions of this new accounting standard at the beginning of fiscal 2019 and is currently assessing the impact of adoption on its consolidated financial statements.
 
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 requirement apply prospectively. The updated guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is

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permitted in any interim or annual period. The Company is currently assessing the timing and impact of adopting the updated provisions.

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 is in the process of assessing the impact of adoption this standard will have on its consolidated financial statements and related disclosures.
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.


NOTE B                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 preliminary purchase price of $857.4 million. The purchase price is preliminary pending final purchase accounting adjustments. 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 has estimated the acquisition date fair values of the assets acquired and liabilities assumed using independent appraisals, and determined final working capital adjustments. A preliminary allocation of the purchase price to the acquired assets, liabilities, and goodwill is presented in the table below.
(in thousands)
 
Accounts receivable
$
21,257

Inventory
29,699

Prepaid and other assets
881

Other assets
935

Property, plant and equipment
83,663

Intangible assets
231,964

Goodwill
610,836

Current liabilities
(21,366
)
Deferred taxes
(100,511
)
   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.


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On August 22, 2017, the Company acquired Cidade do Sol (Ceratti) for a preliminary purchase price of $103.3 million. The transaction was funded by the Company with cash on hand. The Company has completed a preliminary allocation of the fair value of Ceratti. Allocations are based on the acquisition method of accounting and in-process third-party valuation appraisals.

Ceratti is a growing, branded, value-added meats company in Brazil offering more than 70 products in 15 categories, including authentic meats such as mortadella, sausage, and salami for Brazilian retail and foodservice markets under the popular Ceratti® brand.  The acquisition of Ceratti allows the Company to establish a full in-country presence with a premium brand in the fast-growing Brazilian market.

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 International & Other segment.

On August 16, 2017, the Company acquired Fontanini Italian Meats and Sausages (Fontanini), a branded foodservice business, from Capitol Wholesale Meats, Inc. for a preliminary purchase price of $428.4 million. The transaction provides a cash flow benefit resulting from the amortization of the tax basis of assets, the net present value of which is approximately $90.0 million. The transaction was funded by the Company with cash on hand and by utilizing short-term financing. The Company has completed a preliminary allocation of the fair value of Fontanini. Allocations are based on the acquisition method of accounting and in-process third-party valuation appraisals. Primary assets acquired include goodwill of $223.7 million and intangibles of $110.3 million.

Fontanini specializes in authentic Italian meats and sausages, as well as a variety of other premium meat products, including pizza toppings and meatballs, and allows the Company to expand its foodservice business.

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 C                INVENTORIES
 
Principal components of inventories are:
(in thousands)
April 29,
2018
 
October 29,
2017
Finished products
$
579,438

 
$
511,789

Raw materials and work-in-process
250,963

 
237,903

Operating supplies
121,530

 
114,098

Maintenance materials and parts
59,284

 
57,232

Total
$
1,011,215

 
$
921,022



NOTE D                GOODWILL AND INTANGIBLE ASSETS
 
The carrying amounts of goodwill for the second quarter and six months ended April 29, 2018, are presented in the table below. The reduction in goodwill for the quarter is primarily related to the acquisition of Columbus on November 27, 2017. During the second quarter, an allocation from goodwill to the identifiable intangible assets was made based on the preliminary third-party valuation appraisal report received. The other changes in goodwill for the second quarter and first six months relate to purchase accounting adjustments for the Fontanini and Ceratti acquisitions, acquired on August 16, 2017, and August 22, 2017, respectively.
(in thousands)
Grocery
Products
 
Refrigerated
Foods
 
JOTS
 
International
& Other
 
Total
Balance as of January 28, 2018
$
882,582

 
$
1,633,188

 
$
203,214

 
$
238,479

 
$
2,957,463

Purchase adjustments

 
(226,057
)
 

 
550

 
(225,507
)
Balance as of April 29, 2018
$
882,582

 
$
1,407,131

 
$
203,214

 
$
239,029

 
$
2,731,956



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(in thousands)
Grocery
Products
 
Refrigerated
Foods
 
JOTS
 
International
& Other
 
Total
Balance as of October 29, 2017
$
882,582

 
$
795,699

 
$
203,214

 
$
238,318

 
$
2,119,813

Goodwill acquired

 
610,836

 

 

 
610,836

Purchase adjustments

 
596

 

 
711

 
1,307

Balance as of April 29, 2018
$
882,582

 
$
1,407,131

 
$
203,214

 
$
239,029

 
$
2,731,956


The gross carrying amount and accumulated amortization for definite-lived intangible assets are presented in the table below. Additions in the first six months of fiscal 2018 are due to the allocation of $29.4 million related to the preliminary valuation of customer relationships acquired as part of the Columbus acquisition. Once fully amortized, the definite-lived intangible assets are removed from the table.
 
