Exhibit 10.11
HORMEL
SURVIVOR INCOME PLAN FOR EXECUTIVES
(1993 Restatement)
First Effective
December 31, 1984
As Amended And Restated
Effective October
31, 1993
HORMEL SURVIVOR INCOME PLAN FOR
EXECUTIVES
(1993
Restatement)
TABLE OF CONTENTS
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SECTION 1.
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PURPOSE
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1
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SECTION 2.
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DEFINITIONS
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1
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SECTION 3.
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PARTICIPATION
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SECTION 4.
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SURVIVOR BENEFIT
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2
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SECTION 5.
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PAYMENT OF SURVIVOR BENEFIT
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2
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SECTION 6.
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DESIGNATION OF BENEFICIARIES
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3
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SECTION 7.
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UNFUNDED PLAN
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5
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SECTION 8.
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PLAN ADMINISTRATOR
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5
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SECTION 9.
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MISCELLANEOUS
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6
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1
HORMEL SURVIVOR INCOME PLAN FOR
EXECUTIVES
(1993
Restatement)
SECTION 1
PURPOSE
This Plan was established
effective December 31, 1984 for the benefit of certain executives of Geo. A.
Hormel & Company in order to provide incentive to such executives who contribute
to the corporation’s success and in order to retain their services and
encourage them to continue in their efforts to increase Hormel’s profitability.
Pursuant to its reserved power of amendment, Geo. A. Hormel & Company
hereby amends and restates the Plan in its entirety effective for deaths occurring
on or after October 31, 1993 as follows:
SECTION 2
DEFINITIONS
The following terms shall
have the meanings set forth below:
(a)
Base Salary
shall mean the average annual rate of base
salary of a Participant from Hormel for the three (3) consecutive Plan Years
out of the six (6) consecutive Plan Years immediately preceding the
Participant’s death or retirement, as applicable, which produce the highest
average. “Base Salary” shall include incentive payments and bonuses but shall
not include supplemental unemployment benefits, contributions to any profit
sharing or other qualified plan, reimbursements of moving expenses or other
expenses or disability payments. Base Salary shall also include amounts that would
have been included in Base Salary but were voluntarily deferred under a
nonqualified deferred compensation plan maintained by Hormel. The Compensation
Committee shall determine whether a particular item of income constitutes “Base
Salary” if a question arises.
(b)
Beneficiary
shall mean the person or persons entitled under
Section 6 to receive a Survivor Benefit after a Participant’s death.
(c)
Compensation Committee
shall mean the Compensation Committee
of the Hormel Board of Directors as it may from time to time be constituted.
(d)
Executive
shall mean an employee of Hormel who is a
Participant in Hormel’s Operator Share Program.
(e)
Participant
shall mean a present or former Executive on
whose account a Survivor Benefit will be payable under Section 4.
(f)
Plan
shall mean this Survivor Income Plan for Executives, as
amended from time to time.
(g)
Plan Year
shall mean the fiscal period of fifty-two (52) or fifty-three
(53) consecutive calendar weeks that ends on the last Saturday of October in
each year.
(h)
Survivor Benefit
shall mean a benefit payable under Section
4 of this Plan.
(i)
Hormel
shall mean Geo. A. Hormel & Company (doing business
as Hormel Foods Corporation) and its participating subsidiaries.
(j)
Retirement
for this Plan shall mean normal, early or
disability retirement, as defined under the Hormel Foods Corporation Salaried
Employees’ Pension Plan (formerly known as the Geo. A. Hormel & Company
Salaried Employees’ Pension Plan).
SECTION 3
PARTICIPATION
The Compensation
Committee shall designate from time to time the Executives who shall be
Participants in this Plan. No member of the Compensation Committee shall be
excluded from participation hereunder because of his position on the Committee,
however, such member shall not participate in any decision respecting his
account under the plan. A Beneficiary shall be eligible for benefits only as
hereinafter provided.
SECTION 4
SURVIVOR
BENEFIT
(a)
If
a Participant’s employment with Hormel ends because of his death while he is an
Executive, his Beneficiary shall receive an annual Survivor Benefit equal to
60% of the Participant’s Base Salary at the time of his death. This annual
benefit shall be payable for a period of 20 years.
(b)
If
a Participant (i) remains an Executive of Hormel until his Retirement, and (ii)
dies following such Retirement, then his Beneficiary shall receive upon his
death an annual Survivor Benefit equal to 40% of the Participant’s Base Salary
at the time of his retirement. This Survivor Benefit shall be paid over a
period of 15 years.
(c)
Notwithstanding
the provisions of 4(a) and 4(b), no Survivor Benefit shall be payable on the
account of any Executive whose death occurs within two (2) years of his
participation in the Plan and is determined by competent medical authority to
be the result of suicide.
(d)
If
Participant does not satisfy the conditions of 4(a) or 4(b), no Survivor
Benefit shall be payable on his account. For this purpose, should an Executive
voluntarily or involuntarily discontinue full-time service to Hormel for
reasons other than death or disability prior to retirement, the Executive’s
rights under this Plan shall automatically terminate and Hormel shall have no
obligation to make any survivor benefit payable on his account whatsoever
hereunder.
(e)
If
the corporation shall terminate the employment of any Executive prior to
retirement by terminating him for malfeasance, dishonesty, inefficiency or any
other cause as the Board of Directors in its sole discretion deems sufficient, no
Survivor Benefits shall be payable on his account.
SECTION 5
PAYMENT
OF SURVIVOR BENEFIT
(a)
The
annual Survivor Benefit shall be payable in equal monthly installments commencing
on the first day of the second month following the Participant’s death. The
annual Survivor Benefit payable under Section 4(a) shall be paid in 240 equal
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consecutive monthly installments. The annual Survivor Benefit payable under
Section 4(b) shall be paid in 180 equal consecutive monthly installments.
(b)
A
Participant, with the consent of the Compensation Committee and at its sole
discretion, may, during his lifetime, elect a different method of payment
provided that in all events the Survivor Benefit shall be payable over a period
of not less than one month but not more than 240 months. If a Participant elects
to have the Survivor Benefit paid in a manner other than as provided in Section
5(a), the actuaries then servicing Hormel shall determine the present value (by
applying the interest, mortality and other assumptions and the practices and
procedures used in computing benefits under the Hormel Foods Corporation
Salaried Employees’ Pension Plan) of the payment method so elected, and the
amount of the Survivor Benefit shall be reduced accordingly so that the value
of the Survivor Benefit, determined at the time of the Participant’s death, is
the actuarial equivalent of that provided in Section 5(a) above.
SECTION 6
DESIGNATION
OF BENEFICIARIES
(a)
Each
Participant may designate, upon forms to be furnished by and filed with the
Compensation Committee, one or more primary Beneficiaries or alternative
Beneficiaries to receive all or a specified part of the Survivor Benefit in the
event of the Participant’s death. The Participant may change or revoke any such
designation from time to time without notice to or consent from any Beneficiary
or spouse. No such designation, change or revocation shall be effective unless
executed by the Participant and received by the Compensation Committee during
the Participant’s lifetime.
(b)
If
a Participant:
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(i)
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fails to designate a Beneficiary.
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(ii)
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designates a Beneficiary and thereafter such
designation is revoked without another Beneficiary being named, or
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(iii)
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designates one or more Beneficiaries and all such
Beneficiaries so designated fail to survive the Participant.
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such Participant’s Survivor Benefit, or the part thereof as to which
such Participant’s designation fails, as the case may be, shall be payable to
the first class of the following classes of automatic Beneficiaries with a
member surviving the Participant and (except in the case of the Participant’s
surviving issue) in equal shares if there is more than one member in such class
surviving the Participant.
Participant’s surviving
spouse
Participant’s surviving
issue per stirpes and not per capita
Representative of Participant’s estate.
The Compensation Committee may decide, in its sole discretion, to pay
any remaining Survivor Benefit to a successor Beneficiary in one lump sum
actuarially reduced as provided in Section 5(b) above.
(c)
A
Beneficiary entitled to a distribution of all or a portion of a deceased
Participant’s Survivor Benefit may disclaim his or her interest therein subject
to the following requirements. To be
eligible to disclaim, a Beneficiary must be a natural person, must not have
received a distribution of all or any portion of a Survivor Benefit at the time
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such disclaimer is executed and delivered and must have attained at
least age twenty-one (21) years as of the date of the Participant’s death. Any
disclaimer must be in writing and must be executed personally by the
Beneficiary before a notary public. A disclaimer shall state that the
Beneficiary’s entire interest in the undistributed Survivor Benefit is
disclaimed or shall specify what portion thereof is disclaimed. To be
effective, duplicate original executed copies of the disclaimer must be both
executed and actually delivered to both the Compensation Committee and to the
Trustee after the date of the Participant’s death but not later than one hundred
eighty (180) days after the date of the Participant’s death. A disclaimer shall
be irrevocable when delivered to the Compensation Committee. A disclaimer shall
be considered to be delivered to the Compensation Committee only when actually
received by the Compensation Committee. The Compensation Committee shall be the
sole judge of the content, interpretation and validity of a purported
disclaimer. Upon the filing of a valid disclaimer, the Beneficiary shall be
considered not to have survived the Participant as to the interest disclaimed.
No other form of attempted disclaimer shall be recognized by the Compensation
Committee.
(d)
When
used herein and, unless the Participant has otherwise specified in the
Participant’s Beneficiary designation, when used in a Beneficiary designation, “issue”
means all persons who are lineal descendants of the person whose issue are
referred to, including legally adopted descendants and their descendants but
not including illegitimate descendants and their descendants; “child” means an
issue of the first generation: “per stirpes” means in equal shares among living
children of the person whose issue are referred to and the issue (taken
collectively) of each deceased child of such person, with such issue taking by
right of representation of such deceased child: and “survive” and “surviving”
mean living after the death of the Participant.
(e)
Unless
the Participant has otherwise specified in the Participant’s Beneficiary
designation, the following rules shall apply;
(i)
If
there is not sufficient evidence that a Beneficiary was living at the time of
the death of the Participant, it shall be deemed that the Beneficiary was not
living at the time of the death of the Participant.
(ii)
The
automatic Beneficiaries specified in Section 6(b) and the Beneficiaries
designated by the Participant shall become fixed at the time of the Participant’s
death so that, if a Beneficiary survives the Participant but dies before the
receipt of all payments due such Beneficiary hereunder, such remaining payments
shall be payable to the representative of such Beneficiary’s estate.
(iii)
If
the Participant designates as a Beneficiary the person who is the Participant’s
spouse on the date of the designation, either by name or by relationship, or
both, the dissolution, annulment or other legal termination of the marriage
between the Participant and such person shall automatically revoke such
designation. (The foregoing shall not
prevent the Participant from designating a former spouse as a Beneficiary on a
form executed by the Participant and received by the Compensation Committee
after the date of the legal termination of the marriage between the Participant
and such former spouse and during the Participant’s lifetime.)
(iv)
Any
designation of a nonspouse Beneficiary by name that is accompanied by a
description of relationship to the Participant shall be given effect without
regard to whether the relationship to the Participant exists either then or at
the Participant’s death.
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(v)
Any designation of a
Beneficiary only by statement of relationship to the Participant shall be
effective only to designate the person or persons standing in such relationship
to the Participant at the Participant’s death.
A Beneficiary designation is permanently void if it either is executed
or is filed by a Participant who, at the time of such execution or filing, is
then a minor under the law of the state of the Participant’s legal residence.
The Compensation Committee shall be the sole judge of the content,
interpretation and validity of a purported Beneficiary designation.
SECTION 7
UNFUNDED
PLAN
(a)
Benefits
to be provided under this Plan are unfunded obligations of Hormel. Nothing
contained in this Plan shall require Hormel to segregate any monies from its
general funds, to create any trust, to make any special deposits or to purchase
any policies of insurance with respect to such obligations, or otherwise create
any obligation on the part of Hormel to set aside or earmark any monies or
assets specifically for the purpose of satisfying its obligations hereunder. If
Hormel elects to purchase individual policies of insurance on one or more of
the Participants to help finance its obligations under this Plan, such
individual policies and the proceeds therefrom shall at all times remain the
sole property of Hormel and neither the Participants whose lives are insured
nor their Beneficiaries shall have any ownership rights in such policies of
insurance. Hormel reserves absolute right, in its sole discretion, to terminate
such contracts or any similar funding arrangements at any time.
(b)
Participants
from time to time shall execute such documents and papers and take such other
actions as may be necessary to effectuate the purposes of this Plan.
(c)
No
Participant shall be required or permitted to make contributions to this Plan.
(d)
This
Plan shall not be deemed to constitute a contract between Hormel and any
Participant or any Beneficiary hereunder.
(e)
At
no time shall Executive, his surviving spouse or any other Beneficiary the
Executive may have designated under this Plan be deemed to have any right,
title or interest in or to any specific fund or assets of HormeI including, but
not limited to, any insurance contracts which Hormel may at anytime have
purchased. As to any claim for unpaid
Survivor Benefits under this Plan, any Beneficiary shall be a creditor of the
corporation in the same manner as any other creditor having a general claim
against Hormel.
SECTION 8
PLAN
ADMINISTRATOR
(a)
Hormel,
through its Compensation Committee, shall be the Plan administrator of this
Plan and shall be solely responsible for its general administration and interpretation
and for carrying out the respective provisions hereof and shall have full power
and authority as necessary to do so. The Compensation Committee’s construction,
interpretations, decisions and actions, including the determination of the
amount, or recipient of any payment to be made hereunder, shall be final,
binding and conclusive on each Participant and all persons claiming by, through
or under any Participant. Hormel from time to time may make such rules and
establish such procedures for the
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administration of the Plan as it deems necessary and appropriate for
the administration of this Plan and the transaction of its business.
(b)
Hormel
may employ or engage such agents, accountants, actuaries, counsel, other
experts and other persons as it shall deem necessary or desirable in connection
with the interpretation and administration of this Plan. Hormel shall be
entitled to rely upon all certificates made by an accountant or actuary
selected by Hormel. Hormel and its committees, officers, directors and
employees shall not be liable for any action taken, suffered or omitted by them
in good faith in reliance upon the advise or opinion of any counsel,
accountant, actuary or other expert and all action so taken, suffered or
omitted shall be conclusive upon each of them and upon all other persons
interested in this Plan.
(c)
Hormel
may require proof of the death of any Participant and evidence of the right of
any person to receive any Survivor Benefit.
(d)
Claims
under this Plan shall be filed with Hormel on its prescribed forms.
(e)
Hormel
shall withhold from benefits paid under this Plan any taxes or other amounts
required to be withheld by law.
