UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 30, 2011
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________________________ to ________________________________________
Commission File Number: 1-2402
HORMEL FOODS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
|
41-0319970 (I.R.S. Employer Identification No.) |
1 Hormel Place |
|
55912-3680 |
(507) 437-5611
(Registrants telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X YES NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). X YES ___ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer X |
|
Accelerated filer |
Non-accelerated filer (Do not check if a smaller reporting company) |
|
Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes X No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
|
Outstanding at March 6, 2011 | ||
Common Stock |
|
$.0293 par value |
267,037,744 |
|
Common Stock Non-Voting |
|
$.01 par value |
-0- |
|
PART I FINANCIAL INFORMATION
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
|
|
January 30, |
|
|
October 31, | |||
|
|
2011 |
|
|
2010 | |||
|
|
(Unaudited) |
|
|
|
| ||
ASSETS |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
CURRENT ASSETS |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
598,813 |
|
|
$ |
467,845 |
|
Short-term marketable securities |
|
50,719 |
|
|
50,595 |
| ||
Accounts receivable |
|
406,677 |
|
|
430,939 |
| ||
Inventories |
|
787,280 |
|
|
793,771 |
| ||
Income taxes receivable |
|
0 |
|
|
8,525 |
| ||
Deferred income taxes |
|
69,474 |
|
|
70,703 |
| ||
Prepaid expenses |
|
13,612 |
|
|
12,153 |
| ||
Other current assets |
|
22,655 |
|
|
23,635 |
| ||
TOTAL CURRENT ASSETS |
|
1,949,230 |
|
|
1,858,166 |
| ||
|
|
|
|
|
|
| ||
DEFERRED INCOME TAXES |
|
57,048 |
|
|
72,426 |
| ||
|
|
|
|
|
|
| ||
GOODWILL |
|
630,707 |
|
|
629,023 |
| ||
|
|
|
|
|
|
| ||
OTHER INTANGIBLES |
|
139,023 |
|
|
141,522 |
| ||
|
|
|
|
|
|
| ||
PENSION ASSETS |
|
64,572 |
|
|
61,272 |
| ||
|
|
|
|
|
|
| ||
INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES |
|
211,169 |
|
|
214,389 |
| ||
|
|
|
|
|
|
| ||
OTHER ASSETS |
|
155,567 |
|
|
155,017 |
| ||
|
|
|
|
|
|
| ||
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
| ||
Land |
|
55,617 |
|
|
54,017 |
| ||
Buildings |
|
736,006 |
|
|
729,718 |
| ||
Equipment |
|
1,362,978 |
|
|
1,358,237 |
| ||
Construction in progress |
|
43,158 |
|
|
45,283 |
| ||
|
|
2,197,759 |
|
|
2,187,255 |
| ||
Less allowance for depreciation |
|
(1,282,127 |
) |
|
(1,265,152 |
) | ||
|
|
915,632 |
|
|
922,103 |
| ||
|
|
|
|
|
|
| ||
TOTAL ASSETS |
|
$ |
4,122,948 |
|
|
$ |
4,053,918 |
|
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
|
|
January 30, |
|
October 31, | ||||
|
|
2011 |
|
2010 | ||||
|
|
(Unaudited) |
|
|
| |||
LIABILITIES AND SHAREHOLDERS INVESTMENT |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
CURRENT LIABILITIES |
|
|
|
|
|
| ||
Accounts payable |
|
$ |
267,814 |
|
|
$ |
361,287 |
|
Accrued expenses |
|
52,661 |
|
|
46,408 |
| ||
Accrued workers compensation |
|
33,600 |
|
|
33,022 |
| ||
Accrued marketing expenses |
|
87,648 |
|
|
76,552 |
| ||
Employee related expenses |
|
128,906 |
|
|
187,116 |
| ||
Taxes payable |
|
61,959 |
|
|
9,339 |
| ||
Interest and dividends payable |
|
37,615 |
|
|
37,489 |
| ||
Current maturities of long-term debt |
|
350,000 |
|
|
350,000 |
| ||
TOTAL CURRENT LIABILITIES |
|
1,020,203 |
|
|
1,101,213 |
| ||
|
|
|
|
|
|
| ||
PENSION AND POST-RETIREMENT BENEFITS |
|
456,234 |
|
|
454,998 |
| ||
|
|
|
|
|
|
| ||
OTHER LONG-TERM LIABILITIES |
|
94,527 |
|
|
91,068 |
| ||
|
|
|
|
|
|
| ||
SHAREHOLDERS INVESTMENT * |
|
|
|
|
|
| ||
Preferred stock, par value $.01 a share |
|
|
|
|
|
| ||
Common stock, non-voting, par value $.01 a shareauthorized 400,000,000 shares; issuednone |
|
|
|
|
|
| ||
Common stock, par value $.0293 a share authorized 800,000,000 shares; |
|
|
|
|
|
| ||
issued 266,918,934 shares January 30, 2011 |
|
|
|
|
|
| ||
issued 265,963,080 shares October 31, 2010 |
|
7,821 |
|
|
7,793 |
| ||
Additional paid-in capital |
|
17,996 |
|
|
0 |
| ||
Accumulated other comprehensive loss |
|
(161,794 |
) |
|
(175,910 |
) | ||
Retained earnings |
|
2,683,690 |
|
|
2,568,774 |
| ||
HORMEL FOODS CORPORATION SHAREHOLDERS INVESTMENT |
|
2,547,713 |
|
|
2,400,657 |
| ||
NONCONTROLLING INTEREST |
|
4,271 |
|
|
5,982 |
| ||
TOTAL SHAREHOLDERS INVESTMENT |
|
2,551,984 |
|
|
2,406,639 |
| ||
|
|
|
|
|
|
| ||
TOTAL LIABILITIES AND SHAREHOLDERS INVESTMENT |
|
$ |
4,122,948 |
|
|
$ |
4,053,918 |
|
* Shares and par values have been restated, as appropriate, to give effect to the two-for-one stock split, which was approved by the Companys shareholders on January 31, 2011, and effected February 1, 2011.
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
|
|
Three Months Ended | ||||||
|
|
January 30, |
|
January 24, | ||||
|
|
|
|
|
|
| ||
Net sales |
|
$ |
1,921,558 |
|
|
$ |
1,727,447 |
|
Cost of products sold |
|
1,547,553 |
|
|
1,409,060 |
| ||
GROSS PROFIT |
|
374,005 |
|
|
318,387 |
| ||
|
|
|
|
|
|
| ||
Selling, general and administrative |
|
145,161 |
|
|
145,532 |
| ||
|
|
|
|
|
|
| ||
Equity in earnings of affiliates |
|
6,905 |
|
|
2,821 |
| ||
|
|
|
|
|
|
| ||
OPERATING INCOME |
|
235,749 |
|
|
175,676 |
| ||
|
|
|
|
|
|
| ||
Other income and expense: |
|
|
|
|
|
| ||
Interest and investment income |
|
441 |
|
|
443 |
| ||
Interest expense |
|
(6,579 |
) |
|
(6,561 |
) | ||
|
|
|
|
|
|
| ||
EARNINGS BEFORE INCOME TAXES |
|
229,611 |
|
|
169,558 |
| ||
|
|
|
|
|
|
| ||
Provision for income taxes |
|
79,576 |
|
|
57,289 |
| ||
|
|
|
|
|
|
| ||
NET EARNINGS |
|
150,035 |
|
|
112,269 |
| ||
Less: Net earnings attributable to noncontrolling interest |
|
1,209 |
|
|
1,062 |
| ||
NET EARNINGS ATTRIBUTABLE TO HORMEL FOODS CORPORATION |
|
$ |
148,826 |
|
|
$ |
111,207 |
|
|
|
|
|
|
|
| ||
NET EARNINGS PER SHARE: |
|
|
|
|
|
| ||
BASIC |
|
$ |
0.56 |
|
|
$ |
0.42 |
|
DILUTED |
|
$ |
0.55 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
| ||
WEIGHTED AVERAGE SHARES OUTSTANDING: |
|
|
|
|
|
| ||
BASIC |
|
266,560 |
|
|
267,178 |
| ||
DILUTED |
|
271,740 |
|
|
270,712 |
| ||
|
|
|
|
|
|
| ||
DIVIDENDS DECLARED PER SHARE: |
|
$ |
0.1275 |
|
|
$ |
0.1050 |
|
* Shares and per share figures have been restated to give effect to the two-for-one stock split, which was approved by the Companys shareholders on January 31, 2011, and effected February 1, 2011.
