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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 Consolidated Statement of Financial Position at October 27, 2019, 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 27, 2019. The significant accounting policies used in preparing these Consolidated Financial Statements are consistent with those described in Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements in the Form 10-K with the exception of new requirements adopted in the first quarter of fiscal 2020. The Company has considered the impact of COVID-19 and determined there have been no material changes in the Company’s Significant Accounting Policies, including estimates and assumptions, as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 27, 2019.

Rounding: Certain amounts in the Consolidated Financial Statements and associated notes may not foot due to rounding. All percentages have been calculated using unrounded amounts.

Accounting Changes and Recent Accounting Pronouncements:

New Accounting Pronouncements Adopted in Current Fiscal Year 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than twelve months. Recognition, measurement, and presentation of expenses will depend on the classification as a finance or operating lease. The update also requires expanded quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The requirements of the new standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2020. For transition purposes, the Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. The Company elected the comparative periods practical expedient, and as a result, the Company did not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date. Upon adoption, the Company recognized right-of-use assets of $112.7 million and lease liabilities of $114.1 million in the Consolidated Statements of Financial Position as of October 28, 2019. The new standard did not have a material impact on the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.

New Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). The update provides guidance on the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The amendment replaces the current incurred loss impairment approach with a methodology to reflect expected credit losses and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The updated guidance is to be applied on a modified retrospective approach and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, and interim periods therein. The Company will adopt the provisions of this new accounting standard at the beginning of fiscal 2021 and is in the process of evaluating the impact.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820).  The updated guidance requires entities to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Amendments in this guidance also require disclosure of transfers into and out of Level 3 of the fair value hierarchy, purchases and issues of Level 3 assets and liabilities, and clarify that the measurement uncertainty disclosure is as of the reporting date. The guidance removes requirements to disclose the amounts and reasons for transfers between Level 1 and Level 2, policy for timing between of transfers between levels, and the valuation processes for Level 3 fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company will adopt the provisions of this new accounting standard at the beginning of fiscal 2021 and is in the process of evaluating the impact.

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In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans (Topic 715). The updated guidance requires additional disclosures of weighted-average interest crediting rates for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation. Amendments in the guidance also clarify the requirement to disclose the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets. The same disclosure is needed for the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The guidance removes certain previous disclosure requirements no longer considered cost beneficial. The amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company is currently assessing the timing and impact of adopting the updated provisions.

In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions in Topic 740 and clarifying and amending existing guidance. The amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company is currently assessing the timing and impact of adopting the updated provisions.

Recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not relevant to the Company.

 

Acquisition: On March 2, 2020, the Company acquired the assets comprising the Sadler's Smokehouse business (Sadler's) for a preliminary purchase price of $268.9 million, subject to customary working capital adjustments. Sadler's is an authentic, pit-smoked meats business based in Henderson, Texas. This acquisition strengthens the Company's foodservice position and provides an opportunity to further extend the Sadler's product line into the retail and deli channels.

The transaction was funded with cash on hand and accounted for as a business combination using the acquisition method. Allocations of the purchase price to acquired assets, including goodwill and intangibles assets, is pending the completion of a third-party valuation. See Note D - Goodwill and Intangible Assets for preliminary amounts assigned to goodwill.

Operating results for this acquisition have been included in the Company's Consolidated Statements of Operations from the date of acquisition and are reflected in the Refrigerated Foods segment. Pro forma results are not material for inclusion.

Divestiture: On April 15, 2019, the Company completed the sale of CytoSport, Inc. (CytoSport), which included the Muscle Milk^® and Evolve^® brands, to PepsiCo, Inc., and received final proceeds of $479.8 million. The divestiture resulted in a pretax gain of $16.5 million recognized in Selling, General and Administrative expense and a tax benefit of $17.0 million recognized within the Provision for Income Taxes on the Consolidated Statements of Operations.

 

Principal components of inventories are:

(in thousands)	April 26, 2020				October 27, 2019
Finished Products	$	596,966			$	604,035
Raw Materials and Work-in-Process	254,431				255,474
Operating Supplies	128,774				116,981
Maintenance Materials and Parts	68,820				65,872
Total	$	1,048,992			$	1,042,362

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Goodwill: The changes in the carrying amounts of goodwill for the thirteen and twenty-six weeks ended April 26, 2020, are:

(in thousands)	Grocery Products				Refrigerated Foods				Jennie-O Turkey Store				International & Other				Total
Balance at January 26, 2020	$	632,301			$	1,458,692			$	176,628			$	216,467			$	2,484,088
Goodwill Acquired	—				212,871				—				—				212,871
Foreign Currency Translation	—				—				—				(14,120		)		(14,120		)
Balance at April 26, 2020	$	632,301			$	1,671,563			$	176,628			$	202,347			$	2,682,839

(in thousands)	Grocery Products				Refrigerated Foods				Jennie-O Turkey Store				International & Other				Total
Balance at October 27, 2019	$	632,301			$	1,458,692			$	176,628			$	214,024			$	2,481,645
Goodwill Acquired	—				212,871				—				—				212,871
Foreign Currency Translation	—				—				—				(11,677		)		(11,677		)
Balance at April 26, 2020	$	632,301			$	1,671,563			$	176,628			$	202,347			$	2,682,839

The increase to goodwill during the thirteen and twenty-six weeks ended April 26, 2020, is related to the acquisition of Sadler's. The allocation from goodwill to identifiable assets is pending a third party valuation.

