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Hormel Foods 10-Q 2008
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
Form 10-Q
HORMEL FOODS CORPORATION(Exact name of registrant as specified in its charter)
(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. YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
TABLE OF CONTENTS
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PART I – FINANCIAL INFORMATION
HORMEL FOODS CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION(In Thousands of Dollars)
See notes to consolidated financial statements
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HORMEL FOODS CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In Thousands of Dollars)
See notes to consolidated financial statements
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HORMEL FOODS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands of Dollars, Except Per Share Amounts) (Unaudited)
See notes to consolidated financial statements
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HORMEL FOODS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars) (Unaudited)
See notes to consolidated financial statements
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HORMEL FOODS CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands of Dollars, Except Per Share Amounts) (Unaudited)
NOTE A GENERAL Basis of PresentationThe accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year. The balance sheet at October 28, 2007, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 28, 2007.
Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. The reclassifications had no impact on net earnings as previously reported.
GuaranteesThe 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. Currently, the Company provides a standby letter of credit for obligations of an affiliated party that may arise under worker compensation claims. This guarantee provided by the Company amounted to $1,940 as of July 27, 2008.
The Company has also guaranteed a $9,000 loan of an independent farm operator. The loan arose to provide financing to develop a hog growing operation on a tract of land in Arizona, and the term of the loan runs through November 2023. Approximately $2,900 of the loan proceeds have been spent to date, with the remaining $6,100 being held in an escrow account. The Company is obligated to make payments if the farm operator fails to do so, and the Company has made immaterial payments in fiscal 2008. As there is no current intention to spend additional funds on this project, the Company estimates its maximum liability remaining under this guarantee to be approximately $2,700 plus interest.
As of July 27, 2008, these potential obligations were not reflected in the Company’s consolidated statements of financial position.
New Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161). The pronouncement amends and expands the disclosure requirements previously required by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company expects to adopt SFAS 161 in the second quarter of fiscal 2009, and is currently assessing the impact of adopting this accounting standard.
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In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141(R)). The pronouncement establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable the users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Therefore, the Company expects to adopt SFAS 141(R) at the beginning of fiscal 2010, and is currently assessing the impact of adopting this accounting standard.
In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (SFAS 160). The pronouncement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of Accounting Research Bulletin No. 51’s consolidation procedures for consistency with the requirements of SFAS 141(R). SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. Therefore, the Company expects to adopt SFAS 160 at the beginning of fiscal 2010, and is currently assessing the impact of adopting this accounting standard.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). The pronouncement permits entities to choose to measure many financial instruments and certain other items at fair value, which provides the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently, without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Therefore, the Company expects to adopt SFAS 159 at the beginning of fiscal 2009, and is currently assessing the impact of adopting this accounting standard.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). The pronouncement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, and does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Therefore, the Company expects to adopt SFAS 157 at the beginning of fiscal 2009, and is currently assessing the impact of adopting this accounting standard.
In September 2006, the FASB also issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).” The pronouncement requires the funded status of a plan, measured as the difference between the fair value of plan assets and the benefit obligations, be recognized on a plan sponsor’s statement of financial position. It also requires gains or losses that arise during the plan year to be recognized as a component of other comprehensive income to the extent they are not recognized in net periodic benefit cost during the year. These provisions are effective for fiscal years ending after December 15, 2006, and therefore the Company adopted the required provisions of this statement for the fiscal 2007 year end. For fiscal years ending after December 15, 2008, the pronouncement further requires plan sponsors to measure defined benefit plan assets and obligations as of the date of the plan sponsor’s fiscal year end statement of financial position. The Company will be required to adopt these measurement date provisions in fiscal 2009, and does not anticipate a material impact to its results of operations or financial position.
NOTE B ACQUISITIONS
On June 13, 2008, the Company purchased Boca Grande Foods, Inc. (Boca Grande) for a preliminary purchase price of $23,255 cash, including related costs. Boca Grande manufactures, sells, and distributes liquid portion products, and operates a facility in Duluth, Georgia. This acquisition will provide additional capacity, production capabilities, and customers for liquid portion products for Diamond Crystal Brands within the Specialty Foods segment, and should facilitate overall growth within the liquid portions category.
