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Hormel Foods 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

 

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 27, 2008

 

 

 

or

 

 

o

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

 

41-0319970

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1 Hormel Place

 

 

Austin, Minnesota

 

55912-3680

(Address of principal executive offices)

 

(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.                                                                    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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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.

 

Class

 

Outstanding at June 1, 2008

Common Stock

 

$.0586 par value

135,689,845

 

Common Stock Non-Voting

 

$.01 par value

-0

-

 

 




 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(In Thousands of Dollars)

 

 

 

April 27,

 

October 28,

 

 

 

2008

 

2007

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

107,156

 

$

149,749

 

Accounts receivable

 

351,564

 

366,621

 

Inventories

 

750,483

 

646,968

 

Federal income taxes

 

15,686

 

0

 

Deferred income taxes

 

47,995

 

52,583

 

Prepaid expenses and other current assets

 

28,084

 

15,804

 

TOTAL CURRENT ASSETS

 

1,300,968

 

1,231,725

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

63,774

 

66,220

 

 

 

 

 

 

 

GOODWILL

 

604,504

 

595,756

 

 

 

 

 

 

 

OTHER INTANGIBLES

 

153,378

 

162,237

 

 

 

 

 

 

 

PENSION ASSETS

 

100,415

 

99,003

 

 

 

 

 

 

 

INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES

 

95,213

 

102,060

 

 

 

 

 

 

 

OTHER ASSETS

 

181,437

 

170,048

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

Land

 

51,839

 

48,663

 

Buildings

 

646,796

 

615,245

 

Equipment

 

1,225,630

 

1,192,481

 

Construction in progress

 

99,109

 

114,415

 

 

 

2,023,374

 

1,970,804

 

Less allowance for depreciation

 

(1,051,915

)

(1,004,203

)

 

 

971,459

 

966,601

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

3,471,148

 

$

3,393,650

 

 

See notes to consolidated financial statements

 

3



 

 

 

April 27,

 

October 28,

 

 

 

2008

 

2007

 

 

 

(Unaudited)

 

 

 

LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

 

$

252,250

 

$

290,919

 

Notes payable/Short-term debt

 

25,000

 

70,000

 

Accrued expenses

 

63,433

 

66,000

 

Accrued workers compensation

 

28,832

 

27,372

 

Accrued marketing expenses

 

64,922

 

67,260

 

Employee compensation

 

91,900

 

111,051

 

Taxes, other than federal income taxes

 

1,611

 

5,454

 

Dividends payable

 

25,167

 

20,745

 

Federal income taxes

 

0

 

5,927

 

Current maturities of long-term debt

 

0

 

49

 

TOTAL CURRENT LIABILITIES

 

553,115

 

664,777

 

 

 

 

 

 

 

LONG-TERM DEBT—less current maturities

 

350,000

 

350,005

 

 

 

 

 

 

 

PENSION AND POST-RETIREMENT BENEFITS

 

448,519

 

440,810

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

90,728

 

53,275

 

 

 

 

 

 

 

SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

Preferred stock, par value $.01 a share— authorized 80,000,000 shares; issued—none 

 

 

 

 

 

Common stock, non-voting, par value $.01 a share—authorized 200,000,000 shares; issued—none

 

 

 

 

 

Common stock, par value $.0586 a share— authorized 400,000,000 shares;

 

 

 

 

 

issued 135,764,226 shares April 27, 2008

 

 

 

 

 

issued 135,677,494 shares October 28, 2007

 

7,956

 

7,951

 

Accumulated other comprehensive loss

 

(63,817

)

(101,811

)

Retained earnings

 

2,084,647

 

1,978,643

 

TOTAL SHAREHOLDERS’ INVESTMENT

 

2,028,786

 

1,884,783

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

$

3,471,148

 

$

3,393,650

 

 

See notes to consolidated financial statements

 

4



 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 (In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 27,
2008

 

April 29,
2007

 

April 27,
2008

 

April 29,
2007

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,594,084

 

$

1,504,597

 

$

3,215,249

 

$

3,008,680

 

Cost of products sold

 

1,217,445

 

1,158,711

 

2,436,591

 

2,303,357

 

GROSS PROFIT

 

376,639

 

345,886

 

778,658

 

705,323

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Selling and delivery

 

210,282

 

192,507

 

418,226

 

391,151

 

Administrative and general

 

42,625

 

40,433

 

88,100

 