Intangible Assets: The carrying amounts for indefinite-lived intangible assets are:

(in thousands)	April 26, 2020				October 27, 2019
Brands/Tradenames/Trademarks	$	953,190			$	959,400
Other Intangibles	184				184
Foreign Currency Translation	(6,211		)		(3,803		)
Total	$	947,163			$	955,781

The gross carrying amount and accumulated amortization for definite-lived intangible assets are:

	April 26, 2020								October 27, 2019
(in thousands)	Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
Customer Lists/Relationships	$	113,739			$	(41,350	)		$	113,739			$	(36,744	)
Tradenames/Trademarks	10,536				(2,447		)		4,326				(1,589		)
Other Intangibles	2,631				(1,920		)		2,631				(1,228		)
Foreign Currency Translation	—				(4,415		)		—				(3,054		)
Total	$	126,906			$	(50,132	)		$	120,696			$	(42,615	)

 

Amortization expense was $3.4 million and $6.2 million for the thirteen and twenty-six weeks ended April 26, 2020, respectively, compared to $3.1 million and $6.3 for the thirteen and twenty-six weeks ended April 28, 2019.

 

Estimated annual amortization expense for the five fiscal years after October 27, 2019, is:

(in thousands)
2020	$	11,700
2021	12,000
2022	11,644
2023	10,739
2024	8,921

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

	Pension Benefits
	Thirteen Weeks Ended								Twenty-Six Weeks Ended
(in thousands)	April 26, 2020				April 28, 2019				April 26, 2020				April 28, 2019
Service Cost	$	8,896			$	6,511			$	17,792			$	13,021
Interest Cost	13,411				15,095				26,821				30,192
Expected Return on Plan Assets	(25,321		)		(23,121		)		(50,642		)		(46,246		)
Amortization of Prior Service Cost	(542		)		(699		)		(1,084		)		(1,397		)
Recognized Actuarial Loss	5,597				3,701				11,192				7,402
Curtailment Loss (Gain)	—				—				—				2,825
Net Periodic Cost	$	2,041			$	1,487			$	4,079			$	5,797

	Post-retirement Benefits
	Thirteen Weeks Ended								Twenty-Six Weeks Ended
(in thousands)	April 26, 2020				April 28, 2019				April 26, 2020				April 28, 2019
Service Cost	$	193			$	173			$	387			$	347
Interest Cost	2,329				3,009				4,789				6,174
Amortization of Prior Service Cost	(663		)		(669		)		(1,326		)		(1,338		)
Recognized Actuarial Loss	247				—				523				—
Curtailment Loss (Gain)	—				—				—				(620		)
Net Periodic Cost	$	2,106			$	2,513			$	4,373			$	4,563

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 recognized in the first twenty-six weeks of fiscal 2019 were due to the sale of the Fremont, Nebraska, production facility.

 

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 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

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applied hedge accounting to these positions. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.

Volume: As of April 26, 2020, and October 27, 2019, the Company had the following outstanding commodity futures and options contracts related to its hedging programs:

		Volume
Commodity Contracts		April 26, 2020		October 27, 2019
Corn		20.4 million bushels		30.4 million bushels
Lean Hogs		199.1 million pounds		187.3 million pounds

 

Fair Value of Derivatives:  The fair values of the Company’s derivative instruments as of April 26, 2020, and October 27, 2019, are:

				Fair Value (1)
(in thousands)		Location on Consolidated Statements of Financial Position		April 26, 2020				October 27, 2019
Derivatives Designated as Hedges:
Commodity Contracts		Other Current Assets		$	(32,187	)		$	6,405

⁽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.  The gross liability position as of April 26, 2020 is offset by cash collateral of $42.0 million contained within the master netting arrangement. See Note K - 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 assets (liabilities) as of April 26, 2020, and October 27, 2019, are:

Location on Consolidated Statements     of Financial Position		Carrying Amount of the Hedged Assets/(Liabilities)
(in thousands)		April 26, 2020				October 27, 2019
Accounts Payable		$	(5,642	)		$	(2,805	)

Accumulated Other Comprehensive Loss Impact: As of April 26, 2020, the Company included in Accumulated Other Comprehensive Loss hedging losses of $46.1 million (before tax) relating to its positions. The Company expects to recognize the majority of these losses over the next twelve months.