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On August 22, 2007, the Company purchased privately-held Burke Corporation (Burke) for a preliminary purchase price of $115,128 cash, including related costs. Burke is a manufacturer and marketer of pizza toppings and other fully cooked meat products, and operates facilities in Nevada, Iowa, and Ames, Iowa. These facilities increase production capabilities for the Refrigerated Foods segment and should enable growth in the pizza toppings category by expanding the Company’s product offerings to additional foodservice customers.
Operating results for these acquisitions are included in the Company’s consolidated statements of operations from the date of acquisition. Pro forma results are not presented as the acquisitions are not considered material, individually or in the aggregate, to the consolidated Company.
NOTE C STOCK-BASED COMPENSATION
The Company has stock incentive plans for employees and non-employee directors, including stock options and nonvested shares. 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. Ordinary options vest over periods ranging from six months to four years and expire ten years after the grant date. The Company recognizes stock-based compensation expense ratably over the shorter of the requisite service period or vesting period. The fair value of stock-based compensation granted to retirement-eligible individuals is expensed at the time of grant.
During the first quarter of fiscal 2007, the Company made a one-time grant of 100 stock options to each active, full-time employee of the Company on January 8, 2007. This grant vests upon the earlier of five years or attainment of a closing stock price of $50.00 per share for five consecutive trading days, and expires ten years after the grant date.
A reconciliation of the number of options outstanding and exercisable (in thousands) as of July 27, 2008, and changes during the nine months then ended, is as follows:
The weighted-average grant date fair value of stock options granted, and the total intrinsic value of options exercised during the three and nine months of fiscal years 2008 and 2007, is as follows:
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The fair value of each ordinary option award is calculated on the date of grant using the Black-Scholes valuation model. The fair value of the one-time option award made to all active, full-time employees during the first quarter of fiscal 2007 was calculated using a lattice-based model due to the inclusion of the performance condition that could accelerate vesting. No options were granted in the three month periods ended July 27, 2008, or July 29, 2007. Weighted-average assumptions used in calculating the fair value of options granted during the first nine months of fiscal years 2008 and 2007 are as follows:
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 ordinary options grants, the Company has not stratified option holders as exercise behavior has historically been consistent across all employee groups. For the valuation of the one-time options grant made during the first quarter of fiscal 2007, the Company assumed early exercise behavior for a portion of the employee population.
The Company’s nonvested shares vest after five years or upon retirement. A reconciliation of the nonvested shares (in thousands) as of July 27, 2008, and changes during the nine months then ended, is as follows:
No nonvested shares were granted or vested in the three month periods ended July 27, 2008, or July 29, 2007. The weighted-average grant date fair value of nonvested shares granted, the total fair value of nonvested shares granted, and the fair value of shares that have vested during the first nine months of fiscal years 2008 and 2007, is as follows:
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Stock-based compensation expense, along with the related income tax benefit, for the three and nine months of fiscal years 2008 and 2007 is presented in the table below.
At July 27, 2008, there was $19,258 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 2.8 years. During the quarter and nine months ended July 27, 2008, cash received from stock option exercises was $255 and $10,994, respectively, compared to $1,037 and $5,408 for the quarter and nine months ended July 29, 2007. The total tax benefit to be realized for tax deductions from these option exercises for the quarter and nine months ended July 27, 2008, was $731 and $10,128, respectively, compared to $1,027 and $4,753 in the comparable periods of fiscal 2007. The amounts reported for tax deductions for option exercises in the quarter and nine months ended July 27, 2008, include $644 and $9,747, respectively, of excess tax benefits compared to $742 and $4,330, respectively, of excess tax benefits last year, which are included in “Other” under financing activities on the Consolidated Statements of Cash Flows (with an offsetting amount in other operating activities).
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 D GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the three and nine month periods ended July 27, 2008, are presented in the tables below. Additions and adjustments during fiscal 2008 primarily relate to the Boca Grande and Burke acquisitions.
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The gross carrying amount and accumulated amortization for definite-lived intangible assets are presented below.
Amortization expense was $2,740 and $8,888 for the three and nine months ended July 27, 2008, respectively, compared to $2,782 and $8,645 for the three and nine months ended July 29, 2007.
Estimated annual amortization expense for the five fiscal years after October 28, 2007, is as follows:
The carrying amounts for indefinite-lived intangible assets are presented in the table below.
