Hormel Foods Corp (HRL) SEC Quarterly Report (10-Q) for Q2 2017

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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 30, 2017

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.

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 4, 2017
Common Stock		$.01465 par value    528,550,346
Common Stock Non-Voting		$.01 par value                         -0-

Table of Contents

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION – April 30, 2017 and October 30, 2016

CONSOLIDATED STATEMENTS OF OPERATIONS – Three and Six Months Ended April 30, 2017 and April 24, 2016

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – Three and Six Months Ended April 30, 2017 and April 24, 2016

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT – Twelve Months Ended October 30, 2016 and Six Months Ended April 30, 2017 

CONSOLIDATED STATEMENTS OF CASH FLOWS – Six Months Ended April 30, 2017 and April 24, 2016 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations 

CRITICAL ACCOUNTING POLICIES 

RESULTS OF OPERATIONS 

Overview 

Consolidated Results 

Segment Results

Related Party Transactions 

LIQUIDITY AND CAPITAL RESOURCES 

FORWARD-LOOKING STATEMENTS 

Item 3.      Quantitative and Qualitative Disclosures About Market Risk 

Item 4.      Controls and Procedures 

PART II - OTHER INFORMATION 

Item 1.       Legal Proceedings 

Item 1A.    Risk Factors 

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds 

Item 6.       Exhibits 

SIGNATURES 

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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 30,			October 30,
		2017			2016
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	548,901		$	415,143
Accounts receivable		525,322			591,310
Inventories		988,408			985,683
Income taxes receivable		42,026			18,282
Prepaid expenses		15,892			13,775
Other current assets		5,242			5,719
TOTAL CURRENT ASSETS		2,125,791			2,029,912
DEFERRED INCOME TAXES		-			6,223
GOODWILL		1,822,671			1,834,497
OTHER INTANGIBLES		884,739			903,258
PENSION ASSETS		78,168			68,901
INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES		246,840			239,590
OTHER ASSETS		183,932			182,237
PROPERTY, PLANT AND EQUIPMENT
Land		46,608			67,557
Buildings		742,462			805,858
Equipment		1,616,733			1,675,549
Construction in progress		183,198			218,351
Less:  Allowance for depreciation		(1,545,435)			(1,661,866)
Net property, plant and equipment		1,043,566			1,105,449
TOTAL ASSETS		$	6,385,707		$	6,370,067

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands, except share and per share amounts)

		April 30,			October 30,
		2017			2016
		(Unaudited)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable		$	372,361		$	481,826
Accrued expenses		57,137			82,145
Accrued workers compensation		24,796			36,612
Accrued marketing expenses		106,613			119,583
Employee related expenses		171,552			251,433
Taxes payable		1,666			4,331
Interest and dividends payable		90,462			77,266
TOTAL CURRENT LIABILITIES		824,587			1,053,196
LONG-TERM DEBT–less current maturities		250,000			250,000
PENSION AND POST-RETIREMENT BENEFITS		526,992			522,356
OTHER LONG-TERM LIABILITIES		90,180			93,109
DEFERRED INCOME TAXES		7,520			-
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–		7,743			7,742
authorized 1,600,000,000 shares;
issued 528,536,346 shares April 30, 2017
issued 528,483,868 shares October 30, 2016
Additional paid-in capital		-			-
Accumulated other comprehensive loss		(299,151)			(296,303)
Retained earnings		4,974,512			4,736,567
HORMEL FOODS CORPORATION SHAREHOLDERS' INVESTMENT		4,683,104			4,448,006
NONCONTROLLING INTEREST		3,324			3,400
TOTAL SHAREHOLDERS' INVESTMENT		4,686,428			4,451,406
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT		$	6,385,707		$	6,370,067