April 29, 2018
 
October 29, 2017
(in thousands)
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer lists/relationships
$
144,514

 
$
(31,488
)
 
$
115,940

 
$
(25,973
)
Formulas and recipes

 

 
1,950

 
(1,950
)
Other intangibles
7,056

 
(1,885
)
 
3,100

 
(2,044
)
Total
$
151,570

 
$
(33,373
)
 
$
120,990

 
$
(29,967
)
 
Amortization expense was $3.0 million and $6.2 million for the second quarter and six months ended April 29, 2018, respectively, compared to $2.0 million and $4.1 million for the second quarter and six months ended April 30, 2017.
 
Estimated annual amortization expense for the five fiscal years after October 29, 2017, is as follows:
(in millions)
 
2018
$12.7
2019
12.8
2020
12.7
2021
12.8
2022
12.5

The carrying amounts for indefinite-lived intangible assets are presented in the table below. Additions in the first six months of fiscal 2018 are due to the allocation of $201.3 million related to the tradenames acquired as part of the Columbus acquisition.
(in thousands)
April 29,
2018
 
October 29,
2017
Brands/tradenames/trademarks
$
1,132,915

 
$
935,807

Other intangibles
184

 
184

Total
$
1,133,099

 
$
935,991


 

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NOTE E                PENSION AND OTHER POST-RETIREMENT BENEFITS
 
Net periodic benefit cost for pension and other post-retirement benefit plans consists of the following:
 
Pension Benefits
 
Three Months Ended
 
Six Months Ended
(in thousands)
April 29,
2018
 
April 30,
2017
 
April 29,
2018
 
April 30,
2017
Service cost
$
7,903

 
$
7,564

 
$
15,806

 
$
15,128

Interest cost
14,049

 
13,566

 
28,098

 
27,132

Expected return on plan assets
(24,771
)
 
(22,734
)
 
(49,541
)
 
(45,468
)
Amortization of prior service cost
(617
)
 
(750
)
 
(1,234
)
 
(1,500
)
Recognized actuarial loss
4,540

 
6,542

 
9,079

 
13,083

Net periodic cost
$
1,104

 
$
4,188

 
$
2,208

 
$
8,375


 
Post-retirement Benefits
 
Three Months Ended
 
Six Months Ended
(in thousands)
April 29,
2018
 
April 30,
2017
 
April 29,
2018
 
April 30,
2017
Service cost
$
321

 
$
274

 
$
641

 
$
549

Interest cost
2,832

 
2,871

 
5,664

 
5,742

Amortization of prior service cost
(711
)
 
(1,069
)
 
(1,421
)
 
(2,137
)
Recognized actuarial loss
45

 
599

 
89

 
1,227

Net periodic cost
$
2,487

 
$
2,675

 
$
4,973

 
$
5,381


 
NOTE F               DERIVATIVES AND HEDGING
 
The Company uses hedging programs to manage price risk associated with commodity purchases.  These programs utilize futures 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.

Cash Flow Hedges:  The Company utilizes corn and lean hog futures to offset price fluctuations in the Company’s future direct grain and hog purchases.  The financial instruments are designated and accounted for as cash flow hedges, and the Company measures the effectiveness of the hedges at least quarterly.  Effective gains or losses related to these cash flow hedges are reported in accumulated other comprehensive loss (AOCL) and reclassified into earnings, through cost of products sold, in the period or periods in which the hedged transactions affect earnings.  Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold.  The Company typically does not hedge its grain exposure beyond the next two upcoming fiscal years and its hog exposure beyond the next fiscal year.  As of April 29, 2018, and October 29, 2017, the Company had the following outstanding commodity futures contracts that were entered into to hedge forecasted purchases:
 
 
Volume
Commodity
 
April 29, 2018
 
October 29, 2017
Corn
 
11.5 million bushels
 
11.5 million bushels
Lean hogs
 
1.0 million cwt
 
0.3 million cwt
 
As of April 29, 2018, the Company has included in AOCL hedging losses of sixteen thousand dollars (before tax) relating to its positions, compared to gains of $1.8 million (before tax) as of October 29, 2017.  The Company expects to recognize the majority of these losses over the next 12 months.
 