NOTE E SHIPPING AND HANDLING COSTS
Shipping and handling costs are recorded as selling and delivery expenses. Shipping and handling costs were $116,648 and $338,663 for the three and nine months ended July 27, 2008, respectively, compared to $99,938 and $303,901 for the three and nine months ended July 29, 2007.
NOTE F EARNINGS PER SHARE DATA
The following table sets forth the denominator for the computation of basic and diluted earnings per share:
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NOTE G COMPREHENSIVE INCOME
Components of comprehensive income, net of taxes, are:
At the end of the 2007 fiscal year, on October 28, 2007, the Company adopted the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined benefit plan as an asset or liability in its statement of financial position, and recognize through comprehensive income changes in that funded status in the year in which the changes occur. See Note F of the Notes to Consolidated Financial Statements included in the Company’s 2007 Annual Report on Form 10-K for a further description of the effect of adopting SFAS No. 158.
NOTE H INVENTORIES
Principal components of inventories are:
NOTE I DERIVATIVES AND HEDGING
The Company uses hedging programs to manage price risk associated with commodity purchases and foreign currency transactions. These programs utilize futures contracts and swaps to manage the Company’s exposure to price fluctuations in the commodities markets and fluctuations in foreign currencies. The Company has determined its hedge programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged.
Cash Flow Hedge: The Company from time to time utilizes corn and soybean meal futures to offset the price fluctuation in the Company’s future direct grain purchases, and has entered into various NYMEX-based swaps to hedge the purchase of natural gas at certain plant locations. The Company also utilizes currency futures contracts to reduce its exposure to fluctuations in foreign currencies for certain foreign-denominated
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transactions. The financial instruments are designated and accounted for as cash flow hedges, and the Company measures the effectiveness of the hedges on a regular basis. Effective gains or losses related to these cash flow hedges are reported as other comprehensive loss and reclassified into earnings, through cost of products sold (commodity positions) or net sales (currency futures), in the period or periods in which the hedged transactions affect earnings. The Company typically does not hedge its grain and currency exposure beyond 24 months and its natural gas exposure beyond 36 months.
As of July 27, 2008, the Company has included in accumulated other comprehensive loss, hedging gains of $29,287 (net of tax) relating to its positions. The Company expects to recognize the majority of these gains over the next 12 months. Gains in the amount of $17,729 and $25,859, before tax, were reclassified into earnings in the three and nine months ending July 27, 2008, respectively, compared to losses of $1,688 and $4,446, before tax, in the three and nine months ended July 29, 2007. There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges.
Fair Value Hedge: 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 on a regular basis. 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 statement of financial position as a current asset and liability, respectively. 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.
As of July 27, 2008, the fair value of the Company’s futures contracts included on the statement of financial position was $(10,882). Losses on closed futures contracts in the amount of $12,001 and $13,831, before tax, were recognized in earnings during the three and nine months ended July 27, 2008, respectively, compared to losses of $919 and $14,224, before tax, in the same periods of fiscal 2007. There were no gains or losses recognized into earnings as a result of a hedged firm commitment no longer qualifying as a fair value hedge.
Other: During the third quarter of fiscal 2008, the Company held certain futures contracts and swap positions as part of a merchandising program designed to enhance margins. The Company has not applied hedge accounting to these positions. During the three and nine months ended July 27, 2008, the Company recorded a gain of $291 and a charge of $601, respectively, through cost of products sold to record these contracts at their fair value.
NOTE J PENSION AND OTHER POST-RETIREMENT BENEFITS
Net periodic benefit cost for pension and other post-retirement benefit plans consists of the following:
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On July 31, 2008, subsequent to the end of the fiscal 2008 third quarter, the Company made voluntary contributions of $2,606 and $9,859 to its hourly and salaried defined benefit pension plans, respectively.
NOTE K INCOME TAXES
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Company adopted the provisions of FIN 48 at the beginning of fiscal 2008, on October 29, 2007. The adoption of FIN 48 resulted in a $13,863 increase in the liability for uncertain tax positions (resulting in a total liability balance of $32,272), a $4,878 increase in deferred tax assets, and a decrease in retained earnings of $8,985.
The amount of unrecognized tax benefits, including interest and penalties, at July 27, 2008, recorded in other long-term liabilities was $38,716, of which $25,221 would impact the Company’s effective tax rate if recognized. The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense, with $1,029 and $2,705 included in expense in the third quarter and first nine months of fiscal 2008, respectively. The amount of accrued interest and penalties at July 27, 2008, associated with unrecognized tax benefits was $8,499.
