EX-13.1 3 a07-1424_1ex13d1.htm EX-13

Exhibit 13.1

SELECTED PAGES OF 2006 ANNUAL STOCKHOLDERS’ REPORT

Selected Financial Data

 

 

 

 

 

Restated*

 

Restated*

 

Restated*

 

Restated*

 

(In Thousands, Except Per Share Amounts)

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

5,745,481

 

$

5,413,997

 

$

4,779,875

 

$

4,200,328

 

$

3,910,314

 

Net Earnings

 

286,139

 

254,603

 

233,550

 

186,403

 

188,981

 

% of net sales

 

4.98

%

4.70

%

4.89

%

4.44

%

4.83

%

EBIT(1)

 

450,709

 

425,939

 

380,377

 

311,413

 

317,701

 

% of net sales

 

7.84

%

7.87

%

7.96

%

7.41

%

8.12

%

EBITDA(2)

 

571,810

 

541,128

 

475,122

 

399,433

 

400,939

 

% of net sales

 

9.95

%

9.99

%

9.94

%

9.51

%

10.25

%

Return on Invested Capital(3)

 

13.91

%

13.60

%

13.43

%

11.88

%

13.12

%

 

 

 

 

 

 

 

 

 

 

 

 

Financial Position

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

3,060,306

 

$

2,846,560

 

$

2,562,793

 

$

2,424,076

 

$

2,253,542

 

Long-term Debt

 

 

 

 

 

 

 

 

 

 

 

Less Current Maturities

 

350,054

 

350,430

 

361,510

 

395,273

 

409,648

 

Shareholders’ Investment

 

1,802,912

 

1,598,730

 

1,422,258

 

1,273,858

 

1,135,755

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Cash Flow Data

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

121,101

 

115,189

 

94,745

 

88,020

 

83,238

 

Capital Expenditures

 

141,516

 

107,094

 

80,363

 

67,104

 

64,465

 

Acquisitions of Businesses

 

78,925

 

366,496

 

21,452

 

240,970

 

476

 

Share Repurchase

 

36,978

 

22,977

 

37,525

 

6,119

 

10,762

 

Dividends Paid

 

75,840

 

69,371

 

61,343

 

57,092

 

53,437

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

Basic Shares

 

137,845

 

138,040

 

138,596

 

138,440

 

138,706

 

Diluted Shares

 

139,561

 

139,577

 

140,179

 

139,710

 

140,292

 

Earnings per Share – Basic

 

2.08

 

1.84

 

1.69

 

1.35

 

1.36

 

Earnings per Share – Diluted

 

2.05

 

1.82

 

1.67

 

1.33

 

1.35

 

Dividends per Share

 

0.56

 

0.52

 

0.45

 

0.42

 

0.39

 

Shareholders’ Investment Per Share

 

13.10

 

11.60

 

10.32

 

9.19

 

8.21

 

 


*Restated for retrospective application of FIFO inventory valuation

(1)Net earnings before income taxes plus interest expense, less interest and investment income

(2)Net earnings before income taxes plus interest expense, depreciation and amortization, less interest and investment income

(3)After-tax EBIT divided by total debt plus total shareholders’ investment

17




Management’s Discussion and Analysis of Financial Condition

and Results of Operations (In Thousands of Dollars, Except Per Share Amounts)

 

Executive Overview

Fiscal 2006: Fiscal 2006 was another record year for Hormel Foods, with net sales, tonnage volume, and profits exceeding the prior year. The company was able to deliver on its growth objectives to grow top-line sales by five percent and bottom-line net earnings by ten percent. The Specialty Foods and All Other segments ended fiscal 2005 with strong results, and that momentum carried into fiscal 2006, with these units showing the largest operating profit increases over the prior year. Due to higher input costs, the Jennie-O Turkey Store segment reported decreased operating profits compared to a record prior year, but still reported excellent growth on value-added product lines. All the business units were negatively impacted by higher fuel and energy costs for fiscal 2006.

The company’s balanced product portfolio was again evident in fiscal 2006, as top-line growth was reported in all five segments. Excluding the incremental impact of acquisitions, all segments still reported favorable sales results compared to fiscal 2005, demonstrating the company’s ability to grow core product categories with new value-added offerings and successful new product initiatives. The return received from the company’s ongoing investment in research and development was evident during fiscal 2006, as $852,573 or 14.8 percent of net sales were attributable to products introduced since fiscal 2000.

During fiscal 2006, the company completed the acquisition of Valley Fresh and continued to gain efficiencies from the integration of the four businesses acquired in fiscal 2005. The Farmer John business did not perform as well as we had hoped in 2006. We continue to emphasize converting its product mix to value-added items and to leverage its strong brand recognition on the West coast.

Fiscal 2007 Outlook: Overall, the company is well positioned going into the next year. Through organic growth, innovation, and strategic acquisitions, the company has built a well balanced product portfolio that buffers the effects of fluctuations in the protein cycle. The company will continue to focus on new product development, building brand awareness, and the expansion of value-added product lines during fiscal 2007. Additional marketing to support the company’s branded products is expected, which should continue to enhance the results for these product lines.

The most significant risk to fiscal 2007 results is the potential impact of higher grain prices. The largest impact of these higher prices will be on the Jennie-O Turkey Store segment. The company intends to pursue pricing strategies which will pass a portion of these additional costs on to customers. Our value-added product initiatives should also help alleviate some of the cost increases. The higher grain prices will not have as significant an impact on our pork input costs, as most of our hog contracts have been converted to market-based formulas.

The company also announced two acquisitions that were completed subsequent to the end of the fiscal year, which will further expand the company’s portfolio and expand production capacity in fiscal 2007. The company intends to continue providing shareholder value through acquisition opportunities that are accretive to the overall business and complement current product offerings.

Critical Accounting Policies

Hormel Foods’ discussion and analysis of its financial condition and results of operations are based upon the company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The company evaluates, on an on-going basis, its estimates for reasonableness as changes occur in its business environment. The company bases its estimates on experience, the use of independent third-party specialists, and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments, estimates, and uncertainties, and potentially result in materially different results under different assumptions and conditions. Hormel Foods believes the following are its critical accounting policies:

Inventory Valuation: The company values its pork inventories at the lower of cost or USDA market prices (primal values). When the carcasses are disassembled and transferred from primal processing to various manufacturing departments, the primal values, as adjusted by the company for product specifications and further processing, become the basis for calculating inventory values. Turkey raw materials are represented by the deboned meat quantities. The company values these raw materials using a concept referred to as the “meat cost pool.” The meat cost pool is determined by combining the cost to grow turkeys with processing costs, less any net sales revenue from by-products created from the processing and not used in producing company products. The company has developed a series of ratios using historical data and current market conditions (which themselves involve estimates and judgment determinations by the company) to allocate the meat cost pool to each meat component. In addition, substantially all inventoriable expenses, meat, packaging, and supplies are valued by the first-in, first-out method.

18




The company changed its accounting method for certain inventory items from last-in, first-out (LIFO) to first in, first out (FIFO) effective with the first quarter of fiscal 2006. All prior year information has been restated for the retrospective application of this change in accounting principle. See additional discussion in Note A of the Notes to Consolidated Financial Statements.

Goodwill and Other Intangibles: The company’s identifiable intangible assets are amortized over their useful life, unless the useful life is determined to be indefinite. The useful life of an identifiable intangible asset is based on an analysis of several factors including: contractual, regulatory, or legal obligations, demand, competition, and industry trends. Goodwill and indefinite-lived intangible assets are not amortized, but are tested at least annually for impairment.

The goodwill impairment test is a two-step process performed at the reporting unit level. The company’s current reporting units represent operating segments (aggregations of business units that have similar economic characteristics and share the same production facilities, raw materials, and labor force). First, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. The estimated fair value of each reporting unit is determined on the basis of estimated discounted cash flow. If the carrying value exceeds the fair value of the reporting unit, then a second step must be completed in order to determine the amount of goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference. Annual impairment testing for indefinite-lived intangible assets compares the fair value and carrying value of the intangible. The fair value of indefinite-lived intangible assets is determined on the basis of estimated discounted cash flows. If the carrying value exceeds fair value, the indefinite-lived intangible asset is considered impaired and an impairment charge is recorded for the difference. Intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate elements of long-lived assets.

The assumptions used in the estimate of fair value are consistent with historical performance and the estimates and assumptions used in determining future profit plans for each reporting unit. The company reviews product growth patterns, market share information, industry trends, changes in distribution channels, and economic indicators in determining the estimates and assumptions used to develop cash flow and profit plan assumptions.

Accrued Promotional Expenses: Accrued promotional expenses are unpaid liabilities for customer promotional programs in process or completed as of the end of the fiscal year. There are two components to these liabilities: promotional contractual accruals and voluntary performance accruals. Promotional contractual accruals are based on agreements with customers for defined performance. The liability relating to these agreements is based on a review of the outstanding contracts on which performance has taken place, but for which the promotional payments relating to such contracts remain unpaid as of the end of the fiscal year. Voluntary performance accruals are funded through customer purchases and are based on historical promotional expenditure rates by product line. Significant estimates used to determine these liabilities include the level of customer performance and the historical promotional expenditure rate versus contracted rates.

Employee Benefit Plans: The company incurs expenses relating to employee benefits such as noncontributory defined benefit pension plans and postretirement health care benefits. In accounting for these employment costs, management must make a variety of assumptions and estimates including mortality rates, discount rates, overall company compensation increases, expected return on plan assets, and health care cost trend rates. The company considers historical data as well as current facts and circumstances when determining these estimates. The company uses third-party specialists to assist management in the determination of these estimates and the calculation of certain employee benefit expenses.

Income Taxes: The company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes.” The company computes its provision for income taxes based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it operates. Significant judgment is required in evaluating the company’s tax positions and determining its annual tax provision. While the company considers all of its tax positions fully supportable, the company is occasionally challenged by various tax authorities regarding the amount of taxes due. In evaluating the exposure associated with various existing tax positions, the company establishes reserves when it becomes likely that a tax position may be challenged by tax authorities and that the company may not fully sustain that tax position. The company adjusts these reserves as facts and circumstances change. The company believes that its reserves reflect the probable outcome of known tax exposures. To the extent the company was to favorably resolve matters for which accruals have been established or be required to pay amounts in excess of its reserves, the company’s effective tax rate would be impacted in the year of resolution.

19




Results of Operations

Overview

The company is a processor of branded and unbranded food products for retail, foodservice, and fresh product customers. The company operates in the following five segments:

Segment

 

Business Conducted

 

 

 

Grocery Products

 

This segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market. This segment also includes the results of Valley Fresh, Inc. (Valley Fresh) acquired in the second quarter of fiscal 2006, and Arriba Foods, Inc. (Mexican Accent), acquired in the second quarter of fiscal 2005.

 

 

 

Refrigerated Foods

 

This segment includes the Meat Products and Foodservice business units. This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork products for retail, foodservice, and fresh product customers. This segment also includes the Precept Foods, LLC operation, which offers fresh, case-ready, branded pork and beef products to its retail customers. Precept Foods, LLC is a 51 percent owned joint venture between Hormel Foods Corporation and Cargill Meat Solutions Corporation (formerly Excel Corporation), a wholly owned subsidiary of Cargill, Incorporated. Clougherty Packing Company (Farmer John), which was acquired in December 2004, is included as an operating segment within Refrigerated Foods, and the Meat Products business unit includes the results of operations for Lloyd’s Barbeque Company (Lloyd’s), which was acquired in April 2005.

 

 

 

Jennie-O Turkey Store

 

This segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers.

 

 

 

Specialty Foods

 

This segment includes the Diamond Crystal Brands (DCB), Century Foods International (CFI), and Hormel Specialty Products (HSP) operating segments. This segment consists of the packaging and sale of various sugar and sugar substitute products, salt and pepper products, dessert mixes, 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. Diamond Crystal Brands includes the results of operations for Hormel HealthLabs (HHL) and Mark-Lynn Foods Inc. (Mark-Lynn), which was acquired in March 2005.

 

 

 

All Other

 

This segment includes the Dan’s Prize and Hormel Foods International (HFI) operating segments. These businesses produce, market, and sell beef products and manufacture, market, and sell company products internationally. This segment also includes various miscellaneous corporate sales. Previously, this segment also included Vista International Packaging, a manufacturer of food packaging (i.e., casings for dry sausage), which was sold in June 2004.

 

Fiscal Years 2006 and 2005:

Consolidated Results

Net Earnings: Net earnings for the fourth quarter of fiscal 2006 were $90,004, an increase of 9.5 percent compared to earnings of $82,230 for the same period last year. Diluted earnings per share were $.64 compared to $.59 for the same period last year. Net earnings for the year increased 12.4 percent to $286,139 from $254,603 in fiscal 2005. Diluted earnings per share for the same period increased to $2.05 from $1.82 in the prior year.

Fiscal 2006 pretax earnings include an $11,261 charge ($0.05 after-tax per diluted share) for expenses relating to non-qualified plan settlements due to executive retirements, a $9,200 charge ($0.04 after-tax per diluted share) for stock option expense recorded under SFAS 123(R), primarily due to retirements and expensing of new option grants to retirement-eligible individuals, and a $6,218 benefit ($0.03 after-tax per diluted share) from a litigation settlement. Net earnings also benefited from a reduced effective tax rate resulting from $8,238 ($0.06 after-tax per diluted share) of discrete tax benefits recognized during fiscal 2006, including the tax benefits related to a Medicare subsidy, and the settlement of various state and federal tax audits. On a combined basis, these items resulted in no impact on diluted earnings per share.