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

		Three Months Ended						Six Months Ended
		April 30, 2017			April 24, 2016			April 30, 2017			April 24, 2016
Net sales		$	2,187,309		$	2,300,235		$	4,467,536		$	4,592,907
Cost of products sold		1,700,389			1,773,876			3,428,336			3,508,537
GROSS PROFIT		486,920			526,359			1,039,200			1,084,370
Selling, general and administrative		181,009			211,144			391,226			421,092
Goodwill impairment charge		-			991			-			991
Equity in earnings of affiliates		10,121			9,593			23,420			21,068
OPERATING INCOME		316,032			323,817			671,394			683,355
Other income and expense:
Interest and investment income		2,818			3,409			5,267			1,446
Interest expense		(3,023)			(3,029)			(6,049)			(6,436)
EARNINGS BEFORE INCOME TAXES		315,827			324,197			670,612			678,365
Provision for income taxes		104,941			108,813			224,423			227,814
NET EARNINGS		210,886			215,384			446,189			450,551
Less: Net (loss) earnings attributable to noncontrolling interest		(40)			(13)			116			93
NET EARNINGS ATTRIBUTABLE TO HORMEL FOODS CORPORATION		$	210,926		$	215,397		$	446,073		$	450,458
NET EARNINGS PER SHARE:
BASIC		$	0.40		$	0.41		$	0.84		$	0.85
DILUTED		$	0.39		$	0.40		$	0.83		$	0.83
WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC		528,712			529,898			528,649			529,380
DILUTED		539,635			543,769			539,850			543,253
DIVIDENDS DECLARED PER SHARE:		$	0.170		$	0.145		$	0.340		$	0.290

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

		Three Months Ended						Six Months Ended
		April 30, 2017			April 24, 2016			April 30, 2017			April 24, 2016
NET EARNINGS		$	210,886		$	215,384		$	446,189		$	450,551
Other comprehensive income (loss), net of tax:
Foreign currency translation		907			893			(7,180)			(1,722)
Pension and other benefits		3,314			1,774			6,647			3,540
Deferred hedging		(1,184)			(650)			(2,507)			(1,948)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		3,037			2,017			(3,040)			(130)
COMPREHENSIVE INCOME		213,923			217,401			443,149			450,421
Less: Comprehensive income (loss) attributable to noncontrolling interest		8			(69)			(76)			(39)
COMPREHENSIVE INCOME ATTRIBUTABLE TO HORMEL FOODS CORPORATION		$	213,915		$	217,470		$	443,225		$	450,460

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT

(in thousands, except per share amounts)

(Unaudited)

		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 25, 2015		$	7,741		$	-		$	-		$	4,216,125		$	(225,668	)	$	3,195		$	4,001,393
Net earnings											890,052						465			890,517
Other comprehensive loss														(70,635		)	(260		)	(70,895		)
Purchases of common stock					(87,885		)													(87,885		)
Stock-based compensation expense		1						17,828												17,829
Exercise of stock options/nonvested shares		35						7,476												7,511
Shares retired		(35		)	87,885			(25,304		)	(62,546		)							-
Declared cash dividends – $0.58 per share											(307,064		)							(307,064		)
Balance at October 30, 2016		$	7,742		$	-		$	-		$	4,736,567		$	(296,303	)	$	3,400		$	4,451,406
Net earnings											446,073						116			446,189
Other comprehensive loss														(2,848		)	(192		)	(3,040		)
Purchases of common stock					(49,583		)													(49,583		)
Stock-based compensation expense		1						11,860												11,861
Exercise of stock options/nonvested shares		21						9,276												9,297
Shares retired		(21		)	49,583			(21,136		)	(28,426		)							-
Declared cash dividends – $0.34 per share											(179,702		)							(179,702		)
Balance at April 30, 2017		$	7,743		$	-		$	-		$	4,974,512		$	(299,151	)	$	3,324		$	4,686,428