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS INVESTMENT
(in thousands, except per share amounts)
(Unaudited)
|
|
Hormel Foods Corporation Shareholders |
|
|
|
|
| |||||||||||||||
|
|
Common |
|
Treasury |
|
Additional |
|
Retained |
|
Accumulated |
|
Non- |
|
Total |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at October 25, 2009 |
|
$ |
7,828 |
|
$ |
0 |
|
$ |
0 |
|
$ |
2,318,390 |
|
$ |
(203,610 |
) |
$ |
1,713 |
|
$ |
2,124,321 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net earnings |
|
|
|
|
|
|
|
395,587 |
|
|
|
4,189 |
|
399,776 |
| |||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
5,468 |
|
80 |
|
5,548 |
| |||||||
Deferred hedging, net of reclassification adjustment |
|
|
|
|
|
|
|
|
|
33,372 |
|
|
|
33,372 |
| |||||||
Pension and other benefits |
|
|
|
|
|
|
|
|
|
(11,140 |
) |
|
|
(11,140 |
) | |||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
4,269 |
|
427,556 |
| |||||||
Purchases of common stock |
|
|
|
(69,574 |
) |
|
|
|
|
|
|
|
|
(69,574 |
) | |||||||
Stock-based compensation expense |
|
|
|
|
|
14,402 |
|
|
|
|
|
|
|
14,402 |
| |||||||
Exercise of stock options/nonvested shares |
|
65 |
|
(308 |
) |
22,007 |
|
|
|
|
|
|
|
21,764 |
| |||||||
Shares retired |
|
(100 |
) |
69,882 |
|
(36,409 |
) |
(33,373 |
) |
|
|
|
|
0 |
| |||||||
Declared cash dividends $.42 per share* |
|
|
|
|
|
|
|
(111,830 |
) |
|
|
|
|
(111,830 |
) | |||||||
Balance at October 31, 2010 |
|
$ |
7,793 |
|
$ |
0 |
|
$ |
0 |
|
$ |
2,568,774 |
|
$ |
(175,910 |
) |
$ |
5,982 |
|
$ |
2,406,639 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net earnings |
|
|
|
|
|
|
|
148,826 |
|
|
|
1,209 |
|
150,035 |
| |||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
50 |
|
80 |
|
130 |
| |||||||
Deferred hedging, net of reclassification adjustment |
|
|
|
|
|
|
|
|
|
8,916 |
|
|
|
8,916 |
| |||||||
Pension and other benefits |
|
|
|
|
|
|
|
|
|
5,150 |
|
|
|
5,150 |
| |||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
1,289 |
|
164,231 |
| |||||||
Purchases of common stock |
|
|
|
(13,731 |
) |
|
|
|
|
|
|
|
|
(13,731 |
) | |||||||
Stock-based compensation expense |
|
|
|
|
|
8,240 |
|
|
|
|
|
|
|
8,240 |
| |||||||
Exercise of stock options/nonvested shares |
|
44 |
|
(88 |
) |
23,559 |
|
|
|
|
|
|
|
23,515 |
| |||||||
Shares retired |
|
(16 |
) |
13,819 |
|
(13,803 |
) |
|
|
|
|
|
|
0 |
| |||||||
Distribution to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
(3,000 |
) |
(3,000 |
) | |||||||
Declared cash dividends $.1275 per share |
|
|
|
|
|
|
|
(33,910 |
) |
|
|
|
|
(33,910 |
) | |||||||
Balance at January 30, 2011 |
|
$ |
7,821 |
|
$ |
0 |
|
$ |
17,996 |
|
$ |
2,683,690 |
|
$ |
(161,794 |
) |
$ |
4,271 |
|
$ |
2,551,984 |
|
* Per share figures have been restated to give effect to the two-for-one stock split, which was approved by the Companys shareholders on January 31, 2011, and effected February 1, 2011.
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
Three Months Ended | |||||||
|
|
January 30, |
|
January 24, |
| ||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
| ||
Net earnings |
|
$ |
150,035 |
|
|
$ |
112,269 |
|
|
Adjustments to reconcile to net cash provided by operating activities: |
|
|
|
|
|
|
| ||
Depreciation |
|
28,697 |
|
|
28,391 |
|
| ||
Amortization of intangibles |
|
2,500 |
|
|
2,459 |
|
| ||
Equity in earnings of affiliates, net of dividends |
|
(2,874 |
) |
|
(2,821 |
) |
| ||
Provision for deferred income taxes |
|
3,692 |
|
|
4,841 |
|
| ||
Loss on property/equipment sales and plant facilities |
|
237 |
|
|
71 |
|
| ||
Non-cash investment activities |
|
377 |
|
|
96 |
|
| ||
Stock-based compensation expense |
|
8,240 |
|
|
5,362 |
|
| ||
Excess tax benefit from stock-based compensation |
|
(4,395 |
) |
|
(3,511 |
) |
| ||
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
| ||
Decrease in accounts receivable |
|
24,262 |
|
|
23,597 |
|
| ||
Decrease (Increase) in inventories |
|
6,491 |
|
|
(10,356 |
) |
| ||
Decrease (Increase) in prepaid expenses and other current assets |
|
19,633 |
|
|
(1,778 |
) |
| ||
Increase in pension and post-retirement benefits |
|
6,232 |
|
|
6,636 |
|
| ||
Decrease in accounts payable and accrued expenses |
|
(77,795 |
) |
|
(51,321 |
) |
| ||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
165,332 |
|
|
113,935 |
|
| ||
|
|
|
|
|
|
|
| ||
INVESTING ACTIVITIES |
|
|
|
|
|
|
| ||
Acquisitions of businesses/intangibles |
|
(7,207 |
) |
|
(384 |
) |
| ||
Purchases of property/equipment |
|
(16,737 |
) |
|
(18,611 |
) |
| ||
Proceeds from sales of property/equipment |
|
1,280 |
|
|
959 |
|
| ||
Decrease (Increase) in investments, equity in affiliates, and other assets |
|
4,143 |
|
|
(565 |
) |
| ||
NET CASH USED IN INVESTING ACTIVITIES |
|
(18,521 |
) |
|
(18,601 |
) |
| ||
|
|
|
|
|
|
|
| ||
FINANCING ACTIVITIES |
|
|
|
|
|
|
| ||
Dividends paid on common stock |
|
(27,904 |
) |
|
(25,373 |
) |
| ||
Share repurchase |
|
(13,731 |
) |
|
(16,081 |
) |
| ||
Proceeds from exercise of stock options |
|
24,015 |
|
|
6,409 |
|
| ||
Excess tax benefit from stock-based compensation |
|
4,395 |
|
|
3,511 |
|
| ||
Distribution to noncontrolling interest |
|
(3,000 |
) |
|
0 |
|
| ||
Other |
|
382 |
|
|
40 |
|
| ||
NET CASH USED IN FINANCING ACTIVITIES |
|
(15,843 |
) |
|
(31,494 |
) |
| ||
INCREASE IN CASH AND CASH EQUIVALENTS |
|
130,968 |
|
|
63,840 |
|
| ||
Cash and cash equivalents at beginning of year |
|
467,845 |
|
|
385,252 |
|
| ||
CASH AND CASH EQUIVALENTS AT END OF QUARTER |
|
$ |
598,813 |
|
|
$ |
449,092 |
|
|
See Notes to Consolidated Financial Statements
HORMEL FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A GENERAL
Basis of Presentation
The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year. The balance sheet at October 31, 2010, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2010.
Stock Split
On November 22, 2010, the Companys Board of Directors authorized a two-for-one split of the Companys common stock, which was subsequently approved by shareholders at the Companys Annual Meeting on January 31, 2011, and effected on February 1, 2011. The Companys common stock was reclassified by reducing the par value from $.0586 per share to $.0293 per share and the number of authorized shares was increased from 400,000,000 to 800,000,000 shares, in order to effect a two-for-one stock split. The number of authorized shares of nonvoting common stock and preferred stock was also increased to 400,000,000 shares and 160,000,000 shares, respectively, with no change in the par value of those shares.
Unless otherwise noted, all prior year share amounts and per share calculations throughout this Quarterly Report on Form 10-Q have been restated to reflect the impact of this split, and to provide data on a basis comparable to fiscal 2011. Such restatements include calculations regarding the Companys weighted average shares, earnings per share, and dividends per share, as well as disclosures regarding the Companys stock-based compensation plans and share repurchase activity.
Investments
The Company maintains a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans, which is included in other assets on the Consolidated Statements of Financial Position. The securities held by the trust are classified as trading securities. Therefore, unrealized gains and losses associated with these investments are included in the Companys earnings. Gains related to securities still held by the trust were $0.4 million for the quarter ended January 30, 2011, compared to gains of $0.8 million for the quarter ended January 24, 2010. The Company has transitioned the majority of this portfolio to more fixed return investments to reduce the exposure to volatility in equity markets going forward.
The Company also holds securities as part of an investment portfolio, which are classified as short-term marketable securities on the Consolidated Statements of Financial Position. These investments are also trading securities. Therefore, unrealized gains and losses are included in the Companys earnings. The Company recorded a gain of $0.1 million related to these investments during the quarter ended January 30, 2011.
Supplemental Cash Flow Information
Non-cash investment activities presented on the Consolidated Statements of Cash Flows generally consist of unrealized gains or losses on the Companys rabbi trust and other investments, amortization of affordable housing investments, and amortization of bond financing costs. The noted investments are included in other
assets or short-term marketable securities on the Consolidated Statements of Financial Position. Changes in the value of these investments are included in the Companys net earnings and are presented in the Consolidated Statements of Operations as either interest and investment income or interest expense, as appropriate.
Guarantees
The Company enters into various agreements guaranteeing specified obligations of affiliated parties. The Companys guarantees either terminate in one year or remain in place until such time as the Company revokes the agreement. The Company currently provides a renewable standby letter of credit for $4.8 million to guarantee obligations that may arise under worker compensation claims of an affiliated party. This potential obligation is not reflected in the Companys Consolidated Statements of Financial Position.
NOTE B ACQUISITIONS
Effective February 1, 2010, the Company completed the acquisition of the Country Crock® chilled side dish business from Unilever United States Inc. This line of microwaveable, refrigerated side dishes complements the Companys Hormel refrigerated entrées and Lloyds barbeque product lines within the Refrigerated Foods segment. Country Crock® remains a registered trademark of the Unilever Group of Companies and is being used under license.
Operating results for this product line are included in the Companys Consolidated Statements of Operations from the date of acquisition. Pro forma results are not presented, as the acquisition is not material to the consolidated Company.