Sales: Net sales for the fourth quarter increased to $1,557,309 from $1,477,908 in 2005, an increase of 5.4 percent. Net sales for the twelve months of fiscal 2006 increased 6.1 percent to $5,745,481 compared to $5,413,997 last year. Tonnage volume for the fourth quarter increased 5.3 percent to 1.17 billion lbs. from 1.11 billion lbs. last year. Tonnage volume for the year increased 5.8 percent to 4.34 billion lbs. from 4.10 billion lbs. in the prior year.

Net sales and tonnage volume comparisons were positively impacted by the 2006 acquisition of Valley Fresh, which contributed $13,577 of net sales and 9.2 million lbs. of tonnage volume to the fourth quarter results, and $29,223 of net sales and 19.6 million lbs. of tonnage volume to the total fiscal 2006

20




results. Fiscal 2006 comparisons for the full year were also impacted by the 2005 acquisitions of Farmer John, Mexican Accent, Mark-Lynn, and Lloyd’s. Excluding the incremental impact of all acquisitions, net sales and tonnage volume showed increases of 2.8 percent and 2.0 percent, respectively, compared to fiscal 2005.

Gross Profit: Gross profits were $376,562 and $1,383,190 for the quarter and year, respectively, compared to $368,161 and $1,284,448 last year. As a percent of net sales, gross profit decreased to 24.2 percent for the fourth quarter compared to 24.9 percent in 2005, and increased to 24.1 percent for the year compared to 23.7 percent in 2005. Compared to an outstanding fourth quarter in fiscal 2005, the Jennie-O Turkey Store reported the largest decrease in margin percentage for the quarter. Higher input costs were a significant factor as value-added sales demand exceeded the available supply of breast meat, resulting in the need to purchase breast meat while the market was very high. The Specialty Foods segment offset a portion of these decreases with significant margin increases for both the fourth quarter and fiscal year, driven by favorable changes in product mix and production efficiencies achieved in 2006. The All Other segment also contributed to margin increases for the year, while the Grocery Products and Refrigerated Foods segments maintained margins consistent with fiscal 2005 levels. Margins for the full year also reflect a $6,218 gain on litigation recognized in the third quarter of fiscal 2006.

The company expects hog prices in 2007 to approximate fiscal 2006 levels. The outlook for grain shows significantly higher prices entering the upcoming year. Margins will likely be pressured by this price increase, primarily in the Jennie-O Turkey Store segment. The company intends to pursue pricing strategies which will pass a portion of these additional costs on to customers, and expects that additional growth on key value-added product lines should also offset the incremental expense in fiscal 2007.

Selling and Delivery: Selling and delivery expenses for the fourth quarter and year were $187,257 and $754,143, respectively, compared to $180,732 and $691,792 last year. The company experienced significantly higher shipping and handling costs throughout fiscal 2006, increasing $48,049 for the twelve months compared to fiscal 2005. This increase reflects increased tonnage volume, the impact of acquisitions made in both fiscal 2006 and fiscal 2005, and substantially higher freight and warehousing costs. As a percent of net sales, selling and delivery expenses decreased to 12.0 percent for the fourth quarter compared to 12.2 percent in 2005, and increased to 13.1 percent for the year compared to 12.8 percent in 2005. Reduced marketing expenses contributed to the percentage decrease for the quarter. Approximately $3,900 is also reflected in selling and delivery expense for fiscal 2006 related to settlements on non-qualified plans resulting from executive retirements. As a percent of sales, the company expects selling and delivery expenses to approximate 13.4 percent in fiscal 2007, with increased media and marketing support behind the Hormel brand planned for 2007.

Administrative and General: Administrative and general expenses were $44,829 and $182,891 for the quarter and year, respectively, compared to $48,567 and $172,242 last year. As a percent of net sales, administrative and general expenses for the fourth quarter and year were 2.9 and 3.2 percent, respectively, compared to 3.3 and 3.2 percent, respectively, for the quarter and year in fiscal 2005. The decrease in the fourth quarter primarily reflects retirement related benefits for executive officers of approximately $6,000 that were recognized in the fourth quarter of fiscal 2005. Intangible asset amortization related to recent acquisitions increased $1,383 and $2,326 for the fourth quarter and year, respectively, compared to fiscal 2005. Certain expenses in fiscal 2006 also contributed to the increase for the year. In the first quarter, the company recognized $9,200 of stock option expense recorded under SFAS 123(R), primarily due to executive retirements and expensing of new option grants to retirement-eligible individuals. Approximately $5,800 has also been recognized in fiscal 2006 for expenses related to settlements on non-qualified plans resulting from executive retirements. Offsetting these items was a $2,286 gain on the sale of a company airplane during the third quarter. The company expects administrative and general expenses, as a percent of sales, to approximate 2.8 percent in fiscal 2007.

Research and development expenses for the fourth quarter increased to $4,688 from $4,226 in the comparable quarter of 2005, and for the fiscal year increased to $18,631 from $17,585 in 2005. As new product development and the expansion of value-added product lines continue to be priorities for the company, research and development expenses are again expected to increase during fiscal 2007.

Equity in Earnings of Affiliates: Equity in earnings of affiliates was $843 and $4,553 for the quarter and year, respectively, compared to $699 and $5,525 last year. The company’s 40 percent owned Philippine joint venture, Purefoods-Hormel Company, reported lower results throughout fiscal 2006 (down $242 and $1,360 for the fourth quarter and fiscal year, respectively). Decreases were also experienced by the company’s 50 percent owned joint venture, Herdez Corporation, (down $152 and $446 for the fourth quarter and fiscal year, respectively.) Minority interests in the company’s consolidated investments are also reflected in these figures. In the third quarter of fiscal

21




2005, the company recorded a minority interest gain of $461 related to its ownership in the Beijing Hormel Foods Corporation. Excluding this gain, minority interests represented reduced losses of $463 and $1,204 for the fourth quarter and fiscal year, respectively, compared to 2005.

Subsequent to the end of fiscal 2006, the company completed a new joint venture agreement with San Miguel Corporation for a hog production and processing business in Vietnam. The company has a preliminary investment in this joint venture of $20,483, and the 49 percent equity ownership will be reported in the Hormel Foods International operating segment. Due to this new agreement, as well as planned improvements on existing joint ventures, the company expects equity in earnings of affiliates to increase in fiscal 2007.

In conformity with U.S. generally accepted accounting principles, the company accounts for its majority-owned operations under the consolidation method. Investments in which the company owns a minority interest are accounted for under the equity or cost method. These investments, along with receivables from other affiliates, are included in the balance sheet line item “Investments in and receivables from affiliates.” The composition of this line item at October 29, 2006, was as follows:

Country

 

Investments/Receivables

 

United States

 

$

24,929

 

Philippines

 

46,650

 

Mexico

 

5,105

 

Total

 

$

76,684

 

 

Income Taxes: The company’s effective tax rate for the fourth quarter and year was 36.2 and 33.5 percent, respectively, in fiscal 2006 compared to 38.1 and 37.4 percent, respectively, for the quarter and year in fiscal 2005. The decrease in the rates compared to fiscal 2005 primarily represents the benefits from a domestic manufacturing activities tax deduction that was effective for the company beginning in fiscal 2006. The company also recognized $8,238 of discrete tax benefits in fiscal 2006, including a first quarter discrete item recorded for a tax benefit related to a Medicare subsidy, and benefits related to the settlement of various state and federal tax audits throughout fiscal 2006. The company expects the effective tax rate in fiscal 2007 to approximate 35.3 to 35.8 percent.

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 inter segment cooperation, cost allocations, and sharing of assets. 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 K of the Notes to Consolidated Financial Statements.)

 

 

Fourth Quarter Ended

 

Year Ended

 

 

 

 

 

Restated*

 

 

 

 

 

Restated*

 

 

 

 

 

October 29, 2006

 

October 30, 2005

 

% Change

 

October 29, 2006

 

October 30, 2005

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

242,037

 

$

232,801

 

4.0

 

$

846,494

 

$

799,291

 

5.9

 

Refrigerated Foods

 

770,560

 

739,466

 

4.2

 

2,958,365

 

2,801,632

 

5.6

 

Jennie-O Turkey Store

 

316,049

 

311,293

 

1.5

 

1,105,456

 

1,088,324

 

1.6

 

Specialty Foods

 

169,825

 

144,350

 

17.6

 

624,586

 

518,673

 

20.4

 

All Other

 

58,838

 

49,998

 

17.7

 

210,580

 

206,077

 

2.2

 

Total

 

$

1,557,309

 

$

1,477,908

 

5.4

 

$

5,745,481

 

$

5,413,997

 

6.1

 

Segment Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

46,671

 

$

45,524

 

2.5

 

$

137,580

 

$

132,047

 

4.2

 

Refrigerated Foods

 

39,058

 

38,766

 

0.8

 

133,212

 

129,831

 

2.6

 

Jennie-O Turkey Store

 

36,700

 

41,549

 

(11.7

)

128,734

 

136,071

 

(5.4

)

Specialty Foods

 

15,045

 

8,303

 

81.2

 

48,579

 

27,310

 

77.9

 

All Other

 

11,683

 

8,658

 

34.9

 

33,222

 

22,384

 

48.4

 

Total segment operating profit

 

149,157

 

142,800

 

4.5

 

481,327

 

447,643

 

7.5

 

Net interest and investment income

 

(4,207

)

(6,799

)

38.1

 

(20,166

)

(19,213

)

(5.0

)

General corporate expense

 

(3,838

)

(3,239

)

(18.5

)

(30,618

)

(21,704

)

(41.1

)

Earnings before income taxes

 

$

141,112

 

$

132,762

 

6.3

 

$

430,543

 

$

406,726

 

5.9

 

 


*Retrospective application of FIFO inventory valuation (see Note A of the Notes to Consolidated Financial Statements)

22




Grocery Products: Grocery Products net sales increased 4.0 percent for the quarter and 5.9 percent for the year compared to fiscal 2005. Sales tonnage volume increased 1.0 percent for the quarter and 6.1 percent for the year compared to year ago results. Segment profit for Grocery Products increased 2.5 percent for the quarter and 4.2 percent for the year compared to fiscal 2005. Raw material costs were mixed for most of the year, with favorable conditions in pork raw materials used in the SPAM family of products and bacon bits being offset by higher costs for imported beef used in Stagg chili, Dinty Moore beef stew, and hash products. The outlook for raw material costs in the first quarter of fiscal 2007 is similar to costs at the end of fiscal year 2006.

Full year comparisons are impacted by the acquisitions of Mexican Accent in 2005 and Valley Fresh in the second quarter of fiscal 2006, and fourth quarter comparisons are impacted by the Valley Fresh acquisition. These acquisitions contributed an incremental $10,952 and $31,984 to net sales, and 5,734,000 lbs. and 27,719,000 lbs. to tonnage volume for the quarter and year, respectively. Excluding these acquisitions, net sales for the segment decreased 0.7 percent and increased 1.9 percent for the quarter and year, respectively, while tonnage volume decreased 3.0 percent and increased 0.3 percent for the quarter and year, respectively. Both of these acquisitions have been fully integrated into the company’s direct sales force.

Segment results compared to the prior year fourth quarter were driven by the continued success of the company’s microwave line of products and the addition of Valley Fresh. These products continue to receive strong consumer acceptance due to their convenience and the variety of products offered. Tonnage volume on the microwave product line increased 2,847,000 lbs. or 16.1 percent compared to the fourth quarter of fiscal 2005. Other product lines in the segment faced difficult comparisons to the fourth quarter of fiscal 2005 due to strong sales as a result of the active hurricane season. Declines in major product lines include the SPAM family of products (down 512,000 lbs. or 2.5 percent), Dinty Moore canned stew (down 3,175,000 lbs. or 18.4 percent), and Hormel chili (down 780,000 lbs. or 2.4 percent).

The company continually works to improve product formulations and market penetration for existing product lines. In the fourth quarter of fiscal 2006, the company reformulated the recipe for bacon bits and pieces to result in a product with more of a “homestyle” texture and appearance. Consumer research has shown a favorable response to the change thus far. The segment is also in the process of repositioning the Stagg line of chili products to focus on the western half of the United States. This is consistent with the product line’s positioning prior to a national roll-out approximately two years ago, and Hormel chili will be more aggressively marketed in areas where Stagg will no longer compete.

Refrigerated Foods: Net sales by the Refrigerated Foods segment were up 4.2 percent for the quarter and 5.6 percent for the twelve months compared to fiscal 2005. Sales tonnage increased 5.2 percent for the quarter and 7.0 percent for the fiscal year as compared to 2005. Net sales and tonnage volume comparisons for the twelve months were positively impacted by the fiscal 2005 acquisitions of Farmer John and Lloyd’s. Excluding the incremental impact of these acquisitions, net sales and tonnage volume increased 1.3 percent and 2.7 percent respectively, compared to the prior year.

Segment profit for Refrigerated Foods increased 0.8 percent in the fourth quarter, and 2.6 percent for the twelve months, compared to fiscal 2005. Key primal markets returned to more normal levels during the fourth quarter, with the exception of hams which stayed at higher than expected levels. Belly markets declined following the unexpected spike experienced during the third quarter. The improved market conditions resulted in improved margins across several key value-added product categories. Segment profit for the quarter was impacted by a $4,045 write-down on the company’s Houston, Texas plant. The plant has been closed and will be sold, as its geographic location was not an efficient fit within the company’s manufacturing system. For the fiscal year, operating profits also reflect a $3,109 gain on litigation recognized in the third quarter.