Fair Value Hedges:  The Company utilizes futures to minimize the price risk assumed when fixed forward priced contracts are offered to the Company’s commodity suppliers.  The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery.  The futures contracts are designated and accounted for as fair value hedges, and the Company measures the effectiveness of the hedges at least quarterly.  Changes in the fair value of the

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futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and are recorded on the Consolidated Statements of Financial Position as a current asset and liability, respectively.  Effective gains or losses related to these fair value hedges are recognized through cost of products sold in the period or periods in which the hedged transactions affect earnings.  Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold.  As of April 29, 2018, and October 29, 2017, the Company had the following outstanding commodity futures contracts designated as fair value hedges:
 
 
Volume
Commodity
 
April 29, 2018
 
October 29, 2017
Corn
 
5.6 million bushels
 
4.1 million bushels
Lean hogs
 
0.1 million cwt
 
0.4 million cwt
 
Other Derivatives:  The Company holds certain futures and options contract positions as part of a merchandising program to manage the Company’s exposure to fluctuations in commodity markets.  The Company has not applied hedge accounting to these positions.
 
As of April 29, 2018, and October 29, 2017, the Company had the following outstanding futures and options contracts related to these programs:
 
 
Volume
Commodity
 
April 29, 2018
 
October 29, 2017
Corn
 
0.2 million bushels
 

Fair Values:  The fair values of the Company’s derivative instruments (in thousands) as of April 29, 2018, and October 29, 2017, were as follows:
 
 
 
Fair Value (1)
 
Location on Consolidated
Statements of Financial
Position
 
April 29,
2018
 
October 29,
2017
Asset Derivatives:
 
 
 
 
 
Derivatives Designated as Hedges:
 
 
 

 
 

Commodity contracts
Other current assets
 
$
(579
)
 
$
326

 
 
 
 
 
 
Derivatives Not Designated as Hedges:
 
 
 
 
 
Commodity contracts
Other current assets
 
5

 

 
 
 
 
 
 
Total Asset Derivatives
 
 
$
(574
)
 
$
326

(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 K “Fair Value Measurements” for a discussion of these net amounts as reported in the Consolidated Statements of Financial Position.
 
Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the second quarter ended April 29, 2018, and April 30, 2017, were as follows:
 
 
Gain/(Loss)
Recognized in AOCL
(Effective Portion) (1)
 
Location on
Consolidated
Statements
of Operations
 
Gain/(Loss)
Reclassified from
AOCL into Earnings
(Effective Portion) (1)
 
Gain/(Loss)
Recognized in
Earnings (Ineffective
Portion) (2) (4)
 
 
Three Months Ended
 
 
Three Months Ended
 
Three Months Ended
Cash Flow Hedges:
 
April 29, 2018
 
April 30, 2017
 
 
April 29, 2018
 
April 30, 2017
 
April 29, 2018
 
April 30, 2017
Commodity contracts
 
$
(862
)
 
$
(141
)
 
Cost of products sold
 
$
(40
)
 
$
1,753

 
$
(271
)
 
$
40


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Location on
Consolidated
Statements
of Operations
 
Gain/(Loss)
Recognized in
Earnings (Effective
Portion) (3)
 
Gain/(Loss)
Recognized in
Earnings (Ineffective
Portion) (2) (5)
 
 
 
 
 
Three Months Ended
 
Three Months Ended
Fair Value Hedges:
 
 
 
 
 
 
April 29, 2018
 
April 30, 2017
 
April 29, 2018
 
April 30, 2017
Commodity contracts
 
 
 
 
 
Cost of products sold
 
$
1,224

 
$
(467
)
 
$
(23
)
 
$
1

 
 
 
 
Location on
Consolidated
Statements
of Operations
 
Gain/(Loss)
Recognized
in Earnings
 
 
 
 
 
 
 
Three Months Ended
 
 
Derivatives Not
Designated as Hedges:
 
 
 
 
 
 
April 29, 2018
 
April 30, 2017
 
 
 