NOTE C STOCK-BASED COMPENSATION
The Company issues stock options and nonvested shares as part of its stock incentive plans for employees and non-employee directors. The Companys policy is to grant options with an exercise price equal to the market price of the common stock on the date of grant. Options typically vest over periods ranging from six months to four years and expire ten years after the grant date. The Company recognizes stock-based compensation expense ratably over the shorter of the requisite service period or vesting period. The fair value of stock-based compensation granted to retirement-eligible individuals is expensed at the time of grant.
During the first quarter of fiscal 2007, the Company made a one-time grant of 100 stock options (pre-split) to each active, full-time employee of the Company on January 8, 2007. This grant was to vest upon the earlier of five years or attainment of a closing stock price of $50.00 per share (pre-split) for five consecutive trading days, and had an expiration of ten years after the grant date. During the first quarter of fiscal 2011, the options vested after the stock attained the required closing price per share for five consecutive trading days.
A reconciliation of the number of options outstanding and exercisable (in thousands) as of January 30, 2011, and changes during the quarter then ended, is as follows:
|
|
Shares |
|
Weighted |
|
Weighted |
|
Aggregate |
| |
Outstanding at October 31, 2010 |
|
22,048 |
|
|
$16.47 |
|
|
|
|
|
Granted |
|
1,858 |
|
|
24.96 |
|
|
|
|
|
Exercised |
|
(2,068 |
) |
|
16.00 |
|
|
|
|
|
Forfeitures |
|
(15 |
) |
|
18.71 |
|
|
|
|
|
Outstanding at January 30, 2011 |
|
21,824 |
|
|
$ 17.24 |
|
5.9 years |
|
$166,132 |
|
Exercisable at January 30, 2011 |
|
12,890 |
|
|
$ 15.83 |
|
4.4 years |
|
$116,178 |
|
The weighted average grant date fair value of stock options granted, and the total intrinsic value of options exercised (in thousands) during the first quarter of fiscal years 2011 and 2010, is as follows:
|
|
Three Months Ended |
| ||
|
|
January 30, |
|
January 24, |
|
Weighted-average grant date fair value |
|
$ 5.49 |
|
$ 4.46 |
|
Intrinsic value of exercised options |
|
$ 18,540 |
|
$ 9,774 |
|
The fair value of each option award is calculated on the date of grant using the Black-Scholes valuation model utilizing the following weighted-average assumptions:
|
|
Three Months Ended | |||
|
|
January 30, |
|
January 24, | |
Risk-Free Interest Rate |
|
2.9% |
|
3.3% |
|
Dividend Yield |
|
2.0% |
|
2.2% |
|
Stock Price Volatility |
|
21.0% |
|
22.0% |
|
Expected Option Life |
|
8 years |
|
8 years |
|
As part of the annual valuation process, the Company reassesses the appropriateness of the inputs used in the valuation models. The Company establishes the risk-free interest rate using stripped U.S. Treasury yields as of the grant date where the remaining term is approximately the expected life of the option. The dividend yield is set based on the dividend rate approved by the Companys Board of Directors and the stock price on the grant date. The expected volatility assumption is set based primarily on historical volatility. As a reasonableness test, implied volatility from exchange traded options is also examined to validate the volatility range obtained from the historical analysis. The expected life assumption is set based on an analysis of past exercise behavior by option holders. In performing the valuations for option grants, the Company has not stratified option holders as exercise behavior has historically been consistent across all employee and non-employee director groups.
The Companys nonvested shares granted on or before September 26, 2010, vest after five years or upon retirement. Nonvested shares granted after September 26, 2010, vest after one year. There were no nonvested shares granted or vested in the first quarter ended January 30, 2011. As of January 30, 2011, there were 206,460 nonvested shares outstanding, with a weighted average grant date fair value of $18.13 per share.
Stock-based compensation expense, along with the related income tax benefit, for the first quarter of fiscal years 2011 and 2010 is presented in the table below.
|
|
Three Months Ended | ||||
(in thousands) |
|
January 30, |
|
January 24, | ||
Stock-based compensation expense recognized |
|
$ 8,240 |
|
|
$ 5,362 |
|
Income tax benefit recognized |
|
(3,130 |
) |
|
(2,055 |
) |
After-tax stock-based compensation expense |
|
$ 5,110 |
|
|
$ 3,307 |
|
At January 30, 2011, there was $15.5 million of total unrecognized compensation expense from stock-based compensation arrangements granted under the plans. This compensation is expected to be recognized over a weighted average period of approximately 2.9 years. During the quarter ended January 30, 2011 cash received from stock option exercises was $24.0 million compared to $6.4 million for the quarter ended January 24, 2010. The total tax benefit to be realized for tax deductions from these option exercises for the quarter ended January 30, 2011, was $7.0 million compared to $3.7 million in the comparable quarter of fiscal 2010.
Shares issued for option exercises and nonvested shares may be either authorized but unissued shares, or shares of treasury stock acquired in the open market or otherwise.
NOTE D GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the first quarter ended January 30, 2011, are presented in the table below.
(in thousands) |
|
Grocery |
|
Refrigerated |
|
JOTS |
|
Specialty |
|
All Other |
|
Total | |||||||
Balance as of October 31, 2010 |
|
$ |
123,316 |
|
$ |
94,791 |
|
$ |
203,214 |
|
$ |
207,028 |
|
$ |
674 |
|
$ |
629,023 |
|
Goodwill acquired |
|
|
|
1,684 |
|
|
|
|
|
|
|
1,684 |
| ||||||
Balance as of January 30, 2011 |
|
$ |
123,316 |
|
$ |
96,475 |
|
$ |
203,214 |
|
$ |
207,028 |
|
$ |
674 |
|
$ |
630,707 |
|
The gross carrying amount and accumulated amortization for definite-lived intangible assets are presented in the table below.
|
|
January 30, 2011 |
|
October 31, 2010 |
| ||||||||||
(in thousands) |
|
Gross Carrying |
|
Accumulated |
|
Gross Carrying |
|
Accumulated |
| ||||||
Customer lists/relationships |
|
$ |
22,378 |
|
$ |
(10,787 |
) |
|
$ |
22,378 |
|
$ |
(10,194 |
) |
|
Proprietary software & technology |
|
22,000 |
|
(12,949 |
) |
|
23,650 |
|
(13,974 |
) |
| ||||
Formulas & recipes |
|
18,354 |
|
(8,414 |
) |
|
22,404 |
|
(11,914 |
) |
| ||||
Non-compete covenants |
|
5,370 |
|
(4,748 |
) |
|
7,200 |
|
(6,275 |
) |
| ||||
Distribution network |
|
4,120 |
|
(3,062 |
) |
|
4,120 |
|
(2,959 |
) |
| ||||
Other intangibles |
|
8,660 |
|
(4,006 |
) |
|
9,740 |
|
(5,011 |
) |
| ||||
Total |
|
$ |
80,882 |
|
$ |
(43,966 |
) |
|
$ |
89,492 |
|
$ |
(50,327 |
) |
|
Amortization expense was $2.5 million for both the quarter ended January 30, 2011, and the quarter ended January 24, 2010.
Estimated annual amortization expense (in thousands) for the five fiscal years after October 31, 2010, is as follows:
Fiscal Year |
|
Estimated | |
2011 |
|
$ 9,434 |
|
2012 |
|
8,906 |
|
2013 |
|
7,699 |
|
2014 |
|
6,303 |
|
2015 |
|
3,192 |
|
The carrying amounts for indefinite-lived intangible assets are presented in the table below.
(in thousands) |
|
January 30, 2011 |
|
October 31, 2010 |
| ||
Brands/tradenames/trademarks |
|
$ |
94,123 |
|
$ |
94,373 |
|
Other intangibles |
|
7,984 |
|
7,984 |
| ||
Total |
|
$ |
102,107 |
|
$ |
102,357 |
|
NOTE E EARNINGS PER SHARE DATA
The following table sets forth the denominator for the computation of basic and diluted earnings per share:
|
|
Three Months Ended |
| ||
(in thousands) |
|
January 30, |
|
January 24, |
|
|
|
|
|
|
|
Basic weighted-average shares outstanding |
|
266,560 |
|
267,178 |
|
|
|
|
|
|
|
Dilutive potential common shares |
|
5,180 |
|
3,534 |
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding |
|
271,740 |
|
270,712 |
|
For the three months ended January 30, 2011, and January 24, 2010, a total of 1.2 million and 7.5 million weighted average stock options, respectively, were not included in the computation of dilutive potential common shares since their inclusion would have had an antidilutive effect on earnings per share.