Hog costs for the fourth quarter were comparable to the prior year, but have decreased 8.4 percent for the full fiscal year. The company expects markets to continue to decreases lightly in the fiscal 2007 first quarter, to levels comparable to the first quarter of fiscal 2006, while supply is expected to increase approximately 1.5 percent in the upcoming year. The current outlook also shows significantly higher grain costs going into fiscal 2007. Although this will increase hog production costs at Farmer John, the impact on other business units in Refrigerated Foods is expected to be minimal as most hog contracts have been converted to market-based formulas.

The company’s hog processing for the fourth quarter increased 4.2 percent to 2,380,000 hogs from 2,285,000 hogs for the comparable period last year. For the fiscal year, hog processing increased 6.7 percent to 9,160,000 hogs from 8,583,000 hogs in fiscal 2005. Excluding Farmer John, hog processing increased 4.0 percent in fiscal 2006, compared to the prior year.

23




The Meat Products business unit reported strong fourth quarter and fiscal year tonnage volume and operating profit results. Fourth quarter increases over the prior year included Hormel 17 oz. refrigerated entrees (up 465,000 lbs. or 8.3 percent), retail sliced pepperoni (up 629,000 lbs. or 17.9 percent), and Hormel Always Tender flavored meats (up 848,000 lbs. or 13.7 percent). In the deli category, key product lines posting growth over the prior year fourth quarter included Hormel party trays (up 771,000 lbs. or 46.1 percent), and DiLusso Deli Company products (up 329,000 lbs. or 32.8 percent). The national rollout of Hormel Natural Choice pre-sliced deli sandwich meats has also been very successful in fiscal 2006, resulting in an additional 2,120,000 lbs. for the fourth quarter and 5,910,000 lbs. for the twelve months.

The Foodservice business unit reported a slight decrease in tonnage for the fourth quarter, representing decreases in shelf-stable products due to the timing of hurricane relief business that shipped in the fiscal 2005 fourth quarter. Despite this decrease for the quarter, tonnage for the fiscal year was up 3.8 percent and operating profits were up 20.6 percent compared to fiscal 2005, driven by improved market conditions and value-added growth. Key product lines posting double-digit growth in the fourth quarter included BBQ/café h (up 482,000 lbs. or 12.8 percent), pizza toppings (up 931,000 lbs. or 10.2 percent), and premium pork (up 463,000 lbs. or 10.4 percent).This business unit ended the year with a record tonnage week, and that momentum is expected to continue into fiscal 2007.

The Precept Foods, LLC joint venture delivered a strong fourth quarter, driven by the continued rollout of products to additional locations for existing customers. Tonnage for case-ready beef and pork products increased 3,264,000 lbs. or 58.4 percent for the fourth quarter, and 13,260,000 lbs. or 66.4 percent for the year compared to the fiscal 2005 comparable periods.

The company continues to pursue efficiencies from the 2005 acquisition of Farmer John. Although market conditions and product mix issues negatively impacted operating profits in fiscal 2006, new strategies are being implemented to enhance Farmer John’s profitability in fiscal 2007. These include more aggressive pricing strategies, expanded media campaigns, and continued conversion to a more value-added product mix. Two new acquisitions recently announced by the company will also expand the Refrigerated Foods segment in fiscal 2007. The acquisition of Provena Foods, which is expected to close in December, 2006, adds capacity to grow the company’s dry sausage business, and the acquisition of Saag’s Products, Inc. enhances the company’s value-added product portfolio with premium quality gourmet sausages and specialty smoked meats. Farmer John will be a strategic raw material supplier to both locations because of their geographic proximity in California.

Jennie-O Turkey Store: Jennie-O Turkey Store (JOTS) net sales for the quarter and year increased 1.5 and 1.6 percent, respectively, compared to fiscal 2005 periods. Tonnage volume remained flat for the fourth quarter and decreased 3.3 percent for the year compared to prior year results. However, the segment continued to improve its value-added versus commodity product mix. Over 60.0 percent of volume was attributed to value-added products in fiscal 2006, which exceeded a half billion lbs. for the first time.

Segment profit for JOTS decreased 11.7 percent for the fourth quarter and 5.4 percent for the year compared to a record fiscal 2005. The decline in segment profitability for both the quarter and year was due primarily to decreased commodity meat volumes and higher meat input costs compared to the prior year. In 2005, the company was able to capitalize on one-time opportunities to procure additional turkeys which resulted in increased harvest volume and higher commodity meat sales. The opportunity to acquire additional turkeys was not available in the current year. In addition, the company experienced flock livability issues throughout fiscal 2006, which further reduced meat availability. Strong demand for value-added products also caused the company to acquire breast meat on the outside market at a cost higher than internal production costs, which decreased gross margins. To compensate for this, the segment increased the harvest of company-owned birds by bringing them to market at a younger age than normal, which caused unfavorable breast meat yields due to the reduction in the age of harvested birds.

Segment profits did benefit from the continued emphasis on value-added sales growth, which mitigated a portion of the input cost increases. For the fourth quarter and year, each of the segment’s value-added businesses surpassed prior year revenue and tonnage levels. The Foodservice division led the segment in growth in the fourth quarter with net sales up 16.3 percent and tonnage up 13.7 percent, through the marketing of products such as Jennie-O Turkey Store turkey burgers (up 624,000 lbs. or 89.3 percent). The Deli division also reported strong growth for the quarter as revenue increased 7.3 percent and tonnage increased 6.4 percent. Gains were reported on Jennie-O Turkey Store rotisserie turkey breast (up 857,000 lbs. or 25.0 percent), Jennie-O Turkey Store Homestyle products (up 814,000 lbs. or 23.9 percent), and Jennie-O Turkey Store Premium Roasts (up 551,000 lbs. or 45.1 percent). The company’s retail division experienced continued success with Jennie-O Turkey Store branded fresh whole birds (up 1,618,000 lbs. or 63.0 percent) and Jennie-O Turkey Store Oven Ready turkeys (up 284,000 lbs. or 17.3 percent). During fiscal 2006, the company also launched Jennie-O Turkey Store tub luncheon meats, which continue to gain distribution and contributed 531,000 lbs. of volume to the fourth quarter of fiscal 2006. For the fiscal year, operating profits also benefited from a $3,109 gain on litigation recognized in the third quarter.

24




Feed costs for both the fourth quarter and full year were below fiscal 2005 levels. However, grain costs are expected to be significantly higher in fiscal 2007, which could decrease segment profitability. Some concern also exists in the industry about high egg sets and poult placements and the impact they could have on commodity meat and whole bird pricing in the upcoming year. To combat raw material and market pressures, the segment will pursue aggressive pricing strategies and continue its focus on developing new value-added products during fiscal 2007.

Specialty Foods: Specialty Foods net sales increased 17.6 percent for the fourth quarter and 20.4 percent for the twelve months compared to fiscal 2005. Sales tonnage increased 15.3 and 17.3 percent for the quarter and twelve months, respectively, compared to last year. Net sales and tonnage volume comparisons for the twelve months were positively impacted by the fiscal 2005 acquisition of Mark-Lynn. Excluding the incremental impact of this acquisition, net sales and tonnage volume increased 15.3 percent and 10.5 percent respectively, compared to the prior year.

Specialty Foods segment profit increased 81.2 percent and 77.9 percent, for the quarter and fiscal year, respectively, compared to fiscal 2005. All three operating segments within the segment reported outstanding results for both the fourth quarter and fiscal year, driven by adjustments to the product portfolio and efficiencies added to the manufacturing process throughout fiscal 2006. This segment continues to provide diversification and balance within the company, which helps buffer the effects of the protein cycle in other segments. The company expects to further grow this segment in fiscal 2007, but profits are expected to be more in line with the company’s long-term growth guidance, rather than at the record levels experienced in 2006.

HSP net sales and operating profit for the fourth quarter of fiscal 2006 increased 9.7 and 51.9 percent, respectively, compared to the prior year. Results were driven by gains in the canned meat category, including increased sales for contract packaging business (up approximately 122.0 percent compared to fiscal 2005), and canned broth and chicken. Improved margins were also noted on frozen ingredients, compared to the fiscal 2005 fourth quarter.

DCB net sales and operating profit for the fourth quarter of fiscal 2006 increased 11.4 and 41.3 percent, respectively, compared to the prior year. Core products (including sugar packets, sugar substitutes, canisters, and shakers) continued to show strong growth during the fourth quarter. Sugar substitute sales drove the increases for the quarter, with sales up 33.7 percent compared to the fiscal 2005 fourth quarter, as new customers were secured. Although sugar substitutes continue to outperform other key product groups, growth is expected to moderate in fiscal 2007 due to the maturing nature of brands within the category. Gains were also noted on liquid portions, blended products, and HHL dysphasia and malnutrition products during the quarter.

CFI experienced the largest gains for the fourth quarter, with net sales and operating profits up 71.6 and 531.1 percent, respectively, compared to the prior year. Additional customers secured during the year resulted in record production levels for ready-to-drink products during the fourth quarter, and production improvements completed in the third quarter have enabled the company to accommodate that volume. Increased sales of nutritional blends and jars also benefited the fourth quarter and fiscal year.

All Other: All Other net sales increased 17.7 percent for the fourth quarter and 2.2 percent for the year compared to the comparable fiscal 2005 periods. Segment profit increased 34.9 and 48.4 percent for the quarter and year, respectively, compared to last year. Both operating segments, HFI and Dan’s Prize, contributed to the improved results.

HFI net sales increased 17.6 percent in the fourth quarter and 3.2 percent for the twelve months of fiscal 2006, reflecting a planned reduction in picnic sales in the first half of 2006. Operating profit increased 22.4 percent and 70.9 percent for the quarter and year, respectively, compared to fiscal 2005.

Export sales drove both the top and bottom line results, representing notable fourth quarter volume gains on pork exports (up 1,317,000 lbs. or 10.4 percent), the SPAM family of products (up 651,000 lbs. or 13.5 percent), and Stagg chili (up 227,000 lbs. or 12.6 percent) compared to fiscal 2005. Twelve month comparisons are impacted by the reduction in the financial reporting lag on HFI’s joint ventures and wholly owned Australian subsidiary to one month. These entities were previously reported on a two to three month lag, and the adjustment increased all operating measures for the first quarter of fiscal 2005. On a comparable year-to-year basis, total export sales increased 2.9 percent compared to the prior fiscal year.

Improved results from HFI’s China joint ventures also enhanced operating profits in fiscal 2006. Lower raw material costs and growth across all product categories contributed to the positive results. Although, overall China continues to be in a loss position, operating profits improved $600 and $2,135 for the fourth quarter and year, respectively, compared to fiscal 2005.

25




Dan’s Prize, Inc., the company’s wholly owned marketer and seller of beef products, finished the fiscal year with strong fourth quarter net sales and tonnage volume results (up 21.2 and 18.3 percent, respectively), but total fiscal 2006 net sales and tonnage were flat compared to fiscal 2005. Operating profits increased 53.1 and 29.9 percent for the fourth quarter and fiscal year, respectively, due to strong fourth quarter sales of cooked beef items, continued pricing discipline, overhead cost controls, and lower raw material costs compared to the prior year.

Unallocated Income and Expenses: 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 in the segment table for the purpose of reconciling segment results to earnings before income taxes.

Net interest and investment income for the fourth quarter and year was a net expense of $4,207 and $20,166, respectively, compared to a net expense of $6,799 and $19,213 for the comparable periods of fiscal 2005. Returns on investments held in the company’s rabbi trust for supplemental executive retirement plans and deferred income plans increased $530 compared to the prior year fourth quarter, but decreased $2,326 for the full fiscal year. Additionally, the fourth quarter of fiscal 2005 included $2,065 of write-downs of the company’s investments. Interest expense of $25,636 for fiscal 2006 decreased from the prior year by $2,108, resulting from payments on long-term debt and lower short-term debt balances during 2006 due to fewer acquisitions as compared to fiscal 2005. The only material debt balance remaining at the end of fiscal 2006 relates to the company’s $350,000 senior notes which mature in 2011. The company expects interest expense to approximate $24,000 for fiscal 2007.

General corporate expense for the fourth quarter and year was $3,838 and $30,618, respectively, compared to $3,239 and $21,704 for the prior year quarter and twelve months. Fiscal 2006 results include $9,200 of stock option expense recorded in the first quarter under SFAS 123(R), primarily due to executive retirements and expensing of new option grants to retirement-eligible individuals, and approximately $4,800 for expenses related to settlements on non-qualified plans resulting from executive retirements. Expense related to inventory valuation adjustments also increased $3,431 and $6,686 for the fourth quarter and year, respectively. Offsetting these items was a $6,000 charge for retirement related expenses for executive officers recognized in the fourth quarter of fiscal 2005, and a $2,286 gain recorded on the sale of a company airplane in the third quarter of fiscal 2006.

Fiscal Years 2005 and 2004:

The company’s accounting cycle resulted in a 13-week fourth quarter and a 52-week year in fiscal 2005, compared with a 14-week fourth quarter and 53-week year in fiscal 2004. As the company accounts for its operations on a weekly basis, the additional week in fiscal 2004 was fully loaded with expenses, including salaries and depreciation, and did not provide a disproportionate amount of operating profit on a comparable basis.