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

		April 30, 2017				April 24, 2016
OPERATING ACTIVITIES
Net earnings	$	446,189			$	450,551
Adjustments to reconcile to net cash provided by operating activities:
Depreciation		59,185				59,863
Amortization of intangibles		4,143				4,045
Goodwill impairment charge		-				991
Equity in earnings of affiliates, net of dividends		(10,898	)			(6,524	)
Provision for deferred income taxes		11,336				(2,397	)
Loss on property/equipment sales and plant facilities		1,285				88
Non-cash investment activities		(2,618	)			(375	)
Stock-based compensation expense		11,861				14,178
Excess tax benefit from stock-based compensation		(20,704	)			(36,456	)
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable		42,036				57,191
Increase in inventories		(47,792	)			(34,052	)
(Increase) decrease in prepaid expenses and other current assets		(21,790	)			2,781
Increase in pension and post-retirement benefits		6,468				2,346
Decrease in accounts payable and accrued expenses		(215,253	)			(146,397	)
(Decrease) increase in net income taxes payable		(2,292	)			43,302
NET CASH PROVIDED BY OPERATING ACTIVITIES		261,156				409,135
INVESTING ACTIVITIES
Proceeds from sale of business		135,944				-
Purchases of property/equipment		(76,975	)			(99,852	)
Proceeds from sales of property/equipment		1,157				2,709
Decrease in investments, equity in affiliates, and other assets		2,669				12,178
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		62,795				(84,965	)
FINANCING ACTIVITIES
Principal payments on short-term debt		-				(185,000	)
Dividends paid on common stock		(166,507	)			(142,878	)
Share repurchase		(49,583	)			(6,358	)
Proceeds from exercise of stock options		8,879				8,370
Excess tax benefit from stock-based compensation		20,704				36,456
NET CASH USED IN FINANCING ACTIVITIES		(186,507	)			(289,410	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(3,686	)			(2,118	)
INCREASE IN CASH AND CASH EQUIVALENTS		133,758				32,642
Cash and cash equivalents at beginning of year		415,143				347,239
CASH AND CASH EQUIVALENTS AT END OF QUARTER	$	548,901			$	379,881

See Notes to Consolidated Financial Statements

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HORMEL FOODS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A GENERAL

Basis of Presentation

The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.  The balance sheet at October 30, 2016, 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 30, 2016.  Fiscal 2017 is a 52-week year as compared with fiscal 2016, which was 53 weeks, with the additional week occurring in the fourth quarter.

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.

Assets Held for Sale

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

Investments

The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans.  Under the plans, the participants can defer certain types of compensation and elect to receive a return on the deferred amounts based on the changes in fair value of various investment options, primarily a variety of mutual funds.  The Company has corporate-owned life insurance policies on certain participants in the deferred compensation plans.  The cash surrender value of the policies is included in other assets on the Consolidated Statements of Financial Position.  The securities held by the trust are classified as trading securities.  Therefore, unrealized gains and losses associated with these investments are included in the Company's earnings.  Securities held by the trust generated gains of $1.8 million and $3.3 million for the second quarter and six months ended April 30, 2017, respectively, compared to gains of $2.9 million and $1.2 million for the second quarter and six months ended April 24, 2016.

Supplemental Cash Flow Information

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

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Guarantees

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

New Accounting Pronouncements

In May 2014, the FASB issued ASC 606, Revenue from Contracts with Customers .  This topic converges the guidance within U.S. generally accepted accounting principles (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.  On July 8, 2015, the FASB approved a one-year deferral of the effective date.  The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and early adoption is permitted for annual reporting periods beginning after December 15, 2016.  The updated guidance is to be applied either retrospectively or by using a cumulative effect adjustment.  Accordingly, the Company expects to adopt the provisions of this new accounting standard at the beginning of fiscal year 2019, and is currently assessing the impact on its consolidated financial statements with a focus on arrangements with customers.

