Table of Contents

 

 

 

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 July 26, 2009

 

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to             

 

Commission File Number: 1-2402

 

HORMEL FOODS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

41-0319970

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

 

 

 

1 Hormel Place

Austin, Minnesota

(Address of principal executive offices)

 

55912-3680

(Zip Code)

 

(507) 437-5611

(Registrant’s telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  YES   o  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).  o  YES   o  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  o

 

 

 

Non-accelerated filer  o

(Do not check if a smaller reporting company)

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes  x  No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at August 30, 2009

Common Stock

 

$.0586 par value      134,211,526

Common Stock Non-Voting

 

$.01 par value                           -0-

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.    Financial Statements

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION – July 26, 2009 and October 26, 2008

 

CONSOLIDATED STATEMENTS OF OPERATIONS – Three and Nine Months Ended July 26, 2009 and July 27, 2008

 

CONSOLIDATED STATEMENTS OF CASH FLOWS – Nine Months Ended July 26, 2009 and July 27, 2008

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

CRITICAL ACCOUNTING POLICIES

 

RESULTS OF OPERATIONS

 

Overview

 

Consolidated Results

 

Segment Results

 

Related Party Transactions

 

LIQUIDITY AND CAPITAL RESOURCES

 

FORWARD-LOOKING STATEMENTS

 

 

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

 

 

Item 4.    Controls and Procedures

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.    Legal Proceedings

 

 

 

Item 1A.  Risk Factors

 

 

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

Item 6.    Exhibits

 

 

 

SIGNATURES

 

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(In Thousands of Dollars)

 

 

 

July 26,

 

October 26,

 

 

 

2009

 

2008

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

 295,100

 

$

 154,778

 

Accounts receivable

 

355,408

 

411,010

 

Inventories

 

744,667

 

784,542

 

Federal income taxes

 

7,009

 

0

 

Deferred income taxes

 

47,343

 

45,948

 

Prepaid expenses and other current assets

 

30,924

 

41,900

 

TOTAL CURRENT ASSETS

 

1,480,451

 

1,438,178

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

82,648

 

89,249

 

 

 

 

 

 

 

GOODWILL

 

619,771

 

619,325

 

 

 

 

 

 

 

OTHER INTANGIBLES

 

143,483

 

151,219

 

 

 

 

 

 

 

PENSION ASSETS

 

135,616

 

91,773

 

 

 

 

 

 

 

INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES

 

87,017

 

93,617

 

 

 

 

 

 

 

OTHER ASSETS

 

169,047

 

155,453

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

Land

 

52,914

 

52,940

 

Buildings

 

708,692

 

662,519

 

Equipment

 

1,318,029

 

1,275,175

 

Construction in progress

 

45,947

 

78,083

 

 

 

2,125,582

 

2,068,717

 

Less allowance for depreciation

 

(1,166,885

)

(1,091,060

)

 

 

958,697

 

977,657

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

 3,676,730

 

$

 3,616,471

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(In Thousands of Dollars)

 

 

 

July 26,

 

October 26,

 

 

 

2009

 

2008

 

 

 

(Unaudited)

 

 

 

LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

 

$

 297,334

 

$

 378,520

 

Notes payable/Short-term debt

 

60,000

 

100,000

 

Accrued expenses

 

85,899

 

72,192

 

Accrued workers compensation

 

29,724

 

26,825

 

Accrued marketing expenses

 

72,589

 

60,223

 

Employee compensation

 

103,115

 

106,225

 

Taxes, other than federal income taxes

 

5,575

 

6,979

 

Dividends payable

 

25,599

 

24,946

 

Federal income taxes

 

0

 

5,323

 

TOTAL CURRENT LIABILITIES

 

679,835

 

781,233

 

 

 

 

 

 

 

LONG-TERM DEBT—less current maturities

 

350,000

 

350,000

 

 

 

 

 

 

 

PENSION AND POST-RETIREMENT BENEFITS

 

388,743

 

386,590

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

91,749

 

91,076

 

 

 

 

 

 

 

SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

Common stock, par value $.0586 a share—authorized 400,000,000 shares;
issued 134,209,405 shares July 26, 2009
issued 134,520,581 shares October 26, 2008

 

7,865

 

7,883

 

Additional paid-in capital

 

3,291

 

0

 

Accumulated other comprehensive loss

 

(103,121

)

(113,184

)

Retained earnings

 

2,258,368

 

2,112,873

 

TOTAL SHAREHOLDERS’ INVESTMENT

 

2,166,403

 

2,007,572

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

$

 3,676,730

 

$

 3,616,471

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 (In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 26,
2009

 

July 27,
2008*

 

July 26,
2009

 

July 27,
2008*

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,574,440

 

$

1,678,142

 

$

4,858,569

 

$

4,893,391

 

Cost of products sold

 

1,314,116

 

1,449,096

 

4,063,892

 

4,107,702

 

GROSS PROFIT

 

260,324

 

229,046

 

794,677

 

785,689

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

142,010

 

135,256

 

424,381

 

419,567

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of affiliates

 

290

 

241

 

964

 

3,431

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

118,604

 

94,031

 

371,260

 

369,553

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Interest and investment income (loss)

 

6,410

 

(6,454

)

17,385

 

(8,139

)

Interest expense

 

(6,963

)

(7,450

)

(21,336

)

(20,599

)

EARNINGS BEFORE INCOME TAXES

 

118,051

 

80,127

 

367,309

 

340,815

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

40,882

 

28,180

 

128,372

 

123,126

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

77,169

 

$

51,947

 

$

238,937

 

$

217,689

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

BASIC

 

$

0.57

 

$

0.38

 

$

1.78

 

$

1.61

 

DILUTED

 

$

0.57

 

$

0.38

 

$

1.76

 

$

1.58

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

BASIC

 

134,255

 

135,391

 

134,301

 

135,583

 

DILUTED

 

135,720

 

137,055

 

135,419

 

137,447

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE:

 

$

0.190

 

$

0.185

 

$

0.570

 

$

0.555

 

 


* Includes retrospective reclassification of shipping and handling expenses to cost of products sold from selling, general and administrative (See Note A).

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

July 26,
2009

 

July 27,
2008

 

OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

$

238,937

 

$

217,689

 

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

86,339

 

86,226

 

Amortization of intangibles

 

7,735

 

8,888

 

Equity in earnings of affiliates

 

(3,399

)

(5,677

)

Provision for deferred income taxes

 

(4,457

)

(13,901

)

Loss on property/equipment sales and plant facilities

 

342

 

1,833

 

Gain on dissolution of joint venture

 

(3,591

)

0

 

Non-cash investment activities

 

(10,296

)

12,194

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Decrease (Increase) in accounts receivable

 

55,602

 

(9,763

)

Decrease (Increase) in inventories, prepaid expenses, and other current assets

 

68,589

 

(129,649

)

Increase in pension assets

 

(50,053

)

(131

)

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

 

(67,459

)

13,295

 

Other

 

8,835

 

2,427

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

327,124

 

183,431

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Sale of available-for-sale securities

 

6,270

 

146,308

 

Purchase of available-for-sale securities

 

(2,371

)

(155,207

)

Acquisitions of businesses/intangibles

 

(701

)

(27,175

)

Purchases of property/equipment

 

(71,029

)

(96,293

)

Proceeds from sales of property/equipment

 

3,308

 

2,266

 

Decrease in investments, equity in affiliates, and other assets

 

4,283

 

4,902

 

Dividends from affiliates

 

0

 

970

 

NET CASH USED IN INVESTING ACTIVITIES

 

(60,240

)

(124,229

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from short-term debt

 

0

 

75,000

 

Principal payments on short-term debt

 

(40,000

)

(70,000

)

Principal payments on long-term debt

 

0

 

(54

)

Dividends paid on common stock

 

(75,880

)

(70,585

)

Share repurchase

 

(13,876

)

(56,472

)

Proceeds from exercise of stock options

 

1,935

 

10,994

 

Other

 

1,259

 

12,153

 

NET CASH USED IN FINANCING ACTIVITIES

 

(126,562

)

(98,964

)

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

140,322

 

(39,762

)

Cash and cash equivalents at beginning of year

 

154,778

 

149,749

 

CASH AND CASH EQUIVALENTS AT END OF QUARTER

 

$

295,100

 

$

109,987

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

 

HORMEL FOODS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands of Dollars, Except Per Share Amounts)

(Unaudited)

 

NOTE A                                    GENERAL

 

Basis of Presentation
 

The accompanying unaudited consolidated financial statements of Hormel Foods Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.  The Company has evaluated all subsequent events through September 4, 2009, which is the date that the accompanying unaudited financial statements are being issued.  The balance sheet at October 26, 2008, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 26, 2008.