Consolidated Results

Net Earnings: Net earnings for the fourth quarter of fiscal 2005 were $82,230, an increase of 16.3 percent compared to earnings of $70,720 for the same period in fiscal 2004. Diluted earnings per share were $.59 compared to $.51 for the same period in fiscal 2004. Net earnings for the year increased 9.0 percent to $254,603 from $233,550 in fiscal 2004. Diluted earnings per share for the same period increased to $1.82 from $1.67 in the prior year.

Fiscal 2004 net earnings included an $11,470 after-tax gain ($0.08 per share) on the sale of Vista International Packaging, Inc., a $3,963 after-tax gain ($0.03 per share) on the sale of the company’s investment in Campofrio Alimentacion, S.A. and a $2,672 ($0.02 per share) after-tax charge for early retirement packages related to the company’s sales reorganization.

Sales: Net sales for the fourth quarter increased to $1,477,908 from $1,345,216 in 2004, an increase of 9.9 percent. Net sales for the twelve months of fiscal 2005 increased 13.3 percent to $5,413,997 compared to $4,779,875 in 2004. Tonnage volume for the fourth quarter increased 12.2 percent to 1.1 billion lbs. from 990 million lbs. in 2004. Tonnage volume for the year increased 13.5 percent to 4.1 billion lbs. from 3.6 billion lbs. in 2004.

Net sales and tonnage volume comparisons were positively impacted by the 2005 acquisitions of Farmer John, Mexican Accent, Mark-Lynn, and Lloyd’s. On a combined basis, these acquisitions contributed $155,534 in net sales to the fourth quarter results for fiscal 2005. Excluding these acquisitions, both net sales and tonnage volume decreased 1.7 percent in the fourth quarter compared to 2004. For the full 2005 fiscal year, the acquisitions contributed a combined $488,715 in net sales, representing 10.2 percentage points and 12.5 percentage points of the net sales and tonnage volume increases, respectively.

Growth in key product lines, continued demand for value-added product offerings, and successful new product initiatives enhanced sales results throughout fiscal 2005. Excluding the impact of acquisitions, all segments still reported favorable sales results compared to fiscal 2004.

26




Strong sales by Hormel Foods International, up 5.7 percent and 17.6 percent for the fourth quarter and fiscal year, respectively, also offset the impact of divesting the Vista business during the third quarter of fiscal 2004.

Gross Profit: Gross profits were $368,161 and $1,284,448 for the quarter and year, respectively, compared to $320,292 and $1,124,038 in 2004. As a percent of net sales, gross profit increased to 24.9 and 23.7 percent for the fourth quarter and year, respectively, compared to 23.8 and 23.5 percent for the comparable periods in 2004. The Jennie-O Turkey Store segment drove the increase for both the fourth quarter and year, due to higher turkey meat markets, lower feed costs, production efficiencies, and growth in value-added products. Changes in the product mix, primarily due to the Farmer John acquisition, negatively impacted margins compared to fiscal 2004. However, this impact was offset by significant decreases in raw material costs during the fourth quarter, which resulted in improved margins in the Grocery Products, Refrigerated Foods, and All Other segments.

Selling and Delivery: Selling and delivery expenses for the fourth quarter and year were $180,732 and $691,792, respectively, compared to $166,196 and $621,694 in 2004. These increases were primarily due to higher shipping and handling expenses throughout fiscal 2005, representing increased tonnage volume, significantly higher fuel related charges, and acquisitions. As a percent of net sales, selling and delivery expenses decreased to 12.2 percent for the fourth quarter compared to 12.4 percent in 2004, and decreased to 12.8 percent for the year compared to 13.0 percent in 2004. Newly acquired businesses with lower selling and delivery expense ratios contributed to the decrease in fiscal 2005, and price increases offset increases in selling expenses throughout the fiscal year. A pre-tax charge of $4,194 was also recognized in the second quarter of fiscal 2004 for early retirement packages related to a reorganization of the company’s sales force.

Administrative and General: Administrative and general expenses were $48,567 and $172,242 for the quarter and year, respectively, compared to $38,779 and $146,488 in 2004. As a percent of net sales, administrative and general expenses for the fourth quarter and year were 3.3 and 3.2 percent, respectively, compared to 2.9 and 3.1 percent, respectively, for the quarter and year in fiscal 2004. Fiscal 2004 expenses were decreased by reductions in post-retirement benefits of $1,504 and $3,903 for the fourth quarter and year, respectively, related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Items impacting fiscal 2005 included stock option expense increases over 2004 of $446 and $1,733 for the fourth quarter and year, respectively, and retirement related benefits for executive officers of approximately $6,000 recognized during the fourth quarter. Administrative expenses related to acquisitions also contributed to the increase for fiscal 2005, including intangible asset amortization which increased $500 and $2,345 for the fourth quarter and year, respectively, compared to fiscal 2004. These expenses were partially offset by a reduction in bad debt expenses of approximately $1,400 and $2,500 for the fourth quarter and fiscal year of 2005, respectively.

Research and development expenses for the fourth quarter decreased slightly to $4,226 from $4,434 in the comparable quarter of 2004, and for the fiscal year increased to $17,585 from $15,944 in 2004. The decrease for the fourth quarter was primarily due to the timing of new product introductions that occurred late in fiscal 2004, and the year-over-year increase was distributed across various segments.

Equity in Earnings of Affiliates: Equity in earnings of affiliates was $699 and $5,525 for the quarter and year, respectively, compared to $1,282 and $6,458 in 2004. This earnings line reflected decreases from the company’s 50 percent owned joint venture, Herdez Corporation, (down $207 and $476 for the fourth quarter and fiscal year) and the company’s 40 percent owned Philippine joint venture, Purefoods-Hormel Company (down $208 and $201 for the fourth quarter and fiscal year). These decreases were offset by favorable performance by the company’s 49 percent owned joint venture, Carapelli USA, LLC (up $103 and $427 for the fourth quarter and fiscal year) and the company’s 50 percent owned joint venture, Hormel Alimentos (up $177 and $140 for the fourth quarter and fiscal year). Minority interests in the company’s consolidated investments are also reflected in these figures. In the third quarter of fiscal 2005, the company recorded a minority interest gain of $461 related to its ownership in the Beijing Hormel Foods Corporation. Excluding this gain, minority interests represented a decrease in income of $1,307 compared to fiscal 2004.

In conformity with U.S. generally accepted accounting principles, the company accounts for its majority-owned operations under the consolidation method. Investments in which the company owns a minority interest are accounted for under the equity or cost method. These investments, along with receivables from other affiliates, are included in the balance sheet line item “Investments in and receivables from affiliates.” The composition of this line item at October 30, 2005, was as follows:

Country

 

Investments/Receivables

 

 

 

 

 

United States

 

$

22,863

 

Philippines

 

39,884

 

Mexico

 

5,280

 

Total

 

$

68,027

 

 

Income Taxes: The company’s effective tax rate for the fourth quarter and year was 38.1 and 37.4 percent, respectively, in fiscal 2005 compared to 36.5 percent for the quarter and year in fiscal 2004. The increase in the effective rates for fiscal 2005 was the result of higher foreign taxes, the impact of updated state tax rates on deferred tax balances, and the relationship of permanent tax differences to income for the year.

27




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 K of the Notes to Consolidated Financial Statements.)

 

 

Fourth Quarter Ended

 

Year Ended

 

 

 

Restated*

 

Restated*

 

 

 

Restated*

 

Restated*

 

 

 

 

 

October 30, 2005

 

October 30, 2004

 

% Change

 

October 30, 2005

 

October 30, 2004

 

% Change

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

232,801

 

$

222,583

 

4.6

 

$

799,291

 

$

758,256

 

5.4

 

Refrigerated Foods

 

739,466

 

646,715

 

14.3

 

2,801,632

 

2,300,399

 

21.8

 

Jennie-O Turkey Store

 

311,293

 

317,323

 

(1.9

)

1,088,324

 

1,052,682

 

3.4

 

Specialty Foods

 

144,350

 

116,946

 

23.4

 

518,673

 

467,581

 

10.9

 

All Other

 

49,998

 

41,649

 

20.0

 

206,077

 

200,957

 

2.5

 

Total

 

$

1,477,908

 

$

1,345,216

 

9.9

 

$

5,413,997

 

$

4,779,875

 

13.3

 

Segment Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

45,524

 

$

43,950

 

3.6

 

$

132,047

 

$

128,838

 

2.5

 

Refrigerated Foods

 

38,766

 

38,713

 

0.1

 

129,831

 

141,361

 

(8.2

)

Jennie-O Turkey Store

 

41,549

 

31,499

 

31.9

 

136,071

 

80,437

 

69.2

 

Specialty Foods

 

8,303

 

5,683

 

46.1

 

27,310

 

25,674

 

6.4

 

All Other

 

8,658

 

3,802

 

127.7

 

22,384

 

23,278

 

(3.8

)

Total segment operating profit

 

142,800

 

123,647

 

15.5

 

447,643

 

399,588

 

12.0

 

Net interest and investment income

 

(6,799

)

(5,198

)

(30.8

)

(19,213

)

(12,779

)

(50.3

)

General corporate expense

 

(3,239

)

(7,048

)

54.0

 

(21,704

)

(19,211

)

(13.0

)

Earnings before income taxes

 

$

132,762

 

$

111,401

 

19.2

 

$

406,726

 

$

367,598

 

10.6

 

 


*Retrospective application of FIFO inventory valuation (see Note A of the Notes to Consolidated Financial Statements)

Grocery Products: Grocery Products net sales increased 4.6 percent for the quarter and 5.4 percent for the year compared to fiscal 2004. Sales tonnage volume increased 3.1 percent for the quarter and 0.7 percent for the year compared to fiscal 2004. Segment profit for Grocery Products increased 3.6 percent for the quarter and 2.5 percent for the year compared to fiscal 2004. Raw material costs were below prior year and expected levels during the fourth quarter, which resulted in improved profit margins led by gains on the SPAM family of products and Hormel flavored bacon bits. Segment profits for the year were negatively impacted by significantly higher fuel surcharges over fiscal 2004.

At the beginning of the fiscal 2005 third quarter, the company’s sales force incorporated Mexican Accent’s products into its portfolio of ethnic products. The acquisition has been accretive to the Grocery Products segment, and the company continues to pursue synergies with its other Hispanic product lines. The acquisition contributed $6,665 and $20,008 to net sales, and 6,814,000 lbs. and 13,994,000 lbs. to sales tonnage for the quarter and year, respectively. Excluding Mexican Accent, net sales for the segment increased 1.6 percent and 2.8 percent forth quarter and year, respectively, while sales tonnage declined 1.8 percent and 2.3 percent for the quarter and year, respectively.

Key product categories also contributed to tonnage volume and profit increases in the Grocery Products segment compared to the fiscal 2004 fourth quarter. Notable gains were experienced in the microwave category (up 3,133,600 lbs. or 21.6 percent), driven by the success of the Hormel microwave tray line, and the SPAM family of products (up 268,000 lbs. or 1.3 percent). These gains were offset primarily by declines in Stagg chili (down 2,308,000 lbs. or 23.4 percent), as fiscal 2004 reflected pipeline inventory gains when Stagg was introduced nationally. Key categories also showing growth for the year included the microwave category (up 7,700,000 lbs. or 15.1 percent), Hormel chili (up 753,000 lbs. or 0.7 percent), and the SPAM family of products (up 723,000 lbs. or 1.1 percent). Although Dinty Moore canned products showed an overall decline for fiscal 2005 (down 7,568,000 lbs. or 12.8 percent), improvements were seen in the second half of fiscal 2005 as the company explored options for improving sales in this category.

Efforts in the Grocery Products segment continued to be focused on growth initiatives implemented during fiscal 2004. The company continued to expand sales in the chili category. While total chili shipments for the year were flat compared to fiscal 2004, commitments were good for the 2005 winter chili

28




season and dollar shares on both the Hormel and Stagg brands continued to increase over comparable periods to 2004. The company also continued to seek innovative ways to market established product lines, including the SPAM Singles product line, which provided positive results and incremental volume in fiscal 2005.

Refrigerated Foods: Net sales by the Refrigerated Foods segment were up 14.3 percent for the quarter and 21.8 percent for the twelve months compared to fiscal 2004. Sales tonnage increased 21.9 percent for the quarter and 25.6 percent for the fiscal year as compared to 2004. Net sales and tonnage volume comparisons were positively impacted by the December 29, 2004, acquisition of Farmer John and the April 4, 2005, acquisition of Lloyd’s. These acquisitions contributed a combined $136,562 in net sales to the fourth quarter results for fiscal 2005. Excluding these acquisitions, net sales and tonnage volume decreased 6.8 percent and 3.0 percent respectively, in the fourth quarter compared to 2004. For the full 2005 fiscal year, these acquisitions contributed a combined $440,929 in net sales, representing 19.2 percentage points and 23.5 percentage points of the net sales and tonnage volume increases, respectively.

The company’s hog processing for the fourth quarter increased 22.1 percent to 2,285,000 hogs from 1,871,000 hogs for the comparable period in 2004. For the fiscal year, hog processing increased 25.2 percent to 8,583,000 hogs from 6,855,000 hogs in fiscal 2004. Excluding Farmer John, hog processing increased 2.6 percent in fiscal 2005, compared to 2004. Hog markets trended lower in the fourth quarter, down 8.7 percent compared to fiscal 2004.

Segment profit for Refrigerated Foods remained flat in the fourth quarter, and decreased 8.2 percent from fiscal 2004. The company experienced exceptional pork margins during fiscal 2004, creating difficult comparisons throughout fiscal 2005. Margins did improve during the fourth quarter of 2005, but not as quickly as anticipated.