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

In May 2015, the FASB updated the guidance within ASC 820, Fair Value Measurements and Disclosures .  The update provides guidance on the disclosures for investments in certain entities that calculate net asset value (NAV) per share (or its equivalent).  The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share (or its equivalent) as a practical expedient.  The updated guidance is to be applied retrospectively and is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted.  The Company adopted the new provisions of this accounting standard at the beginning of fiscal year 2017, and adoption did not have a material impact on its consolidated financial statements.

In February 2016, the FASB updated the guidance within ASC 842, Leases .  The update requires lessees to put most leases on their balance sheets while recognizing expenses on their income statements in a manner similar to current 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.  The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted and the modified retrospective method is to be applied.  Accordingly, the Company expects to adopt the provisions of this new accounting standard at the beginning of fiscal year 2020, and is currently assessing the impact on its consolidated financial statements.

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

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accounting standard at the beginning of fiscal year 2018, and is currently assessing the impact on its consolidated financial statements.

In June 2016, the FASB updated the guidance within ASC 326, Financial Instruments - Credit Losses .  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 amendments replace the current incurred loss impairment methodology with a methodology that reflects 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 August 2016, the FASB updated the guidance within ASC 230, Statement of Cash Flows.  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 is currently assessing the timing and impact of adopting the updated provisions.

In October 2016, the FASB updated the guidance within ASC 740,  Income Taxes .  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 is currently assessing the timing and impact of adopting the updated provisions.

In January 2017, the FASB updated the guidance within ASC 350,  Intangibles-Goodwill and Other.  The updated guidance eliminates the second step of the two-step impairment test.  The updated guidance modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value.  An impairment charge should be made if a reporting unit's carrying amount exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit.  The updated guidance is effective for fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The updated guidance is required to be adopted on a prospective basis.  The Company is currently assessing the timing and impact of adopting the updated provisions.

In March 2017, the FASB updated the guidance within ASC 715, Compensation – Retirement Benefits.   The updated guidance requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement 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 postretirement 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, with early adoption 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 is currently assessing the timing and impact of adopting the updated provisions.

NOTE B ACQUISITIONS

On May 26, 2016, the Company acquired Justin's, LLC (Justin's) for a final purchase price of $280.9 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 $70.0 million.  The purchase price was funded by the Company with cash on

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hand and by utilizing short-term financing.  Primary assets acquired include goodwill of $186.4 million and intangibles of $89.9 million.

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

Operating results for this acquisition have been included in the Company's Consolidated Statements of Operations from the date of acquisition and are reflected in the Grocery Products segment.

NOTE C INVENTORIES

Principal components of inventories are:

(in thousands)		April 30, 2017			October 30, 2016
Finished products		$	562,847		$	553,634
Raw materials and work-in-process		262,774			253,662
Materials and supplies		162,787			178,387
Total		$	988,408		$	985,683

NOTE D GOODWILL AND INTANGIBLE ASSETS

The carrying amount of goodwill for the six months ended April 30, 2017, is presented in the table below.  There were no changes to the carrying amount of goodwill in the second quarter of fiscal 2017.  The reduction during the first six months is due to the sale of Farmer John on January 3, 2017.  See additional discussion regarding the Company's assets held for sale in Note E.

(in thousands)		Grocery Products			Refrigerated Foods				JOTS			Specialty Foods			International & Other			Total
Balance as of October 30, 2016		$	508,800		$	584,443			$	203,214		$	373,782		$	164,258		$	1,834,497
Goodwill sold		-			(11,826		)		-			-			-			(11,826		)
Balance as of April 30, 2017		$	508,800		$	572,617			$	203,214		$	373,782		$	164,258		$	1,822,671

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

		April 30, 2017						October 30, 2016
(in thousands)		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Customer lists/relationships		$	85,440		$	(22,163)		$	88,240		$	(20,737)
Formulas and recipes		1,950			(1,894)			1,950			(1,796)
Other intangibles		3,100			(1,713)			3,520			(1,677)
Total		$	90,490		$	(25,770)		$	93,710		$	(24,210)

Amortization expense was $2.0 million and $4.1 million for the second quarter and six months ended April 30, 2017, respectively, compared to $1.9 million and $4.0 million for the second quarter and six months ended April 24, 2016.