The effect of Accumulated Other Comprehensive Loss for gains or losses (before tax) related to the Company's derivative instruments for the thirteen weeks ended April 26, 2020, and April 28, 2019, are:

		Gain/(Loss) Recognized  in AOCL (1)								Location on Consolidated Statements of Operations		Gain/(Loss) Reclassified from AOCL into Earnings (1)
		Thirteen Weeks Ended										Thirteen Weeks Ended
(in thousands)		April 26, 2020				April 28, 2019						April 26, 2020				April 28, 2019
Cash Flow Hedges:
Commodity Contracts		$	(47,944	)		$	505			Cost of Products Sold		$	(5,477	)		$	(532	)
Excluded Component (2)		—				5,930

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The effect of Accumulated Other Comprehensive Loss for gains or losses (before tax) related to the Company's derivative instruments for the twenty-six weeks ended April 26, 2020 and April 28, 2019, are:

		Gain/(Loss) Recognized  in AOCL (1)								Location on Consolidated Statements of Operations		Gain/(Loss) Reclassified from AOCL into Earnings (1)
		Twenty-Six Weeks Ended										Twenty-Six Weeks Ended
(in thousands)		April 26, 2020				April 28, 2019						April 26, 2020				April 28, 2019
Cash Flow Hedges:
Commodity Contracts		$	(56,571	)		$	(337	)		Cost of Products Sold		$	(7,352	)		$	(1,775	)
Excluded Component (2)		—				5,243

(1)	See Note H - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on Net Earnings.

(2)	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.

Consolidated Statements of Operations Impact: The effect on the Consolidated Statements of Operations for gains or losses (before tax) related to the Company's derivative instruments for the thirteen and twenty-six weeks ended April 26, 2020, and April 28, 2019, are:

		Cost of Products Sold
		Thirteen Weeks Ended								Twenty-Six Weeks Ended
(in thousands)		April 26, 2020				April 28, 2019				April 26, 2020				April 28, 2019
Consolidated Statements of Operations		$	1,945,113			$	1,875,595			$	3,861,127			$	3,747,616
Cash Flow Hedges - Commodity Contracts
Gain (Loss) Reclassified from AOCL		(5,477		)		(532		)		(7,352		)		(1,775		)
Amortization of Excluded Component from Options		—				(1,110		)		—				(2,468		)
Fair Value Hedges - Commodity Contracts
Gain (Loss) on Commodity Futures (1)		5,960				705				9,146				1,637
Total Gain (Loss) Recognized in Earnings		$	483			$	(937	)		$	1,794			$	(2,606	)

(1)	Amounts represent losses on commodity contracts designated as fair value hedges that were closed during the

thirteen and twenty-six weeks ended April 26, 2020, and April 28, 2019, 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.

 

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 consist of:

(in thousands)	Segment		% Owned		April 26, 2020				October 27, 2019
MegaMex Foods, LLC	Grocery Products		50%		$	221,591			$	218,592
Other Joint Ventures	International & Other		Various (20-40%)		81,602				70,565
Total					$	303,194			$	289,157

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Equity in Earnings of Affiliates consists of:

			Thirteen Weeks Ended								Twenty-Six Weeks Ended
(in thousands)	Segment		April 26, 2020				April 28, 2019				April 26, 2020				April 28, 2019
MegaMex Foods, LLC	Grocery Products		$	7,679			$	13,479			$	17,140			$	23,981
Other Joint Ventures	International & Other		2,342				(188		)		469				768
Total			$	10,021			$	13,291			$	17,608			$	24,749

 

For the thirteen and twenty-six weeks ended April 26, 2020, $10.0 million and $20.0 million of dividends were received from affiliates, compared to $10.0 million of dividends received for the thirteen and twenty-six weeks ended April 28, 2019.

The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $12.3 million is remaining as of April 26, 2020.  This difference is being amortized through Equity in Earnings of Affiliates.

 

Components of Accumulated Other Comprehensive Loss are:

(in thousands)	Foreign Currency Translation				Pension & Other Benefits					Hedging Deferred Gain (Loss)					Accumulated Other Comprehensive Loss
Balance at January 26, 2020	$	(45,184	)		$	(345,364	)			$	(2,730	)			$	(393,278	)
Unrecognized Gains (Losses)
Gross	(26,108		)		78					(47,944		)			(73,975		)
Tax Effect	—				—					11,702					11,702
Reclassification into Net Earnings
Gross	—				4,639			(1)		5,477			(2)		10,116
Tax Effect	—				(1,136		)			(1,337		)			(2,473		)
Net of Tax Amount	(26,108		)		3,582					(32,103		)			(54,630		)
Balance at April 26, 2020	$	(71,292	)		$	(341,783	)			$	(34,833	)			$	(447,908	)

(in thousands)	Foreign Currency Translation				Pension & Other Benefits					Hedging Deferred Gain (Loss)					Accumulated Other Comprehensive Loss
Balance at October 27, 2019	$	(52,996	)		$	(348,877	)			$	2,373				$	(399,500	)
Unrecognized Gains (Losses)
Gross	(18,296		)		68					(56,571		)			(74,799		)
Tax Effect	—				—					13,807					13,807
Reclassification into Net Earnings
Gross	—				9,305			(1)		7,352			(2)		16,657
Tax Effect	—				(2,279		)			(1,794		)			(4,073		)
Net of Tax Amount	(18,296		)		7,093					(37,206		)			(48,408		)
Balance at April 26, 2020	$	(71,292	)		$	(341,783	)			$	(34,833	)			$	(447,908	)

(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.