 
Commodity contracts
 
 
 
 
 
Cost of products sold
 
$
54

 
$
(9
)
 
 
 
 

Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the six months ended April 29, 2018, and April 30, 2017, were as follows:
 
 
Gain/(Loss)
Recognized in AOCL
(Effective Portion) (1)
 
Location on
Consolidated
Statements
of Operations
 
Gain/(Loss)
Reclassified from
AOCL into Earnings
(Effective Portion) (1)
 
Gain/(Loss)
Recognized in
Earnings (Ineffective
Portion) (2) (4)
 
 
Six Months Ended
 
 
Six Months Ended
 
Six Months Ended
Cash Flow Hedges:
 
April 29, 2018
 
April 30, 2017
 
 
April 29, 2018
 
April 30, 2017
 
April 29, 2018
 
April 30, 2017
Commodity contracts
 
$
(1,249
)
 
$
(787
)
 
Cost of products sold
 
$
568

 
$
3,222

 
$
(361
)
 
$
40

 
 
 
 
Location on
Consolidated
Statements
of Operations
 
Gain/(Loss)
Recognized in
Earnings (Effective
Portion) (3)
 
Gain/(Loss)
Recognized in
Earnings (Ineffective
Portion) (2) (5)
 
 
 
 
 
Six Months Ended
 
Six Months Ended
Fair Value Hedges:
 
 
 
 
 
 
April 29, 2018
 
April 30, 2017
 
April 29, 2018
 
April 30, 2017
Commodity contracts
 
 
 
 
 
Cost of products sold
 
$
1,781

 
$
(591
)
 
$
(272
)
 
$
1

 
 
 
 
Location on
Consolidated
Statements
of Operations
 
Gain/(Loss)
Recognized
in Earnings
 
 
 
 
 
 
 
Six Months Ended
 
 
Derivatives Not
Designated as Hedges:
 
 
 
 
 
 
April 29, 2018
 
April 30, 2017
 
 
 
 
Commodity contracts
 
 
 
 
 
Cost of products sold
 
$
66

 
$
(237
)
 
 
 
 
(1)     Amounts represent gains or losses in AOCL before tax.  See Note H “Accumulated Other Comprehensive Loss” for the after-tax impact of these gains or losses on net earnings.
(2)     There were no gains or losses excluded from the assessment of hedge effectiveness during the second quarter or first six months.
(3)     Amounts represent losses on commodity contracts designated as fair value hedges that were closed during the second quarter or the first six months, which were offset by a corresponding gain on the underlying hedged purchase commitment.  Additional gains or losses related to changes in the fair value of open commodity contracts, along with the offsetting gain or loss on the hedged purchase commitment, are also marked-to-market through earnings with no impact on a net basis.
(4)     There were no gains or losses resulting from the discontinuance of cash flow hedges during the second quarter or first six months.
(5)     There were no gains or losses recognized as a result of a hedged firm commitment no longer qualifying as a fair value hedge during the second quarter or first six months.






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NOTE G                                              INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES
 
The Company accounts for its majority-owned operations under the consolidation method.  Investments in which the Company owns a minority interest, and for which there are no other indicators of control, are accounted for under the equity or cost method.  These investments, along with any related receivables from affiliates, are included in the Consolidated Statements of Financial Position as investments in and receivables from affiliates.
 
Investments in and receivables from affiliates consists of the following:
 
(in thousands)
Segment
 
% Owned
 
April 29,
2018
 
October 29,
2017
MegaMex Foods, LLC
Grocery Products
 
50%
 
$
197,204

 
$
177,657

Foreign Joint Ventures
International & Other
 
Various (26-40%)
 
68,375

 
64,712

Total
 
 
 
 
$
265,579

 
$
242,369


Equity in earnings of affiliates consists of the following:
 
 
 
Three Months Ended
 
Six Months Ended
(in thousands)
 
Segment
 
April 29,
2018
 
April 30,
2017
 
April 29,
2018
 
April 30,
2017
MegaMex Foods, LLC
Grocery Products
 
$
12,934

 
$
9,116

 
$
32,522

 
$
18,187

Foreign Joint Ventures
International & Other
 
552

 
1,005

 
4,495

 
5,233

Total
 
 
$
13,486

 
$
10,121

 
$
37,017

 
$
23,420

 
Dividends received from affiliates for the second quarter and six months ended April 29, 2018, were $10.0 million and $10.0 million, respectively, compared to $10.0 million and $12.5 million of dividends received for the second quarter and six months ended April 30, 2017.
 