 

Certain reclassifications of previously reported amounts have been made to conform to the current year presentation.  The reclassifications had no impact on net earnings as previously reported.

 

Change in Accounting Principle

 

In the first quarter of fiscal 2009, the Company changed its method of accounting for shipping and handling expenses and reclassified them from selling, general and administrative to cost of products sold.  This presentation is preferable because the inclusion of shipping and handling expenses in cost of products sold better reflects the cost of producing and distributing the Company’s products.  It also enhances the comparability of the financial statements with our industry peers.  As required by U.S. generally accepted accounting principles, the change has been reflected in the Consolidated Statements of Operations through retrospective application of the change in accounting principle.  The change resulted in a decrease in selling, general and administrative (and a corresponding increase in cost of products sold) for fiscal years 2008, 2007, and 2006 of $459,818, $411,726, and $409,487, respectively.  For the third quarter and nine months ended July 27, 2008, the reclassification totaled $116,648 and $338,663, respectively.  The change did not impact net earnings or net earnings per share as previously reported.

 

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 in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and therefore, unrealized gains and losses associated with these investments are included in the Company’s earnings.  Gains related to securities still held by the trust were $5,674 and $11,522 for the quarter and nine months ended July 26, 2009, respectively, compared to losses of $4,795 and $8,604 for the quarter and nine months ended July 27, 2008.  The Company has begun to transition the majority of this portfolio to more fixed return investments to reduce the exposure to volatility in equity markets going forward.

 

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Table of Contents

 

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 Company’s rabbi trust investments, amortization of affordable housing investments, and amortization of bond financing costs.  Additionally, the Company had a $2,400 investment write-off in the third quarter of fiscal 2008.  The noted investments are included in other assets on the Consolidated Statements of Financial Position.  Changes in the value of these investments are included in the Company’s 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 Company’s guarantees either terminate in one year or remain in place until such time as the Company revokes the agreement.  The Company currently provides a revocable standby letter of credit for obligations of an affiliated party that may arise under worker compensation claims.  This guarantee provided by the Company amounted to $3,890 as of July 26, 2009, and is not reflected in the Company’s Consolidated Statements of Financial Position.

 

The Company has also guaranteed a $9,000 loan of an independent farm operator.  The loan arose to provide financing to develop a hog growing operation on a tract of land in Arizona, and the term of the loan runs through November 2023.  Approximately $2,900 of the loan proceeds have been spent to date, with the remaining $6,100 being held in an escrow account.  The Company is obligated to make payments if the farm operator fails to do so, and the Company has made immaterial payments in fiscal 2008 and 2009.  As there is no current intention to spend additional funds on this project, the Company estimates its maximum liability remaining under this guarantee to be approximately $2,400 plus interest.  The portion of the potential obligation currently held in escrow does not represent a risk to the Company and is therefore not reflected in the Company’s Consolidated Statements of Financial Position.

 

New Accounting Pronouncements

 

In May 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 165, “Subsequent Events” (SFAS 165).  The pronouncement sets forth the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date.  SFAS 165 did not result in a significant change from current practice, as it requires an entity to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet.  Subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued (or are available to be issued) are not recognized, but may require additional disclosure.  Finally, SFAS 165 requires disclosure of the date through which subsequent events have been evaluated, and the basis for that date.  SFAS 165 was effective for interim or annual financial periods ending after June 15, 2009, and therefore, the Company adopted SFAS 165 in the third quarter of fiscal 2009.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161).  The pronouncement amends and expands the disclosure requirements previously required by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  This statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.  SFAS 161 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The Company adopted the provisions of SFAS 161 in the second quarter of fiscal 2009, and the required disclosures are provided in Note H — Derivatives and Hedging.  Adoption did not impact consolidated net earnings, cash flows, or financial position.

 

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Table of Contents

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141(R)).  The pronouncement establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable the users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Generally, the effect of SFAS 141(R) will depend on future acquisitions.  However, the accounting for any tax uncertainties will be subject to the provisions of SFAS 141(R).  The Company will adopt SFAS 141(R) at the beginning of fiscal 2010, and is currently assessing the impact of adopting this accounting standard.

 

In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (SFAS 160).  The pronouncement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  It also amends certain of Accounting Research Bulletin No. 51’s consolidation procedures for consistency with the requirements of SFAS 141(R).  SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years.  The Company will adopt SFAS 160 at the beginning of fiscal 2010, and is currently assessing the impact of adopting this accounting standard.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159).  The pronouncement permits entities to choose to measure many financial instruments and certain other items at fair value, which provides the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently, without having to apply complex hedge accounting provisions.  SFAS 159 was effective for fiscal years beginning after November 15, 2007, and therefore, the Company adopted SFAS 159 at the beginning of fiscal 2009.  The adoption of SFAS 159 did not impact consolidated net earnings, cash flows, or financial position, as the Company did not elect the fair value option.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157).  The pronouncement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, and does not require any new fair value measurements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  However, in February 2008, the FASB also issued FASB Staff Position FAS 157-2 (FSP 157-2), which delayed the effective date of SFAS 157 by one year for nonfinancial assets and liabilities measured at fair value that are recognized or disclosed on a nonrecurring basis (e.g. goodwill, intangible assets, and long-lived assets measured at fair value for impairment testing or nonfinancial assets and liabilities initially measured at fair value during a business combination).  Therefore, the Company adopted SFAS 157 at the beginning of fiscal 2009 for its financial assets and liabilities.  Adoption did not impact net earnings, cash flows, or financial position, but resulted in additional disclosures. (See further discussion in Note I — Fair Value Measurements.)  Subject to the deferral allowed by FSP 157-2, the Company will apply the provisions of SFAS 157 to its nonfinancial assets and liabilities in fiscal 2010, and is currently assessing the impact of this adoption.

 

In September 2006, the FASB also issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R).”  For fiscal years ending after December 15, 2008, the pronouncement requires plan sponsors to measure defined benefit plan assets and obligations as of the date of the plan sponsor’s fiscal year end statement of financial position.  The Company adopted these measurement date provisions at the beginning of fiscal 2009, and elected to use the 15 month alternative measurement approach as an August 1 measurement date had previously been used.  The Company recognized an $11,793 decrease in retained earnings, an $8,416 increase in pension and post-retirement benefits, a $1,459 decrease in accumulated other comprehensive loss, a $1,006 decrease in pension assets, and a $912 increase in deferred tax liabilities, upon adoption.

 

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Table of Contents

 

NOTE B            ACQUISITIONS

 

On June 13, 2008, the Company purchased Boca Grande Foods, Inc. (Boca Grande) for a purchase price of $23,483 cash, including related costs.  Boca Grande manufactures, sells, and distributes liquid portion products, and operates a facility in Duluth, Georgia.  This acquisition provides additional capacity, production capabilities, and customers for liquid portion products for Diamond Crystal Brands within the Specialty Foods segment.