SECTION 9
MISCELLANEOUS
(a)
Except
for payments to a Beneficiary, no Survivor Benefit payable hereunder shall be
subject in any manner to alienation, sale, transfer, assignment, pledge or
encumbrance of any kind unless specifically approved in writing in advance by
the Compensation Committee. Any attempt to alienate, sell, transfer, assign,
pledge or otherwise encumber any assign, pledge or otherwise encumber any
Survivor Benefits, whether presently or hereafter payable, shall be void unless
so approved. Except as required by law, no Survivor Benefit payable under this
Plan shall in any manner be subject to garnishment, attachment, execution or
other legal process, or be liable for or subject to the debts or liability of
any Participant or Beneficiary.
(b)
Notwithstanding
any Plan provision to the contrary, the Board of Directors of Hormel shall have
the right to amend, modify, suspend or terminate this Plan at any time. No
amendment, suspension or termination shall adversely affect the right of a
Beneficiary to receive a Survivor Benefit payable as the result of the death or
retirement and subsequent death of a Participant if death or retirement
occurred prior to the effective date of such amendment, suspension or
termination, except that Hormel reserves the right to prepay the discounted
present value of all amounts due, as determined by applying the interest,
mortality and other assumptions and the practices and procedures used in commuting
benefits under the Hormel Foods Corporation Salaried Employees’ Pension Plan,
upon the initiation of the Compensation Committee and approval of the full
Board of Directors.
(c)
This
agreement shall be binding upon a Participant, his designated Beneficiaries,
his heirs, executors, administrators and successors in interest.
(d)
Nothing
contained herein shall prevent a Participant from continuing or future
participation in any plan which may be provided by Hormel and for which the
Participant may otherwise qualify.
(e)
The
headings and subheadings of this Plan have been inserted for convenience of
reference and are to be ignored in any construction of provisions hereunder.
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(f)
Whenever
any words are used herein in the masculine gender, they should be construed as
to include the feminine gender.
(g)
This
document shall be construed in accordance with the laws of the State of
Minnesota.
(h)
Nothing
contained in this Plan shall be construed as a contract of employment between
any Participant and Hormel or to suggest or create a right in any Participant
to be continued in employment as Executive or other employee of Hormel.
(i)
This
Plan shall be originally effective as of the 31st day of December, 1984.
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, 1993
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HORMEL FOODS
CORPORATION
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By
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/s/ Joel W. Johnson
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Its
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President
& CEO
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7
FIRST AMENDMENT
OF
HORMEL SURVIVOR INCOME PLAN FOR
EXECUTIVES
(1993
Restatement)
The “Hormel
Survivor Income Plan for Executives (1993 Restatement)” adopted by Hormel Foods
Corporation (“Hormel”), a Delaware corporation, on November 1, 1993, but
effective November 1, 1992 (hereinafter referred to as the “Plan Statement”),
is hereby amended as follows:
1.
MONTHLY BASE SALARY,
Effective for the purpose of determining the amount of the Survivor Benefit
payable with respect to Participants who die on or after October 29, 2000,
Section 2(a) of the Plan Statement shall be amended to read in full as follows:
(a)
Base
Salary shall mean one-twelfth (l/l2
th
)
of the average annual rate of base salary of a Participant from Hormel for the
three (3) consecutive calendar years out of the six (6) consecutive calendar
years immediately preceding the Participant’s death or retirement, as
applicable, which produce the highest average. “Base Salary” shall include
incentive payments and bonuses but shall not include supplemental unemployment
benefits, contributions to any profit sharing or other qualified plan,
reimbursements of moving expenses or other expenses or disability payments.
Base Salary shall also include amounts that would have been included in Base
Salary but were voluntarily deferred under a nonqualified deferred compensation
plan maintained by Hormel. The Compensation Committee shall determine whether a
particular item of income constitutes “Base Salary” if a question arises.
2.
FROZEN PARTICIPANT
GROUP. Effective for the purpose of determining which individuals are eligible
to be Participants on or after October 29, 2000, Section 2(d) of the Plan
Statement shall be amended to read in full as follows:
(d)
Executive
shall mean and include each person who is either (i) an employee of Hormel who,
as of October 28, 2000, is (or was) a Participant in this Plan on that date, or
(ii) an employee of Hormel who was not a Participant in this Plan on October
28, 2000 but, after October 28, 2000, is an Executive Officer. However, such
person shall be considered an Executive after October 28, 2000 only: (i) during
continued employment with Hormel while the employee is participating in the
Operators’ Share Plan, or (ii) after employment ends if such person retired
from Hormel while participating in the Operators’ Share Plan.
3.
NAME CHANGE.
Effective February 1, 1995, Section 2(i) of the Plan Statement shall be amended
to read in full as follows:
(i)
Hormel
shall mean Hormel Foods Corporation (formerly known as Geo. A. Hormel &
Company) and its participating subsidiaries.
4.
DEPENDENTS DEFINED.
Effective October 29, 2000, Section 2 of the Plan Statement shall be amended by
adding thereto, in alphabetical sequence, the following additional definition
(and all other definitions shall be renumbered accordingly):
(d)
Eligible Dependent Child
shall mean each individual who,
with respect to a Participant, qualifies as an eligible dependent of that
Participant under the Hormel Foods Corporation Health Care Plan determined at
the time a payment of a Survivor Benefit is due (
i.e
.,
is a child who then satisfies the age and similar criteria in that Health Care
Plan, as they may exist at that time, to be entitled to coverage under that
Plan (i) exclusive of any periods of coverage due to continuation or conversion
rights that may exist under that Plan, and (ii) without regard to whether that
child is then in fact covered by that Plan).
5.
SPOUSE DEFINED.
Effective October 29, 2000, Section 2 of the Plan Statement shall be amended by
adding thereto, in alphabetical sequence, the following additional definition
(and all other definitions shall be renumbered accordingly):
(i)
Surviving Spouse
shall mean the individual who was married
to the Participant at the time of the Participant’s death and had been married
to the Participant for the one (1) year prior to that death.
6.
BENEFITS UPON DEATH.
Effective for deaths occurring on or after October 29, 2000, Section 4 shall be
amended to read in full as follows:
SECTION 4
PRE-2000
PARTICIPANTS
4.1.
When available
.
Upon the death of a Participant who was an employee of Hormel who, as of
October 28, 2000, is (or was) a Participant in this Plan on that date, whether
the death is before or after termination of employment, a Survivor Benefit
shall be paid to the extent hereinafter provided.
4.2
Amount of
Benefit
. The amount of the Survivor Benefit shall be equal to:
4.2. 1.
Death During
Employment
. If a Participant’s
employment with Hormel ends because of his or her death while an Executive
(i.e., the Participant dies while still an employee and an Executive), the Participant’s
Beneficiary shall receive a Survivor Benefit equal to sixty percent (60%) of
the Participant’s Base Salary at the time of the Participant dies. A
Participant shall be considered an Executive after October 28, 2000, only (i)
during continued employment with Hormel while the employee is participating in
the Operators’ Share Plan, or (ii) after employment ends if such
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person retired from Hormel
while participating in the Operators’ Share Plan. This Survivor Benefit shall
be paid in two hundred forty (240) equal monthly installments commencing on the
first day of the second month following the Participant’s death.
4.2.2.
Death After
Retirement
. If a Participant
(i) remains an Executive of Hormel until his or her Retirement, and (ii) dies
following such Retirement, then his or her Beneficiary shall receive upon his
death a Survivor Benefit equal to forty percent (40%) of the Participant’s Base
Salary at the time of his or her retirement. This Survivor Benefit shall be
paid in one hundred eighty (180) equal monthly installments commencing on the
first day of the second month following the Participant’s death.
4.2.3.
Optional
Payment Forms
. A
Participant, with the consent of the Compensation Committee and at its sole
discretion, may, during his or her lifetime, elect a different method of
payment provided that in all events the Survivor Benefit shall be payable over a
period of not less than one month but not more than 240 months. If a Participant elects a different method of
payment, the actuaries then servicing Hormel shall determine the present value
(by applying the interest, mortality and other assumptions and the practices
and procedures used in computing benefits under the Hormel Foods Corporation
Salaried Employees’ Pension Plan) of the payment method so elected, and the
amount of the Survivor Benefit shall be reduced accordingly so that the value
of the Survivor Benefit, determined at the time of the Participant’s death, is
the actuarial equivalent of that would have been paid absent such an election.
SECTION 5
POST-2000
PARTICIPANTS
5.1.
When
available
. Upon the death of
any Participant other than a Participant described in Section 4, whether the
death is before or after termination of employment, a Survivor Benefit shall be
paid to the extent hereinafter provided.
5.2.
Amount of
Benefit
. The amount of the
Survivor Benefit shall be equal to:
5.2.1.
Death During
Employment
. If a Participant’s
employment with Hormel ends because of his or her death while an Executive
(i.e., the Participant dies while still an employee and an Executive), the
Participant’s Surviving Spouse, Eligible Dependent Children or Beneficiary
shall receive a Survivor Benefit equal to sixty percent (60%) of the Participant’s
Base Salary determined at the time of the Participant dies. (A Participant
shall be considered an Executive after October 28, 2000, only (i) during continued
employment with Hormel while the employee is participating in the Operators’
Share Plan, or (ii) after employment ends if such person retired from Hormel
while participating in the Operators’ Share Plan.) This Survivor Benefit shall
be paid monthly, commencing on the first day of the second month following the
Participant’s death, in accordance with Option A below unless Hormel shall have
received prior to the Paiticipant’s death an election made and signed by the
Participant, in such form as Hormel may prescribe, an affirmative election that
the benefit be paid in accordance with Option B below:
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Option A
. The
Survivor Benefit shall be paid in equal monthly payments as follows.
(i)
For
so long as there is a Surviving Spouse, the Survivor Benefit shall be paid to
the Surviving Spouse. After there is no Surviving Spouse, the Survivor Benefit
shall be paid in equal shares to the individuals who are then, on the date of
each such payment, Eligible Dependent Children, if any. However, no more than
two hundred forty (240) equal monthly payments shall be paid to the Surviving
Spouse and Eligible Dependent Children.
(ii)
If,
prior to the time sixty (60) equally monthly installments have been paid
pursuant to (i) above, there is no longer any Surviving Spouse or Eligible
Dependent Child entitled to payment, the Survivor Benefit shall be paid to the Participant’s
Beneficiary. However, no more than sixty (60) equal monthly payments (minus the
number of monthly installments, if any, previously paid to the Surviving Spouse
and Eligible Dependent Children) shall be paid to the Beneficiary.
Option B
. The Survivor Benefit shall be paid for sixty
(60) months to the Participant’s Beneficiary.
5.2.2.
Death After
Retirement
. If a Participant (i) remains an Executive of
Hormel until his or her Retirement, and (ii) dies following such Retirement,
the Participant’s Surviving Spouse, Eligible Dependent Children or Beneficiary
shall receive upon his death an annual Survivor Benefit equal to forty percent
(40%) of the Participant’s Base Salary determined at the time of his
retirement. (A Participant shall be considered an Executive after October 28,
2000, only (i) during continued employment with Hormel while the employee is
participating in the Operators’ Share Plan, or (ii) after employment ends if
such person retired from Hormel while participating in the Operators’ Share
Plan.) This Survivor Benefit shall be paid monthly, commencing on the first day
of the second month following the Participant’s death, in accordance with
Option A below unless Hormel shall have received prior to the Participant’s
death an election made and signed by the Participant, in such form as Hormel
may prescribe, an affirmative election that the benefit be paid in accordance
with Option B below:
Option A
. The Survivor Benefit shall be paid in equal
monthly payments as follows.
(i)
For
so long as there is a Surviving Spouse, the Survivor Benefit shall he paid to
the Surviving Spouse. After there is no Surviving Spouse, the Survivor Benefit
shall be paid in equal shares to the individuals who are then, on the date of
each such payment, Eligible Dependent Children, if any. However, no more than
one hundred eighty (180) equal monthly payments shall be paid to the Surviving
Spouse and Eligible Dependent Children.
4
(ii)
If,
prior to the time sixty (60) equally monthly installments have been paid pursuant
to (i) above, there is no longer any Surviving Spouse or Eligible Dependent
Child entitled to payment, the Survivor Benefit shall be paid to the
Participant’s Beneficiary. However, no more than sixty (60) equal monthly
payments (minus the number of monthly installments, if any, previously paid to
the Surviving Spouse and Eligible Dependent Children) shall be paid to the
Beneficiary.
Option B
. The Survivor Benefit shall be paid for sixty
(60) months to the Participant’s Beneficiary.
5.3.
Disqualification
.
Notwithstanding the provisions of
Section 4 and Section 5, no Survivor Benefit shall be payable under this Plan
on the account of any Participant whose death occurs within two (2) years of
his participation in the Plan and is determined by competent medical authority
to be the result of suicide.
5.4.
No Other
Benefits
. If Participant does
not satisfy the conditions specified in Section 4 or Section 5, no Survivor
Benefit shall be payable with respect to him or her under this Plan. Without
limiting the generality of the foregoing, should a Participant voluntarily or
involuntarily discontinue full-time service to Hormel for reasons other than
death or disability prior to retirement, the Participant’s rights under this
Plan shall automatically terminate and Hormel shall have no obligation to make
any Survivor Benefit payable on his account whatsoever hereunder.
5.5.
Termination
for Cause
. If the corporation
shall terminate the employment of any Participant prior to retirement by
terminating him for malfeasance, dishonesty, inefficiency or any other cause as
the Board of Directors in its sole discretion deems sufficient, no Survivor
Benefits shall be payable on his account under this Plan.
6.
SAVINGS CLAUSE. Save and except as hereinabove expressly amended,
the Plan Statement shall continue in full force and effect.
5
SECOND AMENDMENT
OF
HORMEL SURVIVOR INCOME PLAN FOR
EXECUTIVES
(1993
Restatement)
The “Hormel
Survivor Income Plan for Executives (1993 Restatement)” adopted by Hormel
(“Hormel”), a Delaware corporation, on November 1, 1993, but effective November
1, 1992 (hereinafter referred to as the “Plan Statement”), is hereby amended as
follows:
1.
FORFEITURE
CLAUSE (PRE-2000 PARTICIPANTS). Effective for individuals who are actively
employed at any time on or after November 1, 2000, Section 4 of the Plan
Statement shall be amended by adding thereto a new section 4.3 which shall read
in full as follows:
4.3.