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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, applied to the Company in fiscal 2019. For fiscal 2019 and future periods, the U.S. federal corporate income tax rate is 21.0 percent.

In March 2018, the FASB issued ASU 2018-05, Income Taxes: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (Topic 740), allowing 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. As of January 27, 2019, the Company completed the accounting for the tax effects of the Tax Act.

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 Company's effective tax rate for the thirteen and twenty-six weeks ended April 26, 2020, was 20.6 percent and 18.4 percent, respectively, compared to 11.1 percent and 16.1 percent for the thirteen and twenty-six weeks ended April 28, 2019. The lower rate for the second quarter of 2019 resulted from the net tax benefits generated from the CytoSport divestiture and equity based compensation.

The amount of unrecognized tax benefits, including interest and penalties, is recorded in Other Long-term Liabilities.  If recognized as of April 26, 2020, and April 28, 2019, $24.0 million and $27.7 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 thirteen and twenty-six weeks ended April 26, 2020, and April 28, 2019. The amount of accrued interest and penalties at April 26, 2020, and April 28, 2019, associated with unrecognized tax benefits was $6.1 million and $6.7 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 2017 in the second quarter of fiscal 2019. The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years 2018 through 2021.  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, dating back to 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.

 

The Company issues stock options, restricted stock units, and restricted shares as part of its stock incentive plans for employees and non-employee directors. During the thirteen and twenty-six weeks ended April 26, 2020, stock-based compensation expense was $6.2 million and $15.5 million, respectively, compared to $5.6 million and $13.5 million for the thirteen and twenty-six weeks ended April 28, 2019. The Company recognizes stock-based compensation expense ratably over the shorter of the vesting period or the individual's retirement eligibility date. The fair value of stock-based compensation granted to retirement-eligible individuals is expensed at the time of grant.

At April 26, 2020, there was $31.2 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 2.4 years.  During the thirteen and twenty-six weeks ended April 26, 2020, cash received from stock option exercises was $28.0 million and $64.4 million, respectively, compared to $28.3 million and $44.3 million for the thirteen and twenty-six weeks ended April 28, 2019.

Shares issued for option exercises, restricted stock units, and restricted shares may be either authorized but unissued shares or shares of treasury stock.

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Stock Options: 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. 

Effective with fiscal 2020 grants, the Company has determined the equity award value for eligible employees will be delivered fifty percent in stock options as described above and fifty percent in time-vested restricted stock units with a three-year cliff vesting.

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 April 26, 2020 is:

	Shares			Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Stock Options Outstanding at October 27, 2019	25,994			$	26.49
Granted	1,209			45.86
Exercised	4,927			15.40
Forfeited	124			36.41
Stock Options Outstanding at April 26, 2020	22,152			29.96				5.6		$	369,036
Stock Options Exercisable at April 26, 2020	15,141			$	25.63			4.3		$	317,637

 

The weighted-average grant date fair value of stock options granted and the total intrinsic value of options exercised (in thousands) during the thirteen and twenty-six weeks ended April 26, 2020, and April 28, 2019, are:

	Thirteen Weeks Ended								Twenty-Six Weeks Ended
	April 26, 2020				April 28, 2019				April 26, 2020				April 28, 2019
Weighted-average Grant Date Fair Value	$	7.92			$	8.21			$	7.71			$	9.24
Intrinsic Value of Exercised Options	55,948				75,545				153,894				107,786

 

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:

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	April 26, 2020			April 28, 2019			April 26, 2020			April 28, 2019
Risk-free Interest Rate	1.5	%		2.6	%		1.7	%		2.8	%
Dividend Yield	2.0	%		2.0	%		2.0	%		1.9	%
Stock Price Volatility	19.0	%		19.0	%		19.0	%		19.0	%
Expected Option Life	8 years			8 years			8 years			8 years

 

As part of the annual valuation process, the Company reassesses the appropriateness of the inputs used in the valuation models.  The Company establishes the risk-free interest rate using U.S. Treasury yields as of the grant date.  The dividend yield is 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 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 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 employees.

Restricted Stock Units: Restricted stock units are valued equal to the market price of the common stock on the date of grant and vest after three years. These awards accumulate dividend equivalents, which are provided as additional units and are subject to the same vesting requirements as the underlying grant.