NOTE F COMPREHENSIVE INCOME
Components of comprehensive income, net of taxes, are:
|
|
Three Months Ended |
| ||||||
(in thousands) |
|
January 30, |
|
January 24, |
| ||||
|
|
|
|
|
|
|
| ||
Net earnings |
|
$ |
150,035 |
|
|
$ |
112,269 |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
| ||
Deferred gain (loss) on hedging |
|
12,181 |
|
|
(6,829 |
) |
| ||
Reclassification adjustment into net earnings |
|
(3,265 |
) |
|
8,268 |
|
| ||
Foreign currency translation |
|
130 |
|
|
1,147 |
|
| ||
Pension and post-retirement benefits |
|
5,150 |
|
|
3,338 |
|
| ||
Other comprehensive income |
|
14,196 |
|
|
5,924 |
|
| ||
Total comprehensive income |
|
164,231 |
|
|
118,193 |
|
| ||
Comprehensive income attributable to noncontrolling interest |
|
1,289 |
|
|
1,056 |
|
| ||
Comprehensive income attributable to Hormel Foods Corporation |
|
$ |
162,942 |
|
|
$ |
117,137 |
|
|
The components of accumulated other comprehensive loss, net of tax, are as follows:
(in thousands) |
|
January 30, |
|
October 31, |
| ||||
|
|
|
|
|
|
|
| ||
Foreign currency translation |
|
$ |
8,899 |
|
|
$ |
8,849 |
|
|
Pension & other benefits |
|
(200,093 |
) |
|
(205,243 |
) |
| ||
Deferred gain on hedging |
|
29,400 |
|
|
20,484 |
|
| ||
Accumulated other comprehensive loss |
|
$ |
(161,794 |
) |
|
$ |
(175,910 |
) |
|
NOTE G INVENTORIES
Principal components of inventories are:
(in thousands) |
|
January 30, |
|
October 31, |
| ||
|
|
|
|
|
| ||
Finished products |
|
$ |
412,486 |
|
$ |
431,285 |
|
Raw materials and work-in-process |
|
224,804 |
|
211,745 |
| ||
Materials and supplies |
|
149,990 |
|
150,741 |
| ||
Total |
|
$ |
787,280 |
|
$ |
793,771 |
|
NOTE H DERIVATIVES AND HEDGING
The Company uses hedging programs to manage price risk associated with commodity purchases. These programs utilize futures contracts and swaps to manage the Companys exposure to price fluctuations in the commodities markets. Programs which are designated as hedges are highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Programs that are no longer highly effective are de-designated as a hedge and any future gains or losses are included in the Companys earnings on a mark-to market basis.
Cash Flow Hedges: The Company utilizes corn and soybean meal futures to offset the price fluctuation in the Companys future direct grain purchases, and has entered into various swaps to hedge the purchases of natural gas at certain plant locations. The financial instruments are designated and accounted for as cash flow hedges, and the Company measures the effectiveness of the hedges on a regular basis. Effective gains or losses related to these cash flow hedges are reported in accumulated other comprehensive loss and reclassified into earnings, through cost of products sold, in the period or periods in which the hedged transactions affect earnings. Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold. The Company typically does not hedge its grain or natural gas exposure beyond the next two upcoming fiscal years. As of January 30, 2011, and October 31, 2010, the Company had the following outstanding commodity futures contracts and swaps that were entered into to hedge forecasted purchases:
|
|
Volume | ||
Commodity |
|
January 30, 2011 |
|
October 31, 2010 |
Corn |
|
19.5 million bushels |
|
21.1 million bushels |
Soybean Meal |
|
-- |
|
190,400 tons |
Natural Gas |
|
1.2 million MMBTUs |
|
1.6 million MMBTUs |
As of January 30, 2011, the Company had included in accumulated other comprehensive loss, hedging gains of $29.6 million (before tax) relating to these positions, compared to gains of $32.9 million (before tax) as of October 31, 2010. The Company expects to recognize the majority of these gains over the next 12 months.
Fair Value Hedges: The Company utilizes futures to minimize the price risk assumed when forward priced contracts are offered to the Companys commodity suppliers. The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery. The futures contracts are designated and accounted for as fair value hedges, and the Company measures the effectiveness of the hedges on a regular basis. Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and are recorded on the Consolidated Statements of Financial Position as a current asset and liability, respectively. Effective gains or losses related to these fair value hedges are recognized through cost of products sold in the period or periods in which the hedged transactions affect earnings. Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold. As of January 30, 2011, and October 31, 2010, the Company had the following outstanding commodity futures contracts designated as fair value hedges:
|
|
Volume | ||
Commodity |
|
January 30, 2011 |
|
October 31, 2010 |
Corn |
|
13.7 million bushels |
|
9.9 million bushels |
Lean Hogs |
|
1.3 million cwt |
|
1.1 million cwt |
Other Derivatives: During fiscal years 2011 and 2010, the Company has held certain futures and options contract positions as part of a merchandising program and to manage the Companys exposure to fluctuations in commodity markets. The Company has not applied hedge accounting to these positions. As of January 30, 2011, and October 31, 2010, the Company had the following outstanding futures and options contracts related to these programs:
|
|
Volume | ||
Commodity |
|
January 30, 2011 |
|
October 31, 2010 |
Corn |
|
-- |
|
1.5 million bushels |
Soybean Meal |
|
36,700 tons |
|
1,200 tons |
Additionally, as of January 30, 2011, the Company has de-designated its soybean meal futures contracts that were previously designated as cash flow hedges, as these contracts are no longer highly effective. Hedge accounting will no longer be applied to these contracts as of the date of de-designation. As of January 30, 2011, there were 260,000 tons outstanding under these contracts, and the Company had included in accumulated other comprehensive loss, hedging gains of $17.7 million (before tax) relating to these positions. The Company expects to recognize the majority of these gains over the next 12 months, and any future gains or losses related to these positions will be recognized in earnings as incurred.
Fair Values: The fair values of the Companys derivative instruments (in thousands) as of January 30, 2011, and October 31, 2010, were as follows:
|
|
|
|
Fair Value (1) |
| ||||
|
|
Location on |
|
January 30, 2011 |
|
October 31, 2010 |
| ||
Asset Derivatives: |
|
|
|
|
|
|
| ||
Derivatives Designated as Hedges: |
|
|
|
|
|
|
| ||
Commodity contracts |
|
Other current assets |
|
$ |
35,338 |
|
$ |
54,395 |
|
|
|
|
|
|
|
|
| ||
Derivatives Not Designated as Hedges: |
|
|
|
|
|
|
| ||
Commodity contracts |
|
Other current assets |
|
19,110 |
|
2,137 |
| ||
|
|
|
|
|
|
|
| ||
Total Asset Derivatives |
|
|
|
$ |
54,448 |
|
$ |
56,532 |
|
|
|
|
|
|
|
|
| ||
Liability Derivatives: |
|
|
|
|
|
|
| ||
Derivatives Designated as Hedges: |
|
|
|
|
|
|
| ||
Commodity contracts |
|
Accounts payable |
|
$ |
4,203 |
|
$ |
6,390 |
|
|
|
|
|
|
|
|
| ||
Total Liability Derivatives |
|
|
|
$ |
4,203 |
|
$ |
6,390 |
|
(1) Amounts represent the gross fair value of derivative assets and liabilities. The Company nets its derivative assets and liabilities, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. See Note I - Fair Value Measurements for a discussion of the net amounts as reported in the Consolidated Statements of Financial Position.
Derivative Gains and Losses: Gains or losses (before tax, in thousands) related to the Companys derivative instruments for the first quarter ended January 30, 2011, and January 24, 2010, were as follows:
|
|
Gain/(Loss) |
|
Location on |
|
Gain/(Loss) |
|
Gain/(Loss) |
| ||||||
|
|
Three Months Ended |
|
Consolidated |
|
Three Months Ended |
|
Three Months Ended |
| ||||||
Cash Flow Hedges: |
|
January 30, |
|
January 24, |
|
Statement |
|
January 30, |
|
January 24, |
|
January 30, |
|
January 24, |
|
Commodity contracts |
|
$ 19,590 |
|
$ (10,878) |
|
Cost of products sold |
|
$ 5,247 |
|
$ (11,563) |
|
$ (3,081) |
|
$ 490 |
|
|
|
|
|
|
|
Location on |
|
Gain/(Loss) |
|
Gain/(Loss) |
| ||||
|
|
|
|
|
|
Consolidated |
|
Three Months Ended |
|
Three Months Ended |
| ||||
Fair Value Hedges: |
|
|
|
|
|
Statement |
|
January 30, 2011 |
|
January 24, 2010 |
|
January 30, 2011 |
|
January 24, 2010 |
|
Commodity contracts |
|
|
|
|
|
Cost of products sold |
|
$ (2,543) |
|
$ (571) |
|
$ (122) |
|
$ 108 |
|
|
|
|
|
|
|
Location on |
|
Gain/(Loss) |
|
|
|
|
| ||
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
| |||
Derivatives Not |
|
|
|
|
|
|
January 30, |
|
January 24, |
|
|
|
|
| |
Commodity contracts |
|
|
|
|
|
Cost of products sold |
|
$ 416 |
|
$ 16 |
|
|
|
|
|
(1) Amounts represent gains or losses in AOCL before tax. See Note F Comprehensive Income for the after tax impact of these gains or losses on net earnings.
(2) There were no gains or losses excluded from the assessment of hedge effectiveness during the quarter.
(3) There were no gains or losses resulting from the discontinuance of cash flow hedges during the quarter. However, effective January 30, 2011, the Company has de-designated and discontinued hedge accounting for its soybean meal futures contracts. At the date of de-designation of these hedges, gains of $17.7 million (before tax) were deferred in AOCL. These gains will remain in AOCL until the hedged transactions occur or it is probable the hedged transactions will not occur. Any future gains or losses related to these contracts will be recognized in earnings as incurred.
(4) Losses on commodity contracts designated as fair value hedges were offset by a corresponding gain on the underlying hedged purchase commitment.
(5) There were no gains or losses recognized as a result of a hedged firm commitment no longer qualifying as a fair value hedge during the quarter.
NOTE I FAIR VALUE MEASUREMENTS
Pursuant to the provisions of Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (ASC 820), the Company measures certain assets and liabilities at fair value or discloses the fair value of certain assets and liabilities recorded at cost in the consolidated financial statements. Fair value is calculated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). ASC 820 establishes a fair value hierarchy which requires assets and liabilities measured at fair value to be categorized into one of three levels based on the inputs used in the valuation. Assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The three levels are defined as follows:
Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Observable inputs, other than those included in Level 1, based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.