82,343

 

TOTAL EXPENSES

 

252,907

 

232,940

 

506,326

 

473,494

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of affiliates

 

821

 

(31

)

3,190

 

872

 

OPERATING INCOME

 

124,553

 

112,915

 

275,522

 

232,701

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Interest and investment income (loss)

 

3,253

 

2,625

 

(1,685

)

4,705

 

Interest expense

 

(6,429

)

(6,998

)

(13,149

)

(13,356

)

EARNINGS BEFORE INCOME TAXES

 

121,377

 

108,542

 

260,688

 

224,050

 

Provision for income taxes

 

43,816

 

40,541

 

94,946

 

80,724

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

77,561

 

$

68,001

 

$

165,742

 

$

143,326

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

BASIC

 

$

0.57

 

$

0.49

 

$

1.22

 

$

1.04

 

DILUTED

 

$

0.56

 

$

0.49

 

$

1.20

 

$

1.03

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

BASIC

 

135,652

 

137,743

 

135,679

 

137,638

 

DILUTED

 

137,620

 

139,711

 

137,643

 

139,639

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE:

 

$

0.185

 

$

0.15

 

$

0.37

 

$

0.30

 

 

See notes to consolidated financial statements

 

5



 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

April 27,
2008

 

April 29,
2007

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

$

165,742

 

$

143,326

 

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

57,823

 

56,779

 

Amortization of intangibles

 

6,148

 

5,863

 

Equity in earnings of affiliates

 

(4,587

)

(1,466

)

Provision for deferred income taxes

 

(8,492

)

(3,013

)

Loss on property/equipment sales and plant facilities

 

1,377

 

69

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Decrease in accounts receivable

 

15,057

 

24,814

 

Increase in inventories, prepaid expenses, and other current assets

 

(85,392

)

(73,348

)

(Increase) Decrease in pension assets

 

(398

)

4,330

 

Decrease in accounts payable, accrued expenses, and pension and post-retirement benefits

 

(32,346

)

(74,132

)

Other

 

243

 

5,564

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

115,175

 

88,786

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Sale of available-for-sale securities

 

146,308

 

284,850

 

Purchase of available-for-sale securities

 

(155,207

)

(298,625

)

Acquisitions of businesses/intangibles

 

(3,920

)

(13,618

)

Purchases of property/equipment

 

(67,941

)

(69,961

)

Proceeds from sales of property/equipment

 

1,604

 

2,824

 

Decrease (Increase) in investments, equity in affiliates, and other assets

 

12,300

 

(21,134

)

NET CASH USED IN INVESTING ACTIVITIES

 

(66,856

)

(115,664

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from short-term debt

 

25,000

 

15,000

 

Principal payments on short-term debt

 

(70,000

)

(17,576

)

Principal payments on long-term debt

 

(54

)

(6,304

)

Dividends paid on common stock

 

(45,469

)

(39,881

)

Share repurchase

 

(21,927

)

(11,706

)

Other

 

21,538

 

8,858

 

NET CASH USED IN FINANCING ACTIVITIES

 

(90,912

)

(51,609

)

 

 

 

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

(42,593

)

(78,487

)

Cash and cash equivalents at beginning of year

 

149,749

 

172,485

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF QUARTER

 

$

107,156

 

$

93,998

 

 

See notes to consolidated financial statements

 

6



 

HORMEL FOODS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands of Dollars, Except Per Share Amounts)

(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 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.

 

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.  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, as of April 27, 2008, amounted to $1,940.

 

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 has made an immaterial payment following the end of the 2008 second quarter.  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 April 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 currently expects to adopt SFAS 161 in the second quarter of fiscal 2009.

 

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

 

7



 

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 ARB 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 August 22, 2007, the Company purchased privately-held Burke Corporation (Burke) for a 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 Burke are included in the Company’s consolidated statements of operations from the date of acquisition.  Pro forma results are not presented, as the acquisition is not considered material to the consolidated Company.