 

Operating results for Boca Grande are included in the Company’s Consolidated Statements of Operations from the date of acquisition.  Pro forma results are not presented, as the acquisition is not material to the consolidated Company.

 

NOTE C            STOCK-BASED COMPENSATION

 

The Company has stock incentive plans for employees and non-employee directors, including stock options and nonvested shares.  The Company’s policy is to grant options with the exercise price equal to the market price of the common stock on the date of grant.  Ordinary options vest over periods ranging from six months to four years and expire ten years after the grant date.  The Company recognizes stock-based compensation expense ratably over the shorter of the requisite service period or vesting period.  The fair value of stock-based compensation granted to retirement-eligible individuals is expensed at the time of grant.

 

A reconciliation of the number of options outstanding and exercisable (in thousands) as of July 26, 2009, and changes during the nine months then ended, are as follows:

 

 

 

Shares

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value

 

Outstanding at October 26, 2008

 

10,735

 

$

 31.04

 

 

 

 

 

Granted

 

1,312

 

26.80

 

 

 

 

 

Exercised

 

(199

)

18.06

 

 

 

 

 

Forfeitures

 

(73

)

37.45

 

 

 

 

 

Outstanding at July 26, 2009

 

11,775

 

$

 30.75

 

5.9 years

 

$

 71,425

 

Exercisable at July 26, 2009

 

7,330

 

$

 28.33

 

4.6 years

 

$

 58,575

 

 

The weighted-average grant date fair value of stock options granted, and the total intrinsic value of options exercised during the third quarter and first nine months of fiscal years 2009 and 2008, are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 26,
2009

 

July 27,
2008

 

July 26,
2009

 

July 27,
2008

 

Weighted-average grant date fair value

 

N/A

 

N/A

 

$

 5.86

 

$

 10.38

 

Intrinsic value of exercised options

 

$

 1,046

 

$

 1,915

 

$

 2,604

 

$

 26,521

 

 

The fair value of each ordinary option award is calculated on the date of grant using the Black-Scholes valuation model utilizing the following weighted-average assumptions.  No options were granted in the three month periods ended July 26, 2009, or July 27, 2008.

 

 

 

Nine Months Ended

 

 

 

July 26,
2009

 

July 27,
2008

 

Risk-Free Interest Rate

 

3.2

%

4.0

%

Dividend Yield

 

2.5

%

1.8

%

Stock Price Volatility

 

22.0

%

21.0

%

Expected Option Life

 

8 years

 

8 years

 

 

10



Table of Contents

 

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 Company’s targeted dividend yield.  The expected volatility assumption is set based primarily on historical volatility.  As a reasonableness test, implied volatility from exchange traded options is also examined to validate the volatility range obtained from the historical analysis.  The expected life assumption is set based on an analysis of past exercise behavior by option holders.  In performing the valuations for ordinary option grants, the Company has not stratified option holders as exercise behavior has historically been consistent across all employee groups.

 

The Company’s nonvested shares vest after five years or upon retirement.  A reconciliation of the nonvested shares (in thousands) as of July 26, 2009, and changes during the nine months then ended, is as follows:

 

 

 

Shares

 

Weighted-
Average Grant-
Date Fair Value

 

Nonvested at October 26, 2008

 

77

 

$

 35.72

 

Granted

 

28

 

30.39

 

Vested

 

(8

)

26.97

 

Nonvested at July 26, 2009

 

97

 

$

 34.90

 

 

No nonvested shares were granted or vested in the three month periods ended July 26, 2009, or July 27, 2008.  The weighted-average grant date fair value of nonvested shares granted, the total fair value of nonvested shares granted, and the fair value of shares that have vested during first nine months of fiscal years 2009 and 2008, are as follows:

 

 

 

Nine Months Ended

 

 

 

July 26,
2009

 

July 27,
2008

 

Weighted-average grant date fair value

 

$

 30.39

 

$

 38.97

 

Fair value of nonvested shares granted

 

$

 836

 

$

 974

 

Fair value of shares vested

 

$

 204

 

$

 43

 

 

Stock-based compensation expense, along with the related income tax benefit, for the third quarter and first nine months of fiscal years 2009 and 2008 are presented in the table below.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 26,
2009

 

July 27,
2008

 

July 26,
2009

 

July 27,
2008

 

Stock-based compensation expense recognized

 

$

 2,416

 

$

 2,827

 

$

 9,832

 

$

 12,405

 

Income tax benefit recognized

 

(929

)

(1,079

)

(3,781

)

(4,737

)

After-tax stock-based compensation expense

 

$

 1,487

 

$

 1,748

 

$

 6,051

 

$

 7,668

 

 

At July 26, 2009, there was $16,626 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 2.4 years.  During the quarter and nine months ended July 26, 2009, cash received from stock option exercises was $476 and $1,935, compared to $255 and $10,994 for the quarter and nine months ended July 27, 2008.  The total tax benefit to be realized for tax deductions from these option exercises for the quarter and nine months ended July 26, 2009, was $403 and $1,002, respectively, compared to $731 and $10,128 in the comparable periods in fiscal 2008.  The amounts reported for tax deductions for option exercises in the quarter and nine months ended July 26, 2009 include $397 and $987, respectively, of excess tax benefits compared to $644 and $9,747, respectively, of excess tax benefits in the comparable periods last year, which are included in “Other” under financing activities on the Consolidated Statements of Cash Flows (with an offsetting amount in other operating activities).

 

Shares issued for option exercises and nonvested shares may be either authorized but unissued shares, or shares of treasury stock acquired in the open market or otherwise.

 

11



Table of Contents

 

NOTE D                 GOODWILL AND INTANGIBLE ASSETS

 

The changes in the carrying amount of goodwill for the three and nine month periods ended July 26, 2009, are presented in the tables below.  Additions and adjustments during fiscal 2009 primarily relate to the Boca Grande acquisition.

 

 

 

Grocery
Products

 

Refrigerated
Foods

 

JOTS

 

Specialty
Foods

 

All Other

 

Total

 

Balance as of April 26, 2009

 

$

123,316

 

$

85,539

 

$

203,214

 

$

206,962

 

$

674

 

$

619,705

 

Goodwill acquired

 

 

 

 

249

 

 

249

 

Purchase adjustments

 

 

 

 

(183

)

 

(183

)

Balance as of July 26, 2009

 

$

123,316

 

$

85,539

 

$

203,214

 

$

207,028

 

$

674

 

$

619,771

 

 

 

 

Grocery
Products

 

Refrigerated
Foods

 


JOTS

 

Specialty Foods

 


All Other

 


Total

 

Balance as of October 26, 2008

 

$

123,316

 

$

85,537

 

$

203,214

 

$

206,584

 

$

674

 

$

619,325

 

Goodwill acquired

 

 

2

 

 

304

 

 

306

 

Purchase adjustments

 

 

 

 

140

 

 

140

 

Balance as of July 26, 2009

 

$

123,316

 

$

85,539

 

$

203,214

 

$

207,028

 

$

674

 

$

619,771

 

 

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

 

 

 

July 26, 2009

 

October 26, 2008

 

 

 

Gross Carrying

 

Accumulated

 

Gross Carrying

 

Accumulated

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

Proprietary software & technology

 

$

23,800

 

$

(10,744

)

$

24,200

 

$

(8,986

)

Customer lists/relationships

 

19,678

 

(7,229

)

21,078

 

(6,936

)

Formulas & recipes

 

17,104

 

(9,328

)

20,604

 

(11,405

)

Non-compete covenants

 

7,020

 

(4,818

)

20,120

 

(16,734

)

Distribution network

 

4,120

 

(2,436

)

4,120

 

(2,127

)

Other intangibles

 

7,230

 

(3,308

)

8,630

 

(3,829

)

Total

 

$

78,952

 

$

(37,863

)

$

98,752

 

$

(50,017

)

 

Amortization expense was $2,563 and $7,735 for the three and nine months ended July 26, 2009, respectively, compared to $2,740 and $8,888 for the three and nine months ended July 27, 2008.