The Company is regularly audited by federal and state taxing authorities. During fiscal year 2007, the United States Internal Revenue Service (I.R.S.) concluded its examination of the Company’s consolidated federal income tax returns for the fiscal years through 2005. The Company is not currently under examination by the I.R.S. The Company is in various stages of audit by several state taxing authorities on a variety of fiscal years, as far back as 1996. While it is reasonably possible that one or more of these audits may be completed within the next 12 months and that 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 L SEGMENT REPORTING
The Company develops, processes, and distributes a wide array of food products in a variety of markets. Under the criteria set forth by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company reports its results in the following five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and All Other.
The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market.
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The Refrigerated Foods segment includes the Hormel Refrigerated, Farmer John, and Dan’s Prize operating segments. This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork and beef products for retail, foodservice, and fresh product customers. Results for the Hormel Refrigerated operating segment include the Precept Foods business which offers a variety of case-ready beef and pork products to retail customers. Precept Foods, LLC, is a 51 percent owned joint venture between Hormel Foods Corporation and Cargill Meat Solutions Corporation, a wholly-owned subsidiary of Cargill, Incorporated.
The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers.
The Specialty Foods segment includes the Diamond Crystal Brands, Century Foods International, and Hormel Specialty Products operating segments. This segment consists of the packaging and sale of various sugar and sugar substitute products, salt and pepper products, dessert mixes, liquid portion products, ready-to-drink products, gelatin products, and private label canned meats to retail and foodservice customers. This segment also includes the processing, marketing, and sale of nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products.
The All Other segment includes the Hormel Foods International operating segment, which manufactures, markets, and sells Company products internationally. This segment also includes various miscellaneous corporate sales.
Intersegment sales are recorded at prices that approximate cost and are eliminated in the consolidated statements of operations. Equity in earnings of affiliates is included in segment profit; however, the Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at corporate. These items are included below as net interest and investment income and general corporate expense when reconciling to earnings before income taxes.
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Sales and operating profits for each of the Company’s business segments and reconciliation to earnings before income taxes are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the operating profit and other financial information shown below.
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Beginning in fiscal 2008, Hormel Foods Corporation (the Company) adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (FIN 48). In accordance with FIN 48, the Company recognizes a tax position in its financial statements when it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. That position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. See further discussion regarding the impact of adopting FIN 48 in Note K of the Notes to Consolidated Financial Statements in this Form 10-Q.
There have been no other material changes in the Company’s Critical Accounting Policies, as disclosed in its Annual Report on Form 10-K for the year ended October 28, 2007.
RESULTS OF OPERATIONS
The Company is a processor of branded and unbranded food products for retail, foodservice, and fresh product customers. It operates in five segments as described in Note L of the Notes to Consolidated Financial Statements in this Form 10-Q.
The Company earned $.38 per diluted share in the third quarter of fiscal 2008, compared to $.41 per diluted share in the third quarter of fiscal 2007. Significant factors impacting the quarter were:
· Net sales and tonnage growth was reported across all five segments of the Company. · Jennie-O Turkey Store segment profit decreased significantly due to continued higher grain and fuel related costs during the quarter. · Grocery Products reported a strong quarter driven by strong baseline sales in key brands. · Refrigerated Foods segment profit declined slightly as pricing advances were unable to fully recover higher input costs. · Specialty Foods experienced strong net sales and profit growth in all three operating segments. · Strong export sales drove increased results for the All Other segment. · A challenging investment environment generated significant declines in investment income compared to the prior year.
Net earnings for the third quarter of fiscal 2008 decreased 9.5 percent to $51,947 compared to $57,374 in the same quarter of 2007. Diluted earnings per share for the quarter decreased to $.38 from $.41 last year. Net earnings for the first nine months of 2008 increased 8.5 percent to $217,689 from $200,700 in 2007. Diluted earnings per share for the same period increased to $1.58 from $1.44 in the prior year.
Net sales for the third quarter of fiscal 2008 increased 10.4 percent to $1,678,142 from $1,520,005 in 2007. Tonnage increased 6.7 percent to 1,137 million lbs. for the third quarter compared to 1,066 million lbs. in the same quarter of last year. Net sales for the first nine months of fiscal 2008 increased 8.1 percent to $4,893,391 from $4,528,685 in the first nine months of fiscal 2007. Tonnage for the nine months increased 5.6 percent to 3,467 million lbs. compared to 3,284 million lbs in 2007. Tonnage growth for both the quarter and nine months has been driven by value-added sales growth and additional commodity meat sales. Net sales results also reflect the impact of pricing initiatives that have been pursued throughout the year in response to significantly higher input costs during fiscal 2008.
