HORMEL FOODS CORP /DE/ (HRL) FY 2021 MD&A

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Executive Overview

Fiscal 2021: The Company achieved record sales of $11.4 billion, a 19 percent increase from fiscal 2020, driven by double-digit growth from all four business segments and from all four go-to-market channels (U.S. retail, U.S. foodservice, U.S. deli, and international). Organic volume and organic net sales1 increased 1 percent and 14 percent, respectively (1See explanation of non-GAAP financial measures in the Consolidated Results section). Strong growth from the foodservice businesses, higher pricing across all segments, and the inclusion of the Planters® snack nuts business were the primary drivers of net sales growth. Demand remained elevated across the domestic retail, domestic deli, and international channels, while the domestic foodservice business experienced a significant recovery after the sharp decline experienced last year as a result of the COVID-19 pandemic. Net earnings were in line with last year as improved volume and sales were unable to offset higher costs as a result of inflation on raw materials, freight, labor, and supplies. Diluted earnings per share for fiscal 2021 was $1.66, flat to last year. The net impact to after-tax earnings from one-time acquisition costs and accounting adjustments related to the acquisition of the Planters® snack nuts business were approximately $37 million, or six cents per share, for fiscal 2021.

Refrigerated Foods segment profit for the full year increased as higher earnings from the foodservice business and the impact of numerous pricing actions fully offset significantly higher raw material costs, increased freight expenses, and higher operational costs. Grocery Products segment profit increased due to the addition of the Planters® snack nuts business and improved organic sales. International & Other segment profit improved significantly for the full year, driven by gains from exports, higher income from the Company's partners in the Philippines, South Korea, and Europe, and strong results in China. Earnings for Jennie-O Turkey Store declined due primarily to higher feed costs and increased freight expenses. Volume, net sales, and segment profit for all business segments were constrained by production labor shortages and supply chain disruptions during the second half of the fiscal year.

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During fiscal 2021, the Company continued to prioritize investments to ensure the safety of all team members. For the full year, we absorbed approximately $21 million in direct incremental supply chain costs related to the COVID-19 pandemic to enhance safety measures in its production facilities related to the COVID-19 pandemic. The Company estimates most of these incremental supply chain costs are temporary and will eventually decline as the pandemic subsides. In addition to COVID-related investments, volume, net sales, and segment profit were negatively impacted by labor shortages and supply chain disruption.

The Company reinvested into the business through capital expenditures and returned a record amount of cash back to shareholders in the form of dividends. Capital expenditures in fiscal 2021 were $232 million, including investments in a pizza toppings expansion at our manufacturing facility in Nevada, Iowa, expanding capacity for Columbus® charcuterie in Omaha, Nebraska, significant progress on new production capabilities for retail and foodservice pepperoni, Project Orion, and many other projects to support growth of branded products. The annual dividend for 2022 will be $1.04 per share and marks the 56th consecutive year of dividend increases, representing an increase of 6 percent.

In June 2021, the Company acquired the Planters® snack nuts business for $3.4 billion in cash. Included in the acquisition were the Planters® , NUT-rition® , Planters® Cheez Balls and Corn Nuts® brands. This acquisition amplifies our scale in snacking and entertaining by complementing its other brands in the space, including Hormel® Gatherings®, Herdez®, Wholly®, SKIPPY®, and Columbus®.

Fiscal 2022 Outlook: The Company expects all four segments to deliver sales and earnings growth in fiscal 2022. On a consolidated basis, growth is expected in excess of our long-term growth algorithm due to strength in the Planters® snack nuts business, continued elevated demand across all businesses, improved production throughput, incremental capacity on high-growth categories such as pizza toppings and dry sausage, and the benefit from numerous pricing actions executed during fiscal 2021. The operating environment is expected to remain complex. Industry-wide labor shortages, incremental inflationary pressures, and further supply chain disruption pose the greatest risks to the outlook.

The Company remains in a strong financial position due to its consistent cash flow, liquidity, and strong balance sheet. We plan to continue to support the business through marketing and advertising investments for our leading brands as well as investments into our production capabilities, including new capacity for retail and foodservice pepperoni and a new production line for the SPAM® family of products. We also expect to benefit from the progress we have made on our Project Orion and One Supply Chain initiatives to transform our company and position it for long-term growth. Lastly, we remain committed to returning cash to shareholders in the form of dividends.