The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $14.0 million is remaining as of April 29, 2018.  This difference is being amortized through equity in earnings of affiliates.

 
NOTE H                                                  ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Components of accumulated other comprehensive loss are as follows:
(in thousands)
Foreign
Currency
Translation
 
Pension &
Other
Benefits
 
Deferred
Gain (Loss) -
Hedging
 
Accumulated
Other
Comprehensive
Loss
Balance at January 28, 2018
$
(2,783
)
 
$
(239,989
)
 
 
$
596

 
 
$
(242,176
)
Unrecognized gains (losses)
 
 
 
 
 
 
 
 
 
Gross
4,549

 

 
 
(862
)
 
 
3,687

Tax effect

 

 
 
218

 
 
218

Reclassification into net earnings
 
 
 
 
 
 
 
 
 
Gross

 
3,257

(1)
 
40

(2)
 
3,297

Tax effect

 
(770
)
 
 
(9
)
 
 
(779
)
Net of tax amount
4,549

 
2,487

 
 
(613
)
 
 
6,423

Balance at April 29, 2018
$
1,766

 
$
(237,502
)
 
 
$
(17
)
 
 
$
(235,753
)

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(in thousands)
Foreign
Currency
Translation
 
Pension &
Other
Benefits
 
Deferred
Gain (Loss) -
Hedging
 
Accumulated
Other
Comprehensive
Loss
Balance at October 29, 2017
$
(6,846
)
 
$
(242,475
)
 
 
$
1,246

 
 
$
(248,075
)
Unrecognized gains (losses)
 
 
 
 
 
 
 
 
 
Gross
8,612

 

 
 
(1,249
)
 
 
7,363

Tax effect

 

 
 
310

 
 
310

Reclassification into net earnings
 
 
 
 
 
 
 
 
 
Gross

 
6,513

(1)
 
(568
)
(2)
 
5,945

Tax effect

 
(1,540
)
 
 
244

 
 
(1,296
)
Net of tax amount
8,612

 
4,973

 
 
(1,263
)
 
 
12,322

Balance at April 29, 2018
$
1,766

 
$
(237,502
)
 
 
$
(17
)
 
 
$
(235,753
)
(1) Included in the computation of net periodic cost (see Note E “Pension and Other Post-Retirement Benefits” for additional details).
(2)    Included in cost of products sold in the Consolidated Statements of Operations.


NOTE I                 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 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 will not apply for the Company until fiscal 2019, such as eliminating the domestic manufacturing deduction, creating new taxes on certain foreign sourced income, and introducing new limitations on certain business deductions. For fiscal 2018, and effective in the first quarter, the most significant impacts include lowering of the U.S. federal corporate income tax rate, remeasuring certain net deferred tax liabilities, and requiring the transition tax on the deemed repatriation of certain foreign earnings. The phase-in of the lower federal corporate income tax rate resulted in a blended rate of 23.4 percent for fiscal 2018, as compared to the previous 35 percent, and is based on the applicable tax rates before and after passage of the Tax Act and the number of days in the fiscal year. The tax rate will be reduced to 21 percent in subsequent fiscal years.

The lower effective tax rate for both the second quarter and first six months of fiscal 2018 is largely due to the passage of the Tax Act, lowering the Company's long-term effective tax rate.  In the second quarter, the Company recorded an adjustment to the provisional non-cash tax benefit of $5.8 million, bringing the deferred tax liability revaluation to $73.8 million for the first six months of fiscal 2018. A provisional charge of $5.2 million for deemed repatriation of the Company's previously undistributed foreign earnings was recorded in the first quarter with no additional charges in the second quarter of fiscal 2018. At this point, no additional income taxes have been provided for any undistributed foreign earnings not subject to the transition tax and additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practical at this time. The 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 second quarter and first six months of fiscal 2018 of 20.0 percent and 10.2 percent, respectively, compared to 33.2 percent and 33.5 percent for the respective periods last year. The Company expects a full-year effective tax rate between 17.5 percent and 19.5 percent for fiscal 2018.