 

Estimated annual amortization expense for the five fiscal years after October 26, 2008, is as follows:

 

2009

 

$

10,299

 

2010

 

9,199

 

2011

 

7,681

 

2012

 

7,124

 

2013

 

6,071

 

 

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

 

 

 

July 26, 2009

 

October 26, 2008

 

Brands/tradenames/trademarks

 

$

94,410

 

$

94,500

 

Other intangibles

 

7,984

 

7,984

 

Total

 

$

102,394

 

$

102,484

 

 

12



Table of Contents

 

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

 

Nine Months Ended

 

 

 

July 26,
2009

 

July 27,
2008

 

July 26,
2009

 

July 27,
2008

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

134,255

 

135,391

 

134,301

 

135,583

 

 

 

 

 

 

 

 

 

 

 

Dilutive potential common shares

 

1,465

 

1,664

 

1,118

 

1,864

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

135,720

 

137,055

 

135,419

 

137,447

 

 

NOTE F                 COMPREHENSIVE INCOME

 

Components of comprehensive income, net of taxes, are:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 26,

 

July 27,

 

July 26,

 

July 27,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

77,169

 

$

51,947

 

$

238,937

 

$

217,689

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Deferred (loss) gain on hedging

 

(4,455

)

9,377

 

(14,860

)

43,097

 

Reclassification adjustment into net earnings

 

8,522

 

(11,003

)

23,495

 

(16,069

)

Foreign currency translation

 

1,440

 

(2,039

)

(1,848

)

3,013

 

Pension and post-retirement benefits

 

4,303

 

2,161

 

1,817

 

6,449

 

Other comprehensive income (loss)

 

9,810

 

(1,504

)

8,604

 

36,490

 

Total comprehensive income

 

$

86,979

 

$

50,443

 

$

247,541

 

$

254,179

 

 

The components of accumulated other comprehensive loss, net of tax, are as follows :

 

 

 

July 26,
2009

 

October 26,
2008

 

 

 

 

 

 

 

Foreign currency translation

 

$

3,227

 

$

5,075

 

Pension & other benefits

 

(74,332

)

(77,608

)

Deferred loss on hedging

 

(32,016

)

(40,651

)

Accumulated other comprehensive loss

 

$

(103,121

)

$

(113,184

)

 

NOTE G                 INVENTORIES

 

Principal components of inventories are:

 

 

 

July 26,
2009

 

October 26,
2008

 

 

 

 

 

 

 

Finished products

 

$

408,566

 

$

431,095

 

Raw materials and work-in-process

 

200,130

 

215,353

 

Materials and supplies

 

135,971

 

138,094

 

 

 

 

 

 

 

Total

 

$

744,667

 

$

784,542

 

 

13



Table of Contents

 

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 Company’s exposure to price fluctuations in the commodities markets.  The Company has determined its hedge programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged.

 

Cash Flow Hedges:  The Company utilizes corn and soybean meal futures to offset the price fluctuation in the Company’s future direct grain purchases, and has entered into various swaps to hedge the purchases of grain and 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 exposure beyond 24 months and its natural gas exposure beyond 36 months.  As of July 26, 2009, the Company had the following outstanding commodity futures contracts and swaps that were entered into to hedge forecasted purchases:

 

Commodity

 

Volume

Corn

 

17.2 million bushels

Soybean Meal

 

157,600 tons

Natural Gas

 

5.4 million MMBTU’s

 

As of July 26, 2009, the Company has included in accumulated other comprehensive loss, hedging losses of $50,048 (before tax) relating to its positions.  The Company expects to recognize the majority of these losses 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 Company’s commodity suppliers.  The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery.  The futures contracts are designated and accounted for as fair value hedges, and the Company measures the effectiveness of the hedges on a regular basis.  Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and are recorded on the Consolidated Statement 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 July 26, 2009, the Company had the following outstanding commodity futures contracts designated as fair value hedges:

 

Commodity

 

Volume

Corn

 

8.0 million bushels

Soybean Meal

 

1,900 tons

Lean Hogs

 

564,800 cwt

 

Other Derivatives:  During fiscal 2009, the Company has held certain futures contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in foreign currencies.  The Company has not applied hedge accounting to these positions.  All foreign exchange contracts were closed as of the end of the third quarter.  As of July 26, 2009, the Company had the following outstanding commodity futures contracts related to its merchandising program:

 

Commodity

 

Volume

Pork Bellies

 

3,600 cwt

Lean Hogs

 

9,600 cwt

 

14



Table of Contents

 

Fair Values:  The fair values of the Company’s derivative instruments as of July 26, 2009, were as follows:

 

 

 

July 26, 2009

 

 

 

Location on Consolidated
Statement of Financial Position

 

Fair
Value
(1)

 

Asset Derivatives:

 

 

 

 

 

Derivatives Designated as Hedges:

 

 

 

 

 

Commodity contracts

 

Prepaid expenses and other current assets

 

$

24,521

 

 

 

 

 

 

 

Derivatives Not Designated as Hedges:

 

 

 

 

 

Commodity contracts

 

Prepaid expenses and other current assets

 

(3,595

)

 

 

 

 

 

 

Total Asset Derivatives

 

 

 

$

20,926

 

 

 

 

 

 

 

Liability Derivatives:

 

 

 

 

 

Derivatives Designated as Hedges:

 

 

 

 

 

Commodity contracts

 

Accounts payable

 

$

24,899

 

 

 

 

 

 

 

Total Liability Derivatives

 

 

 

$

24,899

 

 


(1)  Amounts represent the gross fair value of derivative assets and liabilities.  In accordance with FASB Staff Position FIN No. 39-1, 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 Statement of Financial Position.

 

Derivative Gains and Losses:  Gains or losses (before tax) related to the Company’s derivative instruments for the quarter ended July 26, 2009, were as follows:

 

Cash Flow Hedges:

 

Gain/(Loss)
Recognized in
Accumulated Other
Comprehensive
Loss (AOCL)
(Effective Portion) (1)

 

Location on
Consolidated Statement
of Operations

 

Gain/(Loss)
Reclassified from
AOCL into Earnings
(Effective Portion) (1)

 

Gain/(Loss)
Recognized in
Earnings (Ineffective

Portion) (2) (4)

 

Commodity contracts

 

$

(5,341

)

Cost of products sold

 

$

(13,831

)

$

1,363

 

 

Fair Value Hedges:

 

Location on
Consolidated Statement
of Operations

 

Gain/(Loss)
Recognized in
Earnings (Effective
Portion) (3)

 

Gain/(Loss)
Recognized in
Earnings (Ineffective

Portion) (2) (5)

 

Commodity contracts

 

Cost of products sold

 

$

11,333

 

$

(118

)

 

 

 

 

 

 

 

 

Derivatives Not
Designated as Hedges:

 

Location on
Consolidated Statement
of Operations

 

Gain/(Loss)
Recognized
in Earnings

 

 

 

Commodity contracts

 

Cost of products sold

 

$

(154

)

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Interest and investment income (loss)

 

$

(141

)

 

 

 

15



Table of Contents

 

Gains or losses (before tax) related to the Company’s derivative instruments for the nine months ended July 26, 2009, were as follows:

 

Cash Flow Hedges:

 

Gain/(Loss)
Recognized in
Accumulated Other
Comprehensive
Loss (AOCL)
(Effective Portion) (1)

 

Location on
Consolidated Statement
of Operations

 

Gain/(Loss)
Reclassified from
AOCL into Earnings
(Effective Portion) (1)

 

Gain/(Loss)
Recognized in
Earnings (Ineffective

Portion) (2) (4)

 

Commodity contracts

 

$

(22,205

)

Cost of products sold

 

$

(38,131

)

$

810

 

 

Fair Value Hedges:

 

Location on
Consolidated Statement
of Operations

 

Gain/(Loss)
Recognized in
Earnings (Effective
Portion) (3)

 

Gain/(Loss)
Recognized in
Earnings (Ineffective

Portion) (2) (5)

 

Commodity contracts

 

Cost of products sold

 

$

48,949

 

$

(2,386

)

 

 

 

 

 

 

 

 

 

 

Derivatives Not
Designated as Hedges:

 

Location on
Consolidated Statement
of Operations

 

Gain/(Loss)
Recognized
in Earnings

 

 

 

Commodity contracts

 

Cost of products sold

 

$

239

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Interest and investment income (loss)

 

$

(141

)

 

 

 


(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 or nine months.