A detailed review of the Company's fiscal 2021 performance compared to fiscal 2020 appears in following section. A detailed review of the fiscal 2020 performance compared to fiscal 2019 is set forth in Part II, Item 7 of the Company's Form 10-K for the fiscal year ended October 25, 2020 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated herein by reference.

Results of Operations

Overview

The Company is a processor of branded and unbranded food products for retail, foodservice, deli, and commercial customers.

The Company operates in the following four reportable segments:

The Company’s fiscal year consisted of 53 weeks in fiscal year 2021 and 52 weeks in fiscal years 2020 and 2019. Fiscal 2022 will consist of 52 weeks.

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CONSOLIDATED RESULTS

Net Earnings and Diluted Earnings Per Share

Volume and Net Sales

(1)  See the "Non-GAAP Financial Measures" section below for a description of the Company's use of measures not defined by Generally Accepted Accounting Principles (GAAP)

Net sales for the fourth quarter were an all-time record, benefiting from pricing actions across the entire portfolio, organic volume growth, and the inclusion of the Planters® snack nuts business. Results from the foodservice businesses in Refrigerated Foods and Jennie-O Turkey Store were particularly strong due to the continued recovery in the foodservice industry after a significant decline in net sales in the fourth quarter of 2020.

For fiscal 2021, net sales were an all-time record. Strong growth from the foodservice businesses, higher pricing across all segments, and the inclusion of the Planters® snack nuts business were the primary drivers.

In fiscal 2022, the Company expects net sales growth from all four business segments, driven primarily by the impact of higher pricing across the portfolio, volume growth from the value-added businesses, and the benefit of a full year of the Planters® snack nuts business. Offsetting a portion of this growth will be the impact from the new pork supply agreement, which is expected to have a negative cumulative impact on the Refrigerated Foods and International & Other business segments of approximately $350 million.

Cost of Products Sold

For fiscal 2021, cost of products sold for the fourth quarter and full year increased due to inflationary pressures stemming from raw materials, packaging, freight, labor, and many other inputs. The inclusion of the Planters® snack nuts business during the third quarter was also a driver of higher costs.

Direct incremental supply chain costs related to the COVID-19 pandemic for fiscal 2021 were approximately $21 million. This compares to approximately $80 million of higher operational costs related to the COVID-19 pandemic incurred during fiscal 2020.

In fiscal 2022, the Company expects cost of products sold to be higher due to the inclusion of the Planters® snack nuts business and continued inflation. Raw material input costs for pork, beef, turkey, and feed are anticipated to remain above historical levels.

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Gross Profit

Consolidated gross profit as a percentage of net sales for the fourth quarter and full year declined, driven primarily by broad-based inflationary pressures and a lag in mitigating pricing actions. Gross profit as a percentage of net sales for the fourth quarter of fiscal 2021 increased sequentially compared to the third quarter of fiscal 2021 as pricing actions across the entire portfolio became effective. Gross profit as a percentage of net sales declined for all four business segments in the fourth quarter and for the full year compared to fiscal 2020.

In fiscal 2022, the Company expects gross profit as a percentage of net sales to improve due to the impact of pricing actions taken across all business segments during fiscal 2021. Incremental cost inflation poses the largest risk to this assumption. The Company also expects to benefit in the first half of fiscal 2022 from the positive mix impact from the addition of the Planters® snack nuts business.

Selling, General, and Administrative (SG&A)

SG&A expenses for the fourth quarter and full year increased due to the incremental and one-time acquisition-related costs related to the Planters® snack nuts business and higher employee-related expenses. As a percentage of sales, SG&A declined for both the fourth quarter and full year due to record net sales and disciplined expense management.

Advertising investments in the fourth quarter were $43 million compared to $29 million in fiscal 2020, an increase of 48 percent. Advertising investments increased 12 percent for the full year.

In fiscal 2022, the Company intends to continue investing in key brands including Planters®, SPAM®, SKIPPY®, Columbus®, Hormel® Black Label®, Hormel® pepperoni, and Jennie-O®.

