Hormel Foods 10-Q 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Exact name of registrant as specified in its charter)
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(Former name, former address and former fiscal year, if changed since last report.)
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TABLE OF CONTENTS
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In Thousands of Dollars)
See notes to consolidated financial statements
See notes to consolidated financial statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
See notes to consolidated financial statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
See notes to consolidated financial statements
HORMEL FOODS CORPORATION
(In Thousands of Dollars, Except Per Share Amounts)
NOTE A GENERAL
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 Companys Annual Report on Form 10-K for the fiscal year ended October 28, 2007.
The Company enters into various agreements guaranteeing specified obligations of affiliated parties. The Companys 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 Companys 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
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 51s 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 sponsors 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 sponsors 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 Companys product offerings to additional foodservice customers.
Operating results for Burke are included in the Companys 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.
NOTE C STOCK-BASED COMPENSATION
The Company has stock incentive plans for employees and non-employee directors, including stock options and nonvested shares. The Companys 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:
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:
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:
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 Companys 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 Companys 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:
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:
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.
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).
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.
The gross carrying amount and accumulated amortization for definite-lived intangible assets are presented below.
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:
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 $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:
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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.
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.
Net periodic benefit cost for pension and other post-retirement benefit plans consists of the following:
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 Companys 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.
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 Companys 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.
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 Dans 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.
Sales and operating profits for each of the Companys 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.
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 Companys Critical Accounting Policies, as disclosed in its Annual Report on Form 10-K for the year ended October 28, 2007.
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 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.
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 Companys 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 Companys 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 Companys joint ventures. The most notable gains were seen on the Companys 49.0 percent owned joint venture, Carapelli USA, LLC, and the Companys 49.0 percent owned joint venture, San Miguel Purefoods (Vietnam) Co. Ltd. Minority interests in the Companys 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.
Net sales and operating profits for each of the Companys 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.