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A reconciliation of the restricted stock units (in thousands) as of April 26, 2020 is:

	Shares			Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Restricted Stock Units Outstanding at October 27, 2019	—			$	—
Granted	203			45.86
Vested	7			45.54
Restricted Stock Units Outstanding at April 26, 2020	196			$	45.87			2.1		$	9,114

The weighted-average grant date fair value of restricted stock units granted and the total fair value (in thousands) of restricted stock units granted during the thirteen and twenty-six weeks ended April 26, 2020, and April 28, 2019, are:

	Thirteen Weeks Ended								Twenty-Six Weeks Ended
	April 26, 2020				April 28, 2019				April 26, 2020				April 28, 2019
Weighted-average Grant Date Fair Value	$	47.43			$	—			$	45.86			$	—
Fair Value of Restricted Stock Units Granted	1,625				—				9,320				—

Restricted Shares: Restricted shares awarded to non-employee directors annually on February 1 are subject to a restricted period which expires the date of the Company’s next annual stockholders meeting. Newly elected directors receive a prorated award of restricted shares of the Company's common stock, which expires on the date of the Company's second succeeding annual stockholders meeting. A reconciliation of the restricted shares (in thousands) as of April 26, 2020 is:

	Shares			Weighted- Average Grant Date Fair Value
Restricted Shares Outstanding at October 27, 2019	51			$	42.23
Granted	41			47.29
Vested	47			42.08
Restricted Shares Outstanding at April 26, 2020	45			$	47.03

 

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 twenty-six weeks ended April 26, 2020, and April 28, 2019, are:

	Twenty-Six Weeks Ended
	April 26, 2020				April 28, 2019
Weighted-average Grant Date Fair Value	$	47.29			$	42.23
Fair Value of Restricted Shares Granted	1,973				2,134
Fair Value of Shares Vested	1,974				1,760

 

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.  The Company classifies assets and liabilities in their entirety based on the lowest level of input significant to the fair value measurement.  The three levels are defined as follows:

 

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

 

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

 

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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 carried at fair value on a recurring basis as of April 26, 2020, and October 27, 2019, and their level within the fair value hierarchy, are:

	Fair Value Measurements at April 26, 2020
(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)	$	606,073			$	604,583			$	1,490			$	—
Short-term Marketable Securities (2)	16,841				6,848				9,993				—
Other Trading Securities (3)	159,190				—				159,190				—
Commodity Derivatives (4)	15,072				15,072				—				—
Total Assets at Fair Value	$	797,176			$	626,503			$	170,673			$	—
Liabilities at Fair Value
Deferred Compensation (3)	$	57,902			$	—			$	57,902			$	—
Total Liabilities at Fair Value	$	57,902			$	—			$	57,902			$	—

	Fair Value Measurements at October 27, 2019
(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)	$	672,901			$	672,458			$	443			$	—
Short-term Marketable Securities (2)	14,736				5,186				9,550				—
Other Trading Securities (3)	157,526				—				157,526				—
Commodity Derivatives (4)	12,882				12,882				—				—
Total Assets at Fair Value	$	858,045			$	690,526			$	167,519			$	—
Liabilities at Fair Value
Deferred Compensation (3)	$	62,373			$	—			$	62,373			$	—
Total Liabilities at Fair Value	$	62,373			$	—			$	62,373			$	—

 

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 considered Level 1 consist primarily of bank deposits, money market funds rated AAA, or other highly liquid investment accounts, and have a maturity date of three months or less. Cash equivalents considered Level 2 are funds holding agency bonds or securities recognized at amortized cost.

(2)

The Company holds securities as part of a portfolio maintained to generate investment income and to provide cash for operations of the Company, if necessary. The portfolio is managed by a third party who is responsible for daily trading activities, and all assets within the portfolio are highly liquid. The cash, U.S. government securities, and money market funds rated AAA held by the portfolio are classified as Level 1. The current investment portfolio also includes corporate bonds and other asset backed securities for which there is an active, quoted market. Market prices are obtained from a variety of industry providers, large financial institutions, and other third-party sources to calculate a representative daily market value, and therefore, these securities are classified as Level 2.

(3)

The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred compensation 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 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 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

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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.  These 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. 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. During the thirteen and twenty-six weeks ended April 26, 2020, securities held by the trust generated losses of $11.4 million and $6.7 million, respectively, compared to gains of $4.8 million and $6.2 million for the thirteen and twenty-six weeks ended April 28, 2019.

(4)

The Company’s commodity derivatives represent futures contracts and options 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 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 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 26, 2020, the Company has recognized the right to reclaim net cash collateral of $47.5 million from various counterparties (including $5.5 million of realized gains on closed positions and cash of $42.0 million).  As of October 27, 2019, the Company had recognized the right to reclaim net cash collateral of $6.5 million from various counterparties (including $10.5 million of realized gains on closed positions offset by cash owed of $4.0 million).