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Estimated annual amortization expense for the five fiscal years after October 30, 2016, is as follows:

(in millions)
2017		$ 8.1
2018		7.6
2019		7.4
2020		7.4
2021		7.4

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

(in thousands)		April 30, 2017			October 30, 2016
Brands/tradenames/trademarks		$	819,835		$	825,774
Other intangibles		184			7,984
Total		$	820,019		$	833,758

NOTE E ASSETS HELD FOR SALE

At the end of fiscal year 2016, the Company was actively marketing Clougherty Packing, LLC, parent company of Farmer John and Saag's Specialty Meats, along with PFFJ, LLC, farm operations in California, Arizona, and Wyoming (Farmer John).  Through this process, the Company identified the specific assets and liabilities to be sold and allocated goodwill based on the relative fair values of the assets held for sale and the assets that would be retained by the Company.  In November 2016, the Company entered into an agreement for the sale and the transaction closed on January 3, 2017.  The purchase price was $145 million in cash, pending final working capital adjustments.  The assets held for sale were reported within the Company's Refrigerated Foods segment.  The assets held for sale were not material to the Company's annual net sales, net earnings, or earnings per share.

Amounts classified as assets and liabilities held for sale on October 30, 2016, were presented on the Company's Consolidated Statement of Financial Position within their respective accounts, and include the following:

Assets held for sale (in thousands)
Current assets		$	80,861
Goodwill		12,703
Intangibles		14,321
Property, plant and equipment		74,812
Total assets held for sale		$	182,697
Liabilities held for sale (in thousands)
Total current liabilities held for sale		$	44,066

NOTE F PENSION AND OTHER POST-RETIREMENT BENEFITS

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

		Pension Benefits
		Three Months Ended						Six Months Ended
(in thousands)		April 30, 2017			April 24, 2016			April 30, 2017			April 24, 2016
Service cost		$	7,564		$	6,680		$	15,128		$	13,360
Interest cost		13,566			13,678			27,132			27,356
Expected return on plan assets		(22,734)			(21,678)			(45,468)			(43,355)
Amortization of prior service cost		(750)			(1,066)			(1,500)			(2,132)
Recognized actuarial loss		6,542			4,586			13,083			9,171
Net periodic cost		$	4,188		$	2,200		$	8,375		$	4,400

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		Post-retirement Benefits
		Three Months Ended						Six Months Ended
(in thousands)		April 30, 2017			April 24, 2016			April 30, 2017			April 24, 2016
Service cost		$	274		$	317		$	549		$	633
Interest cost		2,871			3,236			5,742			6,472
Amortization of prior service cost		(1,069)			(1,051)			(2,137)			(2,101)
Recognized actuarial loss		599			392			1,227			784
Net periodic cost		$	2,675		$	2,894		$	5,381		$	5,788

NOTE G DERIVATIVES AND HEDGING

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

Cash Flow Hedges:   The Company utilizes corn and lean hog futures to offset price fluctuation 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 30, 2017, and October 30, 2016, the Company had the following outstanding commodity futures contracts that were entered into to hedge forecasted purchases:

		Volume
Commodity		April 30, 2017		October 30, 2016
Corn		15.7 million bushels		22.4 million bushels
Lean hogs		0.1 million cwt		-

As of April 30, 2017, the Company has included in AOCL, hedging gains of $5.2 million (before tax) relating to these positions, compared to gains of $9.2 million (before tax) as of October 30, 2016.  The Company expects to recognize the majority of these gains over the next 12 months.