Forfeiture of Benefits
. All unpaid benefits payable under
this Plan to or with respect to a Participant, shall be permanently forfeited
upon the determination by the Compensation Committee of the Board of Directors
of Hormel that the Participant, either before or after termination of
employment:
(a)
engaged
in a felonious or fraudulent conduct resulting in material harm to Hormel or an
affiliate; or
(b)
made
an unauthorized disclosure to a competitor of any material confidential
information, trade information, or trade secrets of Hormel or an affiliate; or
(c)
provided
Hormel or an affiliate with materially false reports concerning his or her
business interests or employment; or
(d)
made
materially false representations which are relied upon by Hormel or an
affiliate in furnishing information to shareholders, auditors, or any
regulatory or governmental body; or
(e)
maintained
an undisclosed, unauthorized and material conflict of interest in the discharge
of the duties owed by the Participant to Hormel or an affiliate; or
(f)
engaged
in reckless or grossly negligent activity toward Hormel or an affiliate which
is admitted or judicially proven and which results in significant harm to Hormel
or an affiliate; or
(g)
engaged
during his or her employment or during a period of two (2) years after the
termination of his or her employment in any employment or self-employment with
a competitor of Hormel or an affiliate within the geographical area which is
then served by Hormel or an affiliate.
Any dispute arising under
or with respect to this Section shall be subject to the claims procedure set
forth in Section 10.
2.
FORFEITURE
CLAUSE (POST-2000 PARTICIPANTS). Effective for individuals who are actively
employed at any time on or after November 1, 2000, Section 5 of the Plan Statement
shall be amended by adding thereto a new section 5.6 which shall read in full
as follows:
5.6.
Forfeiture of Benefits
. All unpaid benefits payable under
this Plan to or with respect to a Participant, shall be permanently forfeited
upon the determination by the Compensation Committee of the Board of Directors
of Hormel that the Participant, either before or after termination of employment:
(a)
engaged
in a felonious or fraudulent conduct resulting in material harm to Hormel or an
affiliate; or
(b)
made
an unauthorized disclosure to a competitor of any material confidential
information, trade information, or trade secrets of Hormel or an affiliate; or
(c)
provided
Hormel or an affiliate with materially false reports concerning his or her
business interests or employment; or
(d)
made
materially false representations which are relied upon by Hormel or an
affiliate in furnishing information to shareholders, auditors, or any
regulatory or governmental body; or
(e)
maintained
an undisclosed, unauthorized and material conflict of interest in the discharge
of the duties owed by the Participant to Hormel or an affiliate; or
(f)
engaged
in reckless or grossly negligent activity toward Hormel or an affiliate which
is admitted or judicially proven and which results in significant harm to Hormel
or an affiliate; or
(g)
engaged
during his or her employment or during a period of two (2) years after the
termination of his or her employment in any employment or self-employment with
a competitor of Hormel or an affiliate within the
2
geographical area which is then served by Hormel or an
affiliate.
Any dispute arising under
or with respect to this Section shall be subject to the claims procedure set
forth in Section 10.
3.
PLAN
ADMINISTRATION. Effective for claims arising on or after November 1, 2000,
Section 8 of the Plan Statement shall be amended to read in full as follows:
SECTION 8
PLAN
ADMINISTRATOR
(a)
Hormel,
through its Compensation Committee, shall be the Plan administrator of this
Plan and shall be solely responsible for its general administration and
interpretation and for carrying out the respective provisions hereof and shall
have full power and authority as necessary to do so. Hormel from time to time
may make such rules and establish such procedures for the administration of the
Plan as it deems necessary and appropriate for the administration of this Plan
and the transaction of its business.
(b)
Hormel
may employ or engage such agents, accountants, actuaries, counsel, other
experts and other persons as it shall deem necessary or desirable in connection
with the interpretation and administration of this Plan. Hormel shall be
entitled to rely upon all certificates made by an accountant or actuary
selected by Hormel. Hormel and its
committees, officers, directors and employees shall not be liable for any
action taken, suffered or omitted by them in good faith in reliance upon the
advise or opinion of any counsel, accountant, actuary or other expert and all
action so taken, suffered or omitted shall be conclusive upon each of them and
upon all other persons interested in this Plan.
(c)
Hormel
may require proof of the death of any Participant and evidence of the right of
any person to receive any Survivor Benefit.
(d)
Hormel
shall withhold from benefits paid under this Plan any taxes or other amounts
required to be withheld by law.
4.
CLAIMS
PROCEDURES. Effective for claims arising on or after November 1, 2000, the Plan
Statement shall be amended by adding thereto a new Section 10 which shall read
in full as follows:
3
SECTION
10
CLAIMS
PROCEDURES
10.1.
Determinations
. The
Compensation Committee shall make such determinations as may be required from
time to time in the administration of the SIPE.
The Compensation Committee shall have the sole discretion, authority and
responsibility to interpret and construe the SIPE and the plan document and to
determine all factual and legal questions under the SIPE, including but not
limited to the entitlement of employees, participating employees and
beneficiaries and the amounts of their respective interests. Benefits under the
SIPE will be paid only if the Compensation Committee decides in its discretion
that an employee, participating employee or Beneficiary is entitled to them.
The trustee and other interested parties may act and rely upon all information
reported to them hereunder and need not inquire into the accuracy thereof, nor
be charged with any notice to the contrary.
10.2.
Rules and Regulations
. Any rule not in conflict or at variance with
the provisions hereof may be adopted by the Compensation Committee.
10.3.
Method of Executing Instruments
. Information to be supplied or written notices
to be made or consents to be given by Hormel or an affiliate or the
Compensation Committee pursuant to any provision of this SIPE may be signed in
the name of Hormel or an affiliate by any officer or by any employee who has
been authorized to make such certification or to give such notices or consents
or by any Compensation Committee member.
10.4.
Claims Procedure
. Until
modified by the Compensation Committee, the claims procedure set forth in this
Section shall be the claims procedure for the resolution of disputes and
disposition of claims arising under the SIPE. An application for a distribution
or benefits under Section 4 or Section 5 shall be considered as a claim for the
purposes of this Section.
10.4.
1.
Original Claim
. Any
employee, former employee, or beneficiary of such employee or former employee
may, if the employee, former employee or beneficiary so desires, file with the
Compensation Committee a written claim for benefits under the SIPE. Within
ninety (90) days after the filing of such a claim, the Compensation Committee shall
notify the claimant in writing whether the claim is upheld or denied in whole
or in part or shall furnish the claimant a written notice describing specific
special circumstances requiring a specified amount of additional time (but not
more than one hundred eighty days from the date the claim was filed) to reach a
decision on the claim. If the claim is denied in whole or in part, the
Compensation Committee shall state in writing:
(a)
the
specific reasons for the denial,
(b)
the
specific references to the pertinent provisions of this SIPE on which the
4
denial is based,
(c)
a
description of any additional material or information necessary for the
claimant to perfect the claim and an explanation of why such material or
information is necessary, and
(d)
an
explanation of the claims review procedure set forth in this Section.
104.2.
Claims Review Procedure
. Within sixty (60) days after receipt of notice
that the claim has been denied in whole or in part, the claimant may file with
the Compensation Committee a written request for a review and may, in
conjunction therewith, submit written issues and comments. Within sixty (60)
days after the filing of such a request for review, the Compensation Committee
shall notify the claimant in writing whether, upon review, the claim was upheld
or denied in whole or in part or shall furnish the claimant a written notice
describing specific special circumstances requiring a specified amount of
additional time (but not more than one hundred twenty days from the date the
request for review was filed) to reach a decision on the request for review.
10.4.3.
General Rules
.
(a)
No
inquiry or question shall be deemed to be a claim or a request for a review of
a denied claim unless made in accordance with the claims procedure. The Compensation
Committee may require that any claim for benefits and any request for a review
of a denied claim be filed on forms to be furnished by the Compensation
Committee upon request.
(b)
All
decisions on claims and on requests for a review of denied claims shall be made
by the Compensation Committee unless delegated.
(c)
The
Compensation Committee may, in its discretion, hold one or more hearings on a
claim or a request for a review of a denied claim.
(d)
Claimants
may be represented by a lawyer or other representative at their own expense,
but the Compensation Committee reserves the right to require the claimant to
furnish written authorization. A claimant’s representative shall be entitled to
copies of all notices given to the claimant.
(e)
The
decision of the Compensation Committee on a claim and on a request for a review
of a denied claim shall be served on the claimant in writing. If a decision or
notice is not received by a claimant within the time specified, the claim or
request for a review of a denied claim shall be deemed to have been denied.
5
(f)
Prior
to filing a claim or a request for a review of a denied claim, the claimant or
the claimant’s representative shall have a reasonable opportunity to review a
copy of SIPE plan document and all other pertinent documents in the possession
of Hormel, the Compensation Committee and the trustee.
10.4.4.
Deadline to File Claim
. To be considered timely under the SIPE’s claim
and review procedure, a claim must be filed with the Compensation Committee
within one (1) year after the claimant knew or reasonably should have known of
the principal facts upon which the claim is based.
10.4.5.
Exhaustion of Administrative Remedies
. The exhaustion of the claim and review
procedure is mandatory for resolving every claim and dispute arising under this
SIPE. As to such claims and disputes:
(a)
no
claimant shall be permitted to commence any legal action to recover Plan
benefits or to enforce or clarify rights under the SIPE under section 502 or
section 510 of ERISA or under any other provision of law, whether or not
statutory, until the claim and review procedure set forth herein have been
exhausted in their entirety; and
(b)
in
any such legal action all explicit and all implicit determinations by the
Compensation Committee (including, but not limited to, determinations as to
whether the claim, or a request for a review of a denied claim, was timely
filed) shall be afforded the maximum deference permitted by law.
10.4.6.
Deadline to File Legal Action
. No legal action to recover
SIPE benefits or to enforce or clarify rights under the SIPE under section 502
or section 510 of ERISA or under any other provision of law, whether or not
statutory, may be brought by any claimant on any matter pertaining to this SIPE
unless the legal action is commenced in the proper forum before the earlier of:
(a)
thirty
(30) months after the claimant knew or reasonably should have known of the
principal facts on which the claim is based, or
(b)
six
(6) months after the claimant has exhausted the claim and review procedure.
10.4.7.
Knowledge of Fact by Participant Imputed to Beneficiary
.
Knowledge of all facts that a participating employee knew or reasonably should
have known shall be imputed to every claimant who is or claims to be a
beneficiary of the participating employee or otherwise claims to derive an entitlement
by reference to the Participant for the purpose of applying the
6
previously specified
periods.
10.5.
Information Furnished by Participants
. Neither Hormel nor the Compensation Committee
nor the trustee shall be liable or responsible for any error in the computation
of the benefit of a participating employee resulting from any misstatement of
fact made by the participating employee, directly or indirectly, to the Hormel,
the Compensation Committee or the trustee and used by them in determining the
participating employee’s benefit. Neither Hormel nor the Compensation Committee
nor the trustee shall be obligated or required to increase the benefit of such
participating employee which, on discovery of the misstatement, is found to be
understated as a result of such misstatement of the participating employee. However,
the benefit of any participating employee which is overstated by reason of any
such misstatement shall be reduced to the amount appropriate for the
participating employee in view of the truth. Any reduction of an benefit shall
be retained in the SIPE and used to reduce the next succeeding contribution of
Hormel.
5.
SAVINGS
CLAUSE. Save and except as herein
expressly amended, the Plan Statement shall continue in full force and effect.
7
THIRD AMENDMENT
OF
HORMEL SURVIVOR INCOME PLAN FOR
EXECUTIVES
(1993
Restatement)
The “Hormel
Survivor Income Plan for Executives (1993 Restatement)” adopted by Hormel Foods
Corporation (“Hormel”), a Delaware corporation, on November 1, 1993, but
effective November 1, 1992, as heretofore amended by a First Amendment adopted
effective February 1, 1995 and October 29, 2000, and by a Second Amendment
adopted effective November 1, 2000 (hereinafter collectively referred to as the
“Plan Statement”), is hereby amended as follows:
1.
PARTICIPATING
EMPLOYER. Effective for determining
eligibility on or after February 23, 2001, Section 2(e) of the Plan Statement
shall be amended to read as follows:
(e)
Executive
shall mean and include each person who is either
(i) an employee of Hormel who, as of October 28, 2000, is (or was) a
Participant in this Plan on that date; (ii) an employee of Hormel who was not a
Participant in this Plan on October 28, 2000 but, after October 28, 2000, is an
Executive Officer of Hormel Foods Corporation; or (iii) an officer of Hormel
who has been designated by Compensation Committee. However, such person shall be
considered an Executive after October 28, 2000 only: (i) during continued
employment with Hormel while the employee is participating in the Operators’
Share Plan, or (ii) after employment ends if such person retired from Hormel
while participating in the Operators’ Share Plan.
2.
SAVINGS
CLAUSE. Save and except as herein
expressly amended, the Plan Statement shall continue in full force and effect.
FOURTH AMENDMENT
OF
HORMEL SURVIVOR INCOME PLAN FOR
EXECUTIVES
(1993
Restatement)
The “Hormel
Survivor Income Plan for Executives (1993 Restatement)” adopted by Hormel Foods
Corporation (“Hormel”), a Delaware corporation, on November 1, 1993, but
effective November 1, 1992, as heretofore amended by a First Amendment adopted
effective February 1, 1995 and October 29, 2000, and by a Second Amendment
adopted effective November 1, 2000 and by a Third Amendment adopted effective
February 23, 2001 (hereinafter collectively referred to as the “Plan Statement”),
is hereby amended as follows:
1.
BASE
SALARY DETERMINATIONS. Effective for
determining Base Salary of individuals who are actively employed at any time on
or after October 29, 2006, Section 2(a) of the Plan Statement shall be amended
to read as follows:
(a)
Base Salary
shall mean one-twelfth (1/12th) of the average
annual rate of base salary of a Participant from Hormel for the five (5)
calendar years out of the ten (10) consecutive calendar years immediately
preceding the Participant’s death or retirement, as applicable, which produce
the highest average. “Base Salary” shall include incentive payments and
bonuses; provided, however, that long-term incentive plan awards earned on or
after October 29, 2006 shall not be included. Base Salary shall also include
amounts that would have been included in Base Salary but were voluntarily
deferred under a nonqualified deferred compensation plan maintained by Hormel. Base Salary shall not include supplemental
unemployment benefits, contributions to any profit sharing or other qualified
plan, reimbursements of moving expenses or other expenses or disability
payments. The Compensation Committee shall determine whether a particular item
of income constitutes “Base Salary” if a question arises.
2.
RETIREE
SURVIVOR BENEFIT DETERMINATIONS. Effective for determining Survivor Benefits of
individuals who are actively employed at any time on or after October 29,
Section 2 of the Plan Statement shall be amended by the addition of the
following new Section 2(b) to read as follows (and all subsequent sections and
cross references thereto shall be renumbered accordingly):
(b)
Benefit Service
shall mean a measure of a Participant’s
service (stated as a number of years and fractions of years) as defined under
the Hormel Foods Corporation Salaried Employees’ Pension Plan.
3.
RETIREE
SURVIVOR BENEFIT DETERMINATIONS (PRE-2000 PARTICIPANTS). Effective for determining Survivor Benefits of
individuals who are actively employed at any time on or after October 29, 2006
Sections 4.2.1 and 4.2.2 of the Plan Statement shall be amended to read as
follows:
4.2.1.