Level 3: Unobservable inputs that reflect an entitys own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.
The Companys financial assets and liabilities that are measured at fair value on a recurring basis as of January 30, 2011, and October 31, 2010, and their level within the fair value hierarchy, are presented in the tables below.
|
|
Fair Value Measurements at January 30, 2011 |
| ||||||||||
(in thousands) |
|
Fair Value at |
|
Quoted Prices |
|
Significant |
|
Significant |
| ||||
Assets at Fair Value: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents (1) |
|
$ |
499,825 |
|
$ |
499,825 |
|
$ |
-- |
|
$ |
| |
Short-term marketable securities (2) |
|
50,719 |
|
1,714 |
|
49,005 |
|
-- |
| ||||
Other trading securities (3) |
|
109,508 |
|
49,670 |
|
59,838 |
|
-- |
| ||||
Commodity derivatives (4) |
|
10,282 |
|
10,282 |
|
-- |
|
-- |
| ||||
Total Assets at Fair Value |
|
$ |
670,334 |
|
$ |
561,491 |
|
$ |
108,843 |
|
$ |
-- |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities at Fair Value: |
|
|
|
|
|
|
|
|
| ||||
Commodity derivatives (4) |
|
$ |
4,203 |
|
$ |
-- |
|
$ |
4,203 |
|
$ |
-- |
|
Deferred compensation (3) |
|
42,006 |
|
14,510 |
|
27,496 |
|
-- |
| ||||
Total Liabilities at Fair Value |
|
$ |
46,209 |
|
$ |
14,510 |
|
$ |
31,699 |
|
$ |
-- |
|
|
|
Fair Value Measurements at October 31, 2010 |
| ||||||||||
(in thousands) |
|
Fair Value at |
|
Quoted Prices |
|
Significant |
|
Significant |
| ||||
Assets at Fair Value: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents (1) |
|
$ |
360,064 |
|
$ |
360,064 |
|
$ |
-- |
|
$ |
-- |
|
Short-term marketable securities (2) |
|
50,595 |
|
66 |
|
50,529 |
|
-- |
| ||||
Other trading securities (3) |
|
109,153 |
|
49,889 |
|
59,264 |
|
-- |
| ||||
Commodity derivatives (4) |
|
11,604 |
|
11,604 |
|
-- |
|
-- |
| ||||
Total Assets at Fair Value |
|
$ |
531,416 |
|
$ |
421,623 |
|
$ |
109,793 |
|
$ |
-- |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities at Fair Value: |
|
|
|
|
|
|
|
|
| ||||
Commodity derivatives (4) |
|
$ |
6,390 |
|
$ |
-- |
|
$ |
6,390 |
|
$ |
-- |
|
Deferred compensation (3) |
|
42,141 |
|
13,298 |
|
28,843 |
|
-- |
| ||||
Total Liabilities at Fair Value |
|
$ |
48,531 |
|
$ |
13,298 |
|
$ |
35,233 |
|
$ |
-- |
|
The following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:
(1) The Companys cash equivalents consist of money market funds rated AAA. As these investments have a maturity date of three months or less, the carrying value approximates fair value.
(2) The Company holds trading securities as part of a portfolio maintained to generate investment income and to provide cash for operations of the Company, if necessary. The portfolio is managed by a third
party who is responsible for daily trading activities, and all assets within the portfolio are highly liquid. The cash and highly rated money market funds held by the portfolio are classified as Level 1. The current investment portfolio also includes corporate bonds, agency securities, mortgage-backed securities, and other asset-backed securities for which there is an active, quoted market. Market prices are obtained from a variety of industry standard providers, large financial institutions, and other third-party sources to calculate a representative daily market value, and therefore, these securities are classified as Level 2.
(3) The Company also holds trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. The rabbi trust is included in other assets on the Consolidated Statements of Financial Position and is valued based on the underlying fair value of each fund held by the trust. A portion of the funds held related to the supplemental executive retirement plans have been invested in fixed income funds managed by a third party. The declared rate on these funds is set based on a formula using the yield of the general account investment portfolio that supports the fund, adjusted for expenses and other charges. The rate is guaranteed for one year at issue, and may be reset annually on the policy anniversary, subject to a guaranteed minimum rate. As the value is based on adjusted market rates, and the fixed rate is only reset on an annual basis, these funds are classified as Level 2. The remaining funds held are also managed by a third party, and include equity securities, money market accounts, bond funds, or other portfolios for which there is an active quoted market. Therefore these securities are classified as Level 1. The related deferred compensation liabilities are included in other long-term liabilities on the Consolidated Statements of Financial Position and are valued based on the underlying investment selections held in each participants account. Investment options generally mirror those funds held by the rabbi trust, for which there is an active quoted market. Therefore these investment balances are classified as Level 1. The Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based on a specified percentage of the United States Internal Revenue Service (I.R.S.) Applicable Federal Rates in effect and therefore these balances are classified as Level 2.
(4) The Companys commodity derivatives represent futures contracts, option contracts, and swaps used in its hedging programs to offset price fluctuations associated with purchases of corn, soybean meal, and natural gas, and to minimize the price risk assumed when forward priced contracts are offered to the Companys commodity suppliers. The Companys futures and options contracts for corn and soybean meal are traded on the Chicago Board of Trade (CBOT), while futures contracts for lean hogs are traded on the Chicago Mercantile Exchange. These are active markets with quoted prices available and therefore these contracts are classified as Level 1. The Companys natural gas swaps are settled based on quoted prices from the New York Mercantile Exchange. As the swaps settle based on quoted market prices, but are not held directly with the exchange, the swaps are classified as Level 2. All derivatives are reviewed for potential credit risk and risk of nonperformance. The Company nets its derivative assets and liabilities, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The net balance for each arrangement is included in other current assets or accounts payable, as appropriate, in the Consolidated Statements of Financial Position. As of January 30, 2011, the Company has recognized the right to reclaim cash collateral of $3.1 million from, and the obligation to return cash collateral of $47.2 million to, various counterparties. As of October 31, 2010, the Company had recognized the obligation to return cash collateral of $44.9 million to various counterparties.
The Companys financial assets and liabilities also include cash, accounts receivable, accounts payable, and other liabilities, for which carrying value approximates fair value. The Company does not carry its long-term debt at fair value in its Consolidated Statements of Financial Position. Based on borrowing rates 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, was $361.0 million as of January 30, 2011, and $371.8 million as of October 31, 2010.
In accordance with the provisions of ASC 820, the Company also measures certain nonfinancial assets and liabilities at fair value that are recognized or disclosed on a nonrecurring basis (e.g. goodwill, intangible assets, and property, plant and equipment). During the first quarter ended January 30, 2011, and January 24, 2010, there were no material remeasurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
NOTE J PENSION AND OTHER POST-RETIREMENT BENEFITS
Net periodic benefit cost for pension and other post-retirement benefit plans consists of the following:
|
|
Pension Benefits |
|
Post-retirement Benefits |
| ||||||||
|
|
Three Months Ended |
|
Three Months Ended |
| ||||||||
(in thousands) |
|
January 30, |
|
January 24, |
|
January 30, |
|
January 24, |
| ||||
Service cost |
|
$ |
6,052 |
|
$ |
5,391 |
|
$ |
542 |
|
$ |
594 |
|
Interest cost |
|
12,570 |
|
11,794 |
|
4,683 |
|
5,063 |
| ||||
Expected return on plan assets |
|
(15,747) |
|
(13,522) |
|
|
|
|
| ||||
Amortization of prior service cost |
|
(152) |
|
(149) |
|
1,119 |
|
1,099 |
| ||||
Recognized actuarial loss (gain) |
|
4,158 |
|
3,881 |
|
(1) |
|
583 |
| ||||
Net periodic cost |
|
$ |
6,881 |
|
$ |
7,395 |
|
$ |
6,343 |
|
$ |
7,339 |
|
NOTE K INCOME TAXES
The amount of unrecognized tax benefits, including interest and penalties, at January 30, 2011, recorded in other long-term liabilities was $42.2 million, of which $29.7 million would impact the Companys effective tax rate if recognized. The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense, with $0.8 million included in expense in the first quarter of fiscal 2011. The amount of accrued interest and penalties at January 30, 2011, associated with unrecognized tax benefits was $13.3 million.
The Company is regularly audited by federal and state taxing authorities. During fiscal year 2010, the I.R.S. concluded its examination of the Companys consolidated federal income tax returns for the fiscal years through 2007, and opened its examination for fiscal years 2008 and 2009. The Company is in various stages of audit by several state taxing authorities on a variety of fiscal years, as far back as 1996. While it is reasonably possible that one or more of these audits may be completed within the next 12 months and that the related unrecognized tax benefits may change, based on the status of the examinations it is not possible to reasonably estimate the effect of any amount of such change to previously recorded uncertain tax positions.
NOTE L SEGMENT REPORTING
The Company develops, processes, and distributes a wide array of food products in a variety of markets. The Company reports its results in the following five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and All Other.
The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market. This segment also includes the results from the Companys MegaMex Foods, LLC (MegaMex) joint venture.
The Refrigerated Foods segment includes the Hormel Refrigerated operating segment and the Affiliated Business Units. This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork and beef products for retail, foodservice, and fresh product customers. The Affiliated Business Units include the Farmer John, Burke Corporation, Dans Prize, Saags Products, Inc., and Precept Foods businesses. Precept Foods, LLC, is a 50.01 percent owned joint venture between Hormel Foods Corporation and Cargill Meat Solutions Corporation, a wholly-owned subsidiary of Cargill, Incorporated.