 

8



 

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 April 27, 2008, 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 10/28/07

 

10,939

 

$

28.63

 

 

 

 

 

Granted

 

1,327

 

40.10

 

 

 

 

 

Exercised

 

(1,118

)

18.73

 

 

 

 

 

Forfeitures

 

(114

)

37.42

 

 

 

 

 

Outstanding at 4/27/08

 

11,034

 

$

30.92

 

6.6 years

 

$

96,131

 

Exercisable at 4/27/08

 

6,414

 

$

26.37

 

5.1 years

 

$

84,675

 

 

The weighted-average grant-date fair value of stock options granted, and the total intrinsic value of options exercised during the first three and six months of fiscal years 2008 and 2007, is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 27,
2008

 

April 29,
2007

 

April 27,
2008

 

April 29,
2007

 

Weighted-average grant date fair value

 

$

9.67

 

$

11.28

 

$

10.38

 

$

9.40

 

Intrinsic value of exercised options

 

$

10,911

 

$

2,720

 

$

24,606

 

$

9,802

 

 

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.  Weighted-average assumptions used in calculating the fair value of options granted during first three and six months of fiscal years 2008 and 2007 are as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 27,
2008

 

April 29,
2007

 

April 27,
2008

 

April 29,
2007

 

Risk-Free Interest Rate

 

3.7

%

4.9

%

4.0

%

4.6

%

Dividend Yield

 

1.9

%

1.6

%

1.8

%

1.6

%

Stock Price Volatility

 

21.0

%

21.0

%

21.0

%

21.0

%

Expected Option Life

 

8 years

 

8 years

 

8 years

 

7 years

 

 

9



 

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 April 27, 2008, and changes during the six months then ended, is as follows:

 

 

 

Shares

 

Weighted-
Average Grant-
Date Fair Value

 

Nonvested at 10/28/07

 

54

 

$

33.77

 

Granted

 

25

 

38.97

 

Vested

 

(2

)

22.51

 

Nonvested at 4/27/08

 

77

 

$

35.72

 

 

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 three and six months of fiscal years 2008 and 2007, is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 27,
2008

 

April 29,
2007

 

April 27,
2008

 

April 29,
2007

 

Weighted-average grant date fair value

 

$

38.97

 

$

37.92

 

$

38.97

 

$

37.92

 

Fair value of nonvested shares granted

 

$

974

 

$

1,043

 

$

974

 

$

1,043

 

Fair value of shares vested

 

$

43

 

$

25

 

$

43

 

$

1,813

 

 

Stock-based compensation expense, along with the related income tax benefit, for the first three and six months of fiscal years 2008 and 2007 is presented in the table below.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 27,
2008

 

April 29,
2007

 

April 27,
2008

 

April 29,
2007

 

Stock-based compensation expense recognized

 

$

3,233

 

$

2,802

 

$

9,578

 

$

10,066

 

Income tax benefit recognized

 

(1,235

)

(1,065

)

(3,658

)

(3,826

)

After-tax stock-based compensation expense

 

$

1,998

 

$

1,737

 

$

5,920

 

$

6,240

 

 

At April 27, 2008, there was $22,086 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 3.0 years.  During the quarter and six months ended April 27, 2008, cash received from stock option exercises was $1,989 and $10,739, compared to $1,492 and $4,371 for the quarter and six months ended April 29, 2007.  The total tax benefit to be realized for tax deductions from these option exercises for the quarter and six months ended April 27, 2008, was $4,167 and $9,397, respectively, compared to $1,034 and $3,726 in the comparable periods in fiscal 2007.  The amounts reported for tax deductions for option exercises in the quarter and six months ended April 27, 2008 include $4,134 and $9,103, respectively, of excess tax benefits compared to $1,023 and $3,588, 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).

 

10



 

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 six month periods ended April 27, 2008, are presented in the tables below.  Additions and adjustments during fiscal 2008 relate to the Burke acquisition.

 

 

 

Grocery
Products

 

Refrigerated
Foods

 

JOTS

 

Specialty
Foods

 

All Other

 

Total

 

Balance as of January 27, 2008

 

$

123,364

 

$

77,442

 

$

203,214

 

$

194,724

 

$

674

 

$

599,418

 

Goodwill acquired

 

 

2,807

 

 

 

 

2,807

 

Purchase adjustments

 

 

2,279

 

 

 

 

2,279

 

Balance as of April 27, 2008

 

$

123,364

 

$

82,528

 

$

203,214

 

$

194,724

 

$

674

 

$

604,504

 

 

 

 

Grocery
Products

 

Refrigerated
Foods

 

JOTS

 

Specialty
Foods

 

All Other

 

Total

 

Balance as of October 28, 2007

 

$

123,364

 

$

73,780

 

$

203,214

 

$

194,724

 

$

674

 

$

595,756

 

Goodwill acquired

 

 