Sales volume for value-added products in the Meat Products business unit showed positive growth over the 2004 fourth quarter, led by gains in Hormel raw bacon (up 587,000 lbs. or 3.5 percent), Hormel retail hams (up 821,000 lbs. or 7.2 percent), Hormel party trays (up 558,000 lbs. or 50.2 percent),and DiLusso Deli Company products (up 23,000 lbs. or 2.3 percent). Hormel Natural Choice pre-sliced deli sandwich meats, which use the company’s high pressure processing technology, also received good results in test markets. These results reflected aggressive marketing support for the company’s brands, and continued consumer preference for this unit’s product offerings. This unit also includes the results of Lloyd’s, acquired in the second quarter of fiscal 2005. Combining Lloyd’s branded products with existing Hormel branded items positioned the company as the leader in the refrigerated entree category.

The Foodservice business unit also contributed to strong sales results during the fourth quarter, with several key product lines posting double digit growth. Tonnage volume increases over the fiscal 2004 fourth quarter were noted on precooked breakfast sausage (up 349,000 lbs. or 21.6 percent), Always Tender pork (up 340,000 lbs. or 13.1 percent), shelf stable products (up 1,562,000 lbs. or 43.5 percent), Austin Blues BBQ products (up 415,000 lbs. or 20.2 percent), Applewood smoked bacon (up 240,000 lbs. or 16.4 percent), and the café h line of products (up 185,000 lbs. or 16.5 percent).

Outstanding growth was also reported during fiscal 2005 by the Precept Foods, LLC joint venture, generated by new business and expansion of product offerings with existing customers. Tonnage for case-ready beef and pork products increased 1,133,000 lbs. or 25.4 percent for the fourth quarter, and 3,470,000 lbs. or 21.0 percent for the year compared to the fiscal 2004 comparable periods.

Jennie-O Turkey Store: Jennie-O Turkey Store (JOTS) net sales for the quarter and year decreased 1.9 percent and increased 3.4 percent, respectively, compared to fiscal 2004 periods. Tonnage volume decreased 4.7 percent for the quarter and increased 1.6 percent for the year compared to prior year results. The segment continued to improve its value added versus commodity product mix. Over 54.0 percent of volume was attributed to value-added products in fiscal 2005, representing the second consecutive year that value-added tonnage exceeded commodity tonnage on an annual basis.

Segment profit for JOTS increased 31.9 percent for the fourth quarter and 69.2 percent for the year compared to fiscal 2004. These gains were driven by a combination of higher turkey meat markets, lower feed costs, production efficiencies, and growth in value-added products. Commodity meat markets and whole bird markets improved throughout fiscal 2005, with breast meat reaching an all time high in October. Feed costs for both the quarter and full year returned to more traditional levels, which were significantly below the prior year, and decreased approximately $9,000 and $37,000 for the fourth quarter and fiscal year, respectively. Export markets also continued to be strong during the year and, for the first time, the company exceeded 100 million pounds of exports on an annual basis. These favorable conditions were mitigated by higher energy costs associated with farm heating and freight fuel surcharges.

Segment profits continued to benefit from value-added sales growth. The Foodservice division experienced growth in the fourth quarter as a result of obtaining new business. Gains were also reported on premium products in the Deli division, including Jennie-O Turkey Store premium seasoned turkey

29




breast (up 227,000 lbs. or 6.3 percent), the Jennie-O Turkey Store Grand Champion line (up 144,000 lbs. or 13.3 percent), and Jennie-O Turkey Store rotisserie turkey breast (up 805,000 lbs. or 30.7 percent).

In 2004, JOTS introduced Jennie-O Turkey Store Oven Ready Turkey, a product that goes directly from freezer to oven. During 2005, the product line was expanded to include a bone in and boneless turkey breast. This product line continues to be well received by retailers and consumers. The company continually evaluates the performance of its new products, and fiscal 2005 included net sales of approximately $123,700 attributable to products introduced since 2000.

Specialty Foods: Specialty Foods net sales increased 23.4 percent for the fourth quarter and 10.9 percent for the twelve months compared to fiscal 2004. Sales tonnage increased 18.5 and 6.5 percent for the quarter and twelve months, respectively, compared to 2004. Segment profit increased 46.1 percent and 6.4 percent, for the quarter and fiscal year, respectively, compared to fiscal 2004. The acquisition of Mark-Lynn Foods improved the fiscal 2005 results, contributing 10.5 percentage points and 5.9 percentage points of the net sales increase for the fourth quarter and year, respectively. Continued strength from core product sales at Diamond Crystal Brands (DCB), contract manufacturing at Hormel Specialty Products (HSP), and new production at Century Foods International (CFI) also drove the sales increase for the fourth quarter.

HSP net sales increased 25.1 percent for the fourth quarter and 6.3 percent for the year compared to the same periods in 2004. Higher net sales in the fourth quarter were attributed to increased contract manufacturing of canned meats, along with increases in the meat ingredients and refinery categories. Margin percentages declined during fiscal 2005 due to changes in product mix, higher dairy markets, and aggressive cheese pricing. Freight and warehouse expense increases due to higher fuel related costs also had a negative impact on operating profits for the year.

DCB’s core product gross sales (including sugar packets, sugar substitutes, canisters, and shakers) increased 12.7 percent and 16.2 percent over the 2004 fourth quarter and fiscal year, respectively. Sales of the HHL dysphasia and malnutrition products ended the quarter down 5.1 percent. Defending private label conversions and gaining operator compliance helped offset lost contract sales in the nutritional category. Mark-Lynn was successfully integrated into DCB as a fifth processing facility during 2005, and expanded the company’s market share in foodservice packets. This acquisition contributed $12,307 and $27,778 to net sales for the fourth quarter and fiscal year, respectively.

CFI sales increased 26.9 percent in the fourth quarter, but decreased 3.5 percent for the year, compared to fiscal 2004 results. CFI faced a challenging year with volume declines throughout the first three quarters due to the loss of a government contract and lower nutritional sales. Customer and product mix changes at CFI also negatively impacted the segment earlier in the year. Significant improvements in the fourth quarter were the result of the company’s efforts to broaden its customer base.

All Other: All Other net sales increased 20.0 percent for the fourth quarter and 2.5 percent for the year compared to the comparable fiscal 2004 periods. Segment profit increased 127.7 percent and decreased 3.8 percent for the quarter and year, respectively, compared to 2004. Comparisons for the fiscal year were impacted by the divestiture of Vista International Packaging, Inc. (Vista) during the third quarter of fiscal 2004.

Hormel Foods International (HFI) experienced strong international demand for commodity pork items throughout fiscal 2005, with export tonnage increasing to 88,036,000 lbs. or up 9.9 percent over fiscal 2004. Volume gains were also seen on the SPAM family of products (up to 18,148,000 lbs. or up 2.4 percent) and Stagg chili (up to 6,234,000 lbs. or up 10.6 percent) compared to the prior year. These sales, combined with improved results from the company’s China operations, resulted in significant margin increases for the fourth quarter and fiscal year. In the first quarter of fiscal 2005, HFI reduced the financial reporting lag on its joint ventures and wholly owned Australian subsidiary to one month (from a previous two to three month lag). This adjustment increased tonnage (up 4,546,000 lbs.), net sales (up $5,412), and segment profits (up $453) for fiscal 2005. During the third quarter of fiscal 2005, HFI also recorded a minority interest gain of $461 related to its ownership in the Beijing Hormel Foods Corporation.

Dan’s Prize, Inc., the company’s wholly owned marketer and seller of beef products, experienced tonnage decreases in both the fourth quarter and fiscal year compared to 2004. However, the fourth quarter results showed increased operating profits, resulting from margin growth due to favorable market conditions and customer mix.

During the second quarter of fiscal 2004, the company completed the sale of its investment in Campofrio Alimentacion, S.A. The $6,222 pre-tax gain recorded on the sale was excluded from All Other operating profits, and included in “Net interest and investment income.” The company also finalized the sale of the Vista business during the third quarter of fiscal 2004. The $18,063 pre-tax gain recorded on the sale was excluded from All Other operating profits, and included in “General corporate expense.”

30




Unallocated Income and Expenses: 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 in the segment table for the purpose of reconciling segment results to earnings before income taxes.

Net interest and investment income for the fourth quarter and year was a net expense of $6,799 and $19,213, respectively, compared to a net expense of $5,198 and $12,779 for the comparable periods of fiscal 2004. Fiscal 2004 results included a $6,222 pre-tax gain on the sale of the company’s investment in Campofrio Alimentacion, S.A. in the second quarter. Returns on investments held in the company’s rabbi trust for supplemental executive retirement plans and deferred income plans increased for both the fourth quarter and fiscal year, and the company experienced increases in interest income due to maintaining higher average cash balances throughout fiscal 2005. For the quarter and fiscal year, these gains were offset by $2,065 of write-downs of the company’s investments. Interest expense of $27,744 for fiscal 2005 exceeded fiscal 2004 by $602, as acquisitions resulted in additional short-term debt being incurred. This debt was repaid by the end of fiscal 2005.

General corporate expense for the fourth quarter and year was $3,239 and $21,704, respectively, compared to $7,048 and $19,211 for the 2004 fourth quarter and twelve months. Fiscal 2004 results included a pre-tax gain of $18,063 recorded on the sale of Vista International Packaging, Inc. during the third quarter, and reductions in post-retirement benefits of $1,504 and $3,903 for the fourth quarter and year, respectively, related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. (See Note F “Pension and Other Postretirement Health Care Benefits”) Partially offsetting those gains were fiscal 2004 sales reorganization expenses of approximately $7,000 which did not recur in fiscal 2005. Other factors in fiscal 2005 included retirement related expenses for executive officers of approximately $6,000 recognized in the fourth quarter, offset by inventory valuation adjustments of approximately $11,700, decreases in bad debt expenses of approximately $2,500, and lower corporate overhead expenses compared to 2004. The company evaluated its corporate expense allocation methodology during fiscal 2005, resulting in additional expenses being allocated to operating segments.

Related Party Transactions

Certain employees of the company provide administrative services to The Hormel Foundation, which beneficially owns more than five percent of the company’s common stock, for which The Hormel Foundation reimburses the company for its fully allocated cost for the employee time and expenses.

During the fourth quarter of fiscal 2006, the company purchased 295,680 shares of common stock from The Hormel Foundation under its approved share repurchase program. The shares became available for sale upon termination of a Hormel family trust, and were purchased by the company at $36.6867 per share, which represented the average closing price for the three days of August 30, August 31, and September 1, 2006. Settlement took place on September 5, 2006.

Liquidity and Capital Resources

Selected financial ratios at the end of fiscal years 2006 and 2005 are as follows:

 

 

 

 

Restated*

 

 

 

2006

 

2005

 

Liquidity Ratios

 

 

 

 

 

Current ratio

 

2.0

 

1.8

 

Receivables turnover

 

17.9

 

18.9

 

Days sales in receivables

 

21.7

 

20.3

 

Inventory turnover

 

7.9

 

8.3

 

Days sales in inventory

 

47.6

 

47.2

 

Leverage Ratio

 

 

 

 

 

Long-term debt (including current maturities) to equity

 

19.4

%

22.6

%

Operating Ratios

 

 

 

 

 

Pretax profit to net worth

 

25.3

%

26.9

%

Pretax profit to total assets

 

14.6

%

15.0

%

 


*Retrospective application of FIFO inventory valuation (see Note A of the Notes to Consolidated Financial Statements)

Cash, cash equivalents, and short-term marketable securities were $172,485 at the end of fiscal year 2006 compared to $169,546 at the end of fiscal year 2005.

During fiscal 2006, cash provided by operating activities was $326,574 compared to $453,719 in 2005. The decrease in cash provided by operating activities was primarily due to higher earnings offset by changes in working capital items, payments made to settle lump-sum pension obligations, and the funding of one of the company’s qualified defined benefit pension plans. During fiscal 2006, the company made payments of approximately $36,300 to settle pension obligations under non-qualified plans triggered by executive retirements. During the third quarter of fiscal 2006, the company also made a

31




discretionary contribution of $17,650 to its salaried defined benefit pension plan. Changes in working capital included higher levels of accounts receivable and a smaller benefit from accounts payable and accrued expenses than in the prior year.

Cash flow from operating activities provides the company with its principal source of liquidity. The company does not anticipate a significant risk to cash flow from this source in the foreseeable future because the company operates in a relatively stable industry and has strong products across several product lines.

Cash used in investing activities was $170,524 in fiscal year 2006, compared to $404,437 in fiscal year 2005. The decrease was due primarily to acquisitions of businesses/intangibles made during fiscal 2005. Acquisitions made during fiscal 2005, along with the purchase price including related costs, were Farmer John ($208,219), Mexican Accent ($47,996), Mark-Lynn ($43,153), and Lloyd’s ($50,463). During fiscal 2005, the company also purchased the Chi-Chi’s trademark rights related to chips and tortillas for $14,490. The only significant acquisition made in fiscal 2006 was the purchase of Valley Fresh, Inc. for $80,362 in cash.

Expenditures on fixed assets in fiscal 2006 were $141,516 compared to $107,094 in the prior year. Significant projects during 2006 included additional precooked bacon and microwave tray lines at the company’s Rochelle, Illinois facility and plant renovations at the Fremont, Nebraska plant. For fiscal 2007, the company expects capital expenditures will be approximately $145,000, which exceeds estimated depreciation expense. The increase is primarily due to planned investments in additional value-added production capacity to meet consumer demand, and planned expansions at the company’s hog production facilities.