 

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 $254.1 million as of April 26, 2020, and $257.7 million as of October 27, 2019.

The Company has operating leases for manufacturing facilities, office space, warehouses, transportation equipment, and miscellaneous real estate and equipment contracts. Finance leases primarily include turkey growing facilities and an aircraft. The Company's lessor portfolio consists primarily of immaterial operating leases of farm land to third parties.

The Company determines if an arrangement contains a lease at inception. Right-of-use assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at the commencement date. Leases with an initial term of twelve months or less are not recorded on the Consolidated Statements of Financial Position. The Company combines lease and non-lease components together in determining the minimum lease payments for all leases.

The length of the lease term used in recording right-of-use assets and lease liabilities is based on the contractually required lease term adjusted for any options to renew, early terminate, or purchase the lease that are reasonably certain of being exercised. Most leases include one or more options to renew or terminate. The exercise of lease renewal and termination options is at the Company’s discretion and generally is not reasonably certain at lease commencement. The Company’s lease agreements typically do not contain material residual value guarantees. The Company has one lease with an immaterial residual value guarantee that is included in the minimum lease payments.

Certain lease agreements include rental payment increases over the lease term that can be fixed or variable. Fixed payment increases and variable payment increases based on an index or rate are included in the initial lease liability using the index or rate at commencement date. Variable payment increases not based on an index or rate are recognized as incurred.

If the rate implicit in the lease is not readily determinable, the Company used its periodic incremental borrowing rate, based on the information available at commencement date, to determine the present value of future lease payments. For the initial implementation of ASU 2016-02, Leases (Topic 842) the incremental borrowing rate on October 28, 2019, was used to determine the present value of existing operating right-of-use assets and lease liabilities.

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Supplemental balance sheet information related to leases as of April 26, 2020, are:

(in thousands)	Location on Consolidated Statements of Financial Position		April 26, 2020
Right-of-Use Assets
Operating	Other Assets		$	59,054
Finance	Net Property, Plant and Equipment		65,059
Total Right-of-Use Assets			$	124,114
Liabilities
Current
Operating	Accrued Expenses		$	13,767
Finance	Current Maturities of Long-Term Debt		8,295
Noncurrent
Operating	Other Long-Term Liabilities		47,339
Finance	Long-Term Debt - Less Current Maturities		56,861
Total Lease Liabilities			$	126,263

Lease expenses for the thirteen and twenty-six weeks ended April 26, 2020, are:

		Thirteen Weeks Ended			Twenty-Six Weeks Ended
(in thousands)		April 26, 2020			April 26, 2020
Operating Lease Cost (1)		$	5,366		$	10,490
Finance Lease Cost
Amortization of Right-of-Use Assets		2,001			4,000
Interest on Lease Liabilities		587			1,192
Variable Lease Cost (2)		106,866			209,534
Net Lease Cost		$	114,820		$	225,216

(1)	Includes short-term lease costs, which are immaterial.

(2)

ASC 842 - Leases requires disclosure of payments related to agreements with an embedded lease that are not otherwise reflected on the balance sheet. The Company's variable lease costs primarily include inventory related expenses, such as materials, labor, and overhead from manufacturing and service agreements that contain embedded leases. Variability of these costs is determined based on usage or output and may vary for other reasons such as changes in material prices.

The weighted-average remaining lease term and discount rate for lease liabilities included in the Consolidated Statements of Financial Position as of April 26, 2020, are:

		April 26, 2020
Weighted Average Remaining Lease Term
Operating Leases		7.37 years
Finance Leases		8.59 years
Weighted Average Discount Rate
Operating Leases		2.29	%
Finance Leases		3.57	%

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Supplemental cash flow and other information related to leases for the twenty-six weeks ended April 26, 2020, are:

(in thousands)		April 26, 2020
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating Cash Flows from Operating Leases		$	7,258
Operating Cash Flows from Finance Leases		1,192
Financing Cash Flows from Finance Leases		4,069
ROU assets obtained in exchange for new operating lease liabilities		3,600

The maturity of the Company's lease liabilities as of April 26, 2020, are:

(in thousands)	Operating Leases(1)				Finance Leases (2)				Total
2020 (twenty-six weeks remaining)	$	9,055			$	5,240			$	14,296
2021	12,787				10,324				23,111
2022	10,087				9,934				20,021
2023	8,428				9,738				18,166
2024	5,598				9,612				15,209
2025	3,415				8,117				11,532
2026 and beyond	18,644				21,192				39,836
Total Lease Payments	$	68,015			$	74,157			$	142,172
Less: Imputed Interest	6,908				9,001				15,909
Present Value of Lease Liabilities	$	61,107			$	65,156			$	126,263

(1)	Operating lease payments exclude $0.2 million of legally binding minimum lease payments for leases signed but not yet commenced.

(2)	Over the life of the lease contracts, finance lease payments include $8.7 million related to purchase options which are reasonably certain of being exercised.