3,653

 

 

 

 

3,653

 

Purchase adjustments

 

 

5,095

 

 

 

 

5,095

 

Balance as of April 27, 2008

 

$

123,364

 

$

82,528

 

$

203,214

 

$

194,724

 

$

674

 

$

604,504

 

 

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

 

 

 

April 27, 2008

 

October 28, 2007

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Proprietary software & technology

 

$

23,190

 

$

(7,564

)

$

23,190

 

$

(6,168

)

Customer lists/relationships

 

20,959

 

(5,766

)

23,769

 

(4,570

)

Formulas & recipes

 

20,364

 

(10,460

)

20,364

 

(9,360

)

Non-compete covenants

 

19,660

 

(15,639

)

19,660

 

(14,040

)

Distribution network

 

4,120

 

(1,921

)

4,120

 

(1,715

)

Other intangibles

 

8,283

 

(3,262

)

11,756

 

(6,183

)

Total

 

$

96,576

 

$

(44,612

)

$

102,859

 

$

(42,036

)

 

Amortization expense was $2,900 and $6,148 for the three and six months ended April 27, 2008, respectively, compared to $2,925 and $5,863 for the three and six months ended April 29, 2007.

 

Estimated annual amortization expense for the five fiscal years after October 28, 2007, is as follows:

 

2008

 

$

11,486

 

2009

 

9,877

 

2010

 

8,769

 

2011

 

7,319

 

2012

 

6,886

 

 

11



 

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

 

 

 

April 27, 2008

 

October 28, 2007

 

Brands/tradenames/trademarks

 

$

93,430

 

$

93,430

 

Other intangibles

 

7,984

 

7,984

 

Total

 

$

101,414

 

$

101,414

 

 

NOTE E                 SHIPPING AND HANDLING COSTS

 

Shipping and handling costs are recorded as selling and delivery expenses.  Shipping and handling costs were $112,687 and $222,015 for the three and six months ended April 27, 2008, respectively, compared to $101,587 and $203,963 for the three and six months ended April 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:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 27,
2008

 

April 29,
2007

 

April 27,
2008

 

April 29,
2007

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

135,652

 

137,743

 

135,679

 

137,638

 

 

 

 

 

 

 

 

 

 

 

Dilutive potential common shares

 

1,968

 

1,968

 

1,964

 

2,001

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

137,620

 

139,711

 

137,643

 

139,639

 

 

NOTE G                 COMPREHENSIVE INCOME

 

Components of comprehensive income, net of taxes, are:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 27, 2008

 

April 29,
2007

 

April 27, 2008

 

April 29,
2007

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

77,561

 

$

68,001

 

$

165,742

 

$

143,326

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized loss on available-for- sale securities

 

0

 

0

 

0

 

(381

)

Deferred gain (loss) on hedging

 

11,855

 

(5,421

)

33,720

 

(4,810

)

Reclassification adjustment into net earnings

 

(5,290

)

488

 

(5,066

)

1,718

 

Foreign currency translation

 

271

 

459

 

5,052

 

1,773

 

Pension and post-retirement benefits

 

2,145

 

0

 

4,288

 

0

 

Other comprehensive income (loss)

 

8,981

 

(4,474

)

37,994

 

(1,700

)

Total comprehensive income

 

$

86,542

 

$

63,527

 

$

203,736

 

$

141,626

 

 

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.

 

12



 

NOTE H                 INVENTORIES

 

Principal components of inventories are:

 

 

 

April 27,
2008

 

October 28,
2007

 

 

 

 

 

 

 

Finished products

 

$

392,854

 

$

335,863

 

Raw materials and work-in-process

 

223,703

 

187,626

 

Materials and supplies

 

133,926

 

123,479

 

 

 

 

 

 

 

Total

 

$

750,483

 

$

646,968

 

 

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 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 April 27, 2008, the Company has included in accumulated other comprehensive loss, hedging gains of $30,913 (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 $8,496 and $8,130, before tax, were reclassified into earnings in the three and six months ending April 27, 2008, respectively, compared to losses of $777 and $2,759, before tax, in the three and six months ended April 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 April 27, 2008, the fair value of the Company’s futures contracts included on the statement of financial position was $(24,733).  Losses on closed futures contracts in the amount of $6,280 and $1,830, before tax, were recognized in earnings during the three and six months ended April 27, 2008, compared to losses of $5,353 and $13,304, 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.