Cash used in financing activities was $114,611 in fiscal 2006 compared to $98,117 in fiscal 2005. The increase in cash used in financing activities was due mainly to increased dividend payments and higher share repurchase than in the prior year. During fiscal 2006, the company borrowed $70,000 utilizing existing short-term lines of credit to finance working capital needs during the year. The outstanding short-term debt was repaid by the end of the fourth quarter, and the company did not incur any additional long-term debt during 2006. Similarly, the company does not expect to take on any significant additional long-term debt in fiscal 2007.

The company paid $75,840 in dividends to shareholders in fiscal 2006 compared to $69,371 in fiscal 2005. The dividend rate was 56 cents per share in 2006, which reflects a 7.7% increase over the fiscal 2005 amount. The company has paid dividends for 313 consecutive quarters and expects to continue doing so in the future. The annual dividend for fiscal 2007 will increase to 60 cents per share, representing the company’s 41st consecutive annual dividend increase.

Repurchases of common stock were $36,978 in fiscal 2006, compared to $22,977 in the prior year. During the year, the company repurchased 1,058,067 shares of its common stock at an average price per share of $34.95 under the repurchase plan approved by the company’s Board of Directors in October 2002. This amount includes the repurchase of 295,680 shares from The Hormel Foundation during the fourth quarter at the average of the closing market prices for the three days of August 30, August 31, and September 1, 2006. These transactions result in a total of 3.4 million shares having been repurchased through October 29, 2006, under this 10 million share repurchase authorization.

Total debt outstanding at the end of fiscal 2006 was $350,420 compared to $361,505 at the end of the prior year. The company’s debt balance primarily represents $350,000 of senior unsecured notes maturing in 2011. The company is required, by certain covenants in its debt agreements, to maintain specified levels of financial ratios and balance sheet position. At the end of fiscal 2006, the company was in compliance with all of these debt covenants.

32




Contractual Obligations and Commercial Commitments

The following table outlines the company’s future contractual financial obligations as of October 29, 2006 (for additional information regarding these obligations, see Note E “Long-term Debt and Other Borrowing Arrangements” and Note H “Commitments and Contingencies”):

 

 

Payments Due by Periods

 

Contractual Obligations

 

Total

 

Less than 1 year

 

1-3 years

 

3-5 years

 

After 5 years

 

Purchase obligations:

 

 

 

 

 

 

 

 

 

 

 

Hog and turkey commitments(1)

 

$

4,926,731

 

$

746,216

 

$

1,208,349

 

$

789,004

 

$

2,183,162

 

Grain commitments(1)

 

57,175

 

44,318

 

12,857

 

 

 

Turkey grow-out contracts(2)

 

77,731

 

10,030

 

14,113

 

10,480

 

43,108

 

Other(3)

 

66,974

 

63,426

 

3,548

 

 

 

Long-term debt

 

350,420

 

366

 

54

 

350,000

 

 

Interest payments on long-term debt

 

104,352

 

23,195

 

46,376

 

34,781

 

 

Capital expenditures(4)

 

86,256

 

86,256

 

 

 

 

Leases

 

33,149

 

10,360

 

11,115

 

5,788

 

5,886

 

Other long-term liabilities(5)

 

70,069

 

8,876

 

16,907

 

14,865

 

29,421

 

Total Contractual Cash Obligations

 

$

5,772,857

 

$

993,043

 

$

1,313,319

 

$

1,204,918

 

$

2,261,577

 

 


(1) In the normal course of business, the company commits to purchase fixed quantities of livestock and grain from producers to ensure a steady supply of production inputs. Certain of these contracts are based on market prices at the time of delivery, for which the company has estimated the purchase commitment using current market prices as of October 29, 2006. The company also utilizes various hedging programs to manage the price risk associated with these commitments. As of October 29, 2006, these hedging programs result in a net increase of $12,723 in future cash payments associated with the purchase commitments in fiscal 2006, which is not reflected in the table above.

(2) The company also utilizes grow-out contracts with independent farmers to raise turkeys for the company. Under these contracts, the livestock, feed, and other supplies are owned by the company. The farmers provide the required labor and facilities that they either own or sublease from the company, and receive a fee per pound when the turkeys are delivered. As of October 29, 2006, the company had approximately 95 active contracts ranging from two to twenty-five years in duration. The grow-out activity is assumed to continue through the term of these active contracts, and amounts in the table represent the company’s obligation based on turkeys expected to be delivered from these farmers.

(3) Amounts presented for other purchase obligations represent all known open purchase orders and all known contracts exceeding $1,000, related to the procurement of materials, supplies, and various services. The company primarily purchases goods and services on an as-needed basis. Therefore, the amounts in the table represent only a portion of expected future cash expenditures.

(4) Amounts presented for capital expenditures represent only the company’s current commitments to complete construction in progress at various locations. The company estimates total capital expenditures for fiscal year 2007 to be $145,000.

(5) Other long-term liabilities primarily represent payments under the company’s deferred compensation plans and minimum payments required under supply agreements related to the sale of Vista International Packaging, Inc. Minority interest related to the Precept Foods operation is not included in the table above. Also excluded are payments under the company’s defined benefit pension and other postretirement benefit plans. (See estimated benefit payments for the next ten fiscal years in Note F “Pension and Other Postretirement Health Care Benefits”)

In addition to the commitments set forth in the above table, at October 29, 2006, the company had $40,654 in standby letters of credit issued on behalf of the company. The standby letters of credit are primarily related to the company’s self-insured workers’ compensation programs.

The company believes its financial resources, including a five-year revolving credit facility for $200,000 and anticipated funds from operations will be adequate to meet all current commitments.

Off-Balance Sheet Arrangements

The company currently provides a revocable standby letter of credit for $1,940 to guarantee obligations that may arise under workers compensation claims of an affiliated party. This potential obligation is not reflected on the company’s consolidated statements of financial position.

Forward-Looking Statements

This report contains “forward-looking” information within the meaning of the federal securities laws. The “forward-looking” information may include statements concerning the company’s outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts. “Forward-looking” statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the statements. Factors that may affect the operating results of the company are discussed below.

The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective

33




information. The company is filing this cautionary statement in connection with the Reform Act. When used in the company’s Annual Report to Stockholders, in filings by the company with the Securities and Exchange Commission (the Commission), in the company’s press releases and in oral statements made by the company’s representatives, the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify forward-looking statements within the meaning of the Reform Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected.

In connection with the “safe harbor” provisions of the Reform Act, the company is identifying risk factors that could affect financial performance and cause the company’s actual results to differ materially from opinions or statements expressed with respect to future periods. The following discussion of risk factors contains certain cautionary statements regarding the company’s business, which should be considered by investors and others. The following risk factors should be considered in conjunction with any discussions of operations or results by the company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the company.

In making these statements, the company is not undertaking, and specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the company’s business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the company has attempted to list comprehensively these important cautionary risk factors, the company wishes to caution investors and others that other factors may in the future prove to be important in affecting the company’s business or results of operations.

The company cautions readers not to place undue reliance on forward-looking statements, which represent current views as of the date made. Forward-looking statements are inherently at risk to any changes in the national and worldwide economic environment, which could include, among other things, economic conditions, political developments, currency exchange rates, interest and inflation rates, accounting standards, taxes, and laws and regulations affecting the company and its markets.

Risk Factors

Fluctuations in commodity prices of pork, poultry, and feed ingredients could harm the company’s earnings. The company’s results of operations and financial condition are largely dependent upon the cost and supply of pork, poultry, and feed grain as well as the selling prices for many of our products, which are determined by constantly changing market forces of supply and demand over which we have limited or no control.

The live pork industry has recently evolved to very large, vertically integrated, year-round confinement operations operating under long-term supply agreements. This has resulted in fewer hogs being available on the cash spot market. The decrease in the supply of live hogs on the cash spot market could severely diminish the utilization of slaughter facilities and increase the cost of the raw materials they produce. The company uses long-term supply contracts to ensure a stable supply of raw materials while minimizing extreme fluctuations in costs over the long-term. This may result, in the short term, in costs for live hogs that are higher than the cash spot market depending on the relationship of the cash spot market to contract prices, and these higher costs could adversely affect our short-term financial results.

Jennie-O Turkey Store contracts with turkey growers to supplement the turkeys it raises to meet its raw material requirements for whole birds and processed turkey products. Jennie-O Turkey Store results are affected by the cost and supply of feed grains, which fluctuate due to climate conditions, production forecasts, and supply and demand conditions at local, regional, national, and worldwide levels. The company attempts to manage some of its short-term exposure to fluctuations in feed prices by purchasing futures contracts.

Outbreaks of disease among livestock and poultry flocks could harm the company’s revenues and operating margins. The company is subject to risks associated with the outbreak of disease in pork and beef livestock, and poultry flocks, including Bovine Spongiform Encephalopathy (BSE), pneumovirus, and Avian Influenza. The outbreak of disease could adversely affect the company’s supply of raw materials, increase the cost of production, and reduce operating margins. Additionally, the outbreak of disease may hinder the company’s ability to market and sell products both domestically and internationally. The company has developed business continuity plans for various disease scenarios and will continue to update these plans as necessary.

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Market demand for the company’s products may fluctuate due to competition from other producers. The company faces competition from producers of other meats and protein sources, especially beef, chicken, and fish. The bases on which the company competes include:

·              price;

·              product quality;

·              brand identification;

·              breadth of product line; and

·              customer service.

Demand for the company’s products is also affected by competitors’ promotional spending and the effectiveness of the company’s advertising and marketing programs. The company may be unable to compete successfully on any or all of these bases in the future.

The company’s operations are subject to the general risks of the food industry. The food products manufacturing industry is subject to the risks posed by:

·              food spoilage or food contamination;

·              evolving consumer preferences and nutritional and health-related concerns;

·              federal, state, and local food processing controls;

·              consumer product liability claims;

·              product tampering; and

·              the possible unavailability and/or expense of liability insurance.

If one or more of these risks were to materialize, the company’s revenues could decrease, costs of doing business could increase, and the company’s operating results could be adversely affected.

Deterioration of economic conditions could harm the company’s business. The company’s business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, availability of capital markets, consumer spending rates, energy availability and costs (including fuel surcharges), and the effects of governmental initiatives to manage economic conditions. If a high pathogenic H5N1 strain of Avian Influenza developed in the United States, it may negatively impact the national economy and/or the demand for poultry products, and the company’s financial results could suffer. The company has developed contingency plans to address infectious disease scenarios and the potential impact on its operations, and will continue to update these plans as necessary.

The company’s operations are subject to the general risks associated with acquisitions. The company has made several acquisitions in recent years and regularly reviews opportunities for strategic growth through acquisitions. The success of these recent acquisitions and any future acquisitions by the company will depend substantially on its ability to integrate the acquired operations successfully with existing operations.

If the company is unable to integrate new operations successfully, financial results and business reputation could suffer. Additional risks associated with acquisitions are the diversion of management’s attention from other business concerns, the potential loss of key employees and customers of the acquired companies, the possible assumption of unknown liabilities, potential disputes with the sellers, and the inherent risks in entering markets or lines of business in which the company has limited or no prior experience. In addition, acquisitions outside the U.S. may present unique challenges and increase the company’s exposure to the risks associated with foreign operations.

The company’s operations are subject to the general risks of litigation. The company is involved on an ongoing basis in litigation arising in the ordinary course of business. Trends in litigation may include class actions involving consumers, shareholders, or injured persons, and claims relating to labor, employment, or environmental matters. Litigation trends and the outcome of litigation cannot be predicted with certainty and adverse litigation trends and outcomes could adversely affect the company’s financial results.

Government regulation, present and future, exposes the company to potential sanctions and compliance costs that could adversely affect the company’s business. The company’s operations are subject to extensive regulation by the U.S. Department of Agriculture, the U.S. Food and Drug Administration, and other state and local authorities that oversee food safety standards and the processing, packaging, storage, distribution, advertising, and labeling of the company’s products. The company’s manufacturing facilities and products are subject to constant inspection by federal, state, and local authorities. Claims or enforcement proceedings could be brought against the company in the future. Additionally, the company is subject to new or modified laws, regulations, and accounting standards. The company’s failure or inability to comply with such requirements could subject the company to civil remedies, including fines, injunctions, recalls, or seizures, as well as potential criminal sanctions.

The company is subject to stringent environmental regulation and potentially subject to environmental litigation, proceedings, and investigations. The company’s past and present business operations and ownership and operation of real property are subject to extensive and increasingly stringent federal, state, and local environmental laws and regulations pertaining to the discharge of materials into the environment, and the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of

35




the environment. Compliance with these laws and regulations, and the ability to comply with any modifications to these laws and regulations, is material to the company’s business. New matters or sites may be identified in the future that will require additional investigation, assessment, or expenditures. In addition, some of the company’s facilities have been in operation for many years and, over time, the company and other prior operators of these facilities may have generated and disposed of wastes that now may be considered hazardous. Future discovery of contamination of property underlying or in the vicinity of the company’s present or former properties or manufacturing facilities and/or waste disposal sites could require the company to incur additional expenses. The occurrence of any of these events, the implementation of new laws and regulations, or stricter interpretation of existing laws or regulations, could adversely affect the company’s financial results.

The company’s foreign operations pose additional risks to the company’s business. The company operates its business and markets its products internationally. The company’s foreign operations are subject to the risks described above, as well as risks related to fluctuations in currency values, foreign currency exchange controls, compliance with foreign laws, and other economic or political uncertainties. International sales are subject to risks related to general economic conditions, imposition of tariffs, quotas, trade barriers and other restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws, and other economic and political uncertainties. All of these risks could result in increased costs or decreased revenues, which could adversely affect the company’s financial results.