 

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:

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
(in thousands)	April 26, 2020			April 28, 2019			April 26, 2020			April 28, 2019
Basic Weighted-Average Shares Outstanding	538,119			535,480			536,597			534,988
Dilutive Potential Common Shares	8,254			10,850			8,997			11,736
Diluted Weighted-Average Shares Outstanding	546,373			546,330			545,594			546,724
Antidilutive Potential Common Shares	2,172			2,145			2,453			1,607

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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.

 

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 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, deli, and commercial 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 and royalty arrangements.

 

Intersegment sales are recorded at prices that approximate cost and are eliminated in the Consolidated Statements of Operations.  The Company does not allocate investment income, interest expense, or interest income to its segments when measuring performance.  The Company also retains various other income and expenses at the corporate level.  Equity in earnings of affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded.  These items are included below as Net Unallocated 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 profit and other financial information shown below.

 

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	Thirteen Weeks Ended								Twenty-Six Weeks Ended
(in thousands)	April 26, 2020				April 28, 2019				April 26, 2020				April 28, 2019
Sales to Unaffiliated Customers
Grocery Products	$	683,250			$	635,319			$	1,223,876			$	1,242,144
Refrigerated Foods	1,247,336				1,257,884				2,599,127				2,536,631
Jennie-O Turkey Store	343,056				305,256				673,183				626,490
International & Other	148,823				146,285				310,714				299,834
Total	$	2,422,465			$	2,344,744			$	4,806,899			$	4,705,099
Intersegment Sales
Grocery Products	$	6			$	—			$	13			$	22
Refrigerated Foods	5,248				3,273				11,051				5,451
Jennie-O Turkey Store	28,878				30,050				56,720				58,861
International & Other	—				—				—				—
Total	34,132				33,323				67,784				64,334
Intersegment Elimination	(34,132		)		(33,323		)		(67,784		)		(64,334		)
Total	$	—			$	—			$	—			$	—
Net Sales
Grocery Products	$	683,256			$	635,319			$	1,223,889			$	1,242,166
Refrigerated Foods	1,252,584				1,261,157				2,610,178				2,542,082
Jennie-O Turkey Store	371,934				335,306				729,903				685,351
International & Other	148,823				146,285				310,714				299,834
Intersegment Elimination	(34,132		)		(33,323		)		(67,784		)		(64,334		)
Total	$	2,422,465			$	2,344,744			$	4,806,899			$	4,705,099
Segment Profit
Grocery Products	$	127,763			$	104,499			$	196,198			$	199,796
Refrigerated Foods	131,431				158,088				298,775				320,681
Jennie-O Turkey Store	27,348				17,749				65,899				55,653
International & Other	23,164				14,325				43,115				39,303
Total Segment Profit	309,706				294,661				603,986				615,433
Net Unallocated Expense	23,098				(23,178		)		27,297				(9,287		)
Noncontrolling Interest	(119		)		207				(39		)		301
Earnings Before Income Taxes	$	286,489			$	318,046			$	576,651			$	625,021

Revenue has been disaggregated into the categories below to show how sales channels affect the nature, amount, timing, and uncertainty of revenue and cash flows. The amount of total revenues contributed by sales channel for the thirteen and twenty-six weeks ended April 26, 2020, and April 28, 2019, are:

	Thirteen Weeks Ended								Twenty-Six Weeks Ended
(in thousands)	April 26, 2020				April 28, 2019				April 26, 2020				April 28, 2019
U.S. Retail	$	1,455,652			$	1,255,507			$	2,682,082			$	2,508,822
U.S. Foodservice	566,814				716,407				1,275,920				1,406,312
U.S. Deli	223,034				212,715				483,672				463,991
International	176,966				160,115				365,226				325,974
Total	$	2,422,465			$	2,344,744			$	4,806,899			$	4,705,099

The shift in revenues from the U.S. Foodservice to U.S. Retail channel in the thirteen weeks ended April 26, 2020, was driven by the COVID-19 pandemic and subsequent shelter-in-place restrictions.

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The Company’s products primarily consist of meat and other food products. The amount of total revenues contributed by classes of similar products for the thirteen and twenty-six weeks ended April 26, 2020, and April 28, 2019, are: 

	Thirteen Weeks Ended								Twenty-Six Weeks Ended
(in thousands)	April 26, 2020				April 28, 2019				April 26, 2020				April 28, 2019
Perishable	$	1,250,330			$	1,317,455			$	2,650,525			$	2,658,607
Shelf-stable	619,353				444,831				1,070,058				881,728
Poultry	482,959				427,663				942,041				869,055
Miscellaneous	69,823				154,795				144,275				295,709
Total	$	2,422,465			$	2,344,744			$	4,806,899			$	4,705,099

•	Due to the impact of the COVID-19 pandemic and subsequent shelter-in-place restrictions, the Company experienced significant demand shifts from its foodservice business to its retail business. The Company also experienced operational interruptions as its manufacturing facilities and suppliers were impacted by COVID-19.