The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers.
The Specialty Foods segment includes the Diamond Crystal Brands, Century Foods International, and Hormel Specialty Products operating segments. This segment consists of the packaging and sale of various sugar and sugar substitute products, salt and pepper products, liquid portion products, dessert mixes, ready-to-drink products, sports nutrition products, gelatin products, and private label canned meats to retail and foodservice customers. This segment also includes the processing, marketing, and sale of nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products.
The All Other segment includes the Hormel Foods International operating segment, which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Companys international joint ventures and miscellaneous corporate sales.
Intersegment sales are recorded at prices that approximate cost and are eliminated in the Consolidated Statements of Operations. 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. Equity in earnings of affiliates is included in segment operating profit; however, earnings attributable to the Companys noncontrolling interests are excluded. These items are included below as net interest and investment expense (income), general corporate expense, and noncontrolling interest when reconciling to earnings before income taxes.
Sales and operating profits for each of the Companys reportable segments and reconciliation to earnings before income taxes are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the operating profit and other financial information shown below.
|
|
Three Months Ended |
| ||||||
(in thousands) |
|
January 30, |
|
January 24, |
| ||||
|
|
|
|
|
|
|
| ||
Sales to Unaffiliated Customers |
|
|
|
|
|
|
| ||
Grocery Products |
|
$ |
276,899 |
|
|
$ |
261,644 |
|
|
Refrigerated Foods |
|
1,010,702 |
|
|
892,302 |
|
| ||
Jennie-O Turkey Store |
|
364,517 |
|
|
319,951 |
|
| ||
Specialty Foods |
|
191,345 |
|
|
186,942 |
|
| ||
All Other |
|
78,095 |
|
|
66,608 |
|
| ||
Total |
|
$ |
1,921,558 |
|
|
$ |
1,727,447 |
|
|
|
|
|
|
|
|
|
| ||
Intersegment Sales |
|
|
|
|
|
|
| ||
Grocery Products |
|
$ |
0 |
|
|
$ |
0 |
|
|
Refrigerated Foods |
|
2,254 |
|
|
2,063 |
|
| ||
Jennie-O Turkey Store |
|
27,258 |
|
|
21,325 |
|
| ||
Specialty Foods |
|
42 |
|
|
19 |
|
| ||
All Other |
|
0 |
|
|
0 |
|
| ||
Total |
|
$ |
29,554 |
|
|
$ |
23,407 |
|
|
Intersegment elimination |
|
(29,554 |
) |
|
(23,407 |
) |
| ||
Total |
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
| ||
Net Sales |
|
|
|
|
|
|
| ||
Grocery Products |
|
$ |
276,899 |
|
|
$ |
261,644 |
|
|
Refrigerated Foods |
|
1,012,956 |
|
|
894,365 |
|
| ||
Jennie-O Turkey Store |
|
391,775 |
|
|
341,276 |
|
| ||
Specialty Foods |
|
191,387 |
|
|
186,961 |
|
| ||
All Other |
|
78,095 |
|
|
66,608 |
|
| ||
Intersegment elimination |
|
(29,554 |
) |
|
(23,407 |
) |
| ||
Total |
|
$ |
1,921,558 |
|
|
$ |
1,727,447 |
|
|
|
|
|
|
|
|
|
| ||
Segment Operating Profit |
|
|
|
|
|
|
| ||
Grocery Products |
|
$ |
48,562 |
|
|
$ |
54,170 |
|
|
Refrigerated Foods |
|
96,134 |
|
|
70,188 |
|
| ||
Jennie-O Turkey Store |
|
73,825 |
|
|
33,267 |
|
| ||
Specialty Foods |
|
17,278 |
|
|
19,630 |
|
| ||
All Other |
|
9,993 |
|
|
7,722 |
|
| ||
Total segment operating profit |
|
$ |
245,792 |
|
|
$ |
184,977 |
|
|
|
|
|
|
|
|
|
| ||
Net interest and investment expense (income) |
|
6,138 |
|
|
6,118 |
|
| ||
General corporate expense |
|
11,252 |
|
|
10,363 |
|
| ||
Noncontrolling interest |
|
1,209 |
|
|
1,062 |
|
| ||
|
|
|
|
|
|
|
| ||
Earnings before income taxes |
|
$ |
229,611 |
|
|
$ |
169,558 |
|
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
There have been no material changes in the Companys Critical Accounting Policies, as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 31, 2010.
The Company is a processor of branded and unbranded food products for retail, foodservice, and fresh product customers. It operates in five reportable segments as described in Note L in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
A two-for-one split of the Companys common stock was approved by the Companys shareholders on January 31, 2011, and effected on February 1, 2011. All shares and per share calculations for the current and prior year throughout the following discussion reflect the impact of this split.
The Company earned $0.55 per diluted share in the first quarter of fiscal 2011, an increase of 34.1 percent compared to $0.41 per diluted share in the first quarter of fiscal 2010. Significant factors impacting the quarter were:
· Jennie-O Turkey Store reported an outstanding quarter, driven by favorable commodity meat margins and improved operational efficiencies.
· Refrigerated Foods also experienced strong results, as they continued to benefit from high pork operating margins.
· Grocery Products and Specialty Foods showed profit declines, resulting primarily from higher raw material input costs.
· All Other segment profit improved due to increased exports of fresh pork and the SPAM family of products.
Net earnings attributable to the Company for the first quarter of fiscal 2011 increased 33.8 percent to $148.8 million from $111.2 million in the same quarter of fiscal 2010. Diluted earnings per share for the quarter increased to $0.55 from $0.41 last year.
Net sales for the first quarter of fiscal 2011 increased 11.2 percent to a record $1.92 billion from $1.73 billion in 2010. Tonnage increased 3.7 percent to 1.24 billion lbs. for the first quarter compared to 1.20 billion lbs. in the same quarter of last year. All five reporting segments of the Company experienced sales growth over the prior year first quarter, as the strong momentum generated toward the end of fiscal 2010 continued into the new fiscal year. Increases in both commodity meat and value-added sales at Jennie-O Turkey Store provided a significant benefit to top-line results for the quarter, as did improved results across the Refrigerated Foods portfolio of retail and foodservice products. Enhanced sales of core product lines within Grocery Products and higher export sales by the Companys international business were also key contributors to the record results.
Gross profit for the first quarter of fiscal 2011 was $374.0 million compared to $318.4 million for the first quarter last year. Gross profit as a percentage of net sales increased to 19.5 percent for the first quarter of fiscal 2011 from 18.4 percent in the same quarter of fiscal 2010. Jennie-O Turkey Store experienced substantial margin growth over fiscal 2010, driven by favorable commodity meat margins, as well as operational and efficiency improvements across their business. Continued favorable spreads between hog costs and primal values generated significant gains for the Companys pork operations again in the first quarter, which more than offset the impact of higher input costs on the Companys value-added businesses. Although these higher hog costs and primal values are expected to continue in the near term, year-over-year pork operating margins throughout the balance of the fiscal year are not likely to remain as favorable as what was experienced in the first quarter. Higher raw material costs also negatively impacted the Grocery Products and Specialty Foods segments during the first quarter, resulting in overall margin declines versus the comparable quarter of fiscal 2010. Rising fuel costs are also expected to negatively impact margins across all segments of the Company during upcoming quarters.
Selling, general and administrative expenses for the first quarter of fiscal 2011 were $145.2 million compared to $145.5 million in the prior year. Selling, general and administrative expenses as a percentage of net sales were 7.6 percent for the first quarter of fiscal 2011, compared to 8.4 percent for the first quarter of fiscal 2010, primarily reflecting the increased sales results. Higher stock option expense was recorded in the first quarter of fiscal 2011, related to the vesting of options under the Universal Stock Option award granted to all employees in 2007, and brokerage expenses also increased compared to the prior year. These expenses were offset by decreased professional services and travel related expenses during the quarter. Following significant media campaigns in fiscal 2010, the Companys advertising expenses also decreased slightly from the prior year first quarter. However, advertising is expected to increase from first quarter levels as the year progresses due to additional campaigns planned for fiscal 2011 to continue support of the Companys key brands. The Company expects selling, general and administrative expenses to be approximately 8.0 percent of net sales for the remainder of fiscal 2011.
Equity in earnings of affiliates was $6.9 million for the first quarter of fiscal 2011 compared to $2.8 million last year. Increased results from the Companys 50 percent owned MegaMex joint venture and 40 percent owned Philippine joint venture, Purefoods-Hormel Company, drove the increase compared to fiscal 2010.
The effective tax rate for the first quarter of fiscal 2011 was 34.7 percent compared to 33.8 percent for the comparable period of fiscal 2010. The higher rate for the first quarter is primarily due to net favorable discrete items in the first quarter of fiscal 2010 related to prior period state audit settlements. The Company expects a full-year effective tax rate between 35.0 and 36.0 percent for fiscal 2011.