Research and development continues to be a vital part of the Company's strategy to grow existing brands and expand into new branded items. Research and development expenses were $8.3 million and $33.6 million for the fiscal 2021 fourth quarter and year, respectively, compared to $8.4 million and $31.9 million for the corresponding periods in fiscal 2020.

Equity in Earnings of Affiliates

Equity in earnings of affiliates for the fourth quarter of fiscal 2021 increased due to improved earnings from the Company's joint venture in the Philippines. For the full year, equity in earnings of affiliates increased significantly due to strength at MegaMex and in the Philippines.

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The Company accounts for its majority-owned operations under the consolidation method. Investments in which the Company owns a minority interest, and for which there are no other indicators of control, are accounted for under the equity or cost method. These investments, along with receivables from other affiliates, are included in the Consolidated Statements of Financial Position as investments in and receivables from affiliates. The composition of this line item as of October 31, 2021, was as follows:

Interest and Investment Income and Interest Expense

Effective Tax Rate

The effective tax rate for fiscal 2021 was impacted by stock-based compensation. The effective tax rate for fiscal 2020 was impacted by stock-based compensation and state tax settlements. For additional information, refer to Note N - Income Taxes.

The Company expects the effective tax rate in fiscal 2022 to be between 20.5 and 22.5 percent.

SEGMENT RESULTS

Net sales and operating profits for each of the Company’s reportable segments are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the operating profit and other financial information shown below. Additional segment financial information can be found in Note P - Segment Reporting.

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Grocery Products

Net sales for the fourth quarter of fiscal 2021 increased significantly due to the inclusion of the Planters® snack nuts business, higher pricing, and organic volume growth from the center store and Mexican foods portfolios. Growth from brands such as SPAM®, Hormel® Compleats®, Wholly®, and SKIPPY® contributed to the strong results. For fiscal 2021, net sales increased due to the contribution from the Planters® snack nuts business and the benefit of pricing actions across the portfolio, especially in the fourth fiscal quarter.

For the fourth quarter and full year, segment profit increased due to the addition of the Planters® snack nuts business and improved organic sales. Higher pricing across the portfolio helped mitigate inflationary pressure. Volume, net sales, and segment profit were constrained by production labor shortages and supply chain disruptions.

Looking ahead to fiscal 2022, Grocery Products expects to continue to benefit from the addition of the Planters® snack nuts business, pricing actions taken on most product lines, and strong demand for many of its leading retail and Mexican foods brands. Risks to profitability include additional inflationary pressures and labor shortages impacting production on key product lines.

Refrigerated Foods

The continued recovery in the foodservice industry, numerous pricing actions, and strong demand led to significant net sales growth in the fourth quarter of fiscal 2021. Compared to last year, the foodservice business delivered volume and net sales gains in every category. Retail and deli net sales benefited from higher pricing and continued elevated demand for products such as Columbus® grab-and-go items, Hormel® Gatherings® party trays, Hormel® Black Label® bacon, Hormel® pepperoni, and Applegate® natural and organic meats. For the full year, net sales increased due to strong growth from the retail, deli, and foodservice businesses within Refrigerated Foods, which benefited from pricing actions impacting the second half of the year.

Segment profit for the fourth quarter increased primarily due to higher foodservice sales. Higher pricing across the portfolio helped mitigate inflationary pressure. For fiscal 2021, higher earnings from the foodservice business and the impact of numerous pricing actions fully offset significantly higher raw material costs, increased freight expenses, and higher operational expenses. Volume, net sales, and segment profit were constrained by production labor shortages and supply chain disruptions.

In fiscal 2022, Refrigerated Foods is expecting continued net sales growth from the retail, deli, and foodservice businesses due to strong demand and pricing actions taken throughout fiscal 2021. Net sales will be negatively impacted by lower commodity sales due to the new pork supply contract. Profitability is expected to improve due to higher pricing and a more profitable product mix. Risks to profitability include additional inflationary pressures and labor shortages impacting production on key product lines.

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Jennie-O Turkey Store

For the fourth quarter of fiscal 2021, volume and sales increased as the continued recovery in foodservice, strong demand for Jennie-O® retail items, and higher prices across the portfolio more than offset the negative impact from shifting whole bird shipments to earlier in the year. For the full year, sales increased significantly due to favorable commodity prices and higher value-added volumes and pricing.

Segment profit for the fourth quarter and full year 2021 declined due primarily to higher feed costs and increased freight expenses.