(3)   Gains on commodity contracts designated as fair value hedges were offset by a corresponding loss on the underlying hedged purchase commitment.

(4)   There were no gains or losses resulting from the discontinuance of cash flow hedges during the quarter or nine months.

(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 or nine months.

 

NOTE I                  FAIR VALUE MEASUREMENTS

 

Effective at the beginning of fiscal 2009, the Company adopted the provisions of SFAS 157 for its financial assets and liabilities carried at fair value on a recurring basis in the consolidated financial statements.  As discussed in Note A, the FASB allowed deferral of the effective date of SFAS 157 for one year for nonfinancial assets and liabilities measured at fair value that are recognized or disclosed on a nonrecurring basis.  SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

 

SFAS 157 defines fair value 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).  SFAS 157 also 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 entity’s 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.

 

16



Table of Contents

 

The Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of July 26, 2009, and their level within the fair value hierarchy, are presented in the table below.

 

 

 

Fair Value Measurements at July 26, 2009

 

 

 

Fair Value at
July 26, 2009

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

Assets at Fair Value:

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

$

211,218

 

$

211,218

 

$

 

$

 

Trading securities (2)

 

100,053

 

64,503

 

35,550

 

 

Commodity derivatives (3)

 

6,860

 

6,860

 

 

 

Total Assets at Fair Value

 

$

318,131

 

$

282,581

 

$

35,550

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities at Fair Value:

 

 

 

 

 

 

 

 

 

Commodity derivatives (3)

 

$

24,899

 

$

 

$

24,899

 

$

 

Deferred compensation (2)

 

35,811

 

9,880

 

25,931

 

 

Total Liabilities at Fair Value

 

$

60,710

 

$

9,880

 

$

50,830

 

$

 

 


The following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:

(1)           The Company’s 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 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 participant’s 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.

(3)           The Company’s commodity derivatives represent futures 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 Company’s commodity suppliers.  The Company’s futures contracts for corn and soybean meal are traded on the Chicago Board of Trade (CBOT), while futures contracts for lean hogs and bellies are traded on the Chicago Mercantile Exchange.  These are active markets with quoted prices available and therefore the futures contracts are classified as Level 1.  The Company’s corn and soybean meal swaps settle based on quoted prices from the CBOT, while 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.  In accordance with FASB Staff Position FIN No. 39-1, the Company

 

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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 prepaid expenses and other current assets or accounts payable, as appropriate, in the Consolidated Statements of Financial Position.  As of July 26, 2009, the Company had recognized the right to reclaim cash collateral of $42,445 from, and the obligation to return cash collateral of $56,511 to, various counterparties.

 

The Company’s financial assets and liabilities also include accounts receivable, accounts payable, and short-term debt, for which carrying value approximates fair value due to the short periods to maturity for those instruments.  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, utilizing discounted cash flows, was $383,029 as of July 26, 2009, and $357,654 as of October 26, 2008.

 

NOTE J           PENSION AND OTHER POST-RETIREMENT BENEFITS

 

Net periodic benefit cost for pension and other post-retirement benefit plans consists of the following:

 

 

 

Pension Benefits

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 26, 2009

 

July 27, 2008

 

July 26, 2009

 

July 27, 2008

 

Service cost

 

$

4,530

 

$

4,852

 

$

13,563

 

$

14,867

 

Interest cost

 

11,788

 

10,956

 

35,405

 

33,287

 

Expected return on plan assets

 

(13,074

)

(13,994

)

(39,222

)

(42,344

)

Amortization of prior service cost

 

(154

)

(37

)

(451

)

(113

)

Recognized actuarial loss

 

1,291

 

1,345

 

3,965

 

3,978

 

Settlement charge

 

2,569

 

 

6,788

 

 

Net periodic cost

 

$

6,950

 

$

3,122

 

$

20,048

 

$

9,675

 

 

 

 

Post-retirement Benefits

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 26, 2009

 

July 27, 2008

 

July 26, 2009

 

July 27, 2008

 

Service cost

 

$

553

 

$

683

 

$

1,657

 

$

2,047

 

Interest cost

 

5,583

 

5,649

 

16,749

 

16,948

 

Amortization of prior service cost

 

1,376

 

1,454

 

4,129

 

4,362

 

Recognized actuarial (gain) loss

 

(210

)

736

 

(630

)

2,208

 

Net periodic cost

 

$

7,302

 

$

8,522

 

$

21,905

 

$

25,565

 

 

Charges of $4,219 and $2,569 were recognized in the first and third quarter of fiscal 2009, respectively, for settlements on non-qualified pension plans resulting from executive retirements.  The Company made contributions totaling $55,000 in the third quarter of fiscal 2009 to fund its pension plans, and is currently evaluating an additional discretionary contribution.

 

NOTE K          INCOME TAXES

 

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (FIN 48) at the beginning of fiscal 2008, on October 29, 2007.  The amount of unrecognized tax benefits, including interest and penalties, at July 26, 2009, recorded in other long-term liabilities was $41,321, of which $26,952 would impact the Company’s effective tax rate if recognized.  The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense, with $988 and $1,988 included in expense in the third quarter and first nine months of fiscal 2009, respectively.  The amount of accrued interest and penalties at July 26, 2009, associated with unrecognized tax benefits was $10,833.

 

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The Company is regularly audited by federal and state taxing authorities.  During fiscal year 2007, the I.R.S. concluded its examination of the Company’s consolidated federal income tax returns for the fiscal years through 2005.  The Company is currently under examination by the I.R.S. for the fiscal years 2006 and 2007.  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.  Under the criteria set forth by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company reports its results in the following five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and All Other.

 

The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market.

 

The Refrigerated Foods segment includes the Hormel Refrigerated, Farmer John, Burke Corporation, and Dan’s Prize operating segments.  This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork and beef products for retail, foodservice, and fresh product customers.  Results for the Hormel Refrigerated operating segment include the Precept Foods business, which offers a variety of case-ready beef and pork products to retail customers.  Precept Foods, LLC, is a 51 percent owned joint venture between Hormel Foods Corporation and Cargill Meat Solutions Corporation, a wholly-owned subsidiary of Cargill, Incorporated.

 

The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers.

 

The Specialty Foods segment includes the Diamond Crystal Brands, Century Foods International, and Hormel Specialty Products operating segments.  This segment consists of the packaging and sale of various sugar and sugar substitute products, salt and pepper products, liquid portion products, dessert mixes, ready-to-drink products, gelatin products, and private label canned meats to retail and foodservice customers.  This segment also includes the processing, marketing, and sale of nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products.

 

The All Other segment includes the Hormel Foods International operating segment, which manufactures, markets, and sells Company products internationally.  This segment also includes various miscellaneous corporate sales.

 

Intersegment sales are recorded at prices that approximate cost and are eliminated in the Consolidated Statements of Operations.  Equity in earnings of affiliates is included in segment operating profit; however, the Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance.  The Company also retains various other income and unallocated expenses at corporate.  These items are included below as net interest and investment income and general corporate expense when reconciling to earnings before income taxes.