Net sales and operating profits for each of the Companys reportable segments are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the operating profit and other financial information shown below. Additional segment financial information can be found in Note L of the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
|
|
Three Months Ended |
| |||||||
(in thousands) |
|
January 30, |
|
January 24, |
|
% |
| |||
Net Sales |
|
|
|
|
|
|
|
| ||
Grocery Products |
|
$ |
276,899 |
|
$ |
261,644 |
|
5.8 |
|
|
Refrigerated Foods |
|
1,010,702 |
|
892,302 |
|
13.3 |
|
| ||
Jennie-O Turkey Store |
|
364,517 |
|
319,951 |
|
13.9 |
|
| ||
Specialty Foods |
|
191,345 |
|
186,942 |
|
2.4 |
|
| ||
All Other |
|
78,095 |
|
66,608 |
|
17.2 |
|
| ||
Total |
|
$ |
1,921,558 |
|
$ |
1,727,447 |
|
11.2 |
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
| ||
Segment Operating Profit |
|
|
|
|
|
|
|
| ||
Grocery Products |
|
$ |
48,562 |
|
$ |
54,170 |
|
(10.4 |
) |
|
Refrigerated Foods |
|
96,134 |
|
70,188 |
|
37.0 |
|
| ||
Jennie-O Turkey Store |
|
73,825 |
|
33,267 |
|
121.9 |
|
| ||
Specialty Foods |
|
17,278 |
|
19,630 |
|
(12.0 |
) |
| ||
All Other |
|
9,993 |
|
7,722 |
|
29.4 |
|
| ||
|
|
|
|
|
|
|
|
| ||
Total segment operating profit |
|
$ |
245,792 |
|
$ |
184,977 |
|
32.9 |
|
|
Net interest and investment expense (income) |
|
6,138 |
|
6,118 |
|
0.3 |
|
| ||
General corporate expense |
|
11,252 |
|
10,363 |
|
8.6 |
|
| ||
Noncontrolling interest |
|
1,209 |
|
1,062 |
|
13.8 |
|
| ||
|
|
|
|
|
|
|
|
| ||
Earnings before income taxes |
|
$ |
229,611 |
|
$ |
169,558 |
|
35.4 |
|
|
Grocery Products
The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market. This segment also includes the results from the Companys MegaMex joint venture.
Grocery Products net sales and tonnage increased 5.8 percent and 5.2 percent, respectively, for the first quarter of fiscal 2011 compared to the same period in fiscal 2010. Sales momentum was strong across several core product lines. Gains on the SPAM family of products, Hormel chili, Hormel Mary Kitchen hash, and Hormel bacon toppings all contributed to the top-line improvement compared to the prior year first quarter. Sales results for products under the new MegaMex joint venture also increased significantly, reflecting expanded distribution and successful advertising and promotional initiatives.
Segment profit for Grocery Products decreased 10.4 percent for the first quarter compared to prior year results. The higher pork and beef raw material input costs experienced in the latter half of fiscal 2010 continued into fiscal 2011, and reduced profitability across much of the Grocery Products portfolio. Product lines most notably impacted included the SPAM family of products, hash and stew items, and bacon toppings. Reductions in selling and marketing expenses were able to partially offset the higher input costs during the first quarter. Increased equity in earnings results from the MegaMex joint venture also benefitted profit results compared to the prior year, reflecting improved sales and the addition of Don Miguel Foods in the fourth quarter of fiscal 2010.
The Company expects that higher input costs will continue to negatively impact margins for Grocery Products in upcoming quarters. Pricing advances have recently been taken on certain core product lines, with additional actions being pursued for the second quarter, which should mitigate a portion of the higher costs as the year progresses.
Refrigerated Foods
The Refrigerated Foods segment includes the Hormel Refrigerated operating segment and the Affiliated Business Units. This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork and beef products for retail, foodservice, and fresh product customers. The Affiliated Business Units include the Farmer John, Burke Corporation, Dans Prize, Saags Products, Inc., and Precept Foods businesses. Precept Foods, LLC, is a 50.01 percent owned joint venture between Hormel Foods Corporation and Cargill Meat Solutions Corporation, a wholly-owned subsidiary of Cargill, Incorporated.
Net sales and tonnage for the Refrigerated Foods segment increased 13.3 percent and 1.8 percent, respectively, for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. Strong top-line growth was reported by both the retail and foodservice divisions, as well as the Affiliated Business Units, compared to the prior year first quarter.
Value-added sales growth within the Meat Products business unit was notable in the first quarter, with Hormel party trays, Hormel bacon, Hormel retail pepperoni, and Hormel Always Tender flavored meats all increasing significantly from the prior year first quarter. Hormel refrigerated entrees also showed a double-digit increase, aided by the co-marketing of these items with the newly integrated Country Crock® side dishes. The side dishes are now being co-branded with the Hormel brand on the label as well, to enhance the consumer connection to the entrees, with favorable response to date. Country Crock® remains a registered trademark of the Unilever Group of Companies and is being used under license. Within the Foodservice business unit, sales of Natural Choice deli meats, Café H ethnic meats and Austin Blues barbeque products were also particularly strong, continuing the momentum gained toward the end of fiscal 2010.
Segment profit for Refrigerated Foods increased 37.0 percent for the first quarter compared to the prior year. The Company processed 2.43 million hogs in the first quarter of fiscal 2011, up from 2.36 million hogs in the first quarter of the prior year, as favorable market conditions and adequate supply created advantageous harvest opportunities. The unusually favorable spreads between hog costs and primal values experienced throughout
the latter half of fiscal 2010 continued into the new fiscal year, resulting in a substantial increase in pork operating results on a year-over-year basis for the first quarter. However, the continued high pork primal values also continued to pressure margins for the Companys value-added businesses, and countered the benefit of volume and sales gains on the bottom-line.
Pork operating margins have been volatile in recent weeks. The Company still expects some benefit compared to fiscal 2010 for the first half of the year, but then a decrease in the latter half. Primal values are also expected to remain at elevated levels, and pricing initiatives have been implemented for the second quarter across a broad range of products within Refrigerated Foods to mitigate a portion of the raw material increases. Looking forward, the current and anticipated future increases in food and fuel costs will likely challenge our Foodservice business unit during the remainder of fiscal 2011 as restaurant traffic is impacted.
Jennie-O Turkey Store
The Jennie-O Turkey Store (JOTS) segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers.
JOTS net sales and tonnage increased 13.9 percent and 4.9 percent, respectively, for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. Commodity meat sales increased substantially as the Company was able to capitalize on favorable commodity pricing throughout the first quarter. Media campaigns launched during the latter half of fiscal 2010 also continued to be successful in generating incremental volume for JOTS entering fiscal 2011, with value-added sales up 9.0 percent compared to the prior year.
Segment profit for JOTS increased 121.9 percent for the first quarter of fiscal 2011 compared to the prior year. Favorable commodity meat margins were a key driver of the increase, resulting from increased volumes and improved pricing. Continued operational and efficiency gains throughout the entire supply chain for JOTS have also contributed to the exceptional profit results compared to fiscal 2010. Increased value-added sales and favorable hedge positions have further enhanced margin results entering fiscal 2011.
As noted, JOTS remains focused on growing its value-added businesses. During the first quarter, notable growth was achieved on Jennie-O Turkey Store turkey burgers, turkey bacon, and fresh tray pack items. The Company intends to continue advertising support for the Jennie-O Turkey Store brand during fiscal 2011, which should continue to enhance top-line results.
Commodity meat prices continue to be excellent entering the second quarter, indicating an overall favorable industry balance between supply and demand. However, the industry continues to place more poults, which is a concern for later in fiscal 2011. Recent grain price increases have been tempered by the Companys hedge positions to date, but the higher costs and continued grain price volatility that are being predicted will be a challenge during the remainder of the fiscal year. Rising fuel costs may also negatively impact results going forward. These market conditions will likely create difficulty for the latter half of fiscal 2011 in exceeding the strong results reported in the prior year.
Specialty Foods
The Specialty Foods 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, liquid portion products, dessert mixes, ready-to-drink products, sports nutrition products, gelatin products, and private label canned meats to retail and foodservice customers. This segment also includes the processing, marketing, and sale of nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products.
Specialty Foods net sales and tonnage increased 2.4 percent and 7.2 percent, respectively, compared to the same quarter of fiscal 2010. Sales gains were primarily due to increased sales of sugar and blended items at DCB, which offset declines in sugar substitutes. Tonnage growth outpacing sales primarily reflects a larger percentage of toll-based contract manufacturing business at CFI during fiscal 2011, compared to the prior year.
Segment profit for Specialty Foods decreased 12.0 percent compared to the prior year first quarter. Reduced contract packaging sales negatively impacted segment profit results for HSP, and high raw material costs reduced margins across several key product categories. DCB also continued to be impacted by rising raw material costs. Pricing initiatives for both of these business units will be effective in upcoming quarters, and should help to protect margin results for Specialty Foods. Changes in product mix, including lower than expected sales of nutritional jars, also resulted in profit declines for CFI during the first quarter.
All Other
The All Other segment includes the Hormel Foods International (HFI) operating segment, which manufactures, markets, and sells Company products internationally. This segment also includes the results from the Companys international joint ventures and miscellaneous corporate sales.
All Other net sales increased 17.2 percent for the first quarter of fiscal 2011 compared to the same quarter of fiscal 2010. Strong export sales for HFI, including the SPAM family of products and fresh pork, drove the top-line increase. Following declines in fiscal 2010, segment profit also improved in the first quarter of fiscal 2011, increasing 29.4 percent compared to prior year results. The increased sales, favorable currency rates, and improved results from the Companys international joint ventures all contributed to the profit gains and were able to offset higher input and freight costs experienced during the first quarter. Improved pork margins were also beneficial entering fiscal 2011, compared to the prior year when the weak global economy was having a negative impact on results. The Company anticipates that the higher input and freight costs will continue as the year progresses. Strong sales momentum and pricing initiatives effective in the second quarter should help to mitigate the impact of these higher costs on margin results for HFI.