Looking ahead to fiscal 2022, Jennie-O Turkey Store expects momentum from its value-added and commodity businesses to continue due to the benefit of improved pricing and strong demand. Segment profit is expected to improve in fiscal 2022 due to higher pricing. Increased feed, operational, and logistics costs are expected to weigh on profitability near-term, with improvement expected in the back half of the year.

International & Other

Net sales growth for the fourth quarter and full year was broad-based, driven by strong demand and higher prices for branded exports and improved results in China. Fresh pork export volume declined for the quarter and for the full year due to labor shortages.

For the fourth quarter of fiscal 2021, all areas of the business delivered growth in segment profits, led by higher export margins and China. Segment profit improved significantly for the full year, driven by gains from exports, higher income from the Company's partners in the Philippines, South Korea, and Europe, and strong results in China.

The International & Other segment anticipates business momentum to continue, led by growth in China, strong export demand, and the impact of higher prices in fiscal 2022. Net sales and profits will be modestly impacted by lower commodity sales due to the new pork supply contract. International shipping interruptions pose a risk to export sales and profit growth.

Unallocated Income and Expense

The Company does not allocate deferred compensation, investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at the corporate level. Equity in Earnings of Affiliates is included in segment profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included in the segment table for the purpose of reconciling segment results to Earnings Before Income Taxes.

Net Unallocated Expense decreased for the fourth quarter of fiscal 2021 as favorable reserve adjustments more than offset higher interest expense and lower investment income. For the full year, Net Unallocated Expense increased significantly due to one-time acquisition costs and accounting adjustments related to the acquisition of the Planters® snack nuts business of $43 million and higher interest expense. These increases were partially offset by higher investment income.

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Non-GAAP Financial Measures

The non-GAAP adjusted financial measurements of adjusted operating income, adjusted selling, general, and administrative expenses, and adjusted diluted earnings per share are presented to provide investors with additional information to facilitate the comparison of past and present operations. These measurements exclude the impact of the acquisition-related expenses and accounting adjustments related to the acquisition of the Planters® snack nuts business. The tax impact was calculated using the effective tax rate for the quarter in which the expenses and accounting adjustments were incurred.

The non-GAAP adjusted financial measurements of organic net sales and organic volume are presented to provide investors with additional information to facilitate the comparison of past and present operations. Organic net sales and organic volume are defined as net sales and volume, excluding the impact of acquisitions and divestitures. Organic net sales and organic volume exclude the impacts of the acquisition of the Planters® snack nuts business (June 2021) in the Grocery Products, Refrigerated Foods, and International & Other segments and the Sadler's Smokehouse acquisition (March 2020) in the Refrigerated Foods segment.

The Company provides Earnings before interest and taxes (EBIT) and Earnings before interest, taxes, depreciation and amortization (EBITDA) because these measures are useful to management and investors as indicators of operating strength relative to prior years and are commonly used to benchmark the Company’s performance.

The Company believes these non-GAAP financial measurements provide useful information to investors because they are the measurements used to evaluate performance on a comparable year-over-year basis. Non-GAAP measurements are not intended to be a substitute for U.S. GAAP measurements in analyzing financial performance. These non-GAAP measurements are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.

The tables below show the calculations to reconcile from the GAAP measures to the non-GAAP adjusted measures.

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ORGANIC VOLUME (NON-GAAP)

ORGANIC NET SALES (NON-GAAP)

EBIT and EBITDA

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LIQUIDITY AND CAPITAL RESOURCES

When assessing liquidity and capital resources, the Company evaluates cash and cash equivalents, short-term and long-term investments, income from operations, and borrowing capacity.

Cash Flow Highlights

Cash and cash equivalents declined in fiscal 2021 as the Company made significant investments in the acquisition of the Planters® snack nuts business, dividend payments, repayment of long-term debt, and capital expenditures. Additional details related to significant drivers of cash flows are provided below.

Cash Provided by (Used in) Operating Activities

▪Cash flows from operating activities were largely impacted by changes in operating assets and liabilities.

–Accounts receivable increased $192 million in fiscal 2021 primarily due to increased sales and the incremental impact of the Planters® snack nuts business. The $120 million increase in fiscal 2020 is largely due to increased sales and the timing of collections.