 

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Sales and operating profits for each of the Company’s business segments and reconciliation to earnings before income taxes are set forth below.  The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets.  Therefore, 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

 

Nine Months Ended

 

 

 

July 26,
2009

 

July 27,
2008

 

July 26,
2009

 

July 27,
2008

 

Sales to Unaffiliated Customers

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

209,012

 

$

222,922

 

$

692,639

 

$

683,801

 

Refrigerated Foods

 

847,578

 

890,978

 

2,579,064

 

2,580,259

 

Jennie-O Turkey Store

 

295,381

 

310,532

 

890,165

 

893,870

 

Specialty Foods

 

167,203

 

192,001

 

519,679

 

563,322

 

All Other

 

55,266

 

61,709

 

177,022

 

172,139

 

Total

 

$

1,574,440

 

$

1,678,142

 

$

4,858,569

 

$

4,893,391

 

 

 

 

 

 

 

 

 

 

 

Intersegment Sales

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

0

 

$

0

 

$

0

 

$

0

 

Refrigerated Foods

 

1,898

 

2,011

 

5,813

 

3,990

 

Jennie-O Turkey Store

 

24,145

 

25,747

 

73,114

 

71,735

 

Specialty Foods

 

48

 

42

 

151

 

160

 

All Other

 

0

 

0

 

0

 

0

 

Total

 

$

26,091

 

$

27,800

 

$

79,078

 

$

75,885

 

Intersegment elimination

 

(26,091

)

(27,800

)

(79,078

)

(75,885

)

Total

 

$

0

 

$

0

 

$

0

 

$

0

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

209,012

 

$

222,922

 

$

692,639

 

$

683,801

 

Refrigerated Foods

 

849,476

 

892,989

 

2,584,877

 

2,584,249

 

Jennie-O Turkey Store

 

319,526

 

336,279

 

963,279

 

965,605

 

Specialty Foods

 

167,251

 

192,043

 

519,830

 

563,482

 

All Other

 

55,266

 

61,709

 

177,022

 

172,139

 

Intersegment elimination

 

(26,091

)

(27,800

)

(79,078

)

(75,885

)

Total

 

$

1,574,440

 

$

1,678,142

 

$

4,858,569

 

$

4,893,391

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Profit

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

33,215

 

$

29,849

 

$

116,527

 

$

107,829

 

Refrigerated Foods

 

58,291

 

36,331

 

155,731

 

154,762

 

Jennie-O Turkey Store

 

15,920

 

8,078

 

61,847

 

54,590

 

Specialty Foods

 

16,488

 

16,895

 

47,237

 

50,701

 

All Other

 

4,664

 

5,785

 

17,936

 

20,653

 

Total segment operating profit

 

$

128,578

 

$

96,938

 

$

399,278

 

$

388,535

 

 

 

 

 

 

 

 

 

 

 

Net interest and investment income

 

(553

)

(13,904

)

(3,951

)

(28,738

)

General corporate expense

 

(9,974

)

(2,907

)

(28,018

)

(18,982

)

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

$

118,051

 

$

80,127

 

$

367,309

 

$

340,815

 

 

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Table of Contents

 

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

 

CRITICAL ACCOUNTING POLICIES

 

There have been no material changes in the Company’s Critical Accounting Policies, as disclosed in its Annual Report on Form 10-K for the year ended October 26, 2008.

 

RESULTS OF OPERATIONS
 

Overview

 

The Company is a processor of branded and unbranded food products for retail, foodservice, and fresh product customers.  It operates in five segments as described in Note L in the Notes to Consolidated Financial Statements in this Form 10-Q.

 

The Company earned $0.57 per diluted share in the third quarter of fiscal 2009, an increase of 50.0 percent compared to $0.38 per diluted share in the third quarter of fiscal 2008.  Significant factors impacting the quarter were:

 

·      Refrigerated Foods profit increased, reflecting significantly reduced input costs for its value-added businesses.

·      Jennie-O Turkey Store continued to report increased profits, driven primarily by lower feed costs due to the planned reduction of turkey production and a reduced cost per ton during the quarter.

·      Grocery Products profit results were positively impacted by continued strength in sales of core canned items.

·      Specialty Foods results declined due to continued weak sales by its Century Foods International operating segment.

·      Net interest and investment income showed notable improvement due to gains on the Company’s rabbi trust investments.

 

Consolidated Results

 

Net earnings for the third quarter of fiscal 2009 increased 48.6 percent to $77,169 from $51,947 in the same quarter of 2008.  Diluted earnings per share for the quarter increased 50.0 percent to $0.57 from $0.38 last year.  Net earnings for the first nine months of 2009 increased 9.8 percent to $238,937 from $217,689 in 2008.  Diluted earnings per share increased to $1.76 from $1.58 for the same period of the prior year.

 

Net sales for the third quarter of fiscal 2009 decreased 6.2 percent to $1,574,440 versus $1,678,142 in 2008.  Tonnage decreased 3.7 percent to 1,094 million lbs. for the third quarter compared to 1,137 million lbs. in the same quarter of last year.  Net sales for the first nine months of fiscal 2009 decreased 0.7 percent to $4,858,569 from $4,893,391 in the first nine months of fiscal 2008.  Tonnage for the nine months decreased 2.4 percent to 3,384 million lbs. compared to 3,467 million lbs. in 2008.  Declines reflect the continued impact of a weak economy, planned reductions in production for the Company’s turkey operations in response to market conditions, and the discontinuance of sales of Carapelli olive oil and certain other product lines.  Net sales for the nine months remain comparable to the prior year as strong demand for core product lines and the impact of earlier pricing initiatives have helped to mitigate the impact of the tonnage declines.

 

Gross profit for the third quarter and first nine months of fiscal 2009 was $260,324 and $794,677, respectively, compared to $229,046 and $785,689 for the same periods last year.  Gross profit as a percentage of net sales for the third quarter and nine months increased to 16.5 and 16.4 percent in 2009, from 13.6 and 16.1 percent for the comparable quarter and nine months of fiscal 2008.  The Refrigerated Foods segment benefited from significantly reduced input costs during the quarter compared to the prior year, as a rapid increase in primal

 

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values due to export demand during the third quarter of fiscal 2008 pressured margins in the segment’s value-added businesses.  The lower costs were able to offset the impact of continued weak cut-out margins in pork operations.  Margin improvement also continued at Jennie-O Turkey Store during the third quarter driven by lower feed costs compared to the prior year, due to a planned reduction in turkey production and a decreased cost per ton.  Significantly lower freight expense across most segments of the Company also improved the third quarter and nine month margin results.

 

Selling, general and administrative expenses for the third quarter and first nine months of fiscal 2009 were $142,010 and $424,381, respectively, compared to $135,256 and $419,567 last year.  As a percentage of net sales, selling, general and administrative expenses for the third quarter and first nine months increased to 9.0 percent and 8.7 percent, respectively, compared to the prior year at 8.1 percent and 8.6 percent.  Increased medical costs and higher pension expenses contributed to the increase for both the quarter and nine months, offsetting declines in travel and advertising expenses.  Additional employee incentive plan costs also contributed to the increase for the third quarter.  The Company expects overall selling, general and administrative expenses to be approximately 9.0 percent of net sales for the remainder of fiscal 2009.

 

Equity in earnings of affiliates was $290 and $964 for the third quarter and first nine months, respectively, compared to $241 and $3,431 last year.  Equity for both the third quarter and nine months was negatively impacted by the dissolution of the Company’s Carapelli USA, LLC joint venture in the second quarter of fiscal 2009.  For the first nine months, results for the Company’s other joint ventures have been mixed.   Decreases compared to the prior year were primarily due to lower results from the Company’s 40 percent owned Philippine joint venture, Purefoods-Hormel Company, and the Company’s 49 percent owned joint venture, San Miguel Purefoods (Vietnam) Co. Ltd.  These declines were partially offset by improved performance from the Company’s 50 percent owned joint venture, Herdez Corporation.  Minority interests in the Company’s consolidated investments are also reflected in these figures, and remained comparable to the prior year.