Death During Employment
. If a Participant’s employment with Hormel ends
because of his or her death while an Executive (i.e., the Participant dies
while still an employee and an Executive), the Participants Beneficiary shall
receive a Survivor Benefit equal to sixty percent (60%) of the Participant’s
Base Salary at the time of the Participant dies. A Participant shall be considered
an Executive after October 28, 2000, only (i) during continued employment with
Hormel while the employee is participating in the Operators’ Share Plan, or
(ii) after employment ends if such person retired from Hormel while
participating in the Operators’ Share Plan. This Survivor Benefit shall be paid
in two hundred forty (240) equal monthly installments commencing on the first
day of the second month following the Participant’s death. Notwithstanding the
foregoing, if prior to the time one hundred twenty (120) equal monthly
installments have been paid, there is no Surviving Spouse or Eligible Dependent
Child entitled to payment, the Survivor Benefit shall be paid to the
Participant’s Beneficiary in no more than one hundred twenty (120) equal monthly
installments (minus the number of monthly installments, if any, previously paid
to a Surviving Spouse and Eligible Dependent Children).
4.2.2.
Death After Retirement
. If a Participant (i) remains an Executive of
Hormel until his or her Retirement, and (ii) dies following such Retirement, then
his or her Beneficiary shall receive upon his death a Survivor Benefit equal to
one percent (1%) of the Participant’s Base Salary (determined as of such
specified date), multiplied by the Participant’s Benefit Service (determined as
of such specified date), not to exceed forty (40). This Survivor Benefit shall
be paid in one hundred eighty (180) equal monthly installments commencing on
the first day of the second month following the Participant’s death. Notwithstanding
the foregoing, if prior to the time one hundred twenty (120) equal monthly
installments have been paid, there is no Surviving Spouse or Eligible Dependent
Child entitled to payment, the Survivor Benefit shall be paid to the
Participant’s Beneficiary in no more than one hundred twenty (120) equal
monthly installments (minus the number of monthly installments, if any,
previously paid to a Surviving Spouse and Eligible Dependent Children).
4.
RETIREE
SURVIVOR BENEFIT DETERMINATIONS (POST-2000 PARTICIPANTS). Effective for
determining Survivor Benefits of individuals who are actively employed at any
time on or after October 29, 2006, the introductory paragraph in Section 5.2.2
of the Plan Statement shall be amended to read as follows:
5.2.2.
Death After Retirement
. If a Participant (i) remains an Executive of
Hormel until his or her Retirement, and (ii) dies following such Retirement,
the Participant’s Surviving Spouse, Eligible Dependent Children or Beneficiary
shall receive upon his death a Survivor Benefit equal to one percent (1%) of
the Participant’s Base Salary (determined as of such specified date),
multiplied by the Participant’s Benefit Service (determined as of such
specified date), not to exceed forty (40). (A Participant shall be considered an Executive
after October 28, 2000, only (i) during continued employment with Hormel while
the employee is participating in the Operators’ Share Plan, or (ii) after
employment ends if such person retired from Hormel while participating in the
Operators’ Share Plan.) This Survivor Benefit shall be paid monthly, commencing
on the first day of the second month following the Participant’s death, in
accordance with Option A below unless Hormel shall have received prior to the
Participant’s death an
election made and signed by the Participant, in such form as Hormel may prescribe,
an affirmative election that the benefit be paid in accordance with Option B
below:
5.
SAVINGS
CLAUSE. Save and except as herein
expressly amended, the Plan Statement shall continue in full force and effect.
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.
34
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
|
|
$
|
(948
|
)
|
$
|
(15,966
|
)
|
$
|
381
|
|
$
|
(1,463
|
)
|
$
|
(17,996
|
)
|
Derivatives
and Hedging Activity:
The
company uses commodity and
currency positions to manage its exposure to price fluctuations in those markets. The contracts
are recorded at fair value on the
consolidated statements of financial position within prepaid expenses and other current assets, or other current liabilities. Additional information on
hedging activities is presented
in Note J.
Equity
Method Investments:
The
company has a number of investments
in joint ventures where its voting interests are in excess of 20 percent but not greater than 50
percent. The company accounts for
such investments under the equity method of accounting, and its underlying share of each investee’s equity is reported
in the consolidated statements of financial position as part of investments in and receivables from
affiliates. The only significant
equity method investment is a 40 percent ownership interest in a Philippines joint venture,
Purefoods-Hormel Company, which
has a book value of $46.7 million at October 29, 2006, and $39.9 million at October 30, 2005. This investment is included in the All Other segment for
purposes of measuring segment
assets and profits.
On November 20, 2006,
subsequent to the end of fiscal year
2006, the company completed a joint venture agreement with San Miguel Corporation for a hog production
and processing business in
Vietnam, for a preliminary investment of $20.5 million. The joint venture will strengthen the
company’s presence in Asia, and
the company’s 49 percent equity ownership will be reported in the Hormel Foods International
operating segment.
46
The company regularly
monitors and evaluates the fair value
of our equity investments. If events and circumstances indicate that a decline in the fair value of these
assets has occurred and is other
than temporary, the company will record a charge in “equity in earnings of affiliates” in the consolidated statementsof operations. The company’s equity
investments do not have a readily
determinable fair value as none of them are publicly traded. The fair values of the company’s private equity investments are determined by discounting the
estimated future cash flows of
each entity. These cash flow estimates include assumptions on growth rates and future currency exchange rates. The company did not record an
impairment charge on any of its
equity investments in fiscal years 2006, 2005, or 2004.
Revenue
Recognition:
The
company recognizes sales when title
passes upon delivery of its products to customers net of applicable provisions for discounts, returns,
and allowances. Products are
delivered upon receipt of customer purchase orders with acceptable terms, including price and collectibility that is reasonably assured.
The company offers various
sales incentives to customers
and consumers. Incentives that are offered off-invoice include prompt pay allowances, spoilage allowances,
and temporary price reductions.
These incentives are recognized as reduction of revenue at the time title passes. Coupons are used as an incentive for consumers to purchase various
products. The coupons reduce
revenues at the time they are offered. Promotional contracts and voluntary promotions are performed by customers to promote the company’s products
to the consumers. These
incentives reduce revenues at the time of performance through direct payments and accrued promotional funds. Accrued promotional funds are unpaid
liabilities for promotional
contracts and voluntary promotions in process or completed at the end of a quarter or fiscal year. Promotional contract accruals are based on a review of the
unpaid outstanding contracts on
which performance has taken place. Voluntary
performance accruals are based on the historical spend rates by product lines. Estimates used to determine the revenue reduction include the level of
customer performance and the
historical spend rate versus contracted rates.
Advertising
Expenses:
Advertising
costs are expensed when incurred.
Advertising expenses include all media advertising but exclude the costs associated with samples
and market research. Advertising
costs for fiscal years 2006, 2005, and 2004 were $93.7 million, $87.3 million, and $78.2 million, respectively.
Shipping and
Handling Costs:
Shipping
and handling costs are recorded
as selling and delivery expenses. Shipping and handling costs for fiscal years 2006, 2005, and 2004 were $409.5 million, $361.4 million, and $305.8
million, respectively.
Research and
Development Expenses:
Research
and development costs are
expensed as incurred and are included in administrative and general expenses. Research and development expenses incurred for fiscal years 2006, 2005,
and 2004 were $18.6 million,
$17.6 million, and $15.9 million, respectively.
Income
Taxes:
The company
records income taxes in accordance with
the liability method of accounting. Deferred taxes are recognized for the estimated taxes
ultimately payable or recoverable
based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur.
Employee
Stock Options:
In the
fourth quarter of fiscal 2003, the
company adopted the fair value method of accounting for stock-based compensation in accordance with
Statement of Financial Accounting
Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and
Disclosure” and elected to use
the prospective method to recognize stock-based compensation expense. In the first quarter of fiscal year 2006, the company adopted the provisions of
SFAS No. 123 (revised 2004) and
began expensing stock-based compensation using the modified prospective method. At that time, the company recognized $9.2 million ($6.1 million
after tax, or $.04 per share) of
stock-based compensation expense primarily due to executive retirements and the expensing of new options grants to retirement-eligible individuals.
For options subject to graded
vesting, the company recognizes
stock-based compensation expense ratably over the shorter of the vesting period or requisite service
period. Stock-based compensation
expense for grants made to retirement-eligible employees is recognized on the date of grant.
Pro forma amounts if the
company had used the fair value
method in accounting for all employee stock options are as follows:
|
|
|
Year Ended
|
|
|
|
|
Restated*
|
|
Restated*
|
|
|
|
|
October 30,
|
|
October 30,
|
|
|
(In Thousands)
|
|
2005
|
|
2004
|
|
|
Net earnings, as
reported
|
|
$
|
254,603
|
|
$
|
233,550
|
|
|
Add: Stock-based
compensation expense included in reported net earnings, net of related tax
effects
|
|
4,391
|
|
2,568
|
|
|
Deduct: Total
stock-based compensation expense determined under fair value method for all
awards, net of related tax effects
|
|
(5,752
|
)
|
(4,821
|
)
|
|
Pro forma net earnings
|
|
$
|
253,242
|
|
$
|
231,297
|
|
|
Earnings per
share:
|
|
|
|
|
|
|
Basic – as reported
|
|
$
|
1.84
|
|
$
|
1.69
|
|
|
Basic – pro forma
|
|
$
|
1.83
|
|
$
|
1.67
|
|
|
|
|
|
|
|
|
|
Diluted – as reported
|
|
$
|
1.82
|
|
$
|
1.67
|
|
|
Diluted – pro
forma
|
|
$
|
1.81
|
|
$
|
1.65
|
|
*Retrospective
application of FIFO inventory valuation.
Share
Repurchases:
On October 2, 2002, the company announced that its Board of Directors
had authorized the company to repurchase up to 10,000,000 shares of common
stock with no expiration date. The company repurchased 1.1 million shares of
its common stock at an average price
47
per
share of $34.95 under this repurchase plan during fiscal 2006. This amount
includes 295,680 shares from the Hormel Foundation during the fourth quarter,
purchased at the average of the closing market prices for the three days of
August 30, August 31, and September 1, 2006. In total, 3.4 million shares have
been repurchased through October 29, 2006, under the current share repurchase
authorization.
Earnings Per
Share:
Basic earnings per share are computed using the weighted-average common
shares outstanding. Diluted earnings per share are computed using the
weighted-average common shares outstanding after adjusting for potential common
shares from stock options. For all years presented, the reported net earnings
were used when computing basic and diluted earnings per share. A reconciliation
of the shares used in the computation is as follows:
|
(In Thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
|
Basic
weighted-average shares outstanding
|
|
137,845
|
|
138,040
|
|
138,596
|
|
|
Dilutive
potential common shares
|
|
1,716
|
|
1,537
|
|
1,583
|
|
|
Diluted
weighted-average shares outstanding
|
|
139,561
|
|
139,577
|
|
140,179
|
|
Accounting
Changes and Recent Accounting
Pronouncements:
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158,
“Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).” The pronouncement requires the
funded status of a plan, measured
as the difference between the fair value of plan assets and the benefit obligation, be recognized on a plan sponsor’s statement of financial
position. It also requires gains
or losses that arise during the plan year to be recognized as a component of other comprehensive income
to the extent they are not
recognized in net periodic benefit cost during the year. The pronouncement also requires plan sponsors to measure defined benefit plan assets and
obligations as of the date of the
plan sponsor’s fiscal year-end statement of financial position. The pronouncement is effective for
fiscal years ending after
December 15, 2006. The company will adopt the statement in fiscal year 2007 and is currently assessing the impact of adopting this accounting standard.
In June 2006, the FASB issued
Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes
a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in
a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15,
2006, and therefore the company
expects to adopt FIN 48 at the beginning of fiscal 2008. The company has not yet determined the impact of this accounting standard.
In May 2005, the FASB issued
SFAS No. 154, “Accounting
Changes
and Error Corrections – a replacement of Accounting Principles Board (APB) Opinion No. 20 and FASB
Statement No. 3.” The
pronouncement requires that all voluntary changes in accounting principle be reported by
retrospectively applying the
principle to all prior periods that are presented in the financial statements. The statement is
effective for fiscal years
beginning after December 15, 2005, with early adoption permitted for changes made after issuance of
the statement. During the first
quarter of fiscal 2006, the company early adopted the provisions of SFAS No. 154 and reported a change in accounting principle for certain inventory
items through the required
retrospective application. See discussion of the impact on the company’s financial statements above under “Change in Accounting Principle.”
In December 2004, the FASB
issued SFAS No. 123(R), “Share-
Based Payment,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation,” and supercedes
APB Opinion No. 25, “Accounting
for Stock Issued to Employees.” The statement requires that entities measure the cost of employee services received in exchange for an award of
equity instruments based on the
grant date fair value of the award, as calculated using an accepted valuation model. In
addition, the statement rescinds
the use of the prospective transition model for expensing employee stock options and accelerates
expensing of new option grants
for retirement-eligible individuals. The impact of adopting this statement is discussed above
under “Employee Stock Options.”
In November 2004, the FASB
issued SFAS No. 151, “Inventory
Costs – an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4.” The statement requires
that idle facility expense,
excessive spoilage, double freight, and rehandling costs be recognized as a current-period charge
to earnings. Previous guidance
mandated that these costs be charged to earnings on a current basis only under certain circumstances. The company adopted the provisions of this
statement at the beginning of
fiscal year 2006, and adoption did not have a material impact on the company’s results of operations or financial position.
Note B
Acquisitions and Divestitures
On March 31, 2006, the
company acquired Valley Fresh, Inc.
(Valley Fresh) for the preliminary purchase price of $80.4 million in
cash, including related costs. Valley Fresh has the leading market share in the canned ready-to-eat
chicken category and distributes
more than 50 convenient precooked chicken products on a national basis, primarily under the Valley Fresh brand. Valley Fresh was a privately held
company and employs approximately
265 employees at its 90,000-square-foot manufacturing facility in Turlock, California. Valley Fresh
products are expected to further
strengthen the portfolio within the company’s Grocery Products segment.
48
On
September 6, 2006, the company announced that it entered into a definitive
merger agreement, pursuant to which the company will acquire Provena Foods Inc.
(Provena). Provena is a publicly traded company based in Chino, California, and
provides pepperoni and pasta to pizza makers and packaged food manufacturers.
The proposed acquisition has been approved by the board of directors of each
company and is subject to customary closing conditions, including the approval
of the Provena shareholders. Shareholders holding approximately 46 percent of
the outstanding shares of Provena common stock, as of September 6, 2006, had
agreed to vote their shares in favor of the merger agreement and against any
competing proposal. Assuming shareholder approval, the transaction is expected
to close by the end of calendar year 2006 with an estimated value of $16.8
million.