Fair Value Hedges:  The Company utilizes futures to minimize the price risk assumed when forward priced contracts are offered to the Company's commodity suppliers.  The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery.  The futures contracts are designated and accounted for as fair value hedges, and the Company measures the effectiveness of the hedges at least quarterly.  Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and are recorded on the Consolidated Statements of Financial Position as a current asset and liability, respectively.  Effective gains or losses related to these fair value hedges are recognized through cost of products sold in the period or periods in which the hedged transactions affect earnings.  Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold.  As of April 30, 2017, and October 30, 2016, the Company had the following outstanding commodity futures contracts designated as fair value hedges:

		Volume
Commodity		April 30, 2017		October 30, 2016
Corn		1.2 million bushels		3.6 million bushels
Lean hogs		0.1 million cwt		0.2 million cwt

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

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As of April 30, 2017, and October 30, 2016, the Company had the following outstanding futures related to these programs:

		Volume
Commodity		April 30, 2017		October 30, 2016
Corn		0.3 million bushels		4.0 million bushels
Soybean meal		-		11,000 tons

Fair Values:   The fair values of the Company's derivative instruments (in thousands) as of April 30, 2017, and October 30, 2016, were as follows:

				Fair Value (1)
		Location on Consolidated Statements of Financial Position		April 30, 2017			October 30, 2016
Asset Derivatives
Derivatives Designated as Hedges
Commodity contracts		Other current assets		$	(1,011)		$	(194)
Derivatives not Designated as Hedges
Commodity contracts		Other current assets		(5)			144
Total Asset Derivatives				$	(1,016)		$	(50)

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

Derivative Gains and Losses:   Gains or losses (before tax, in thousands) related to the Company's derivative instruments for the second quarter ended April 30, 2017, and April 24, 2016, were as follows:

		Gain/(Loss) Recognized in AOCL (Effective Portion) (1)						Location on		Gain/(Loss) Reclassified from AOCL into Earnings (Effective Portion) (1)						Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (4)
		Three Months Ended						Consolidated		Three Months Ended						Three Months Ended
Cash Flow Hedges		April 30, 2017			April 24, 2016			Statements of Operations		April 30, 2017			April 24, 2016			April 30, 2017			April 24, 2016
Commodity contracts		$	(141)		$	(1,620)		Cost of products sold		$	1,753		$	(577)		$	40		$	(29)

Location on

Gain/(Loss) Recognized in Earnings (Effective Portion) (3)

Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (5)

Consolidated

Three Months Ended

Three Months Ended

Fair Value Hedges

Statements of Operations

April 30, 2017

April 24, 2016

April 30, 2017

April 24, 2016

Commodity contracts

Cost of products sold

$

(467)

$

664

$

1

$

13

Location on

Gain/(Loss) Recognized in Earnings

Consolidated

Three Months Ended

Derivatives not Designated as Hedges

Statements of Operations

April 30, 2017

April 24, 2016

Commodity contracts

Cost of products sold

$

(9)

$

50

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Derivative Gains and Losses:   Gains or losses (before tax, in thousands) related to the Company's derivative instruments for the six months ended April 30, 2017, and April 24, 2016, were as follows:

		Gain/(Loss) Recognized in AOCL (Effective Portion) (1)						Location on		Gain/(Loss) Reclassified from AOCL into Earnings (Effective Portion) (1)						Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (4)
		Six Months Ended						Consolidated		Six Months Ended						Six Months Ended
Cash Flow Hedges		April 30, 2017			April 24, 2016			Statements of Operations		April 30, 2017			April 24, 2016			April 30, 2017			April 24 2016
Commodity contracts		$	(787)		$	(4,468)		Cost of products sold		$	3,222		$	(1,344)		$	40		$	(28)

Location on

Gain/(Loss) Recognized in Earnings (Effective Portion) (3)

Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (5)

Consolidated

Six Months Ended

Six Months Ended

Fair Value Hedges

Statements of Operations

April 30, 2017

April 24, 2016

April 30, 2017

April 24, 2016

Commodity contracts

Cost of products sold

$

(591)

$

1,906

$

1

$

(239)

Location on

Gain/(Loss) Recognized in Earnings

Consolidated

Six Months Ended

Derivatives not Designated as Hedges

Statements of Operations

April 30, 2017

April 24, 2016

Commodity contracts

Cost of products sold

$

(237)

$

(430)

(1) Amounts represent gains or losses in AOCL before tax.  See Note I "Accumulated Other Comprehensive Loss" or the Consolidated Statements of Comprehensive Income for the after-tax impact of these gains or losses on net earnings.