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 the second quarter and first six months of fiscal 2018, as described above. As the Company accumulates and processes data to finalize the underlying calculations, and as regulators issue further guidance, estimates may change during fiscal 2018. The Company will continue to refine such amounts within the measurement period allowed, which will be completed no later than the first quarter of fiscal 2019.


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The amount of unrecognized tax benefits, including interest and penalties, is recorded in other long-term liabilities.  If recognized as of April 29, 2018, and April 30, 2017, $24.6 million and $19.8 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, with $0.2 million and $(0.1) million of interest and penalties included in expense in the second quarter, and $0.4 million and $0.1 million recorded in the first six months of fiscal years 2018 and 2017, respectively. The amount of accrued interest and penalties at April 29, 2018, and April 30, 2017, associated with unrecognized tax benefits was $6.8 million and $2.7 million, respectively.

The Company is regularly audited by federal and state taxing authorities.  The United States Internal Revenue Service (I.R.S.) concluded its examination of fiscal 2016 in the first quarter of fiscal 2018.  The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years 2017 and 2018.  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 J               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.
 
A reconciliation of the number of options outstanding and exercisable (in thousands) as of April 29, 2018, and changes during the six months then ended, is as follows:
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic Value
Outstanding at October 29, 2017
30,685

 
$
18.08

 
 
 
 
Granted
2,334

 
36.63

 
 
 
 
Exercised
2,934

 
10.23

 
 
 
 
Forfeited
11

 
35.31

 
 
 
 
Expired
1

 
37.76

 
 
 
 
Outstanding at April 29, 2018
30,073

 
$
20.28

 
4.9
 
$
492,127

Exercisable at April 29, 2018
24,177

 
$
16.76

 
4.0
 
$
478,511

 
The weighted-average grant date fair value of stock options granted and the total intrinsic value of options exercised (in thousands) during the second quarter and first six months of fiscal years 2018 and 2017, are as follows. 
 
Three Months Ended
 
Six Months Ended
 
April 29,
2018
 
April 30,
2017
 
April 29,
2018
 
April 30,
2017
Weighted-average grant date fair value
$
6.49

 
$
7.03

 
$
6.86

 
$
6.41

Intrinsic value of exercised options
$
15,512

 
$
9,070

 
$
71,814

 
$
61,088

 

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The fair value of each option award is calculated on the date of grant using the Black-Scholes valuation model utilizing the following weighted-average assumptions:
 
Three Months Ended
 
Six Months Ended
 
April 29,
2018
 
April 30,
2017
 
April 29,
2018
 
April 30,
2017
Risk-free interest rate
2.7
%
 
2.5
%
 
2.3
%
 
2.4
%
Dividend yield
2.2
%
 
1.9
%
 
2.1
%
 
2.0
%
Stock price volatility
19.0
%
 
19.0
%
 
19.0
%
 
19.0
%
Expected option life
8 years

 
8 years

 
8 years

 
8 years

 
As part of the annual valuation process, the Company reassesses the appropriateness of the inputs used in the valuation models.  The Company establishes the risk-free interest rate using stripped U.S. Treasury yields as of the grant date where the remaining term is approximately the expected life of the option.  The dividend yield is set based on the dividend rate approved by the Company’s Board of Directors and the stock price on the grant date.  The expected volatility assumption is set based primarily on historical volatility.  As a reasonableness test, implied volatility from exchange traded options is also examined to validate the volatility range obtained from the historical analysis.  The expected life assumption is set based on an analysis of past exercise behavior by option holders.  In performing the valuations for option grants, the Company has not stratified option holders as exercise behavior has historically been consistent across all executive employee and non-employee director groups.
 
Restricted shares awarded on February 1 are subject to a restricted period which expires the date of the Company’s next annual
stockholders meeting. A reconciliation of the restricted shares (in thousands) as of April 29, 2018, and changes during the six months then ended, is as follows:
 
Shares
 
Weighted-
Average Grant
Date Fair Value
Restricted at October 29, 2017
58

 
$
35.62

Granted
52

 
34.08

Vested
57

 
35.62

Forfeited
1

 
35.62

Restricted at April 29, 2018
52

 
$
34.08

 
The weighted-average grant date fair value of restricted shares granted, the total fair value (in thousands) of restricted shares granted, and the fair value (in thousands) of shares that have vested during the first six months of fiscal years 2018 and 2017, are as follows:
 
Six Months Ended
 
April 29,
2018
 
April 30,
2017
Weighted-average grant date fair value
$
34.08

 
$
35.62

Fair value of restricted shares granted
1,760

 
2,080

Fair value of shares vested
2,053

 
1,920

 
During the second quarter and six months ended April 29, 2018, stock-based compensation expense was $4.1 million and $11.4 million, respectively, compared to $4.6 million and $11.9 million for the second quarter and six months ended April 30, 2017, respectively.
 