•	Segment profit increased due to strong growth from Grocery Products, Jennie-O Turkey Store, and International & Other more than offsetting a decline in Refrigerated Foods.

•	Net earnings decreased due primarily to one-time gains resulting from the CytoSport divestiture last year and losses on investments during the quarter.

•	Grocery Products profit increased significantly due to higher sales and an improved mix across the portfolio.

•	Jennie-O Turkey Store segment profit increased due to higher sales and improved plant and live production performance.

•	International & Other profit increased as higher branded export margins and income from affiliates more than offset weaker results in China and lower fresh pork export margins.

•	Refrigerated Foods segment profit decreased as improved results from many branded retail products were more than offset by the adverse profit impact from significantly lower foodservice sales and higher operational costs.

•	Year-to-date cash flow from operations was $548.3 million, up 50 percent compared to last year due to lower levels of inventory and accounts receivable.

•	The Company acquired Sadler's Smokehouse for $268.9 million during the quarter. The transaction closed on March 2, 2020.

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(a)	Disclosure Controls and Procedures.

(b)	Internal Controls.

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▪	food spoilage;

▪	food contamination caused by disease-producing organisms or pathogens, such as Listeria monocytogenes, Salmonella, and pathogenic E. coli;

▪	food allergens;

▪	nutritional and health-related concerns;

▪	federal, state, and local food processing controls;

▪	consumer product liability claims;

▪	product tampering; and

▪	the possible unavailability and/or expense of liability insurance.

▪	The financial stability of our customers and suppliers may be compromised, which could result in additional bad debts for the Company or non-performance by suppliers; and

▪	The value of our investments in debt and equity securities may decline, including most significantly the Company’s trading securities held as part of a rabbi trust to fund supplemental executive retirement plans and deferred income plans, and the Company’s assets held in pension plans.

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•	One or more of the Company's manufacturing facilities may be shutdown or have their operations significantly impacted due to employee illnesses, increased absenteeism, and/or actions by government agencies. Capital projects may be delayed as additional capacity is no longer currently needed. The Company's co-manufacturers and material suppliers may face similar impacts.

•	Regulatory restrictions and measures taken at the Company's facilities to prevent or slowdown the spread of COVID-19 may impact facilities’ efficiency.

•	Operating costs may increase as measures are put in place to prevent or slowdown the spread of COVID-19, such as facility improvements, employee testing, short term disability policies, and manufacturing employee bonus payments.

•	Any new or additional measures required by national, state or local governments to combat COVID-19 may similarly add additional operational costs.

•	Ongoing closure or reduced operations at foodservice establishments may impact results for the Company's foodservice business. Bankruptcy filings and/or delinquent payments from foodservice industry or other customers may negatively impact cash flow.

•	A national and/or global economic downturn may impact consumer purchase behavior, such as reduced foodservice volume, lower volume in premium brands, and potential loss of business to private label.

•	It may become more difficult and/or expensive to obtain debt or equity financing necessary to sustain the Company's operations, make capital expenditures, and/or finance future acquisitions.

•	The Company may face litigation by stockholders, employees, suppliers, customers, consumers, and others relating to COVID-19 and its effects.

•

The Company relies on its dedicated employees, many of whom have a long tenure with the Company. Operations may be negatively impacted if members of the Company's leadership team, or other key employees, become ill with COVID-19 or otherwise terminate their employment as a result of COVID-19. Further, the Company may face challenges hiring, onboarding, and training new employees, including leadership, which may impact results. The Company may also face operational challenges if government quarantine orders restrict movement of employees.

•	It is possible that the COVID-19 pandemic could negatively affect the Company's labor relations or labor costs.

•	In accordance with recommendations to reduce large gatherings and increase social distancing, many of the Company's office-based employees are working remotely, which may bring additional information technology and data security risks.

•

Supply chain disruptions of various types arising from COVID-19 may impact the Company's ability to make products, the cost for such products, and the ability to deliver products to customers. Closure or reduced operations of material suppliers could result in shortages of key raw materials, as well as impact prices for those materials. The volatility in the market for raw material and supplies could impact the Company's profitability.

•	National, state, and local government orders closing or limiting operation of borders and ports, or imposing quarantine, could impact the Company's ability to obtain raw materials and to deliver finished goods to customers.

•	COVID-19 has wide-reaching impacts to society and the business making all decisions, interactions, and transactions significantly more complex.

•

The Company is committed to being transparent through communications to inform shareholders, employees, customers, consumers, and others about the enhanced safety protocols implemented. The Company must keep pace with a rapidly changing media environment. If the Company's public relations efforts are not effective or if consumers perceive them to be irresponsible, the Company's competitive position, reputation, and market share may suffer.

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▪	price;

▪	product quality and attributes;

▪	brand identification;

▪	breadth of product line; and

▪	customer service.

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