–In fiscal 2021, inventory increased $145 million due to inflation in raw material and supplies and the acquisition of the Planters® snack nuts business.

–Accounts payable and accrued expenses increased $115 million in fiscal 2021 related to the incremental impact of the Planters® snack nuts business. In fiscal 2020, cash flows benefited from a $111 million increase due to the timing of payments.

Cash Provided by (Used in) Investing Activities

▪In fiscal 2021, the Company acquired the Planters® snack nuts business for $3.4 billion. In fiscal 2020, the Company acquired the assets of Sadler's Smokehouse for $271 million.

▪Capital expenditures were $232 million and $368 million in fiscal 2021 and 2020, respectively. Significant spending included several multi-year projects including the pizza toppings expansion at our manufacturing facility in Nevada, Iowa, a new dry sausage facility in Omaha, Nebraska, and Project Orion, as well as ongoing investments to support food and employee safety and the growth of branded products.

Cash Provided by (Used in) Financing Activities

▪The Company issued $2.3 billion and $1.0 billion of long-term debt in fiscal 2021 and 2020, respectively. Proceeds from these issuances, along with cash on hand, were used to fund the acquisition of the Planters® snack nuts business. See Note L - Long-term Debt and Other Borrowing Arrangements for more information.

▪Cash dividends paid to the Company’s shareholders continues to be an ongoing financing activity for the Company with payments totaling $523 million in fiscal 2021 and $487 million in fiscal 2020. The dividend rate was $0.98 per share in fiscal 2021, which reflected a 5 percent increase over the fiscal 2020 rate of $0.93 per share.

▪The Company repaid $250 million of its senior unsecured notes upon maturity in fiscal 2021.

Sources and Uses of Cash

The Company believes its balanced business model, with diversification across raw material inputs, channels, and categories, provides stability in ever changing economic environments. The Company applies a waterfall approach to capital resource allocation, which focuses first on required uses of cash such as capital expenditures to maintain facilities, dividend returns to investors, and mandatory debt repayments. Next, the Company looks to strategic items in support of growth initiatives such as acquisitions and innovation investments, which is followed by opportunistic uses including incremental debt repayment and share repurchases. The Company believes its anticipated income from operations, cash on hand, and borrowing capacity under the current credit facility will be adequate to meet all short-term and long-term commitments. The Company's ability to leverage its balance sheet through the issuance of debt provides the flexibility to take advantage of strategic opportunities which may require additional funding.

Capital expenditures for fiscal 2022 are estimated to be $310 million. The largest projects are expected to include new capacity for retail and foodservice pepperoni and a new production line for the SPAM® family of products.

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The Company remains committed to providing a return to investors through cash dividends. The annual dividend rate for fiscal 2022 was increased 6 percent to $1.04 per share, representing the 56th consecutive annual dividend increase.

The following table shows the Company's other material cash commitments as of October 31, 2021:

(1) The Company commits to purchase quantities of livestock, grain, and other raw materials to ensure a steady supply of production inputs. The Company uses hedging programs to manage price risk associated with a portion of the future grain and hog commitments. The purchase commitments listed above do not reflect the impact of the hedging instruments that manage the risk of fluctuating commodity markets. See Note F - Derivatives and Hedging and Note J - Commitments and Contingencies for more information.

(2) As of October 31, 2021, the Company’s outstanding debt included unsecured senior notes due in fiscal 2024, 2028, 2030, and 2051. The Company is required by certain covenants in its debt agreements to maintain specified levels of financial ratios and financial position. As of October 31, 2021, the Company was in compliance with all debt covenants. See Note L - Long-term Debt and Other Borrowing Arrangements for additional details.

(3) Represents pension and other post-retirement benefit payments related to the Company's unfunded defined benefit plans. Benefit payments reflect expectations for the next ten years as estimates are not readily available beyond that point. See Note G - Pension and Other Post-retirement Benefits for additional details.

(4) For more information on the Company's lease obligations, see Note K - Leases.

As of October 31, 2021, the Company had $47.3 million of standby letters of credit issued on its behalf. The standby letters of credit are primarily related to the Company’s self-insured workers compensation programs. However, this amount includes revocable standby letters of credit totaling $3.1 million for obligations of an affiliated party that may arise under workers compensation claims. Letters of credit are not reflected in the Company’s Consolidated Statements of Financial Position.