Deterioration of labor relations or increases in labor costs could harm the company’s business. The company has approximately 18,100 employees, of which approximately 6,100 are represented by labor unions, principally the United Food and Commercial Workers’ Union. A significant increase in labor costs or a deterioration of labor relations at any of the company’s facilities that results in work slowdowns or stoppages could harm the company’s financial results. Union contracts at the company’s plants in Algona, Iowa; Austin, Minnesota; Beloit, Wisconsin; Fremont, Nebraska; and Tucker, Georgia will expire in September, 2007. These contracts cover a combined total of 3,157 employees. Negotiations have not yet been initiated at any of these locations.

Quantitative and Qualitative Disclosure About Market Risks

Hog Markets. The company’s earnings are affected by fluctuations in the live hog market. To minimize the impact on earnings, and to ensure a steady supply of quality hogs, the company has entered into contracts with producers for the purchase of hogs at formula-based prices over periods of up to 15 years. Contract formulas are based on hog production costs, hog futures, hog primal values, or industry reported hog markets. Purchased hogs under contract accounted for 81 percent and 69 percent of the total hogs purchased by the company in fiscal years 2006 and 2005, respectively. The company has been actively converting to market-based formulas in order to better match input costs with customer pricing. Therefore, a hypothetical 10 percent change in the cash market would have had an immaterial effect on the company’s results of operations.

Certain procurement contracts allow for future hog deliveries (firm commitments) to be forward priced. The company generally hedges these firm commitments by entering into hog futures contracts. These futures contracts are designated and accounted for as fair value hedges. The change in the market value of such futures contracts has historically been, and is expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. Changes in the fair value of the futures contracts, along with the gain or loss on the firm commitment, are marked-to-market through earnings and are recorded on the statement of financial position as a current asset and liability, respectively. The fair value of the company’s open futures contracts as of October 29, 2006, was $(5,473).

The company measures its market risk exposure on its hog futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in market prices. A 10 percent increase in market prices would have negatively impacted the fair value of the company’s October 29, 2006, open contracts by $6,734, which in turn would lower the company’s future cost of purchased hogs by a similar amount.

Turkey Markets. The company raises or contracts for live turkeys. Production costs in raising turkeys are subject primarily to fluctuations in feed grain prices, and to a lesser extent, fuel costs. To reduce the company’s exposure to changes in grain prices, the company utilizes a hedge program to offset the fluctuation in the company’s future direct grain purchases.

36




This program utilizes corn and soybean meal futures, and these contracts are accounted for under cash flow hedge accounting. The open contracts are reported at their fair value of $2,467, before tax, on the statement of financial position as of October 29, 2006.

The company measures its market risk exposure on its grain futures contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for grain. A 10 percent decrease in the market price for grain would have negatively impacted the fair value of the company’s October 29, 2006, open grain contracts by $1,603, which in turn would lower the company’s future cost on purchased grain by a similar amount.

Natural Gas. Production costs at the company’s plants and feed mills are also subject to fluctuations in fuel costs. To reduce the company’s exposure to changes in natural gas prices, the company utilizes a hedge program to offset the fluctuation in the company’s future natural gas purchases. This program utilizes natural gas swaps, and these contracts are accounted for under cash flow hedge accounting. The open contracts are reported at their fair value of $(4,256), before tax, on the statement of financial position as of October 29, 2006.

The company measures its market risk exposure on its natural gas contracts using a sensitivity analysis, which considers a hypothetical 10 percent change in the market prices for natural gas. A 10 percent decrease in the market price for natural gas would have negatively impacted the fair value of the company’s October 29, 2006, open natural gas contracts by $4,381, which in turn would lower the company’s future cost on natural gas purchases by a similar amount.

Long-Term Debt. A principal market risk affecting the company is the exposure to changes in interest rates on the company’s fixed-rate, long-term debt. As of October 29, 2006, fixed-rate debt totaled $350,420 at rates ranging from 6.625 to 8.21 percent. Market risk for fixed-rate, long-term debt is estimated as the potential increase in fair value, resulting from a hypothetical 10 percent decrease in interest rates, and amounts to approximately $8,433. The fair values of the company’s long-term debt were estimated using discounted future cash flows based on the company’s incremental borrowing rates for similar types of borrowing arrangements.

International. The fair values of certain company assets are subject to fluctuations in foreign currencies. The majority of these assets were eliminated in the second quarter of fiscal 2004 when the company sold its remaining equity interest in the Spanish food company Campofrio Alimentacion, S.A. The company’s remaining net asset position in foreign currencies as of October 29, 2006, was $83,643, with most of the exposure existing in Philippine pesos and Chinese yuan. Changes in currency exchange rates impact the fair values of company assets either currently through the consolidated statement of operations, as currency gains/losses, or by affecting other comprehensive income/loss.

The company measures its foreign currency exchange risk by using a 10 percent sensitivity analysis on the company’s primary foreign net asset position, the Philippine peso, as of October 29, 2006. A 10 percent strengthening in the value of the peso relative to the U.S. dollar would result in other comprehensive income of $4,665 pre-tax. A 10 percent weakening in the value of the peso relative to the U.S. dollar would result in other comprehensive loss of the same amount.

37




 

Report of Management

Management’s Responsibility for Financial Statements

The accompanying financial statements were prepared by the management of Hormel Foods Corporation which is responsible for their integrity and objectivity. These statements have been prepared in accordance with U. S. generally accepted accounting principles appropriate in the circumstances and, as such, include amounts that are based on our best estimates and judgments.

Hormel Foods Corporation has developed a system of internal controls described to assure that the records reflect the transactions of the company and that the established policies and procedures are adhered to. This system is augmented by well-communicated written policies and procedures, a strong program of internal audit, and well-qualified personnel.

These financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm, and their report is included herein. The audit was conducted in accordance with the Public Company Accounting Oversight Board (United States) and includes a review of the company’s accounting and financial controls and tests of transactions.

The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the independent auditors, management, and the internal auditors to assure that each is carrying out its responsibilities. Both Ernst & Young LLP and our internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the results of their audit work and their opinions on the adequacy of internal controls and the quality of financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Management of Hormel Foods Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the company, as such term is defined in Exchange Act Rules 13a – 15(f). The company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting standards. Under the supervision, and with the participation of management, including the chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on our evaluation under the framework in Internal Control – Integrated Framework, we concluded that our internal control over financial reporting was effective as of October 29, 2006. Our management’s assessment of effectiveness of our internal control over financial reporting as of October 29, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

 

Jeffrey M. Ettinger

 

Michael J. McCoy

Chairman of the Board, President

 

Executive Vice President

and Chief Executive Officer

 

and Chief Financial Officer

38




 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
Hormel Foods Corporation
Austin, Minnesota

We have audited management’s assessment, included in the section of the accompanying Report of Management entitled Management’s Report on Internal Control over Financial Reporting, that Hormel Foods Corporation maintained effective internal control over financial reporting as of October 29, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Hormel Foods Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Hormel Foods Corporation maintained effective internal control over financial reporting as of October 29, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Hormel Foods Corporation maintained, in all material respects, effective internal control over financial reporting as of October 29, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Hormel Foods Corporation as of October 29, 2006, and October 30, 2005, and the related consolidated statements of operations, changes in shareholders’ investment, and cash flows for each of the three fiscal years in the period ended October 29, 2006, and our report dated December 14, 2006, expressed an unqualified opinion thereon.

Minneapolis, Minnesota

December 14, 2006

 

39




 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
Hormel Foods Corporation
Austin, Minnesota

We have audited the accompanying consolidated statements of financial position of Hormel Foods Corporation as of October 29, 2006, and October 30, 2005, and the related consolidated statements of operations, changes in shareholders’ investment, and cash flows for each of three fiscal years in the period ended October 29, 2006. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hormel Foods Corporation at October 29, 2006, and October 30, 2005, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended October 29, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Hormel Foods Corporation’s internal control over financial reporting as of October 29, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 14, 2006, expressed an unqualified opinion thereon.

Minneapolis, Minnesota

December 14, 2006

 

40




 

Consolidated Statements of Financial Position

(In Thousands, Except Share Amounts)

 

October 29, 2006

 

October 30, 2005*

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

172,485

 

$

131,046

 

Short-term marketable securities

 

0

 

38,500

 

Accounts receivable (net of allowance for doubtful accounts of 3,922 at October 29, 2006 and 5,518 at October 30, 2005)

 

341,916

 

301,001

 

Inventories

 

570,932

 

534,572

 

Deferred income taxes

 

48,535

 

39,428

 

Prepaid expenses and other current assets

 

7,803

 

20,691

 

Total Current Assets

 

1,141,671

 

1,065,238

 

Deferred Income Taxes

 

7,387

 

1,253

 

Goodwill

 

550,706

 

502,107

 

Other Intangibles

 

147,975

 

139,579

 

Net Pension Assets

 

66,097

 

30,676

 

Investments In And Receivables From Affiliates

 

76,684

 

68,027

 

Other Assets

 

158,976

 

162,004

 

Property, Plant and Equipment

 

 

 

 

 

Land

 

46,854

 

49,281

 

Buildings

 

562,949

 

548,044

 

Equipment

 

1,110,315

 

1,059,328

 

Construction in progress

 

123,608

 

66,326

 

 

 

1,843,726

 

1,722,979

 

Less allowance for depreciation

 

(932,916

)

(845,303

)

 

 

910,810

 

877,676

 

Total Assets

 

$

3,060,306

 

$

2,846,560

 

 

 

 

 

 

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

 Current Liabilities

 

 

 

 

 

Accounts payable

 

$

271,358

 

$

255,144

 

Accrued expenses

 

27,103

 

26,270

 

Accrued workers compensation

 

27,895

 

27,619

 

Accrued marketing expenses

 

68,503

 

68,640

 

Employee compensation

 

107,332

 

114,518

 

Taxes, other than federal income taxes

 

7,784

 

11,993

 

Dividends payable

 

19,361

 

17,950

 

Federal income taxes

 

55,312

 

49,963

 

Current maturities of long-term debt

 

366

 

11,075

 

Total Current Liabilities

 

585,014

 

583,172

 

Long-Term Debt – less current maturities

 

350,054

 

350,430

 

Accumulated Postretirement Benefit Obligation

 

271,240

 

263,663

 

Other Long-Term Liabilities

 

51,086

 

50,565

 

Shareholders’ Investment

 

 

 

 

 

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

 

 

 

 

 

Common stock, nonvoting, 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 137,639,954 shares October 29, 2006, issued 137,843,090 shares October 30, 2005

 

8,066

 

8,078

 

Additional paid-in capital

 

2,507

 

3,260

 

Accumulated other comprehensive loss

 

(17,996

)

(24,923

)

Retained earnings

 

1,821,202

 

1,612,315

 

 

 

1,813,779

 

1,598,730

 

Treasury stock; 300,000 shares October 29, 2006

 

(10,867

)

0

 

Total Shareholders’ Investment

 

1,802,912

 

1,598,730

 

Total Liabilities and Shareholders’ Investment

 

$

3,060,306

 

$

2,846,560

 

 


See notes to consolidated financial statements. *Retrospective application of FIFO inventory valuation.

41




 

Consolidated Statements of Operations

 

 

Fiscal Year Ended

 

(In Thousands, Except Per Share Amounts)

 

October 29, 2006

 

October 30, 2005*

 

October 30, 2004*

 

 

 

 

 

 

 

 

 

Net sales

 

$

5,745,481

 

$

5,413,997

 

$

4,779,875

 

Cost of products sold

 

4,362,291

 

4,129,549

 

3,655,837

 

Gross Profit

 

1,383,190

 

1,284,448

 

1,124,038

 

Expenses:

 

 

 

 

 

 

 

Selling and delivery

 

754,143

 

691,792

 

621,694

 

Administrative and general

 

182,891

 

172,242

 

146,488

 

Gain on sale of business

 

0

 

0

 

(18,063

)

Total Expenses and Gain on Sale of Business

 

937,034

 

864,034

 

750,119

 

Equity in earnings of affiliates

 

4,553

 

5,525

 

6,458

 

Operating Income

 

450,709

 

425,939

 

380,377

 

Other income and expense:

 

 

 

 

 

 

 

Interest and investment income

 

5,470

 

8,531

 

14,363

 

Interest expense

 

(25,636

)

(27,744

)

(27,142

)

Earnings Before Income Taxes

 

430,543

 

406,726

 

367,598

 

Provision for income taxes

 

144,404

 

152,123

 

134,048

 

Net Earnings

 

$

286,139

 

$

254,603

 

$

233,550

 

 

 

 

 

 

 

 

 

Net Earnings Per Share:

 

 

 

 

 

 

 

Basic

 

$

2.08

 

$

1.84

 

$

1.69

 

Diluted

 

$

2.05

 

$

1.82

 

$

1.67

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding:

 

 

 

 

 

 

 

Basic

 

137,845

 

138,040

 

138,596

 

Diluted

 

139,561

 

139,577

 

140,179

 

 


See notes to consolidated financial statements. *Retrospective application of FIFO inventory valuation.