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. Equity in earnings of affiliates is included in segment operating profit; however, earnings attributable to the Companys noncontrolling interests are excluded. 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 first quarter of fiscal 2011 was a net expense of $6.1 million, even with the first quarter of fiscal 2010. Lower returns on the Companys rabbi trust for supplemental executive retirement plans and deferred income plans were offset by increased interest income during the quarter. Interest expense of $6.6 million for the first quarter was also comparable to the prior year. The Company anticipates that interest expense will approximate $20.0 to $23.0 million for fiscal 2011.
General corporate expense for the first quarter of fiscal 2011 was $11.3 million compared to $10.4 million for the comparable period of fiscal 2010. Higher expense related to the vesting of options under the Universal Stock Option award granted to all employees in 2007 was partially offset by reduced pension and insurance expenses compared to the prior year.
Net earnings attributable to the Companys noncontrolling interests were $1.2 million for the first quarter of fiscal 2011, compared to $1.1 million in the first quarter of fiscal 2010. The slight increase reflects improved performance from the Companys Precept Foods business, while results from its China operations remained flat compared to the prior year.
There has been no material change in the information regarding Related Party Transactions that was disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2010.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $598.8 million at the end of the first quarter of fiscal year 2011 compared to $449.1 million at the end of the comparable fiscal 2010 period.
Cash provided by operating activities was $165.3 million in the first quarter of fiscal 2011 compared to $113.9 million in the same period of fiscal 2010. Increased earnings were the primary driver of the increase, in addition to favorable overall changes in working capital balances and a $4.0 million dividend received from the Companys Philippine joint venture.
Cash used in investing activities decreased slightly to $18.5 million in the first quarter of fiscal 2011 from $18.6 million in the comparable quarter of fiscal 2010. Increased outflows related to capital expenditures and acquisitions were offset by inflows generated from the Companys affiliates. The Company currently estimates its fiscal 2011 capital expenditures to be approximately $120.0 to $130.0 million.
Cash used in financing activities was $15.8 million in the first quarter of fiscal 2011 compared to $31.5 million in the same period of fiscal 2010. The Company used $13.7 million for common stock repurchases in the first quarter of fiscal 2011, compared to $16.1 million in the same period of the prior year. For additional information pertaining to the Companys share repurchase plans or programs, see Part II, Item 2 Unregistered Sales of Equity Securities and Use of Proceeds. Increased financing cash flows of approximately $18.5 million were generated from the Companys stock option plans in fiscal 2011, primarily due to the vesting of options under the Universal Stock Option award granted to all employees in 2007. Offsetting a portion of those proceeds was a $3.0 million proportional distribution to the Companys noncontrolling interest during the first quarter of fiscal 2011, which had not occurred in first quarter of the prior year.
Cash dividends paid to the Companys shareholders also continue to be a significant financing activity for the Company. Dividends paid in the first quarter of 2011 were $27.9 million compared to $25.4 million in the comparable period of fiscal 2010. For fiscal 2011, the annual dividend rate has been increased to $0.51 per share, representing the 45th consecutive annual dividend increase. The Company has paid dividends for 330 consecutive quarters and expects to continue doing so.
The Companys long-term debt balance of $350.0 million was reclassified to current maturities during fiscal 2010, and is scheduled to be repaid during the third quarter of fiscal 2011. The Company is currently investigating opportunities to replace a portion of the long-term debt that will mature. The Company is required, by certain covenants in its debt agreements, to maintain specified levels of financial ratios and financial position. At the end of the first quarter of fiscal 2011, the Company was in compliance with all of these debt covenants.
Cash flows from operating activities continue to provide the Company with its principal source of liquidity. The Company does not anticipate a significant risk to cash flows from this source in the foreseeable future because the Company operates in a relatively stable industry and has strong brands across many product lines.
The Companys priorities for uses of cash remain investing in the business and returning value to its shareholders, as evidenced by a lengthy history of dividend increases. Capital spending to enhance current operations and additional share repurchases will also be evaluated throughout fiscal 2011. Given the Companys consistently strong cash balance, it is also well positioned to take advantage of strategic acquisitions, and will continue to pursue opportunities in that area.
Contractual Obligations and Commercial Commitments
The Company records income taxes in accordance with the provisions of ASC 740, Income Taxes. The Company is unable to determine its contractual obligations by year related to this pronouncement, as the ultimate amount or timing of settlement of its reserves for income taxes cannot be reasonably estimated. The total liability for unrecognized tax benefits, including interest and penalties, at January 30, 2011, was $42.2 million.
There have been no other material changes to the information regarding the Companys future contractual financial obligations that was disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2010.
Off-Balance Sheet Arrangements
The Company currently provides a renewable standby letter of credit for $4.8 million to guarantee obligations that may arise under workers compensation claims of an affiliated party. This potential obligation is not reflected in the Companys Consolidated Statements of Financial Position.
This report contains forward-looking information within the meaning of the federal securities laws. The forward-looking information may include statements concerning the Companys 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.
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 information. The Company is filing this cautionary statement in connection with the Reform Act. When used in the Companys Annual Report to Stockholders, filings by the Company with the Securities and Exchange Commission (the Commission), the Companys press releases, and oral statements made by the Companys 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 Companys actual results to differ materially from opinions or statements expressed with respect to future periods. The discussion of risk factors in Part II, Item 1A of this Quarterly Report on Form 10-Q contains certain cautionary statements regarding the Companys business, which should be considered by investors and others. Such 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 Companys 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 Companys 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Hog Markets: The Companys 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 up to 10 years. Purchased hogs under contract accounted for 96 percent and 94 percent of the total hogs purchased by the Company during the first quarter of fiscal 2011 and 2010, respectively. The majority of these contracts use market-based formulas based on hog futures, hog primal values, or industry reported hog markets. Under normal, long-term market conditions, changes in the cash hog market are offset by proportional changes in primal values. Therefore, a hypothetical 10 percent change in the cash hog market would have had an immaterial effect on the Companys 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 using 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 is highly effective at offsetting changes in price movements of the hedged item, and the Company evaluates the effectiveness of the contracts on a regular basis. 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 Consolidated Statements of Financial Position as a current asset and liability, respectively. The fair value of the Companys open futures contracts as of January 30, 2011, was $(14.7) million compared to $0.6 million as of October 31, 2010.
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 Companys January 30, 2011, open contracts by $12.0 million, which in turn would lower the Companys future cost of purchased hogs by a similar amount.
Turkey and Hog Production Costs: The Company raises or contracts for live turkeys and hogs to meet some of its raw material supply requirements. Production costs in raising turkeys and hogs are subject primarily to fluctuations in feed prices, and to a lesser extent, fuel costs. Under normal, long-term market conditions, changes in the cost to produce turkeys and hogs are offset by proportional changes in their respective markets.
To reduce the Companys exposure to changes in grain prices, the Company utilizes a hedge program to offset the fluctuation in the Companys future direct grain purchases. 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 with an unrealized gain of $50.6 million, before tax, on the Consolidated Statement of Financial Position as of January 30, 2011, compared to an unrealized gain of $46.4 million, before tax, as of October 31, 2010.
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 Companys January 30, 2011, open grain contracts by $21.0 million, which in turn would lower the Companys future cost on purchased grain by a similar amount.
Natural Gas: Production costs at the Companys plants and feed mills are also subject to fluctuations in fuel costs. To reduce the Companys exposure to changes in natural gas prices, the Company utilizes a hedge program to offset the fluctuation in the Companys 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 with an unrealized loss of $4.2 million, before tax, on the Consolidated Statement of Financial Position as of January 30, 2011, compared to an unrealized loss of $6.4 million, before tax, as of October 31, 2010.
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 Companys January 30, 2011, open natural gas contracts by $0.5 million, which in turn would lower the Companys 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 Companys fixed-rate, long-term debt. 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 $0.1 million. The fair value of the Companys long-term debt (including current maturities) was estimated using discounted future cash flows based on the Companys incremental borrowing rate for similar types of borrowing arrangements.
Investments: The Company holds trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans, and as part of an investment portfolio. As of January 30, 2011, the balance of these securities totaled $160.2 million. A portion of these securities represent fixed income funds. The Company is subject to market risk due to fluctuations in the value of the remaining investments, as unrealized gains and losses associated with these securities are included in the Companys net earnings on a mark-to-market basis. A 10 percent decline in the value of the investments not held in fixed income funds would have a direct negative impact to the Companys pretax earnings of approximately $10.0 million, while a 10 percent increase in value would have a positive impact of the same amount.
International: While the Company does have international operations and operates in international markets, it considers its market risk in such activities to be immaterial.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures.
As of the end of the period covered by this report (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures were effective to provide reasonable assurance that information the Company is required to disclose in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Commission rules and forms, and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Internal Controls.
During the first quarter of fiscal year 2011, there has been no change in the Companys internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
The Company is a party to various legal proceedings related to the on-going operation of its business. The resolution of any currently known matters is not expected to have a material effect on the Companys financial condition, results of operations, or liquidity.
The Companys operations are subject to the general risks of the food industry.
The food products manufacturing industry is subject to the risks posed by:
n food spoilage;
n food contamination caused by disease-producing organism or pathogens, such as Listeria monocytogenes, Salmonella, and pathogenic E coli.;
n food allergens;
n nutritional and health-related concerns;
n federal, state, and local food processing controls;
n consumer product liability claims;
n product tampering; and
n the possible unavailability and/or expense of liability insurance.