 

The effective tax rate for the third quarter and first nine months of fiscal 2009 was 34.6 and 34.9 percent, respectively, compared to 35.2 and 36.1 percent for the comparable quarter and nine months of fiscal 2008.  The lower rate for both the third quarter and first nine months of fiscal 2009 reflects more positive returns on the Company’s rabbi trust in the current year, which are not taxable.  The lower rate for the nine months is also due to an increase in interest reserves as a result of the adoption of FIN 48 and net unfavorable discrete items in the first quarter of fiscal 2008.  The Company expects an effective tax rate of approximately 36.0 percent for the remainder of fiscal 2009.

 

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Table of Contents

 

Segment Results

 

Net sales and operating profits for each of the Company’s segments are set forth below.  The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets.  Therefore, 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 Form 10-Q.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 26,
2009

 

July 27,
2008

 

%
Change

 

July 26,
2009

 

July 27,
2008

 

%
Change

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

209,012

 

$

222,922

 

(6.2

)

$

692,639

 

$

683,801

 

1.3

 

Refrigerated Foods

 

847,578

 

890,978

 

(4.9

)

2,579,064

 

2,580,259

 

(0.0

)

Jennie-O Turkey Store

 

295,381

 

310,532

 

(4.9

)

890,165

 

893,870

 

(0.4

)

Specialty Foods

 

167,203

 

192,001

 

(12.9

)

519,679

 

563,322

 

(7.7

)

All Other

 

55,266

 

61,709

 

(10.4

)

177,022

 

172,139

 

2.8

 

Total

 

$

1,574,440

 

$

1,678,142

 

(6.2

)

$

4,858,569

 

$

4,893,391

 

(0.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Grocery Products

 

$

33,215

 

$

29,849

 

11.3

 

$

116,527

 

$

107,829

 

8.1

 

Refrigerated Foods

 

58,291

 

36,331

 

60.4

 

155,731

 

154,762

 

0.6

 

Jennie-O Turkey Store

 

15,920

 

8,078

 

97.1

 

61,847

 

54,590

 

13.3

 

Specialty Foods

 

16,488

 

16,895

 

(2.4

)

47,237

 

50,701

 

(6.8

)

All Other

 

4,664

 

5,785

 

(19.4

)

17,936

 

20,653

 

(13.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total segment operating profit

 

$

128,578

 

$

96,938

 

32.6

 

$

399,278

 

$

388,535

 

2.8

 

Net interest and investment income

 

(553

)

(13,904

)

96.0

 

(3,951

)

(28,738

)

86.3

 

General corporate expense

 

(9,974

)

(2,907

)

(243.1

)

(28,018

)

(18,982

)

(47.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

$

118,051

 

$

80,127

 

47.3

 

$

367,309

 

$

340,815

 

7.8

 

 

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.

 

Grocery Products net sales decreased 6.2 percent for the third quarter and increased 1.3 percent for the first nine months compared to the same fiscal 2008 periods.  Tonnage decreased 7.6 percent for the third quarter and 1.0 percent for the first nine months compared to the prior year.  Top-line results for both the quarter and nine months were negatively impacted by the discontinuance of sales of Carapelli olive oil in the third quarter, as well as the rationalization of certain other products lines.  Excluding those items last year, sales for Grocery Products were essentially flat compared to fiscal 2008.  Sales of the SPAM family of products and Hormel chili continued to be strong, with double-digit increases noted for both the third quarter and nine months.  These product lines continue to offer a good value proposition to consumers.  Sales of Herdez ethnic products were also strong during the third quarter.  Sales of Hormel Compleats microwave meals declined during the quarter, reflecting competitive activity and the ongoing economic trend away from convenience items.

 

Segment profit for Grocery Products increased 11.3 percent for the third quarter and 8.1 percent for the nine months compared to the fiscal 2008.  Lower pork input costs and the impact of pricing advances taken in prior periods benefited results for the quarter.  This segment has also experienced significant reductions in freight expenses throughout fiscal 2009.  Grocery Products continues to be challenged with increased input costs on certain product lines due to higher prices for beef and steel.

 

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Many of these same factors are expected to continue throughout the remainder of the fiscal year.  Continued investments in promotional programs should provide some additional top-line improvement during the fourth quarter.  Construction of the new production facility in Dubuque, Iowa also continues, which will provide additional capacity for canned and microwave tray items beginning in fiscal 2010.

 

Refrigerated Foods

 

The Refrigerated Foods segment includes the Hormel Refrigerated, Farmer John, Burke Corporation (Burke), and Dan’s Prize operating segments.  This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork and beef products for retail, foodservice, and fresh product customers.  Results for the Hormel Refrigerated operating segment include the Precept Foods business, which offers a variety of case-ready beef and pork products to retail customers.  Precept Foods, LLC, is a 51 percent owned joint venture between Hormel Foods Corporation and Cargill Meat Solutions Corporation, a wholly-owned subsidiary of Cargill, Incorporated.

 

Net sales for the Refrigerated Foods segment decreased 4.9 percent for the third quarter and were flat for the first nine months of fiscal 2009, compared to the same periods of fiscal 2008.  Tonnage decreased 0.9 percent and 1.7 percent for the third quarter and first nine months, respectively, compared to last year.  The continued weak economy impacted sales results for this segment.  Foodservice sales were particularly soft, and lower pricing on retail fresh pork items also contributed to the sales decline.

 

Segment profit for Refrigerated Foods increased 60.4 and 0.6 percent for the third quarter and first nine months of fiscal 2009, respectively, compared to the prior year.  The Company processed 2,266,000 hogs during the third quarter, which decreased slightly from the prior year.  Lower input costs and a more favorable product mix drove the increased profits compared to fiscal 2008.  However, continued weak cut-out margins persisted into the third quarter, which generated additional pork operating losses and offset a portion of the gains realized in the value-added businesses.  This segment has also benefited from significantly reduced freight expenses throughout fiscal 2009, as compared to the prior year.

 

The Meat Products business unit reported another strong quarter, with double-digit sales growth achieved for Hormel Natural Choice lunchmeats, Hormel party trays, Hormel retail pepperoni, and DiLusso Deli Company products.  However, sales of Hormel refrigerated entrees and Lloyd’s barbeque ribs showed some declines during the third quarter.  The Foodservice business unit also continued to experience sales and tonnage declines, reflecting the ongoing decrease in travel and restaurant business due to economic conditions.  The Company has been successful in pursuing other foodservice channels to offset a portion of those lost sales.

 

Farmer John continued to struggle with lower hog markets for the Company’s live hog production facilities, which have generated sizable losses for both the third quarter and first nine months of 2009.  However, this business continued to reduce expenses and expand its sales of value-added products, resulting in an overall improvement in profits compared to the prior year third quarter.

 

The outlook for this segment is mixed entering the fourth quarter.  Continued lower input costs are expected to provide some additional benefit, and some improvement in cut-out values has occurred recently.  However, weak export markets and softness in the foodservice sector are also expected to persist throughout the remainder of the fiscal year, which could negatively impact results.

 

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 decreased 4.9 percent for the third quarter and were flat for the first nine months versus the comparable periods of fiscal 2008.  Tonnage decreased 2.2 percent for the third quarter and 1.8 percent for the first nine months, compared to fiscal 2008 results.  Lower sales of retail commodity items, primarily whole birds, were a key driver of the decreased sales due to the timing of shipments and overall lower pricing compared to fiscal 2008.  Planned volume reductions have also impacted sales and have driven inventory levels

 

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significantly lower than the prior year.  Value-added net sales also declined in the third quarter, reflecting competitive pressures and changes in consumer behavior driven by economic conditions.