 

13



 

Other:  During the second quarter of fiscal 2008, the Company held certain futures contract 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 six months ended April 27, 2008, the Company recorded a charge of $448 and $892, 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:

 

 

 

Pension Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 27, 2008

 

April 29, 2007

 

April 27, 2008

 

April 29, 2007

 

Service cost

 

$

5,032

 

$

4,750

 

$

10,015

 

$

9,500

 

Interest cost

 

11,074

 

10,637

 

22,331

 

21,275

 

Expected return on plan assets

 

(14,203

)

(13,376

)

(28,350

)

(26,752

)

Amortization of prior service cost

 

(38

)

(29

)

(76

)

(58

)

Recognized actuarial loss

 

1,317

 

1,466

 

2,633

 

2,932

 

 

 

 

 

 

 

 

 

 

 

Net periodic cost

 

$

3,182

 

$

3,448

 

$

6,553

 

$

6,897

 

 

 

 

Post-retirement Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 27, 2008

 

April 29, 2007

 

April 27, 2008

 

April 29, 2007

 

Service cost

 

$

682

 

$

748

 

$

1,364

 

$

1,496

 

Interest cost

 

5,649

 

5,767

 

11,299

 

11,534

 

Amortization of prior service cost

 

1,454

 

1,433

 

2,908

 

2,866

 

Recognized actuarial loss

 

736

 

923

 

1,472

 

1,845

 

 

 

 

 

 

 

 

 

 

 

Net periodic cost

 

$

8,521

 

$

8,871

 

$

17,043

 

$

17,741

 

 

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 April 27, 2008, recorded in other long-term liabilities is $37,463, of which $24,423 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 $838 and $1,676 included in expense in the second quarter and first six months of fiscal 2008, respectively.  The amount of accrued interest and penalties at April 27, 2008, associated with unrecognized tax benefits is $8,145.

 

14



 

The Company is regularly audited by federal and state taxing authorities.  During fiscal year 2007, the United States Internal Revenue Service (IRS) 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 IRS.  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 estimate the amount of any such change to previously recorded uncertain tax positions.

 

The effective tax rate for the second quarter and first six months of fiscal 2008 was 36.1 and 36.4 percent, respectively, compared to 37.4 and 36.0 percent for the comparable periods of fiscal 2007.  The lower rate for the second quarter is primarily due to discrete events in 2007 related to unfavorable prior period audit settlements.

 

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.

 

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.

 

15



 

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, we do not represent that these segments, if operated independently, would report the operating profit and other financial information shown below.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 27,
2008

 

April 29,
2007

 

April 27,
2008

 

April 29,
2007

 

Sales to Unaffiliated Customers

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

233,464

 

$

223,625

 

$

460,879

 

$

429,841

 

Refrigerated Foods

 

831,821

 

796,339

 

1,689,281

 

1,594,311

 

Jennie-O Turkey Store

 

291,889

 

270,044

 

583,338

 

546,658

 

Specialty Foods

 

182,534

 

169,069

 

371,321

 

346,148

 

All Other

 

54,376

 

45,520

 

110,430

 

91,722

 

Total

 

$

1,594,084

 

$

1,504,597

 

$

3,215,249

 

$

3,008,680

 

 

 

 

 

 

 

 

 

 

 

Intersegment Sales

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

0

 

$

0

 

$

0

 

$

0

 

Refrigerated Foods

 

1,114

 

839

 

1,979

 

1,129

 

Jennie-O Turkey Store

 

24,177

 

25,472

 

45,988

 

44,640

 

Specialty Foods

 

23

 

50

 

118

 

76

 

All Other

 

0

 

0

 

0

 

0

 

Total

 

$

25,314

 

$

26,361

 

$

48,085

 

$

45,845

 

Intersegment elimination

 

(25,314

)

(26,361

)

(48,085

)

(45,845

)

Total

 

$

0

 

$

0

 

$

0

 

$

0

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

233,464

 

$

223,625

 

$

460,879

 

$

429,841

 

Refrigerated Foods

 

832,935

 

797,178

 

1,691,260

 

1,595,440

 

Jennie-O Turkey Store

 

316,066

 

295,516

 

629,326

 

591,298

 

Specialty Foods

 

182,557

 

169,119

 

371,439

 

346,224

 

All Other

 

54,376

 

45,520

 

110,430

 

91,722

 

Intersegment elimination

 

(25,314

)

(26,361

)