CRITICAL ACCOUNTING ESTIMATES

This discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. See Note A - Summary of Significant Accounting Policies for additional information.

Critical accounting estimates are defined as those reflective of significant judgments, estimates and uncertainties, which may result in materially different results under different assumptions and conditions. As conditions resulting from the COVID-19 pandemic continue to evolve, the Company expects these judgments and estimates may be subject to change, which could materially impact future periods. The Company believes the following are its critical accounting estimates:

Revenue Recognition

Description: The Company recognizes sales at the point in time when the performance obligation has been satisfied and control of the product has transferred to the customer. Obligations for the Company are usually fulfilled once shipped product is received or picked up by the customer. Revenue is recorded net of applicable provisions for discounts, returns, and allowances.

Judgments and Uncertainties: The Company offers various sales incentives to customers and consumers. Incentives offered off-invoice include prompt pay allowances, will call allowances, spoilage allowances, and temporary price reductions. These incentives are recognized as reductions of revenue at the time control is transferred. Coupons are used as an incentive for consumers to purchase various products. The coupons reduce revenues at the time they are offered, based on estimated redemption rates. Promotional contracts are performed by customers to promote the Company’s products to consumers. These incentives reduce revenues at the time of performance through direct payments and accrued promotional funds. Accrued promotional funds are unpaid liabilities for promotional contracts in process or completed at the end of a quarter or fiscal year. Accruals with customers are based on defined performance.

Sensitivity of Estimate to Change: The liability relating to these agreements is based on a review of the outstanding contracts on which performance has taken place but which the promotional payments relating to such contracts remain unpaid as of the

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end of the fiscal year. The level of customer performance and the historical spend rate versus contracted rates are estimates used to determine these liabilities.

Income Taxes

Description: The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur.

Judgments and Uncertainties: The Company computes its provision for income taxes based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it operates. Judgment is required in evaluating the Company’s tax positions and determining its annual tax provision.

Sensitivity of Estimate to Change: While the Company considers all of its tax positions fully supportable, the Company is occasionally challenged by various tax authorities regarding the amount of taxes due. The Company recognizes a tax position in its financial statements when it is more likely than not the position will be sustained upon examination, based on its technical merits. The position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. A change in judgment related to the expected ultimate resolution of uncertain tax positions will be recognized in earnings in the quarter of such change. As of October 31, 2021, the Company had $27.1 million of unrecognized tax benefits, including interest and penalties, recorded in Other Long-term Liabilities.

Business Combinations

Description: The Company accounts for business combinations using the acquisition method of accounting. The Company allocates the purchase price of an acquired business to the assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date with the excess recorded as Goodwill.

Judgments and Uncertainties: The acquisition method of accounting requires the Company to make significant estimates and assumptions regarding the fair value of the acquired assets. Fair value of the assets and liabilities acquired is determined through established valuation techniques, such as the income, cost or market approach. The Company may utilize third-party valuation experts to assist in the fair value determination. The fair value measurements of identifiable intangibles are based on available historical information and expectations and assumptions about the future. Significant assumptions used to value identifiable intangible assets may include projected revenue growth, estimated cash flows, discount rates, royalty rates, and other factors.

Determining the useful life of an intangible asset also requires judgment. Certain acquired brands are expected to have indefinite lives based on their history and the Company’s intent to continue to support and build the brands. Other acquired assets, such as customer relationships, are expected to have determinable useful lives.

Sensitivity of Estimate to Change: On June 7, 2021 the Company acquired the Planters® snack nuts business for $3.4 billion and used a third-party valuation specialist to perform the valuation of the assets acquired. Refer to Note B - Acquisitions and Divestitures for more information. The Company acquired tradenames which were determined to have a fair value of $712.0 million. Key assumptions used to calculate the fair value of the tradenames using a relief from royalty model included revenue projections, royalty rates, and discount rates. The Company also identified customer relationships which were assigned a fair value of $51.0 million using the distributor method under the income approach. Assumptions in valuing this asset included future earnings projections, customer attrition rate, and discount rate, among others. The Company believes the estimates applied to be based on reasonable assumptions, but which are inherently uncertain. As a result, actual results may differ from the assumptions and judgments used to determine fair value of the assets acquired, which could result in material impairment losses in the future.