At April 29, 2018, there was $17.8 million of total unrecognized compensation expense from stock-based compensation arrangements granted under the plans.  This compensation is expected to be recognized over a weighted-average period of approximately 2.5 years.  During the second quarter and six months ended April 29, 2018, cash received from stock option exercises was $6.5 million and $30.0 million, respectively, compared to $1.5 million and $8.9 million for the second quarter and six months ended April 30, 2017, respectively. 

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

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NOTE K                FAIR VALUE MEASUREMENTS
 
Pursuant to the provisions of ASC 820, Fair Value Measurements and Disclosures (ASC 820), the Company measures certain assets and liabilities at fair value or discloses the fair value of certain assets and liabilities recorded at cost in the consolidated financial statements.  Fair value is calculated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  ASC 820 establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of three levels based on the inputs used in the valuation.  Assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement.  The three levels are defined as follows:
 
Level 1:  Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
 
Level 2: Observable inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.
 
Level 3:  Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.
 
The Company’s financial assets and liabilities measured at fair value on a recurring basis as of April 29, 2018, and October 29, 2017, and their level within the fair value hierarchy, are presented in the tables below.
 
Fair Value Measurements at April 29, 2018
(in thousands)
Total Fair Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets at Fair Value
 

 
 

 
 

 
 

Cash and cash equivalents (1)
$
261,571

 
$
261,571

 
$

 
$

Other trading securities (2)
137,499

 

 
137,499

 

Commodity derivatives (3)
3,509

 
3,509

 

 

Total Assets at Fair Value
$
402,579

 
$
265,080

 
$
137,499

 
$

Liabilities at Fair Value
 
 
 
 
 
 
 
Deferred compensation (2)
$
61,679

 
$

 
$
61,679

 
$

Total Liabilities at Fair Value
$
61,679

 
$

 
$
61,679

 
$

 
Fair Value Measurements at October 29, 2017
(in thousands)
Total Fair Value

 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets at Fair Value
 

 
 

 
 

 
 

Cash and cash equivalents (1)
$
444,122

 
$
444,122

 
$

 
$

Other trading securities (2)
128,530

 

 
128,530

 

Commodity derivatives (3)
2,821

 
2,821

 

 

Total Assets at Fair Value
$
575,473

 
$
446,943

 
$
128,530

 
$

Liabilities at Fair Value
 
 
 
 
 
 
 
Deferred compensation (2)
$
62,341

 
$

 
$
62,341

 
$

Total Liabilities at Fair Value
$
62,341

 
$

 
$
62,341

 
$

 
The following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:
(1)
The Company’s cash equivalents consist primarily of bank deposits, money market funds rated AAA, or other highly liquid investment accounts.  As these investments have a maturity date of three months or less, the carrying value approximates fair value.

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Table of Contents

(2)
A majority of the funds held in the rabbi trust relate to the supplemental executive retirement plans and have been invested in fixed income funds managed by a third party.  The declared rate on these funds is set based on a formula using the yield of the general account investment portfolio supporting the fund, adjusted for expenses and other charges.  The rate is guaranteed for one year at issue, and may be reset annually on the policy anniversary, subject to a guaranteed minimum rate.  As the value is based on adjusted market rates, and the fixed rate is only reset on an annual basis, these funds are classified as Level 2.  The funds held in the rabbi trust are included in other assets on the Consolidated Statements of Financial Position.  The remaining funds held are also managed by a third-party insurance policy, the values of which represent their cash surrender value based on the fair value of the underlying investments in the account and include equity securities, money market accounts, bond funds, or other portfolios for which there is an active quoted market.  Therefore these policies are also classified as Level 2.  The related deferred compensation liabilities are included in other long-term liabilities on the Consolidated Statements of Financial Position with investment options generally mirroring those funds held by the rabbi trust.  Therefore these investment balances are classified as Level 2.  The Company also offers a fixed rate investment option to participants.  The rate earned on these investments is adjusted annually based on a specified percentage of the I.R.S. Applicable Federal Rates.  These balances are classified as Level 2.
(3)
The Company’s commodity derivatives represent futures contracts used in its hedging or other programs to offset price fluctuations associated with purchases of corn and hogs, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers.  The Company’s futures contracts for corn and soybean meal are traded on the Chicago Board of Trade, while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange.  These are active markets with quoted prices available, and these contracts are classified as Level 1.  All derivatives are reviewed for potential credit risk and risk of nonperformance.  The Company nets the derivative assets and liabilities for each of its hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract.  The net balance for each program is included in other current assets or accounts payable, as appropriate, in the Consolidated Statements of Financial Position.  As of April 29, 2018, the Company has recognized the right to reclaim net cash collateral of $4.1 million from various counterparties (including $5.7 million of realized gains offset by cash owed of $1.6 million on closed positions).  As of October 29, 2017, the Company had recognized the right to reclaim net cash collateral of $2.5 million from various counterparties (including $11.0 million of realized gains offset by cash owed of $8.5 million on closed positions).
 