(48,085

)

(45,845

)

Total

 

$

1,594,084

 

$

1,504,597

 

$

3,215,249

 

$

3,008,680

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Profit

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

41,611

 

$

39,194

 

$

77,980

 

$

72,178

 

Refrigerated Foods

 

55,625

 

44,187

 

118,431

 

86,129

 

Jennie-O Turkey Store

 

11,708

 

13,949

 

46,512

 

43,920

 

Specialty Foods

 

15,513

 

16,281

 

33,806

 

34,323

 

All Other

 

5,843

 

4,866

 

14,868

 

11,340

 

Total segment operating profit

 

$

130,300

 

$

118,477

 

$

291,597

 

$

247,890

 

 

 

 

 

 

 

 

 

 

 

Net interest and investment income

 

(3,176

)

(4,373

)

(14,834

)

(8,651

)

General corporate expense

 

(5,747

)

(5,562

)

(16,075

)

(15,189

)

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

$

121,377

 

$

108,542

 

$

260,688

 

$

224,050

 

 

16



 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (In Thousands of Dollars, Except Per Share Amounts)
 

CRITICAL ACCOUNTING POLICIES

 

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
 

Overview

 

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 in the Notes to Consolidated Financial Statements in this Form 10-Q.

 

The Company earned $0.56 per diluted share in the second quarter of fiscal 2008, compared to $0.49 per diluted share in the second quarter of fiscal 2007.  Significant factors impacting the quarter were:

 

·

Net sales and tonnage growth was reported by all five segments of the Company.

·

Refrigerated Foods operating profits increased significantly due to lower pork input costs and strong sales of value-added products.

·

Grocery Products also showed improved profit results, driven by sales growth on the SPAM family of products and Hormel Compleats microwave meals.

·

The Jennie-O Turkey Store segment reported operating profit declines, reflecting continued high grain and fuel related costs during the quarter.

·

Specialty Foods also reported lower profit results due to higher input costs and lower volumes in the Hormel Specialty Products and Diamond Crystal Brands operating segments.

 

Consolidated Results

 

Net earnings for the second quarter of fiscal 2008 increased 14.1 percent to $77,561 compared to $68,001 in the same quarter of 2007.  Diluted earnings per share for the quarter increased 14.3 percent to $0.56 from $0.49 last year.  Net earnings for the first six months of 2008 increased 15.6 percent to $165,742 from $143,326 in 2007.  Diluted earnings per share for the same period increased 16.5 percent to $1.20 from $1.03 in the prior year.

 

Net sales for the second quarter of fiscal 2008 increased 5.9 percent to $1,594,084 from $1,504,597 in 2007.  Tonnage increased 4.8 percent to 1,148 million lbs. for the second quarter compared to 1,096 million lbs. in the same quarter of last year.  Net sales for the first six months of fiscal 2008 increased 6.9 percent to $3,215,249 from $3,008,680 in the first six months of fiscal 2007.  Tonnage for the six months increased 5.0 percent to 2,330 million lbs. compared to 2,219 million lbs. in 2007.  Both value-added sales growth and additional commodity meat sales drove top-line results for fiscal 2008.

 

17



 

Net sales and tonnage comparisons for the quarter were positively impacted by 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 $29,764 of net sales and 19.6 million lbs. of tonnage to the second quarter results, and $68,731 of net sales and 48.9 million lbs. of tonnage to the six month results.  Excluding the impact of these acquisitions, net sales and tonnage increased 4.0 percent and 3.0 percent, respectively, compared to the second quarter of fiscal 2007, and increased 4.6 percent and 2.8 percent, respectively, compared to the first six months of last year.

 

Gross profit for the second quarter and first six months of fiscal 2008 was $376,639 and $778,658, respectively, compared to $345,886 and $705,323 for the same periods last year.  Gross profit as a percentage of net sales for the second quarter and six months increased to 23.6 and 24.2 percent in 2008, from 23.0 and 23.4 percent for the comparable quarter and six months of fiscal 2007.  Gross profit gains were primarily driven by the Refrigerated Foods segment due to lower hog input costs throughout the second quarter and first six months.  Increased results in that segment were able to offset declines in the Jennie-O Turkey Store segment, which continued to struggle with rising grain and fuel-related costs.  Value-added growth and cost containment initiatives across all segments also strengthened margins in fiscal 2008.  With corn futures near the $6.00 per bushel level and hog input costs rising significantly, the Company will continue to pursue additional pricing actions and operational efficiencies throughout the remainder of fiscal 2008 to recover additional costs, where possible.