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

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

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

(5) There were no gains or losses recognized as a result of a hedged firm commitment no longer qualifying as a fair value hedge during the second quarter or first six months.

NOTE H INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES

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

Investments in and receivables from affiliates consists of the following:

(in thousands)		Segment		% Owned		April 30, 2017			October 30, 2016
MegaMex Foods, LLC		Grocery Products		50%		$	184,379		$	180,437
Foreign Joint Ventures		International & Other		Various (26-40%)		62,461			59,153
Total						$	246,840		$	239,590

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Equity in earnings of affiliates consists of the following:

				Three Months Ended						Six Months Ended
(in thousands)		Segment		April 30, 2017			April 24, 2016			April 30, 2017			April 24, 2016
MegaMex Foods, LLC		Grocery Products		$	9,116		$	8,568		$	18,187		$	15,773
Foreign Joint Ventures		International & Other		1,005			1,025			5,233			5,295
Total				$	10,121		$	9,593		$	23,420		$	21,068

Dividends received from affiliates for the second quarter and six months ended April 30, 2017, were $10.0 million and $12.5 million, respectively, compared to $9.5 million and $14.5 million, respectively, for the second quarter and six months ended April 24, 2016.

The Company recognized a basis difference of $21.3 million associated with the formation of MegaMex Foods, LLC, of which $14.9 million is remaining as of April 30, 2017.  This difference is being amortized through equity in earnings of affiliates.

NOTE I ACCUMULATED OTHER COMPREHENSIVE LOSS

Components of accumulated other comprehensive loss are as follows:

(in thousands)		Foreign Currency Translation			Pension & Other Benefits			Deferred Gain (Loss) - Hedging			Accumulated Other Comprehensive Loss
Balance at January 29, 2017		$	(13,336)		$	(293,219)		$	4,415		$	(302,140)
Unrecognized gains (losses)
Gross		859			-			(141)			718
Tax effect		-			-			52			52
Reclassification into net earnings
Gross		-			5,321 (1)			(1,753) (2)			3,568
Tax effect		-			(2,007)			658			(1,349)
Net of tax amount		859			3,314			(1,184)			2,989
Balance at April 30, 2017		$	(12,477)		$	(289,905)		$	3,231		$	(299,151)

(in thousands)		Foreign Currency Translation			Pension & Other Benefits			Deferred Gain (Loss) - Hedging			Accumulated Other Comprehensive Loss
Balance at October 30, 2016		$	(5,489)		$	(296,552)		$	5,738		$	(296,303)
Unrecognized gains (losses)
Gross		(6,988)			-			(787)			(7,775)
Tax effect		-			-			294			294
Reclassification into net earnings
Gross		-			10,673 (1)			(3,222) (2)			7,451
Tax effect		-			(4,026)			1,208			(2,818)
Net of tax amount		(6,988)			6,647			(2,507)			(2,848)
Balance at April 30, 2017		$	(12,477)		$	(289,905)		$	3,231		$	(299,151)

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

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

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NOTE J INCOME TAXES

The amount of unrecognized tax benefits, including interest and penalties, is recorded in other long-term liabilities.  If recognized as of April 30, 2017, and April 24, 2016, $19.8 million and $18.3 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 for the second quarter and first six months of fiscal 2017 was $(0.1) million and $0.1 million, respectively, compared to $0.7 million and $0.4 million for the comparable quarter and first six months of fiscal 2016.  The amount of accrued interest and penalties at April 30, 2017, and April 24, 2016, associated with unrecognized tax benefits was $2.7 million and $2.9 million, respectively.