The Company’s financial assets and liabilities include accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value.  The Company does not carry its long-term debt at fair value in its Consolidated Statements of Financial Position.  Based on borrowing rates available to the Company for long-term financing with similar terms and average maturities, the fair value of long-term debt, utilizing discounted cash flows (Level 2), was $632.4 million as of April 29, 2018, and $266.5 million as of October 29, 2017.
 
In accordance with the provisions of ASC 820, the Company measures certain nonfinancial assets and liabilities at fair value, which are recognized or disclosed on a nonrecurring basis (e.g. goodwill, intangible assets, and property, plant and equipment).   During the first six months ended April 29, 2018, and April 30, 2017, there were no material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.


NOTE L               EARNINGS PER SHARE DATA
 
The reported net earnings attributable to the Company were used when computing basic and diluted earnings per share.  The following table sets forth the shares used as the denominator for those computations:
 
Three Months Ended
 
Six Months Ended
(in thousands)
April 29,
2018
 
April 30,
2017
 
April 29,
2018
 
April 30,
2017
Basic weighted-average shares outstanding
529,799

 
528,712

 
529,626

 
528,649

Dilutive potential common shares
13,012

 
10,923

 
13,520

 
11,201

Diluted weighted-average shares outstanding
542,811

 
539,635

 
543,146

 
539,850

 
For the second quarter and six months ended April 29, 2018, a total of 6.8 million and 6.1 million weighted-average stock options, respectively, were not included in the computation of dilutive potential common shares since their inclusion would have had an antidilutive effect on earnings per share, compared to 4.5 million and 3.9 million, respectively, for the second quarter and six months ended April 30, 2017.







24

Table of Contents


NOTE M                SEGMENT REPORTING
 
The Company develops, processes, and distributes a wide array of food products in a variety of markets.  The Company reports its results in the following four segments:  Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. As a result of a business realignment at the beginning of fiscal 2018, the former Specialty Foods segment results are now reported as part of the Grocery Products segment. Periods presented herein have been recast to reflect this change.
 
The Grocery Products 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 joint venture.
 
The Refrigerated Foods segment consists primarily of the processing, marketing, and sale of branded and unbranded pork, beef, and poultry products for retail, foodservice, and fresh product customers.
 
The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers.
 
The International & Other 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.
 
Intersegment sales are recorded at approximate cost and are eliminated in the Consolidated Statements of Operations.  The Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance.  The Company also retains various other income and unallocated expenses at corporate.  Equity in earnings of affiliates is included in segment operating profit; however, earnings attributable to the Company’s noncontrolling interests are excluded.  These items are included below as net interest and investment expense (income), general corporate expense, and noncontrolling interest when reconciling to earnings before income taxes.
 
Sales and operating profits for each of the Company’s reportable segments and reconciliation to earnings before income taxes are set forth below.  The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets.  Therefore, the Company does not represent these segments, if operated independently, would report the operating profit and other financial information shown below.
 

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Table of Contents

 
Three Months Ended
 
Six Months Ended
(in thousands)
April 29,
2018
 
April 30,
2017
 
April 29,
2018
 
April 30,
2017
Sales to Unaffiliated Customers
 

 
 

 
 

 
 

Grocery Products
$