 

Selling and delivery expenses for the second quarter and first six months of fiscal 2008 were $210,282 and $418,226, respectively, compared to $192,507 and $391,151 last year.  This increase is primarily due to higher shipping and handling costs of $11,100 and $18,052 for the second quarter and first six months, respectively, over the same periods in fiscal 2007.  Ongoing increases in fuel-related costs have driven freight and warehousing expenses above the prior year across all segments of the Company.  Brokerage fees have also increased compared to fiscal 2007.  As a percentage of net sales, selling and delivery expenses increased to 13.2 percent for the second quarter of fiscal 2008 compared to 12.8 percent in the comparable quarter of fiscal 2007.  For the first six months, selling and delivery expenses were 13.0 percent of net sales, even with the prior year.  Within this category, the Company’s advertising expenses were 1.7 percent of net sales for both the second quarter and first six months, consistent with prior year levels.  However, advertising for the Hormel Compleats product line is scheduled for the third quarter, and several other media campaigns are planned which should drive advertising expense for the full fiscal year above 2007 levels.  The Company expects overall selling and delivery expenses to exceed prior year levels for the remainder of fiscal 2008, primarily due to continued higher freight and warehousing costs.

 

Administrative and general expenses were $42,625 and $88,100 for the second quarter and first six months, respectively, compared to $40,433 and $82,343 last year.  As a percentage of net sales, administrative and general expenses for both the quarter and first six months were 2.7 percent, flat compared to prior year percentages.  Increased expense for both the quarter and first six months is primarily due to higher professional service expenses and accruals related to the Company’s incentive plans.  Favorable pension and insurance experience has offset a portion of those additional expenses.  The Company expects administrative and general expenses to remain at current levels for the remainder of fiscal 2008.

 

Equity in earnings of affiliates was $821 and $3,190 for the second quarter and first six months, respectively, compared to $(31) and $872 last year.  Increases for both the quarter and first six months were reported across several of the Company’s joint ventures.  The most notable gains were seen 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 $406 and $803 for the second quarter and first six months, respectively, compared to the prior year.

 

The effective tax rate for the second quarter and first six months of fiscal 2008 was 36.1 and 36.4 percent, respectively, compared to 37.4 and 36.0 percent for the comparable quarter and six months of fiscal 2007.  The lower rate for the second quarter is primarily due to discrete events in 2007 related to unfavorable prior period audit settlements.  The Company expects a full-year effective tax rate between 36.0 and 36.5 percent for fiscal 2008.

 

18



 

Segment Results

 

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, we do 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 L of the Notes to Consolidated Financial Statements in this Form 10-Q.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 27,
2008

 

April 29,
 2007

 

%
Change

 

April 27,
2008

 

April 29,
 2007

 

%
Change

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

233,464

 

$

223,625

 

4.4

 

$

460,879

 

$

429,841

 

7.2

 

Refrigerated Foods

 

831,821

 

796,339

 

4.5

 

1,689,281

 

1,594,311

 

6.0

 

Jennie-O Turkey Store

 

291,889

 

270,044

 

8.1

 

583,338

 

546,658

 

6.7

 

Specialty Foods

 

182,534

 

169,069

 

8.0

 

371,321

 

346,148

 

7.3

 

All Other

 

54,376

 

45,520

 

19.5

 

110,430

 

91,722

 

20.4

 

Total

 

$

1,594,084

 

$

1,504,597

 

5.9

 

$

3,215,249

 

$

3,008,680

 

6.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

41,611

 

$

39,194

 

6.2

 

$

77,980

 

$

72,178

 

8.0

 

Refrigerated Foods

 

55,625

 

44,187

 

25.9

 

118,431

 

86,129

 

37.5

 

Jennie-O Turkey Store

 

11,708

 

13,949

 

(16.1

)

46,512

 

43,920

 

5.9

 

Specialty Foods

 

15,513

 

16,281

 

(4.7

)

33,806

 

34,323

 

(1.5

)

All Other

 

5,843

 

4,866

 

20.1

 

14,868

 

11,340

 

31.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total segment operating profit

 

$

130,300

 

$

118,477

 

10.0

 

$

291,597

 

$

247,890

 

17.6

 

Net interest and investment income

 

(3,176

)

(4,373

)

27.4