On
November 10, 2006, subsequent to the end of fiscal year 2006, the company
acquired the assets of Saag’s Products, Inc. (Saag’s) for a preliminary
purchase price of $12.0 million cash, plus the assumption of certain
obligations. Saag’s is based in San Leandro, California, and is a leading
processor and marketer of branded, premium quality gourmet sausages and
specialty smoked meats. The acquisition provides opportunities to expand the
company’s production capacity, and to enhance the product portfolio within the
Refrigerated Foods segment.
On
December 29, 2004, the company purchased all of the outstanding stock of
Clougherty Packing Company (Clougherty) for $208.2 million in cash, including
related costs. Clougherty was a privately held Southern California pork
processor and is the maker of the
Farmer
John
brand of pork products popular throughout the Southwestern
United States. The acquisition strengthens the company’s presence in that
geographic area and complements many of the company’s existing product
families. Clougherty was reorganized into Clougherty Packing, LLC (d/b/a Farmer
John) after acquisition. Farmer John’s operating results are reported in the Refrigerated
Foods segment. Allocation of the final purchase price, including related costs,
is presented in the table below.
|
(In Thousands)
|
|
|
|
|
Current assets
|
|
$
|
66,260
|
|
|
Goodwill
|
|
7,628
|
|
|
Other
intangibles
|
|
21,400
|
|
|
Other assets
|
|
50
|
|
|
Property, plant,
and equipment
|
|
139,585
|
|
|
Current
liabilities
|
|
(26,704
|
)
|
|
Purchase price
(including related costs)
|
|
$
|
208,219
|
|
On
January 31, 2005, the company acquired Arriba Foods, Inc. (a/k/a Mexican
Accent) for $48.0 million in cash, including related costs. Based in New
Berlin, Wisconsin, Mexican Accent manufactures and distributes a wide variety
of premium Mexican flour tortillas, corn tortillas, salsas, seasonings, and
tortilla chips for retail markets and the foodservice industry. These products
are marketed under the
Manny’s
,
Gringo Pete’s
, and
Mexican Accent
brands, and strengthen the
company’s presence in the ethnic products category. Mexican Accent’s operating
results are reported in the Grocery Products segment.
On
March 30, 2005, the company acquired privately held Mark-Lynn Foods Inc.
(Mark-Lynn) of Bremen, Georgia, for $43.2 million in cash, including related
costs. Mark-Lynn manufactures and distributes a wide array of food products
including salt and pepper packets, ketchup, mustard, sauces and salad dressings,
creamers, sugar packets, jellies, desserts, and drink mixes. Mark-Lynn is
managed by the Diamond Crystal Brands business unit and enhances the company’s
foodservice focus within the Specialty Foods segment.
On
April 4, 2005, the company completed the acquisition of Lloyd’s Barbeque
Company (Lloyd’s) for $50.5 million in cash, including related costs. Lloyd’s
has manufacturing operations in St. Paul, Minnesota, and offers a full range of
barbeque products including original shredded pork, chicken and beef tubs,
honey hickory shredded pork and chicken, barbeque pork spareribs, beef
backribs, and pork babyback ribs, all under the
Lloyd’s
brand name. Lloyd’s products complement the company’s
existing offerings within the Refrigerated Foods segment, and is expected to
enhance market share, particularly in the retail refrigerated entrée category.
Effective June
30, 2004, the company completed the sale of Vista International Packaging,
Inc., the company’s food packaging subsidiary. The company recorded an $18.1 million
pre-tax gain ($11.5 million after tax, or $.08 per share) in the third quarter
of fiscal 2004 related to the sale.
On October 18,
2004, the company purchased the assets of Concept Foods, Inc. (Concept) for
$17.1 million in cash. Concept, located in Alma, Kansas, was renamed Alma Foods
upon acquisition. Alma Foods manufactures a wide variety of fully cooked
entrees.
Operating results for
each completed acquisition above are included in the company’s consolidated
statements of operations from the date of acquisition. Pro forma results of
operations are not presented, as no acquisitions in 2006, 2005, or 2004 were
considered material, individually or in the aggregate, to the consolidated
company.
Note C
Inventories
Principal
components of inventories are:
|
|
|
|
|
Restated*
|
|
|
|
|
October 29,
|
|
October 30,
|
|
|
(In Thousands)
|
|
2006
|
|
2005
|
|
|
Finished
products
|
|
$
|
308,509
|
|
$
|
284,341
|
|
|
Raw materials
and work-in-process
|
|
153,189
|
|
147,968
|
|
|
Materials and
supplies
|
|
109,234
|
|
102,263
|
|
|
Total
|
|
$
|
570,932
|
|
$
|
534,572
|
|
*Retrospective
application of FIFO inventory valuation (see Note A).
49
Note D
Goodwill and Intangible Assets
The
changes in the carrying amount of goodwill for the fiscal years ended October
29, 2006, and October 30, 2005, are presented in the table below. The amounts
presented for goodwill acquired in fiscal year 2005 reflect the acquisitions of
Farmer John, Mexican Accent, Mark-Lynn, and Lloyd’s. The purchase adjustments
in fiscal year 2005 also relate to the purchase accounting for those
acquisitions. Goodwill acquired in fiscal 2006 reflects the acquisition of
Valley Fresh. The purchase adjustments in fiscal year 2006 relate to the
purchase accounting for Valley Fresh, including an allocation to intangible
assets based on appraisals, and to a lesser extent, finalizing the purchase
accounting for the fiscal 2005 acquisitions.
|
(In Thousands)
|
|
Grocery
Products
|
|
Refrigerated
Foods
|
|
Jennie-O
Turkey Store
|
|
Specialty
Foods
|
|
Other
|
|
Total
|
|
|
Balance as of
October 30, 2004
|
|
$
|
40,564
|
|
$
|
5,224
|
|
$
|
203,214
|
|
$
|
166,374
|
|
$
|
2,352
|
|
$
|
417,728
|
|
|
Goodwill
acquired
|
|
35,598
|
|
41,753
|
|
0
|
|
26,372
|
|
0
|
|
103,723
|
|
|
Purchase
adjustments
|
|
3,259
|
|
(21,097
|
)
|
0
|
|
(1,506
|
)
|
0
|
|
(19,344
|
)
|
|
Balance as of
October 30, 2005
|
|
79,421
|
|
25,880
|
|
203,214
|
|
191,240
|
|
2,352
|
|
502,107
|
|
|
Goodwill
acquired
|
|
61,334
|
|
76
|
|
0
|
|
|
|
0
|
|
61,410
|
|
|
Purchase
adjustments
|
|
(16,388
|
)
|
0
|
|
0
|
|
3,577
|
|
0
|
|
(12,811
|
)
|
|
Balance as of October 29, 2006
|
|
$
|
124,367
|
|
$
|
25,956
|
|
$
|
203,214
|
|
$
|
194,817
|
|
$
|
2,352
|
|
$
|
550,706
|
|
The gross carrying amount and accumulated
amortization for definite-lived intangible assets are presented in the table
below. The increase in fiscal year 2006 primarily represents intangible assets
acquired from Valley Fresh.
|
|
|
October 29, 2006
|
|
October 30, 2005
|
|
|
(In Thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Weighted
Average Life
(in Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Weighted
Average Life
(in Years)
|
|
|
Formulas &
recipes
|
|
$
|
20,875
|
|
(9,574
|
)
|
8.1
|
|
$
|
20,075
|
|
(6,402
|
)
|
8.4
|
|
|
Non-compete
covenants
|
|
19,310
|
|
(11,103
|
)
|
4.9
|
|
15,320
|
|
(7,532
|
)
|
4.8
|
|
|
Proprietary software
& technology
|
|
17,040
|
|
(3,831
|
)
|
9.2
|
|
10,920
|
|
(2,106
|
)
|
10.4
|
|
|
Customer
lists/relationships
|
|
11,300
|
|
(3,093
|
)
|
11.0
|
|
12,260
|
|
(2,004
|
)
|
11.2
|
|
|
Distribution
network
|
|
3,700
|
|
(1,303
|
)
|
10.0
|
|
3,700
|
|
(933
|
)
|
10.0
|
|
|
Purchase &
supply agreements
|
|
2,460
|
|
(2,096
|
)
|
3.1
|
|
3,090
|
|
(1,914
|
)
|
2.9
|
|
|
Other
intangibles
|
|
7,992
|
|
(2,845
|
)
|
6.7
|
|
3,352
|
|
(1,972
|
)
|
4.8
|
|
|
Total
|
|
$
|
82,677
|
|
(33,845
|
)
|
7.8
|
|
$
|
68,717
|
|
(22,863
|
)
|
8.1
|
|
Amortization
expense for the fiscal years ended October 29, 2006, October 30, 2005, and
October 30, 2004, was $11.7 million, $9.4 million, and $7.1 million,
respectively.
Estimated
annual amortization expense (in thousands) for the five fiscal years after
October 29, 2006, is as follows:
|
2007
|
|
$
|
11,074
|
|
|
2008
|
|
8,146
|
|
|
2009
|
|
6,485
|
|
|
2010
|
|
5,704
|
|
|
2011
|
|
4,853
|
|
The carrying amounts for indefinite-lived
intangible assets are as follows. The increase in fiscal year 2006 primarily
represents trademarks acquired from Valley Fresh.
|
|
|
October 29,
|
|
October 30,
|
|
|
(In Thousands)
|
|
2006
|
|
2005
|
|
|
Unamortized
Intangible Assets:
|
|
|
|
|
|
|
Brand/tradename/trademarks
|
|
$
|
91,159
|
|
$
|
85,741
|
|
|
Other
intangibles
|
|
7,984
|
|
7,984
|
|
|
Total
|
|
$
|
99,143
|
|
$
|
93,725
|
|
During the fourth quarter of fiscal 2006, the
company completed the required annual impairment tests of indefinite-lived
intangible assets and goodwill with no material impairment indicated. Useful
lives of intangible assets were also reviewed during this process, with no
material adjustments required.
50
Note E
Long-term Debt and Other Borrowing Arrangements
Long-term debt consists of:
|
|
|
October 29,
|
|
October 30,
|
|
|
(In Thousands)
|
|
2006
|
|
2005
|
|
|
Senior unsecured
notes, with interest at 6.625%, interest due semi-annually through 2011
|
|
$
|
350,000
|
|
$
|
350,000
|
|
|
Medium-term
unsecured notes, with interest at 7.35%, paid in 2006
|
|
0
|
|
10,714
|
|
|
Other
|
|
420
|
|
791
|
|
|
|
|
350,420
|
|
361,505
|
|
|
Less current
maturities
|
|
366
|
|
11,075
|
|
|
Total
|
|
$
|
350,054
|
|
$
|
350,430
|
|
As of October
29, 2006, the company has unused lines of credit of $200.0 million which bear
interest at variable rates below prime. A fixed fee is paid for the
availability of these credit lines.
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
the current fiscal year, the company was in compliance with all of these
covenants.
Aggregate annual
maturities of long-term debt for the five fiscal years after October 29, 2006,
are as follows:
|
(In Thousands)
|
|
|
|
|
2007
|
|
$
|
366
|
|
|
2008
|
|
54
|
|
|
2009
|
|
0
|
|
|
2010
|
|
0
|
|
|
2011
|
|
350,000
|
|
|
|
|
|
|
|
Total interest paid during fiscal 2006, 2005,
and 2004 was $25.7 million, $27.9 million, and $27.1 million, respectively.
Based on borrowing rates currently available to the company for long-term
financing with similar terms and average maturities, the fair value of long-term
debt, including current maturities, utilizing discounted cash flows, is $370.7
million.
Note F
Pension and Other Postretirement
Health Care Benefits
The
company has several defined benefit plans and defined contribution plans
covering most employees. Total costs associated with the company’s defined
contribution benefit plans in 2006, 2005, and 2004 were $23.3 million, $21.2
million, and $18.7 million, respectively. Benefits for defined benefit pension
plans covering hourly employees are provided based on stated amounts for each
year of service while plan benefits covering salaried employees are based on final
average compensation. No plan amendments were enacted in 2006 that materially
affected the company’s defined benefit pension plans at the measurement date.
During fiscal 2006, the company recognized settlement charges of $11.3 million
on non-qualified benefit plans triggered by executive retirements. As part of
the company’s sales reorganization that took place in fiscal 2004, the company
offered early retirement packages to certain employees. The acceptance of these
offers resulted in an increase to the benefit obligation and recognition of a
one-time charge of $1.9 million in 2004. The company’s funding policy is to
make annual contributions of not less than the minimum required by applicable
regulations. Actuarial gains and losses and any adjustments resulting from plan
amendments are deferred and amortized to expense over periods ranging from
10-14 years.
Certain groups of employees are eligible for postretirement
health or welfare benefits. Eligible employees who retired prior to January
1,1987, receive the company-sponsored medical and life insurance benefits that
were in effect when they retired. The medical plan for eligible employees who
retired after January 1, 1987, is automatically modified to incorporate plan
benefit and plan provision changes whenever they are made to the active
employee plan. Contribution requirements for this group of retired employees
are governed by the Retiree Health Care Payment Program and may change each
year as the cost to provide coverage is determined. Eligible employees hired
after January 1, 1990, may receive postretirement medical coverage but must pay
the full cost of the coverage. During fiscal year 2004, the company incurred a
one-time charge of $0.9 million for health care benefits offered as a result of
the sales reorganization discussed above. The company also increased the plan
deductibles paid by post-1987 union retirees which reduced the benefit
obligation by $4.4 million in 2004. Actuarial gains and losses and any
adjustments resulting from plan amendments are deferred and amortized to
expense over periods ranging from 10-18 years.
51
In fiscal 2004, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) resulted in a reduction of
the company’s accumulated postretirement benefit obligation (APBO) of $41.5
million, which represents an actuarial gain that is being amortized over future
service periods. Because the Retiree Health Care Payment Program uses cost of
coverage to determine retiree contribution amounts, the company used the
anticipated subsidy payments from the Act to reduce the cost of coverage and,
ultimately, the contributions of retirees. This resulted in an increase to the
accumulated benefit obligation of $5.2 million and $15.6 million in 2006 and
2005, respectively, which represents an actuarial loss that will be amortized
over future service periods.
The
annual measurement date used to determine pension and other postretirement benefit
amounts is August 1.