Goodwill and Other Indefinite-Lived Intangibles

Description: Other indefinite-lived intangible assets primarily include tradenames obtained through business acquisitions which are originally recorded at their estimated fair values at the date of acquisition. Goodwill is the residual after allocating the purchase price to net assets acquired and is allocated across the Company’s reporting units: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International. Goodwill and indefinite-lived intangible assets are not amortized but tested annually for impairment, or more frequently if impairment indicators arise. If the carrying value of these assets exceeds the estimated fair value, the asset is considered impaired which requires a reduction to earnings. See Note A - Summary of Significant Accounting Policies for additional details regarding the Company’s procedures.

Judgments and Uncertainties: Determining whether impairment indicators exist and estimating the fair value of the Company’s goodwill reporting units and intangible assets for impairment testing requires significant judgment. Indefinite-lived tradenames are evaluated for impairment using an income approach utilizing the relief from royalty method. Significant assumptions include

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royalty rate, annual projected revenue, discount rate, and estimated long term growth rate. Estimating the fair value of goodwill reporting units using the discounted cash flow model requires management to make assumptions and projections of future cash flows, revenues, earnings, discount rates, long term growth rates, and other factors.

Sensitivity of Estimate to Change: The assumptions used to assess impairment consider historical trends, macroeconomic conditions, and projections consistent with the Company’s operating strategy. Changes in these estimates can have a significant impact on the assessment of fair value which could result in material impairment losses.

During the fourth quarter of fiscal 2021, the Company elected to perform a quantitative assessment of goodwill. No goodwill impairment charges were recorded as a result of the testing and the estimated fair value of each goodwill reporting unit exceeded the calculated carrying value by more than 50 percent. A 10 percent decline in projected cash flows or 10 percent increase in the discount rate would not result in an impairment.

The Company also elected to perform quantitative impairment testing for indefinite-lived intangible assets. The estimated fair value of each indefinite-lived intangible asset exceeded the carrying value by more than 10 percent as such no impairment charges were recorded. A 10 percent decline in forecasted revenue or 10 percent increase in the discount rate would not result in a material impairment.

Pension and Other Post-Retirement Benefits

Description: The Company sponsors several defined benefit pension and post-retirement health care benefit plans and recognizes the associated expenses, assets, and liabilities.

Judgments and Uncertainties: In accounting for these employment costs and the associated benefit obligations, management must make a variety of assumptions and estimates including mortality rates, discount rates, compensation increases, expected return on plan assets, and health care cost trend rates. The Company considers historical data as well as current facts and circumstances when determining these estimates. Expected long-term rate of return on plan assets is based on fair value, composition of the asset portfolio, historical long-term rates of return, and estimates of future performance. Mortality and discount rates used are based on actuarial tables elected at each fiscal year-end. The Company uses third-party specialists to assist in the determination of these estimates and the calculation of certain employee benefit expenses and the outstanding obligation.

Benefit plan assets are stated at fair value. Due to the lack of readily available market prices, private equity investments are valued by models using a combination of available market data and unobservable inputs that consider earnings multiples, discounted cash flows, and other qualitative and quantitative factors. Other benefit plan investments are measured at Net Asset Value (NAV) per share of the fund's underlying investments as a practical expedient.

Sensitivity of Estimate to Change: The assumed discount rate, expected long-term rate of return on plan assets, rate of future compensation increase, and health care cost trend rate have a significant impact on the amounts reported for the benefit plans. For the year ended October 31, 2021, the Company had $1,712.0 million and $274.7 million in pension benefit obligation and post-retirement benefit obligation, respectively. For fiscal 2022, the Company expects a credit of $6.6 million in pension benefit costs and an expense of $10.5 million in post-retirement benefit costs. A one-percentage-point change in these rates would have the following effects:

As of October 31, 2021, the Company had $109.4 million and $821.8 million of private equity and NAV investments, respectively. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements. The Company also holds quarterly meetings with the investment adviser to review fund performance, which include comparisons to the relevant indices. On an annual basis, the Company performs pricing tests on certain underlying investments to gain additional assurance of the reliability of values received from the fund manager.

See Note G - Pension and Other Post-retirement Benefits for additional information.

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