42




 

Consolidated Statements of Changes in Shareholders Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Shareholders’

 

(In Thousands, Except Per Share Amounts)

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 25, 2003

 

138,596

 

$

8,122

 

0

 

$

0

 

$

4,073

 

$

1,286,807

 

$

(25,144

)

$

1,273,858

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings*

 

 

 

 

 

 

 

 

 

 

 

233,550

 

 

 

233,550

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

8,776

 

8,776

 

Unrealized loss on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,927

)

(4,927

)

Deferred hedging, net of reclassification adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(110

)

(110

)

Adjustment in minimum pension liability

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,129

)

(2,129

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

235,160

 

Purchases of common stock

 

 

 

 

 

(1,379

)

(37,525

)

 

 

 

 

 

 

(37,525

)

Stock option expense

 

 

 

 

 

 

 

 

 

4,201

 

 

 

 

 

4,201

 

Exercise of stock options

 

321

 

18

 

337

 

8,645

 

322

 

 

 

 

 

8,985

 

Shares retired

 

(1,042

)

(61

)

1,042

 

28,880

 

(8,596

)

(20,223

)

 

 

0

 

Cash dividends – $.45 per share

 

 

 

 

 

 

 

 

 

 

 

(62,421

)

 

 

(62,421

)

Balance at October 30, 2004

 

137,875

 

$

8,079

 

0

 

$

0

 

$

0

 

$

1,437,713

 

$

(23,534

)

$

1,422,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings*

 

 

 

 

 

 

 

 

 

 

 

254,603

 

 

 

254,603

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

217

 

217

 

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

Deferred hedging, net of reclassification adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

6,806

 

6,806

 

Adjustment in minimum pension liability

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,412

)

(8,412

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

253,214

 

Purchases of common stock

 

 

 

 

 

(773

)

(22,977

)

 

 

 

 

 

 

(22,977

)

Stock option expense

 

 

 

 

 

 

 

 

 

7,159

 

 

 

 

 

7,159

 

Exercise of stock options

 

688

 

41

 

53

 

1,534

 

9,149

 

 

 

 

 

10,724

 

Shares retired

 

(720

)

(42

)

720

 

21,443

 

(13,048

)

(8,353

)

 

 

0

 

Cash dividends – $.52 per share

 

 

 

 

 

 

 

 

 

 

 

(71,648

)

 

 

(71,648

)

Balance at October 30, 2005

 

137,843

 

$

8,078

 

0

 

$

0

 

$

3,260

 

$

1,612,315

 

$

(24,923

)

$

1,598,730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

286,139

 

 

 

286,139

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

4,058

 

4,058

 

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

381

 

381

 

Deferred hedging, net of reclassification adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,781

)

(5,781

)

Adjustment in minimum pension liability

 

 

 

 

 

 

 

 

 

 

 

 

 

8,269

 

8,269

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

293,066

 

Purchases of common stock

 

 

 

 

 

(1,058

)

(36,978

)

 

 

 

 

 

 

(36,978

)

Stock option expense

 

 

 

 

 

 

 

 

 

17,766

 

 

 

 

 

17,766

 

Exercise of stock options/nonvested shares

 

492

 

29

 

63

 

2,069

 

5,482

 

 

 

 

 

7,580

 

Shares retired

 

(695

)

(41

)

695

 

24,042

 

(24,001

)

 

 

 

 

0

 

Cash dividends – $.56 per share

 

 

 

 

 

 

 

 

 

 

 

(77,252

)

 

 

(77,252

)

Balance at October 29, 2006

 

137,640

 

$

8,066

 

(300

)

$

(10,867

)

$

2,507

 

$

1,821,202

 

$

(17,996

)

$

1,802,912

 

 


See notes to consolidated financial statements. *Retrospective application of FIFO inventory valuation

43




 

Consolidated Statements of Cash Flows

 

 

Fiscal Year Ended

 

(In Thousands)

 

October 29, 2006

 

October 30, 2005*

 

October 30, 2004*

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

Net earnings

 

$

286,139

 

$

254,603

 

$

233,550

 

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

109,360

 

105,774

 

87,675

 

Amortization of intangibles

 

11,741

 

9,415

 

7,070

 

Equity in earnings of affiliates

 

(4,083

)

(5,797

)

(5,884

)

Provision for deferred income taxes

 

(26,736

)

(24,333

)

(10,494

)

(Gain) loss on property/equipment sales and plant facilities

 

(686

)

149

 

(432

)

Gain on sales of business and investment

 

0

 

0

 

(24,285

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable

 

(37,986

)

6,463

 

14,803

 

Increase in inventories, prepaid expenses, and other current assets

 

(21,722

)

(15,180

)

(31,997

)

(Increase) decrease in net pension assets

 

(22,406

)

23,478

 

(5,733

)

Increase in accounts payable and accrued expenses

 

14,899

 

93,078

 

22,644

 

Other

 

18,054

 

6,069

 

4,557

 

Net Cash Provided by Operating Activities

 

326,574

 

453,719

 

291,474

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

Sale of available-for-sale securities

 

174,960

 

188,800

 

86,470

 

Purchase of available-for-sale securities

 

(136,460

)

(118,300

)

(195,600

)

Acquisitions of businesses/intangibles

 

(78,925

)

(366,496

)

(21,452

)

Purchases of property/equipment

 

(141,516

)

(107,094

)

(80,363

)

Proceeds from sales of property/equipment

 

8,689

 

2,938

 

2,903

 

Proceeds from sales of business and investment

 

0

 

0

 

126,774

 

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

 

1,917

 

(5,060

)

(3,680

)

Dividends from affiliates

 

811

 

775

 

0

 

Net Cash Used in Investing Activities

 

(170,524

)

(404,437

)

(84,948

)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

Proceeds from short-term debt

 

70,000

 

115,000

 

0

 

Principal payments on short-term debt

 

(70,000

)

(115,000

)

0

 

Principal payments on long-term debt

 

(11,085

)

(15,765

)

(32,298

)

Dividends paid on common stock

 

(75,840

)

(69,371

)

(61,343

)

Share repurchase

 

(36,978

)

(22,977

)

(37,525

)

Other

 

9,292

 

9,996

 

6,545

 

Net Cash Used in Financing Activities

 

(114,611

)

(98,117

)

(124,621

)

Increase (Decrease) in Cash and Cash Equivalents

 

41,439

 

(48,835

)

81,905

 

Cash and cash equivalents at beginning of year

 

131,046

 

179,881

 

97,976

 

Cash and Cash Equivalents at End of Year

 

$

172,485

 

$

131,046

 

$

179,881

 

 


See notes to consolidated financial statements. *Retrospective application of FIFO inventory valuation. Note A

44




 

Note A

Summary of Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements include the accounts of Hormel Foods Corporation and all of its majority-owned subsidiaries after elimination of intercompany accounts, transactions, and profits.

Reclassifications: Certain reclassifications of previously reported amounts have been made to conform to the current year presentation and to conform with recent accounting pronouncements and guidance. The reclassifications had no impact on net earnings as previously reported.

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Fiscal Year: The company’s fiscal year ends on the last Sunday in October. Fiscal years 2006 and 2005 consisted of 52 weeks, and fiscal year 2004 consisted of 53 weeks.

Change in Accounting Principle: In the first quarter of fiscal 2006, the company changed its method of accounting for the materials portion of turkey products and substantially all inventoriable expenses, packages, and supplies (in total approximately 23.0 percent of total gross inventory at the end of fiscal 2005) that had previously been accounted for utilizing the Last-In First-Out (LIFO) method to the First-In First-Out (FIFO) method. As a result, all inventories are now stated at the lower of cost, determined on a FIFO basis, or market. The change is preferable because it provides a more meaningful presentation of the company’s financial position as it values inventory in a manner which more closely approximates current cost; it provides a consistent and uniform costing method across the company’s operations; FIFO inventory values better represent the underlying commercial substance of selling the oldest products first; it is the prevalent method used by other entities within the company’s industry; and it enhances the comparability of the financial statements with those of our industry peers. As required by U.S. generally accepted accounting principles, the change has been reflected in the consolidated statements of financial position, consolidated statements of operations, and consolidated statements of cash flows through retrospective application of the FIFO method. Inventories as of the beginning of fiscal 2005 were increased by the LIFO reserve ($36.7 million), the net current deferred tax assets were decreased ($7.9 million), current tax liabilities were increased ($5.8 million), and shareholders’ investment was increased by the after-tax effect ($23.0 million). Previously reported net earnings for fiscal years 2005 and 2004 were increased by $1.1 million and $1.9 million, respectively.

Cash and Cash Equivalents and Short-term Marketable Securities: The company considers all investments with anoriginal maturity of three months or less on their acquisition date to be cash equivalents. The company classifies investments with an original maturity of more than three months on their acquisition date as short-term marketable securities. Short-term marketable securities consist primarily of auction rate securities. The company’s auction rate securities generally have long-term stated maturities of 20 to 30 years, but have characteristics of short-term investments due to a rate-setting mechanism and the ability to liquidate them through a Dutch auction process that occurs on pre-determined intervals of less than 90 days. The company classifies its auction rate securities as available-for-sale investments and has not recorded any unrealized gains or losses associated with the investments in 2006 or 2005.

Inventories: Inventories are stated at the lower of cost, determined on a FIFO basis, or market. As described above, the company changed its method of accounting for certain inventory components from the LIFO method to the FIFO method at the beginning of fiscal year 2006.

Property, Plant and Equipment: Property, plant and equipment are stated at cost. The company generally uses the straight-line method in computing depreciation. The annual provisions for depreciation have been computed principally using the following ranges of asset lives: buildings 20 to 40 years, machinery and equipment 5 to 10 years.

Software development and implementation costs are expensed until the company has determined that the software will result in probable future economic benefits, and management has committed to funding the project. Thereafter, all qualified external implementation costs, and purchased software costs are capitalized and amortized using the straight-line method over the remaining estimated useful lives, not exceeding five years.

Goodwill and Intangibles: Goodwill and other intangibles are originally recorded at their estimated fair values at date of acquisition, and are allocated to reporting units that will receive the related sales and income. The company’s current reporting units represent operating segments (aggregations of business units that have similar economic characteristics and share the same production facilities, raw materials, and labor force). Goodwill and indefinite-lived intangibles are tested annually for impairment, or more frequently if impairment indicators arise. Definite-lived intangibles are amortized over their estimated useful lives and are evaluated for impairment annually, or more frequently if impairment indicators are present, using a process similar to that used to test long-lived assets for impairment.

Impairment of Long-lived Assets: The company reviews long-lived assets and definite-lived intangibles for impairment annually or more frequently when events or changes in circumstances indicate that the carrying amount of an asset

45




 

may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets and any related goodwill, the carrying value is reduced to the estimated fair value.

In the fourth quarter of fiscal year 2006, the company recorded a write-down of $4.0 million related to the closing of its plant in Houston, Texas, to record the facility at estimated fair market value. The plant was closed during fiscal 2006 to better achieve efficiencies in the company’s manufacturing and distribution network.

Foreign Currency Translation: Assets and liabilities denominated in foreign currency are translated at the current exchange rate as of the statements of financial position date, and income statement amounts are translated at the average monthly exchange rate. Translation adjustments resulting from fluctuations in exchange rates are recorded as a component of accumulated other comprehensive loss in shareholders’ investment.

When calculating foreign currency translation, the company deemed its foreign investments to be permanent in nature and has not provided for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars.

Available-for-Sale Securities: The fair value of investments classified as available-for-sale is included in other assets on the consolidated statements of financial position. Unrealized gains and losses are recorded to other comprehensive income/(loss) and reclassified to earnings when the investment is sold.

Accumulated Other Comprehensive Loss: The components of accumulated other comprehensive loss are as follows:

 

 

 

 

 

 

Unrealized

 

 

 

Accumulated

 

 

 

Foreign

 

Minimum

 

Gain (Loss) on

 

Deferred

 

Other

 

 

 

Currency

 

Pension

 

Available-for-

 

Gain (Loss) –

 

Comprehensive

 

(In Thousands)

 

Translation

 

Liability

 

Sale Securities

 

Hedging

 

Loss

 

Balance at October 25, 2003

 

$

(13,999

)

$

(13,694

)

$

4,927

 

$

(2,378

)

$

(25,144

)

Unrecognized gains (losses)

 

8,776

 

(4,131

)

(4,927

)

(6,260

)

(6,542

)

Reclassification into net earnings

 

 

 

 

 

 

 

6,035

 

6,035

 

Tax effect

 

 

 

2,002

 

 

 

115

 

2,117

 

Net of tax amount

 

8,776

 

(2,129

)

(4,927

)

(110

)

1,610

 

Balance at October 30, 2004

 

$

(5,223

)

$

(15,823

)

$

0

 

$

(2,488

)

$

(23,534

)

Unrecognized gains (losses)

 

217

 

(12,882

)

 

 

10,433

 

(2,232

)

Reclassification into net earnings

 

 

 

 

 

 

 

492

 

492

 

Tax effect

 

 

 

4,470

 

 

 

(4,119

)

351

 

Net of tax amount

 

217

 

(8,412

)

 

 

6,806

 

(1,389

)

Balance at October 30, 2005

 

$

(5,006

)

$

(24,235

)

$

0

 

$

4,318

 

$

(24,923

)

Unrecognized gains (losses)

 

4,058

 

13,015

 

611

 

(9,078

)

8,606

 

Reclassification into net earnings

 

 

 

 

 

 

 

(219

)

(219

)

Tax effect

 

 

 

(4,746

)

(230

)

3,516

 

(1,460

)

Net of tax amount

 

4,058

 

8,269

 

381

 

(5,781

)

6,927

 

Balance at October 29, 2006