The following is
a reconciliation of the beginning and ending balances of the benefit obligation
and the fair value of plan assets:
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
(In Thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
773,016
|
|
$
|
656,280
|
|
$
|
406,076
|
|
$
|
371,520
|
|
|
Benefit
obligation of assumed plan
|
|
2,233
|
|
|
|
|
|
|
|
|
Service cost
|
|
22,247
|
|
19,239
|
|
3,499
|
|
3,223
|
|
|
Interest cost
|
|
40,604
|
|
40,278
|
|
21,634
|
|
22,417
|
|
|
Actuarial loss
(gain)
|
|
(63,947
|
)
|
94,237
|
|
(22,117
|
)
|
38,507
|
|
|
Benefits paid
|
|
(73,237
|
)
|
(37,018
|
)
|
(29,305
|
)
|
(29,591
|
)
|
|
Benefit
obligation at end of year
|
|
$
|
700,916
|
|
$
|
773,016
|
|
$
|
379,787
|
|
$
|
406,076
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
(In Thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
Fair value plan assets
at beginning of year
|
|
$
|
639,515
|
|
$
|
597,014
|
|
|
|
|
|
|
Fair value of assumed
plan
|
|
1,701
|
|
|
|
|
|
|
|
|
Actual return on plan
assets
|
|
43,381
|
|
76,572
|
|
|
|
|
|
|
Employer contributions
|
|
56,142
|
|
2,947
|
|
|
|
|
|
|
Benefits paid
|
|
(73,237
|
)
|
(37,018
|
)
|
|
|
|
|
|
Fair value of plan
assets at end of year
|
|
667,502
|
|
639,515
|
|
|
|
|
|
|
Funded status
|
|
(33,414
|
)
|
(133,501
|
)
|
(379,787
|
)
|
(406,076
|
)
|
|
Unrecognized actuarial
loss
|
|
120,026
|
|
197,097
|
|
46,145
|
|
71,795
|
|
|
Unrecognized prior service
cost
|
|
4,554
|
|
5,464
|
|
57,602
|
|
63,257
|
|
|
Benefit payments subsequent
to measurement date
|
|
687
|
|
387
|
|
4,800
|
|
7,361
|
|
|
Net amount recognized
|
|
$
|
91,853
|
|
$
|
69,447
|
|
$
|
(271,240
|
)
|
$
|
(263,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in the consolidated statements of financial position as of October
29, 2006, and October 30, 2005, were as follows:
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
(In Thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Prepaid benefit cost
|
|
$
|
160,233
|
|
$
|
149,422
|
|
|
|
|
|
|
Accrued benefit
liability
|
|
(94,823
|
)
|
(119,133
|
)
|
$
|
(276,040
|
)
|
$
|
(271,024
|
)
|
|
Accumulated other comprehensive
loss
|
|
25,756
|
|
38,771
|
|
|
|
|
|
|
Benefit payments subsequent
to measurement date
|
|
687
|
|
387
|
|
4,800
|
|
7,361
|
|
|
Net amount recognized
|
|
$
|
91,853
|
|
$
|
69,447
|
|
$
|
(271,240
|
)
|
$
|
(263,663
|
)
|
The
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $117.4 million, $96.4 million, and $1.8 million,
respectively, as of October 29, 2006, and $145.5 million, $118.2 million, and
$1.5 million, respectively, as of October 30, 2005.
Net
periodic cost of defined benefit plans included the following:
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
(In Thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
|
Service cost
|
|
$
|
22,221
|
|
$
|
19,239
|
|
$
|
16,998
|
|
$
|
3,499
|
|
$
|
3,223
|
|
$
|
3,070
|
|
|
Interest cost
|
|
40,620
|
|
40,278
|
|
38,711
|
|
21,634
|
|
22,417
|
|
21,199
|
|
|
Expected return
on plan assets
|
|
(51,324
|
)
|
(47,750
|
)
|
(40,468
|
)
|
|
|
|
|
|
|
|
Amortization of
transition obligation
|
|
|
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
Amortization of
prior service cost
|
|
910
|
|
910
|
|
924
|
|
5,654
|
|
5,654
|
|
5,654
|
|
|
Recognized
actuarial loss
|
|
9,806
|
|
13,752
|
|
10,058
|
|
3,533
|
|
3,843
|
|
116
|
|
|
Settlement
charges
|
|
11,261
|
|
|
|
|
|
|
|
|
|
|
|
|
Early retirement
charge
|
|
|
|
|
|
1,858
|
|
|
|
|
|
867
|
|
|
Net periodic
cost
|
|
$
|
33,494
|
|
$
|
26,429
|
|
$
|
27,868
|
|
$
|
34,320
|
|
$
|
35,137
|
|
$
|
30,906
|
|
52
Assumptions
used to determine benefit obligations are as follows:
|
|
|
2006
|
|
2005
|
|
|
Discount rate
|
|
6.33
|
%
|
5.50
|
%
|
|
Rate of future
compensation increase
|
|
5.00
|
%
|
5.00
|
%
|
Assumptions
used to determine net periodic benefit costs are as follows:
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Discount rate
|
|
5.50
|
%
|
6.25
|
%
|
6.50
|
%
|
|
Rate of future
compensation increase
|
|
5.00
|
%
|
5.00
|
%
|
5.00
|
%
|
|
Expected long-term
return on plan assets
|
|
8.25
|
%
|
8.25
|
%
|
7.90
|
%
|
The
expected long-term rate of return on plan assets is developed in consultation
with outside advisors. A range is determined based on the composition of the
asset portfolio, historical long-term rates of return, and estimates of future
performance.
For
measurement purposes, an 8% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2007. The rate is assumed to
decrease by 1% per year to 5% for 2010, and remain at that level thereafter.
Assumed
health care cost trend rates have a significant impact on the amounts reported
for the health care plan. A one-percentage-point change in assumed health care
cost trend rates would have the following effects:
|
|
|
1-Percentage-Point
|
|
|
(In Thousands)
|
|
Increase
|
|
Decrease
|
|
|
Effect on total
of service and interest cost components
|
|
$
|
2,926
|
|
$
|
(2,023
|
)
|
|
Effect on the
postretirement benefit obligation
|
|
29,542
|
|
(25,959
|
)
|
|
|
|
|
|
|
|
|
|
The
actual and target weighted-average asset allocations for the company’s pension
plan assets as of the plan measurement date are as follows.
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
Target
|
|
|
|
Target
|
|
|
Asset Category
|
|
Actual
|
|
Range
|
|
Actual
|
|
Range
|
|
|
Equity
Securities
|
|
69.6
|
%
|
60-80
|
%
|
69.7
|
%
|
65-75
|
%
|
|
Fixed Income
|
|
29.9
|
%
|
25-35
|
%
|
30.1
|
%
|
25-35
|
%
|
|
Other
|
|
0.5
|
%
|
0
|
%
|
0.2
|
%
|
0
|
%
|
Target allocations are established in
consultation with outside advisors through the use of asset-liability modeling
to attempt to match the duration of the plan assets with the duration of the
company’s projected benefit liability. The asset allocation strategy attempts
to minimize the long-term cost of pension benefits, reduce the volatility of
pension expense, and achieve a healthy funded status for the plans.
As of the 2006 measurement date, plan assets
included 2.1 million shares of common stock of the company having a market
value of $77.6 million or 12% of total plan assets. Dividends paid during the
year on shares held by the plan were $1.1 million. In 2005, plan assets
included 2.3 million shares of common stock of the company having a market
value of $72.2 million or 11% of total plan assets.
The
company made a discretionary contribution of $17.7 million to the company’s defined
benefit plans in 2006. The company also made contributions and benefit payments
of $36.3 million to settle lump sum obligations under non-qualified pension
plans triggered by executive retirements during fiscal 2006. The company does
not have any current plans to make additional discretionary contributions to
fund the pension plans, but will continue to assess the funded status
throughout fiscal 2007. The company expects to make contributions of $32.4
million during 2007 that represent benefit payments for unfunded plans.
Benefits
expected to be paid over the next ten fiscal years are as follows:
|
|
|
Pension
|
|
Other
|
|
|
(In Thousands)
|
|
Benefits
|
|
Benefits
|
|
|
2007
|
|
$
|
38,290
|
|
$
|
27,842
|
|
|
2008
|
|
37,866
|
|
28,174
|
|
|
2009
|
|
42,611
|
|
28,835
|
|
|
2010
|
|
41,113
|
|
28,277
|
|
|
2011
|
|
40,078
|
|
28,105
|
|
|
2012 and later
|
|
218,724
|
|
131,287
|
|
|
|
|
|
|
|
|
|
|
Note G
Income Taxes
The
components of the provision for income taxes are as follows:
|
|
|
|
|
Restated*
|
|
Restated*
|
|
|
(In Thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
151,484
|
|
$
|
159,331
|
|
$
|
130,389
|
|
|
State
|
|
18,487
|
|
14,019
|
|
13,273
|
|
|
Foreign
|
|
1,169
|
|
3,106
|
|
880
|
|
|
Total current
|
|
171,140
|
|
176,456
|
|
144,542
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
(24,521
|
)
|
(25,688
|
)
|
(8,377
|
)
|
|
State
|
|
(2,215
|
)
|
1,355
|
|
(2,117
|
)
|
|
Total deferred
|
|
(26,736
|
)
|
(24,333
|
)
|
(10,494
|
)
|
|
Total provision
for income taxes
|
|
$
|
144,404
|
|
$
|
152,123
|
|
$
|
134,048
|
|
*Retrospective
application of FIFO inventory valuation (See Note A).
53
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The company believes that, based upon
its lengthy and consistent history of profitable operations, it is more likely
than not that the net deferred tax assets of $55.9 million will be realized on
future tax returns, primarily from the generation of future taxable income.
Significant components of the deferred income tax liabilities and assets are as
follows:
|
|
|
|
|
Restated*
|
|
|
|
|
October 29,
|
|
October 30,
|
|
|
(In Thousands)
|
|
2006
|
|
2005
|
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
Prepaid pension
|
|
$
|
(60,453
|
)
|
$
|
(55,627
|
)
|
|
Tax over book depreciation
|
|
(70,101
|
)
|
(67,147
|
)
|
|
Book/tax basis difference from acquisitions
|
|
(39,205
|
)
|
(33,317
|
)
|
|
Other, net
|
|
(36,570
|
)
|
(36,326
|
)
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
Postretirement benefits
|
|
108,347
|
|
102,398
|
|
|
Pension accrual
|
|
19,631
|
|
16,790
|
|
|
Deferred compensation
|
|
17,775
|
|
16,262
|
|
|
Supplemental pension accrual
|
|
20,222
|
|
13,487
|
|
|
Stock options
|
|
16,258
|
|
11,797
|
|
|
Insurance accruals
|
|
12,900
|
|
12,831
|
|
|
Vacation accrual
|
|
11,033
|
|
10,799
|
|
|
Book/tax inventory valuation difference
|
|
3,569
|
|
(2,939
|
)
|
|
Other, net
|
|
52,516
|
|
51,673
|
|
|
Net deferred tax
assets
|
|
$
|
55,922
|
|
$
|
40,681
|
|
*Retrospective
application of FIFO inventory valuation (See Note A).
Reconciliation
of the statutory federal income tax rate to the company’s effective tax rate is
as follows:
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
U.S. statutory
rate
|
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
|
State taxes on
income, net of federal tax benefit
|
|
2.4
|
|
2.5
|
|
2.0
|
|
|
Medicare Part D
Supplement
|
|
(1.2
|
)
|
0.0
|
|
0.0
|
|
|
Manufacture
Deduction
|
|
(1.0
|
)
|
0.0
|
|
0.0
|
|
|
All other, net
|
|
(1.7
|
)
|
(0.1
|
)
|
(0.5
|
)
|
|
Effective tax rate
|
|
33.5
|
%
|
37.4
|
%
|
36.5
|
%
|
U.S.
income taxes have not been provided on undistributed earnings of foreign
subsidiaries, which were approximately $33.8 million as of October 29, 2006.
The company has reinvested such earnings overseas in foreign operations indefinitely.
Total income taxes paid during fiscal 2006,
2005, and 2004 were $155.2 million, $136.8 million, and $138.8 million,
respectively.
Note H
Commitments and Contingencies
The
company enters into various agreements guaranteeing specified obligations of affiliated
parties. Currently the company provides a revocable $1.9 million standby letter
of credit for obligations of an affiliated party that may arise under worker
compensation claims. This potential obligation is not reflected in the company’s
consolidated statements of financial position.
In
order to ensure a steady supply of hogs and turkeys and to keep the cost of
products stable, the company has entered into contracts with producers for the
purchase of hogs and turkeys at formula-based prices over periods of up to 15
years. The company has also entered into grow-out contracts with independent
farmers to raise turkeys for the company for periods up to 25 years. Under
these arrangements, the company owns the livestock, feed, and other supplies
while the independent farmers provide facilities and labor. The company has
also contracted for the purchase of corn, soybean meal, and other feed
ingredients from independent suppliers for periods up to two years. Under these
contracts, the company is committed at October 29, 2006, to make purchases,
assuming current price levels, as follows:
|
(In Thousands)
|
|
|
|
|
2007
|
|
$
|
800,565
|
|
|
2008
|
|
671,212
|
|
|
2009
|
|
564,105
|
|
|
2010
|
|
450,664
|
|
|
2011
|
|
348,821
|
|
|
Later years
|
|
2,226,270
|
|
|
Total
|
|
$
|
5,061,637
|
|
Purchases
under these contracts for fiscal 2006, 2005, and 2004 were $939.3 million,
$1,039.1 million, and $977.0 million, respectively.
The
company has noncancelable operating lease commitments on facilities and
equipment at October 29, 2006, as follows:
|
(In Thousands)
|
|
|
|
|
2007
|
|
$
|
10,360
|
|
|
2008
|
|
6,839
|
|
|
2009
|
|
4,276
|
|
|
2010
|
|
3,331
|
|
|
2011
|
|
2,457
|
|
|
Later years
|
|
5,886
|
|
|
Total
|
|
$
|
33,149
|
|
The
company expensed $23.3 million, $23.0 million, and $20.0 million for rent in fiscal
2006, 2005, and 2004, respectively.
The
company has commitments to expend approximately $86.3 million to complete
construction in progress at various locations as of October 29, 2006.
54
As
a condition to the sale of Vista International Packaging, Inc., the company
contracted to continue purchasing specified amounts of packaging materials over
seven years. The contracted amounts approximate historical purchases of those
items, and represent a remaining maximum obligation of $26.4 million if those
purchasing levels are not attained.
As of October
29, 2006, the company had $40.7 million of standby letters of credit issued on
its behalf. The standby letters of credit are primarily related to the company’s
self-insured workers’ compensation programs.
The company is
involved on an ongoing basis in litigation arising in the ordinary course of
business. In the opinion of management, the outcome of litigation currently
pending will not materially affect the company’s results of operations,
financial condition, or liquidity.
Note I
Stock-Based Compensation
The
company has stock incentive plans for employees and non-employee directors,
including stock options and nonvested shares. The company’s policy is to grant
options with the exercise price equal to the market price of the common stock
on the date of grant. Options vest over periods ranging from six months to four
years and expire ten years after the date of the grant. The company recognizes
stock-based compensation expense ratably over the shorter of the requisite
service period or vesting period. The fair value of stock-based compensation
granted to retirement-eligible individuals is expensed at the time of grant.