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Net sales and tonnage comparisons for the quarter were positively impacted by the third quarter 2008 acquisition of Boca Grande Foods, Inc. (Boca Grande) and the fourth quarter 2007 acquisition of Burke Corporation (Burke), and year to date comparisons also benefited from the first quarter 2007 acquisition of Provena Foods Inc. (Provena). These acquisitions contributed an incremental $37,617 of net sales and 24.2 million lbs. of tonnage to the third quarter results, and $106,348 of net sales and 73.1 million lbs. of tonnage to the nine month results. Excluding the impact of these acquisitions, net sales and tonnage increased 7.9 percent and 4.4 percent, respectively, compared to the third quarter of fiscal 2007, and increased 5.7 percent and 3.3 percent, respectively, compared to the first nine months of last year.
Gross profit for the third quarter and nine months of fiscal 2008 was $345,694 and $1,124,352, respectively, compared to $323,381 and $1,028,704 for the same periods last year. Gross profit as a percentage of net sales decreased to 20.6 percent for the third quarter of fiscal 2008 from 21.3 percent in the same quarter of 2007. For the first nine months, this percentage has increased to 23.0 percent, slightly above 22.7 percent for the comparable period of the prior year. Continued higher feed input and fuel costs at our Jennie-O Turkey Store segment were a key factor contributing to the decline in margins for the third quarter compared to the prior year. An oversupply of turkey breast meat in the market also kept commodity pricing low and negatively impacted results. The Refrigerated Foods segment was also impacted by higher input costs that were not fully recovered through pricing actions. The combination of the existing turkey industry conditions described above and expected volatility in the pork complex are expected to continue to pressure margins in upcoming quarters.
Selling and delivery expenses for the third quarter and nine months of fiscal 2008 were $204,167 and $622,393, respectively, compared to $187,823 and $578,974 last year. This increase is primarily due to higher shipping and handling costs of $16,710 and $34,762 for the third quarter and first nine months of fiscal 2008 compared to the prior year. Selling and delivery expenses as a percentage of net sales decreased to 12.2 percent and 12.7 percent, respectively, for the third quarter and nine months of fiscal 2008, compared to 12.4 percent and 12.8 percent of net sales in the comparable periods of 2007. The percentage declines generally reflect the impact of pricing initiatives taken during 2008. The Company’s marketing investment for both the third quarter and nine months exceeded prior year levels due to on-going media campaigns supporting several key brands. Due to higher anticipated freight and warehousing costs and increased marketing expenses, selling and delivery expenses are expected to remain above the prior year for the remainder of fiscal 2008.
Administrative and general expenses were $47,737 and $135,837 for the third quarter and nine months of fiscal 2008, respectively, compared to $41,231 and $123,574 last year. As a percentage of net sales, administrative and general expenses for both the fiscal 2008 third quarter and nine months was 2.8 percent, compared to 2.7 percent for both the comparable quarter and nine months in fiscal 2007. The nine month increase reflects higher professional service expenses incurred during fiscal 2008. The Company expects administrative and general expenses to remain near current levels during the fourth quarter, and to approximate 2.8 percent of net sales for the 2008 fiscal year.
Equity in earnings of affiliates was $241 and $3,431 for the third quarter and nine months of fiscal 2008, respectively, compared to $1,212 and $2,084 last year. The decline for the quarter primarily reflects lower results from the Company’s 40.0 percent owned Philippine joint venture, Purefoods-Hormel Company, due to the impact of the weakening Philippine peso. For the nine months, notable gains were reported on the Company’s 49.0 percent owned joint venture, Carapelli USA, LLC, and the Company’s 49.0 percent owned joint venture, San Miguel Purefoods (Vietnam) Co. Ltd. Minority interests in the Company’s consolidated investments are also reflected in these figures, resulting in decreased earnings of $341 and $1,144 for the third quarter and first nine months, respectively, compared to the prior year.