The Company is regularly audited by federal and state taxing authorities.  The United States Internal Revenue Service (I.R.S.) concluded their examination of fiscal year 2015 in the first quarter of fiscal 2017.  The Company has elected to participate in the Compliance Assurance Process (CAP) for fiscal years 2016 and 2017.  The objective of CAP is to contemporaneously work with the I.R.S. to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return.  The Company may elect to continue participating in CAP for future tax years; the Company may withdraw from the program at any time.

The Company is in various stages of audit by several state taxing authorities on a variety of fiscal years, as far back as 2011.  While it is reasonably possible that one or more of these audits may be completed within the next 12 months and the related unrecognized tax benefits may change based on the status of the examinations, it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.

NOTE K STOCK-BASED COMPENSATION

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

A reconciliation of the number of options outstanding and exercisable (in thousands) as of April 30, 2017, and changes during the six months then ended, is as follows:

		Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at October 30, 2016		31,998		$  16.05
Granted		2,360		33.58
Exercised		2,410		10.12
Forfeited		36		9.35
Outstanding at April 30, 2017		31,912		$  17.80		5.0 years		$ 558,326
Exercisable at April 30, 2017		25,753		$  14.46		4.1 years		$ 532,730

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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 2017 and 2016, are as follows:

	Three Months Ended						Six Months Ended
	April 30, 2017			April 24, 2016			April 30, 2017			April 24, 2016
Weighted-average grant date fair value	$	7.03		$	8.36		$	6.41		$	7.82
Intrinsic value of exercised options	$	9,070		$	45,081		$	61,088		$	103,216

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:

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

Nonvested shares vest on the earlier of the day before the Company's next annual meeting date or one year. A reconciliation of the nonvested shares (in thousands) as of April 30, 2017, and changes during the six months then ended, is as follows:

		Shares		Weighted- Average Grant- Date Fair Value
Nonvested at October 30, 2016		47		$  41.01
Granted		58
Vested		47
Nonvested at April 30, 2017		58		$  35.62

The weighted-average grant date fair value of nonvested shares granted, the total fair value (in thousands) of nonvested shares granted, and the fair value (in thousands) of shares that have vested during the first six months of fiscal years 2017 and 2016, are as follows:

		Six Months Ended
		April 30, 2017		April 24, 2016
Weighted-average grant date fair value		$  35.62		$  41.01
Fair value of nonvested shares granted		$  2,080		$  1,920
Fair value of shares vested		$  1,920		$  1,920

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Stock-based compensation expense, along with the related income tax benefit, for the second quarter and first six months of fiscal years 2017 and 2016 is presented in the table below.

	Three Months Ended						Six Months Ended
(in thousands)	April 30, 2017			April 24, 2016			April 30, 2017			April 24, 2016
Stock-based compensation expense recognized	$	4,621		$	7,016		$	11,861		$	14,178
Income tax benefit recognized	(1,753)			(2,662)			(4,500)			(5,379)
After-tax stock-based compensation expense	$	2,868		$	4,354		$	7,361		$	8,799

At April 30, 2017, there was $15.2 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 2.5 years.  During the second quarter and six months ended April 30, 2017, cash received from stock option exercises was $1.5 million and $8.9 million, respectively, compared to $4.9 million and $8.4 million for the second quarter and six months ended April 24, 2016.  The total tax benefit to be realized for tax deductions from these option exercises for the second quarter and six months ended April 30, 2017, was $3.4 million and $23.0 million, respectively, compared to $17.2 million and $39.2 million in the comparable periods of fiscal 2016.

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

NOTE L FAIR VALUE MEASUREMENTS

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

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

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

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

20