A reconciliation
of the number of options outstanding and exercisable (in thousands) as of
October 29, 2006, and changes during the fiscal year then ended, is as follows:
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
|
Outstanding at
10/30/05
|
|
8,381
|
|
$
|
22.75
|
|
|
|
|
|
|
Granted
|
|
1,235
|
|
32.78
|
|
|
|
|
|
|
Exercised
|
|
(788
|
)
|
15.33
|
|
|
|
|
|
|
Forfeited
|
|
(5
|
)
|
29.48
|
|
|
|
|
|
|
Outstanding
at 10/29/06
|
|
8,823
|
|
$
|
24.81
|
|
6.0 yrs
|
|
$
|
99,141
|
|
|
Exercisable at 10/29/06
|
|
5,620
|
|
$
|
21.99
|
|
4.8 yrs
|
|
$
|
79,038
|
|
The
weighted-average grant date fair value of stock options granted and the total intrinsic
value of options exercised (in thousands) during each of the past three fiscal
years is as follows:
|
|
|
Fiscal Year Ended
|
|
|
|
|
October 29,
|
|
October 30,
|
|
October 30,
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Weighted-average
grant date fair value
|
|
$
|
9.26
|
|
$
|
8.35
|
|
$
|
7.31
|
|
|
Intrinsic value of
exercised options
|
|
$
|
15,470
|
|
$
|
20,194
|
|
$
|
15,497
|
|
The
fair value of each option award is estimated on the date of grant using the
Black-Scholes valuation model using the following weighted-average assumptions:
|
|
|
Fiscal Year Ended
|
|
|
|
|
October 29,
|
|
October 30,
|
|
October 30,
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Risk-free
interest rate
|
|
4.5
|
%
|
4.1
|
%
|
3.9
|
%
|
|
Dividend yield
|
|
1.7
|
%
|
1.7
|
%
|
1.8
|
%
|
|
Stock price
volatility
|
|
21.0
|
%
|
22.0
|
%
|
24.4
|
%
|
|
Expected option life
|
|
8 years
|
|
8 years
|
|
7 years
|
|
As
part of the valuation process, the company reassesses the appropriateness of
the inputs into the Black-Scholes model used for option valuations. The company
establishes the risk-free interest rate using stripped U.S. Treasury yields as
of the grant date where the remaining term is approximately the expected life
of the option. The dividend yield is set based on the dividend rate approved by
the company’s Board of Directors and the stock price on the grant date. The
expected volatility assumption is set based primarily on historical volatility.
As a reasonableness test, implied volatility from exchange traded options is
also examined to validate the volatility range obtained from the historical
analysis. The expected life assumption is set based on an analysis of past
exercise behavior by option holders. In performing the option valuations, the
company has not stratified option holders as exercise behavior has historically
been consistent across all employee groups.
The company’s
nonvested shares vest after five years or upon retirement. A reconciliation of
the nonvested shares (in thousands) as of October 29, 2006, and changes during
the fiscal year then ended is as follows:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
|
Shares
|
|
Fair Value
|
|
|
Nonvested at
10/30/05
|
|
134
|
|
$
|
28.88
|
|
|
Granted
|
|
79
|
|
33.44
|
|
|
Vested
|
|
(114
|
)
|
29.20
|
|
|
Nonvested at 10/29/06
|
|
99
|
|
$
|
32.16
|
|
The
weighted-average grant date fair value of nonvested shares granted, the total
fair value (in thousands) of nonvested shares granted, and the fair value (in
thousands) of shares that have vested during each of the past three fiscal
years is as follows:
|
|
|
Fiscal Year Ended
|
|
|
|
|
October 29,
|
|
October 30,
|
|
October 30,
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Weighted-average
grant date fair value
|
|
$
|
33.44
|
|
$
|
31.50
|
|
$
|
26.97
|
|
|
Fair value of
nonvested shares granted
|
|
$
|
2,656
|
|
$
|
2,000
|
|
$
|
1,713
|
|
|
Fair value of shares
vested
|
|
$
|
3,332
|
|
$
|
30
|
|
$
|
25
|
|
55
Stock-based
compensation expense, along with the related income tax benefit, for each of
the past three fiscal years is as follows:
|
|
|
Fiscal Year Ended
|
|
|
(In Thousands)
|
|
October 29,
2006
|
|
October 30,
2005
|
|
October 30,
2004
|
|
|
Stock-based
compensation expense recognized
|
|
$
|
18,985
|
|
$
|
10,661
|
|
$
|
6,094
|
|
|
Income tax
benefit recognized
|
|
(7,130
|
)
|
(4,092
|
)
|
(2,369
|
)
|
|
After-tax stock-based compensation
expense
|
|
$
|
11,855
|
|
$
|
6,569
|
|
$
|
3,725
|
|
At
October 29, 2006, there was $10.6 million of total unrecognized compensation
cost from stock-based compensation arrangements granted under the plans. This
compensation is expected to be recognized over a weighted-average period of
approximately 2.4 years. During fiscal years 2006, 2005, and 2004, cash
received from stock option exercises was $4.1 million, $8.2 million, and $6.1
million, respectively. The total tax benefit to be realized for tax deductions
from these option exercises was $7.0 million, $7.8 million, and $6.0 million,
respectively. The $7.0 million tax deduction for fiscal year 2006 includes $4.5
million of excess tax benefits which are included in “Other” under financing
activities on the Consolidated Statements of Cash Flows (with an offsetting
amount in other operating activities).
Shares
issued for option exercises may be either authorized but unissued shares, or
shares of treasury stock acquired in the open market or otherwise. The number
of shares available for future grants (in thousands) was 10,771 at October 29,
2006, 2,045 at October 30, 2005, and 3,610 at October 30, 2004.
Note J
Derivatives and Hedging
The company uses
hedging programs to manage price risk associated with commodity purchases and
foreign currency transactions. These programs utilize futures contracts and
swaps to manage the company’s exposure to price fluctuations in the commodities
markets and fluctuations in foreign currencies.
Cash Flow Hedge:
The company from time to time utilizes
corn and soybean meal futures to offset the price fluctuation in the company’s
future direct grain purchases. The company has entered into various NYMEX-based
swaps to hedge the purchase of natural gas at certain plant locations. The
company also utilizes currency futures contracts to reduce its exposure to fluctuations
in foreign currencies for certain foreign-denominated transactions. The financial
instruments are designated and accounted for as cash flow hedges, and the
company measures the effectiveness of the hedges on a regular basis. The
company has determined its hedges to be highly effective. In 2006, the company
recorded a charge of $0.2 million to earnings related to ineffectiveness.
Effective gains or losses related to these cash flow hedges are reported as
other comprehensive income (loss) and reclassified into earnings, through cost
of products sold (commodity positions) or net sales (currency futures), in the
period or periods in which the hedged transactions affect earnings. The company
typically does not hedge its grain and currency exposure beyond 12 months and
its natural gas exposure beyond 36 months.
As of October
29, 2006, the company has included in accumulated other comprehensive loss
hedging losses of $1.5 million (net of tax) relating to its positions. The
company expects to recognize the majority of these losses over the next 12
months. Gains in the amount of $0.2 million, before tax, were reclassified into
earnings in fiscal 2006. There were no gains or losses reclassified into
earnings as a result of the discontinuance of cash flow hedges.
Fair
Value Hedge:
The
company utilizes futures to minimize the price risk assumed when forward priced
contracts are offered to the company’s commodity suppliers. The intent of the
program is to make the forward priced commodities cost nearly the same as cash
market purchases at the date of delivery.
The
futures contracts are designated and accounted for as fair value hedges, and
the company measures the effectiveness of the hedges on a regular basis. The
company has determined its hedge programs to be highly effective. In 2006, the
company recorded a charge of $2.0 million to earnings related to ineffective
positions. Changes in the fair value of the futures contracts, along with the
gain or loss on the hedged purchase commitment, are marked-to-market through
earnings and are recorded on the statement of financial position as a current
asset and liability, respectively. Gains or losses related to these fair value
hedges are recognized through cost of products sold in the period or periods in
which the hedged transaction affects earnings.
As of October
29, 2006, the fair value of the company’s open futures contracts included on
the statement of financial position was $(15.2) million. Losses on closed
futures contracts in the amount of $0.5 million, before tax, were recognized in
earnings during the fiscal year. There were no gains or losses recognized into
earnings as a result of a hedged firm commitment no longer qualifying as a fair
value hedge.
Other:
As of October 29, 2006, the company held
certain futures contracts positions as part of a merchandising program designed
to enhance the margins of company-owned livestock. The company has not applied
hedge accounting to these positions. During fiscal year 2006, the company
recorded a charge of $1.2 million through cost of products sold to record these
contracts at their fair value.
56
Note K
Segment Operating Results
The company
develops, processes, and distributes a wide array of food products in a variety
of markets. Under the criteria set forth by the accounting standard SFAS No.
131, “Disclosures about Segments of an Enterprise and Related Information,” the
company reports its results in the following five segments: Grocery Products,
Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and All Other.
The Grocery
Products segment consists primarily of the processing, marketing, and sale of
shelf-stable food products sold predominately in the retail market. This
segment also includes the results of Valley Fresh, acquired in the second
quarter of fiscal 2006, and Mexican Accent, acquired in the second quarter of fiscal
2005.
The
Refrigerated Foods 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. 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, which was acquired in April 2005.
The Jennie-O Turkey
Store segment consists primarily of the processing, marketing, and sale of
branded and unbranded turkey products for retail, foodservice, and fresh
product customers.
The
Specialty Foods segment includes the Diamond Crystal Brands, Century Foods International,
and Hormel Specialty Products operating segments. This segment consists of the
packaging and sale of various sugar and sugar substitute products, salt and
pepper products, dessert mixes, 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 and
Mark-Lynn, which was acquired in March 2005.
The
All Other segment includes the Dan’s Prize and Hormel Foods International
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.
Intersegment
sales are recorded at prices that approximate cost and are eliminated in the
consolidated statements of operations. Equity in earnings of affiliates is
included in segment profit; however, the company does not allocate investment
income, interest expense, and interest income to its segments when measuring
performance. The company also retains various other income and unallocated
expenses at corporate. These items are included below as “Net interest and
investment income” and “General corporate expense” when reconciling to earnings
before income taxes.
Sales
and operating profits for each of the company’s business segments and
reconciliation to earnings before income taxes are set forth below. The company
is an integrated enterprise, characterized by substantial intersegment
cooperation, cost allocations, and sharing of assets. Therefore, we do not
represent that these segments, if operated independently, would report the
operating profit and other financial information shown below.
|
|
|
|
|
Restated*
|
|
Restated*
|
|
|
(In Thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
|
Sales
to Unaffiliated Customers
|
|
|
|
|
|
|
|
|
Grocery Products
|
|
$
|
846,494
|
|
$
|
799,291
|
|
$
|
758,256
|
|
|
Refrigerated
Foods
|
|
2,958,365
|
|
2,801,632
|
|
2,300,399
|
|
|
Jennie-O Turkey
Store
|
|
1,105,456
|
|
1,088,324
|
|
1,052,682
|
|
|
Specialty Foods
|
|
624,586
|
|
518,673
|
|
467,581
|
|
|
All Other
|
|
210,580
|
|
206,077
|
|
200,957
|
|
|
Total
|
|
$
|
5,745,481
|
|
$
|
5,413,997
|
|
$
|
4,779,875
|
|
|
Intersegment
Sales
|
|
|
|
|
|
|
|
|
Grocery Products
|
|
$
|
—
|
|
$
|
—
|
|
$
|
10
|
|
|
Refrigerated
Foods
|
|
7,348
|
|
8,305
|
|
10,122
|
|
|
Jennie-O Turkey
Store
|
|
79,622
|
|
69,710
|
|
69,468
|
|
|
Specialty Foods
|
|
219
|
|
139
|
|
58
|
|
|
All Other
|
|
80,034
|
|
83,264
|
|
92,551
|
|
|
Total
|
|
167,223
|
|
161,418
|
|
172,209
|
|
|
Intersegment
elimination
|
|
(167,223
|
)
|
(161,418
|
)
|
(172,209
|
)
|
|
Total
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
Grocery Products
|
|
$
|
846,494
|
|
$
|
799,291
|
|
$
|
758,266
|
|
|
Refrigerated
Foods
|
|
2,965,713
|
|
2,809,937
|
|
2,310,521
|
|
|
Jennie-O Turkey
Store
|
|
1,185,078
|
|
1,158,034
|
|
1,122,150
|
|
|
Specialty Foods
|
|
624,805
|
|
518,812
|
|
467,639
|
|
|
All Other
|
|
290,614
|
|
289,341
|
|
293,508
|
|
|
Intersegment
elimination
|
|
(167,223
|
)
|
(161,418
|
)
|
(172,209
|
)
|
|
Total
|
|
$
|
5,745,481
|
|
$
|
5,413,997
|
|
$
|
4,779,875
|
|
*Retrospective
application of FIFO inventory valuation (see Note A).