The effective tax rate for the third quarter and first nine months of fiscal 2008 was 35.2 and 36.1 percent, respectively, compared to 36.4 and 36.1 percent for the comparable periods of fiscal 2007. The lower rate for the third quarter is primarily due to net favorable discrete items related to prior period audit settlements, foreign tax accruals, and various provision-to-return adjustments. The Company expects a full-year effective tax rate between 36.0 and 36.5 percent for fiscal 2008.
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Net sales and operating profits for each of the Company’s 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 operation profit and other financial information shown below. Additional segment financial information can be found in Note L of the Notes to Consolidated Financial Statements in this form 10-Q.
Grocery Products
The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market.
Grocery Products net sales increased 10.3 percent for the third quarter and 8.2 percent for the nine months compared to the comparable fiscal 2007 periods. Tonnage increased 9.5 percent for the quarter and 5.2 percent for the nine months compared to the prior year. Segment profit for Grocery Products increased 11.1 percent for the third quarter and 8.9 percent for the nine months compared to fiscal 2007.
Strong sales of key product lines drove the top-line results for Grocery Products. Hormel and Stagg chili both had notable gains over the prior year third quarter, driven by successful retail promotional programs and gains achieved over competitive brands. Net sales also improved for Dinty Moore stew, following the introduction of new Big Bowl microwave products and strong marketing support during the quarter. Increased sales of Hormel Compleats microwave meals over the prior year also contributed to the positive results. The overall net sales growth for Grocery Products also reflects the impact of pricing advances taken on several product lines throughout fiscal 2008.
The Grocery Products segment continued to experience cost pressures during the third quarter, particularly related to higher protein input costs, fuel, and other ingredients. These higher expenses are expected to continue into upcoming quarters, and additional pricing initiatives are planned for certain product lines in the fourth quarter to recover a portion of the cost increases.
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Refrigerated Foods
The Refrigerated Foods segment includes the Hormel Refrigerated, Farmer John, and Dan’s Prize operating segments. This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork and beef products for retail, foodservice, and fresh product customers. Results for the Hormel Refrigerated operating segment include the Precept Foods business which offers a variety of case-ready beef and pork products to retail customers. Precept Foods, LLC, is a 51 percent owned joint venture between Hormel Foods Corporation and Cargill Meat Solutions Corporation, a wholly-owned subsidiary of Cargill, Incorporated.
Net sales by the Refrigerated Foods segment increased 8.0 percent for the third quarter and 6.6 percent for the nine months of fiscal 2008, compared to the same periods of fiscal 2007. Tonnage increased 3.9 percent and 5.5 percent for the third quarter and nine months, respectively, compared to last year. Net sales and tonnage comparisons were positively impacted by the fourth quarter 2007 acquisition of Burke, and year to date comparisons also benefited from the first quarter 2007 acquisition of Provena. These acquisitions contributed an incremental $35,135 of net sales and 21.0 million lbs. of tonnage to the third quarter results and $103,866 of net sales and 69.9 million lbs. of tonnage to the nine month results. Excluding the impact of these acquisitions, net sales and tonnage increased 3.7 percent and 0.2 percent, respectively, compared to the third quarter of fiscal 2007, and increased 2.3 percent and 1.5 percent, respectively, compared to the first nine months of last year.
Segment profit for Refrigerated Foods decreased 1.2 percent and increased 25.9 percent for the third quarter and nine months, respectively, compared to the prior year. The Company processed 2,271,000 hogs during the third quarter, which was comparable to 2,265,000 hogs for the same period last year. Pork operating margins were strong, but the rapid increase in primal values experienced throughout the third quarter pressured margins in the segment’s value-added business units. Strong industry export demand contributed to the higher pork costs. The Meat Products and Foodservice units were unable to advance pricing quickly enough to fully recover their increased input costs. The Company expects hog markets in the fourth quarter of fiscal 2008 to exceed prior year levels, and Refrigerated Foods will continue to pursue pricing advances during the remainder of the fiscal year to mitigate a portion of the higher input costs.
Demand for value-added products remained strong during the quarter. The Meat Products business unit reported significant retail sales growth, particularly for DiLusso Deli Company products, Hormel pepperoni, and Hormel refrigerated entrees. The Foodservice unit continued to experience softness in the casual dining segment, but was able to partially offset that impact by increasing sales to other channels. Sales growth was noted on premium pork, Austin Blues BBQ, turkey, pork sausage, and economy hams.
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