57
|
|
|
|
|
Restated*
|
|
Restated*
|
|
|
(In Thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
|
Segment
Operating Profit
|
|
|
|
|
|
|
|
|
Grocery Products
|
|
$
|
137,580
|
|
$
|
132,047
|
|
$
|
128,838
|
|
|
Refrigerated
Foods
|
|
133,212
|
|
129,831
|
|
141,361
|
|
|
Jennie-O Turkey
Store
|
|
128,734
|
|
136,071
|
|
80,437
|
|
|
Specialty Foods
|
|
48,579
|
|
27,310
|
|
25,674
|
|
|
All Other
|
|
33,222
|
|
22,384
|
|
21,425
|
|
|
Total segment
operating profit
|
|
$
|
481,327
|
|
$
|
447,643
|
|
$
|
397,735
|
|
|
Net interest and
investment income
|
|
(20,166
|
)
|
(19,213
|
)
|
(12,779
|
)
|
|
General
corporate expense
|
|
(30,618
|
)
|
(21,704
|
)
|
(17,358
|
)
|
|
Earnings before income taxes
|
|
$
|
430,543
|
|
$
|
406,726
|
|
$
|
367,598
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Grocery Products
|
|
$
|
388,493
|
|
$
|
261,314
|
|
$
|
177,041
|
|
|
Refrigerated
Foods
|
|
938,965
|
|
885,940
|
|
570,557
|
|
|
Jennie-O Turkey
Store
|
|
698,663
|
|
688,841
|
|
708,683
|
|
|
Specialty Foods
|
|
426,787
|
|
430,246
|
|
368,205
|
|
|
All Other
|
|
142,083
|
|
117,715
|
|
152,422
|
|
|
Corporate
|
|
465,315
|
|
462,504
|
|
585,885
|
|
|
Total
|
|
$
|
3,060,306
|
|
$
|
2,846,560
|
|
$
|
2,562,793
|
|
|
Additions
to Property Plant and Equipment
|
|
|
|
|
|
|
|
|
Grocery Products
|
|
$
|
25,955
|
|
$
|
9,657
|
|
$
|
3,761
|
|
|
Refrigerated
Foods
|
|
61,769
|
|
57,164
|
|
40,278
|
|
|
Jennie-O Turkey
Store
|
|
25,814
|
|
19,822
|
|
20,706
|
|
|
Specialty Foods
|
|
6,363
|
|
5,357
|
|
4,373
|
|
|
All Other
|
|
2,690
|
|
2,457
|
|
1,826
|
|
|
Corporate
|
|
18,925
|
|
12,637
|
|
9,419
|
|
|
Total
|
|
$
|
141,516
|
|
$
|
107,094
|
|
$
|
80,363
|
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
|
Grocery Products
|
|
$
|
9,198
|
|
$
|
6,575
|
|
$
|
5,597
|
|
|
Refrigerated
Foods
|
|
45,873
|
|
42,758
|
|
25,676
|
|
|
Jennie-O Turkey
Store
|
|
33,855
|
|
33,862
|
|
32,927
|
|
|
Specialty Foods
|
|
15,353
|
|
15,121
|
|
14,033
|
|
|
All Other
|
|
2,857
|
|
3,200
|
|
3,051
|
|
|
Corporate
|
|
13,965
|
|
13,673
|
|
13,461
|
|
|
Total
|
|
$
|
121,101
|
|
$
|
115,189
|
|
$
|
94,745
|
|
*Retrospective
application of FIFO inventory valuation (see Note A).
The
company’s products primarily consist of meat and other food products.
Perishable meat includes fresh meats, sausages, hams, wieners, and bacon
(excluding Jennie-O Turkey Store products). Shelf-stable includes canned
products, tortillas, salsas, and other items that do not require refrigeration.
The Poultry category is composed primarily of Jennie-O Turkey Store products.
The Other category primarily consists of nutritional food products and supplements,
sugar and sugar substitutes, dessert and drink mixes, and industrial gelatin
products.
The percentages of total
revenues contributed by classes of similar products for the last three fiscal
years are as follows:
|
|
|
Fiscal Year Ended
|
|
|
|
|
October 29,
2006
|
|
October 30,
2005
|
|
October 30,
2004
|
|
|
Perishable meat
|
|
53.8
|
%
|
54.0
|
%
|
50.7
|
%
|
|
Poultry
|
|
19.7
|
%
|
20.1
|
%
|
22.0
|
%
|
|
Shelf-stable
|
|
17.1
|
%
|
16.3
|
%
|
16.9
|
%
|
|
Other
|
|
9.4
|
%
|
9.6
|
%
|
10.4
|
%
|
|
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Revenues from external customers are classified
as domestic or foreign based on the final customer destination. No individual
foreign country is material to the consolidated results. Additionally, the
company’s long-lived assets located in foreign countries are not significant.
Total revenues attributed to the U.S. and all foreign countries in total for
the last three fiscal years of the company are as follows:
|
|
|
Fiscal Year Ended
|
|
|
(In Thousands)
|
|
October 29,
2006
|
|
October 30,
2005
|
|
October 30,
2004
|
|
|
United States
|
|
$
|
5,528,197
|
|
$
|
5,189,206
|
|
$
|
4,565,134
|
|
|
Foreign
|
|
217,284
|
|
224,791
|
|
214,741
|
|
|
|
|
$
|
5,745,481
|
|
$
|
5,413,997
|
|
$
|
4,779,875
|
|
Note L
Quarterly
Results of Operations (Unaudited)
The
following tabulations reflect the unaudited quarterly results of operations for
the years ended October 29, 2006, and October 30, 2005.
|
(In Thousands,
Except Per Share Data)
|
|
Net
Sales
|
|
Gross
Profit
|
|
Net
Earnings
|
|
Diluted
Earnings
Per Share
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
1,415,933
|
|
$
|
352,995
|
|
$
|
69,276
|
|
$
|
0.50
|
|
|
Second quarter
|
|
1,365,345
|
|
331,479
|
|
67,308
|
|
0.48
|
|
|
Third quarter
|
|
1,406,894
|
|
322,154
|
|
59,551
|
|
0.43
|
|
|
Fourth quarter
|
|
1,557,309
|
|
376,562
|
|
90,004
|
|
0.64
|
|
|
2005
Restated*
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
1,271,431
|
|
$
|
312,068
|
|
$
|
64,633
|
|
$
|
0.46
|
|
|
Second quarter
|
|
1,309,637
|
|
302,946
|
|
55,978
|
|
0.40
|
|
|
Third quarter
|
|
1,355,021
|
|
301,273
|
|
51,762
|
|
0.37
|
|
|
Fourth quarter
|
|
1,477,908
|
|
368,161
|
|
82,230
|
|
0.59
|
|
*Retrospective
application of FIFO inventory valuation (See Note A).
58
Corporate Officers
Jeffrey M.
Ettinger
*
Chairman of the Board,
President and Chief Executive Officer
(elected Chairman of the Board
effective 11/21/2006)
Michael J.
McCoy
*
Executive Vice President
and Chief Financial Officer
(retires effective 12/31/2006 as
Executive Vice President and
Chief Financial Officer)
Gary J. Ray
*
Executive Vice President
Steven G.
Binder
Group Vice President
Richard A.
Bross
Group Vice President /
President,
Hormel Foods International
Ronald W.
Fielding
Group Vice President
(effective 1/1/2007 advancing
to Executive Vice President)
Michael D.
Tolbert
Group Vice President /
President,
Jennie-O Turkey Store, Inc.
Larry L.
Vorpahl
Group Vice President
William F.
Snyder
Senior Vice President
Jody H.
Feragen
Vice President of
Finance
and Treasurer
(effective 1/1/2007 advancing
to Senior Vice President and
Chief Financial Officer)
James W.
Cavanaugh
Senior Vice President,
General Counsel
and Corporate Secretary
D. Scott
Aakre
Vice President
Julie H.
Craven
Vice President
Thomas R.
Day
Vice President
Bryan D.
Farnsworth
Vice President
Roland G.
Gentzler
Assistant Controller
(effective 1/1/2007 advancing
to Vice President of Finance
and Treasurer)
Dennis B.
Goettsch
Vice President
Daniel A.
Hartzog
Vice President
David P.
Juhlke
Vice President
Phillip L.
Minerich, Ph.D.
Vice President
Kurt F.
Mueller
Vice President
Larry J.
Pfeil
Vice President
Russell C.
Potter
Vice President
Douglas R.
Reetz
Vice President
Bruce R.
Schweitzer
Vice President
James N.
Sheehan
Vice President and
Controller
James M.
Splinter
Vice President
Joseph C.
Swedberg
Vice President
Robert A.
Tegt
Vice President
Brian D.
Johnson
Assistant Secretary
Kevin C.
Jones
Assistant Secretary
*Director
59
Shareholder Information
Independent
Auditors
Ernst
& Young LLP
220
South Sixth Street, Ste 1400
Minneapolis, MN
55402-4509
Stock Listing
Hormel
Foods Corporation’s common stock is traded on the New York Stock Exchange under
the symbol HRL. The CUSIP number is 440452100. There are approximately 11,600
record shareholders and over 23,350 shareholders whose shares are held in
street name by brokerage firms and financial institutions.
The annual certification of the company’s
compliance with corporate governance listing standards required by Section
303A.12(a) of the New York Stock Exchange (NYSE) Listed Company Manual was
submitted to the NYSE on February 27, 2006. The company filed with the
Securities and Exchange Commission (SEC), as Exhibits 31.1, 31.2 and 31.3 to
its Form 10-K filed on January 13, 2006, the Sarbanes-Oxley Act Section 302
certification regarding the quality of the company’s public disclosure.
Common Stock
Data
The high and low
prices of the company’s common stock and the dividends per share declared for
each fiscal quarter of 2006 and 2005, respectively, are shown below:
|
2006
|
|
High
|
|
Low
|
|
Dividend
|
|
|
First Quarter
|
|
35.43
|
|
31.46
|
|
.1400
|
|
|
Second Quarter
|
|
36.09
|
|
32.59
|
|
.1400
|
|
|
Third Quarter
|
|
38.34
|
|
33.15
|
|
.1400
|
|
|
Fourth Quarter
|
|
38.41
|
|
35.16
|
|
.1400
|
|
|
2005
|
|
High
|
|
Low
|
|
Dividend
|
|
|
First Quarter
|
|
32.11
|
|
27.43
|
|
.1300
|
|
|
Second Quarter
|
|
32.65
|
|
29.18
|
|
.1300
|
|
|
Third Quarter
|
|
33.10
|
|
29.16
|
|
.1300
|
|
|
Fourth Quarter
|
|
33.00
|
|
30.06
|
|
.1300
|
|
Transfer Agent
and Registrar
Wells Fargo Bank, N.A.
161 North Concord
Exchange
P.O. Box 64854
South St. Paul, MN 55164-0854
www.shareowneronline.com
For the convenience of shareholders, a tollfree
number (1-877-536-3559) can be used whenever questions arise regarding changes
in registered ownership, lost or stolen certificates, address changes, or other
matters pertaining to the transfer of stock or shareholder records. When
requesting information, shareholders must provide their tax identification
number, the name(s) in which their stock is registered, and their record
address.
Since December of 2004, the company has
participated in the Direct Registration Profile Modification System (DRPMS).
Transfers or issuances of shares are now issued in book-entry form, unless you
specifically request a stock certificate. A statement will be delivered to you
reflecting any transactions processed in your account.
The
transfer agent makes shareholder account data available to shareholders of
record via the Internet. This service allows shareholders to view various
account details, such as certificate information, dividend payment history,
and/or dividend reinvestment plan records, over a secure Internet connection
with the required entry of a tax identification number and a PIN number.
Information is available 24 hours per day, seven days a week. If you are
interested, you may use the Web site www.shareowneronline.com and access “FIRST
TIME VISITOR” to arrange for a PIN setup.
Household
Sorting
If
you hold stock in more than one account, duplicate mailings of financial
information may result. You can help eliminate the added expense by requesting
only one copy be sent. Please supply the transfer agent with the names in which
all accounts are registered and the name of the account for which you wish to
receive mailings. This will not in any way affect dividend check mailings. We
cannot household sort between record accounts and brokerage accounts.
Dividend
Reinvestment Plan
Hormel Foods Corporation’s Dividend Reinvestment
Plan, available to record shareholders, allows for full dividend reinvestment
and voluntary cash purchases with brokerage commissions or other service fees
paid by the company. Automatic debit for cash contribution is also available.
This is a convenient method to have money automatically withdrawn each month
from a checking or savings account and invested in your Dividend Reinvestment
Plan account. To enroll in the plan or obtain additional information, contact
Wells Fargo Bank, N.A., using the address or telephone number provided with its
listing in this section as company transfer agent and registrar. Enrollment in
the plan is also available on the Internet at www.shareowneronline.com.
An
optional direct dividend deposit service offers shareholders a convenient
method of having quarterly dividend payments electronically deposited into
their personal checking or savings account. The dividend payment is made in the
account each payment date, providing shareholders with immediate use of their
money. For information about the service and how to participate, contact Wells
Fargo Bank, N.A., transfer agent. You may also activate this feature on the
Internet at www.shareowneronline.com.
Dividends
The
declaration of dividends and all dates related to the declaration of dividends
are subject to the judgment and discretion of the Board of Directors of Hormel
Foods Corporation. Quarterly dividends are typically paid on the 15th of
February, May, August, and November. Postal delays may cause receipt dates to
vary.
Reports and
Publications
Copies
of the company’s Form 10-K (annual report) and Form10-Q (quarterly report) to
the Securities and Exchange Commission (SEC), proxy statement, all news
releases, and other corporate literature are available free upon request by
calling (507) 437-5345 or by accessing the information on the Internet at
www.hormel.com. The company’s Annual Report to Shareholders is mailed
approximately one month before the Annual Meeting.
Annual Meeting
The Annual
Meeting of Shareholders will be held Tuesday, January 30, 2007, in the Richard
L. Knowlton Auditorium at Austin (Minn.) High School. The meeting will convene
at 8:00 p.m.
Questions
about Hormel Foods
Shareholder
Inquiries
(507) 437-5944
Analyst/Investor
Inquiries
(507) 437-5007
Media Inquiries
(507) 437-5345
Consumer
Response
Inquiries
regarding products of Hormel Foods Corporation should be addressed:
Consumer Response
Hormel Foods Corporation
1 Hormel Place
Austin, MN 55912-3680
or call 1-800-523-4635
Trademarks
References in italic within this report
represent valuable trademarks owned or licensed by Hormel Foods, LCC or its
subsidiaries.
60
Board of Directors
John R. Block
Former U.S. Secretary of Agriculture
Senior Legislative Advisor,
Olsson, Frank and Weeda, P.C.
Director
since October 1997
Jeffrey M. Ettinger
Chairman of the Board,
President and Chief Executive Officer
(elected Chairman of the Board effective 11/21/2006)
Director
since May 2004
E. Peter Gillette, Jr.
Senior Advisor to U.S. Trust Company
Retired President, Piper Trust Company
Director
since July 1996
Luella G. Goldberg
Trustee, University of Minnesota Foundation
Member, Board of Overseers,
University of Minnesota
Carlson School of Management
Trustee and Chair Emerita, Wellesley College
Past Board Chair,
University of Minnesota Foundation
Director
since September 1993
Susan I. Marvin
President, Marvin Windows and Doors
Trustee, University of Minnesota Foundation
Director
since July 2002
Michael J. McCoy
Executive Vice President
and Chief Financial Officer
(retires effective 12/31/2006 as
Executive Vice President and Chief Financial Officer)
Director
since May 2000
John L. Morrison
Managing Director, Goldner Hawn
Johnson & Morrison Incorporated
Chairman, Callanish Capital Partners
Director
since November 2003
Elsa A. Murano, Ph.D.
Texas A&M University Vice Chancellor
and Dean of Agriculture
Professor, Department of Animal Science
Director
since September 2006
Robert C. Nakasone
Chief Executive Officer,
NAK Enterprises, LLC
Director
since September 2006
Dakota A. Pippins
President and Chief Executive Officer,
Pippins Strategies, LLC
Director
since January 2001
Gary J. Ray
Executive Vice President
Director
since November 1990
Hugh C. Smith, M.D.
Professor of Medicine,
Mayo Clinic College of Medicine
Consultant in the Cardiovascular Division
at Mayo Clinic
Director
since September 2006
John G. Turner
Chairman, Hillcrest Capital Partners
Director since March 2000
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