 

Segment profit for JOTS increased 97.1 percent for the third quarter and 13.3 percent for the first nine months of fiscal 2009 compared to the prior year.  Lower feed expense, due to a planned reduction in turkey production and a decreased cost per ton compared to the prior year, was again the key driver of the improved profitability this quarter.  Despite production cutbacks, the industry remains in an oversupply situation for breast meat and whole birds, causing commodity markets to remain at unusually low levels.  The volume reductions at JOTS noted above have allowed the Company to avoid generating surplus breast meat, which would have been sold at a loss under these market conditions.

 

Following several consecutive quarters of growth in its value-added businesses, JOTS did report a decline in the third quarter.  Gains on retail products, such as Jennie-O Turkey Store turkey burgers, were unable to offset decreased revenues for the foodservice and deli business units.  The Company continues to focus on its value-added product lines and is pursuing options to restore growth in this area in upcoming quarters, including new media campaigns planned for the fourth quarter.

 

JOTS continues to focus on balancing inventories with value-added production demand.  Export restrictions are a concern entering the fourth quarter.  It is also likely that the industry oversupply of breast meat will keep commodity prices low during at least the remainder of fiscal 2009.  Although feed costs are expected to be volatile in the fourth quarter, they should still be less than a year ago.  The trend of weaker consumer demand is also a challenge, and may impact results for JOTS in the fourth quarter.

 

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, 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 has been challenged throughout fiscal 2009, as net sales decreased 12.9 percent for the third quarter and 7.7 percent for the first nine months, compared to the same periods of fiscal 2008.  Tonnage decreased 13.2 percent for the quarter and 9.3 percent for the first nine months, compared to the prior year.  The Boca Grande acquisition contributed an incremental $3,277 of net sales and 4.0 million lbs. of tonnage to the third quarter results for this segment, and $13,842 of net sales and 15.8 million lbs. of tonnage to the nine month results.  Specialty Foods segment profit decreased 2.4 percent in the third quarter and 6.8 percent for the first nine months, compared to 2008 results.

 

Declines in both net sales and profits continued to be driven by reduced sales of nutritional powders and ready-to-drink products at CFI.  The loss of business due to competitive issues and an overall slowdown with existing key customers have continued to negatively impact results compared to the prior year.  Increased sales of nutritional products at DCB offset a portion of these declines.  Sales and margins for private label luncheon meat, hash, and chili were also up at HSP during the quarter, offsetting a decline in contract packaging sales.  Reduced freight and distribution expenses have also benefited this segment during fiscal 2009.

 

Entering the fourth quarter, sales of private label canned products are expected to remain strong.  CFI continues to pursue new contract packaging opportunities, but results are still expected to trail the prior year.  DCB will continue to face competitive pricing pressures on certain product lines, but a favorable product mix and lower freight expenses should provide some upside during the fourth quarter.

 

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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 various miscellaneous corporate sales.

 

All Other net sales decreased 10.4 percent for the quarter and increased 2.8 percent for the first nine months, as compared to fiscal 2008.  HFI export sales of fresh pork declined compared to the fiscal 2008 third quarter, as the weak global economy and publicity regarding the H1N1 flu virus have impacted pork export markets.  Segment profit decreased 19.4 and 13.2 percent for the third quarter and first nine months of fiscal 2009, respectively, compared to prior year results.  Lower raw material costs provided some benefit for the quarter, but were unable to offset the impact of the weaker export markets and unfavorable currency exchange rates in key international markets.  Although the Company’s international joint ventures improved modestly in the third quarter, they continue to represent a significant decrease in profits for the first nine months, compared to fiscal 2008.

 

Unallocated Income and Expenses
 

The Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance.  The Company also retains various other income and unallocated expenses at corporate.  These items are included in the segment table for the purpose of reconciling segment results to earnings before income taxes.

 

Net interest and investment income represented a net expense of $553 and $3,951 for the third quarter and first nine months of fiscal 2009, respectively, compared to a net expense of $13,904 and $28,738 for the comparable quarter and nine months of fiscal 2008.  The decreased expense was primarily driven by improved investment returns on the Company’s rabbi trust for supplemental executive retirement plans and deferred income plans, which increased $10,469 and $20,126 for the third quarter and first nine months, respectively, compared to fiscal 2008.  Fiscal 2009 results also include a $3,591 pretax gain recognized on the dissolution of the Company’s Carapelli USA, LLC joint venture.  Additionally, the Company recorded a $2,400 investment write-off in the third quarter of fiscal 2008.  Interest expense of $6,963 and $21,336 for the third quarter and first nine months of 2009, respectively, was comparable to prior year levels.  The Company anticipates that interest expense will approximate $29,000 for fiscal 2009.

 

General corporate expense for the third quarter and first nine months was $9,974 and $28,018, respectively, compared to $2,907 and $18,982 for the comparable periods of fiscal 2008.  Increased expense for the third quarter and nine months reflects higher medical and pension related expenses, which are expected to continue in upcoming quarters.  Additional employee incentive plan costs also contributed to the increase for the quarter.

 

Related Party Transactions

 

There has been no material change in the information regarding Related Party Transactions that was disclosed in the Company’s Annual Report on Form 10-K for the year ended October 26, 2008.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $295,100 at the end of the third quarter of fiscal year 2009 compared to $109,987 at the end of the comparable fiscal 2008 period.

 

Cash provided by operating activities was $327,124 in the first nine months of fiscal 2009 compared to $183,431 in the same period of fiscal 2008.  Increased earnings and favorable changes in working capital generated most of the increase, as significant decreases in inventory and accounts receivable balances during fiscal 2009 have more than offset decreases in accounts payable and accrued expense balances.  These increases were partially offset by a contribution of $55,000 to fund the Company’s pension plans in the third quarter of fiscal 2009.

 

Cash used in investing activities decreased to $60,240 in the first nine months of fiscal 2009 from $124,229 in the comparable period of fiscal 2008.  Decreased cash outflow related to acquisition activity was the primary driver of the decrease, due to the acquisition of Boca Grande in the third quarter of fiscal 2008 for $23,255.  Lower fixed asset expenditures during fiscal 2009 also contributed to the decrease, declining to $71,029 for the first nine months of fiscal 2009 from $96,293 in the comparable period of fiscal 2008.  The Company currently estimates its fiscal 2009 fixed asset expenditures to be approximately $100,000.  The Company’s investments in available-for-sale securities also resulted in a lower net cash outflow of approximately $12,800 for the first nine months of fiscal 2009 compared to the prior year.

 

Cash used in financing activities was $126,562 in the first nine months of fiscal 2009 compared to $98,964 in the same period of fiscal 2008.  The Company used $13,876 for common stock repurchases in first nine months of fiscal 2009, compared to $56,472 in the same period of the prior year.  For additional information pertaining to the Company’s share repurchase plans or programs, see Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”  Offsetting this decrease were increased net payments on short-term debt.  Additionally, cash flows generated from the Company’s stock option plan decreased approximately $17,800 during the first nine months of fiscal 2009, as compared to the prior year.

 

Cash dividends paid to the Company’s shareholders also continue to be a significant financing activity for the Company.  Dividends paid in the first nine months of 2009 were $75,880 compared to $70,585 in the comparable period of fiscal 2008.  For fiscal 2009, the annual dividend rate has been increased to $0.76 per share, representing the 43rd consecutive annual dividend increase.  The Company has paid dividends for 324 consecutive quarters and expects to continue doing so.

 

The Company is required, by certain covenants in its debt agreements, to maintain specified levels of financial ratios and balance sheet position.  At the end of the third quarter of fiscal 2009, the Company was in compliance with all of these debt covenants.

 

Cash flow from operating activities provides the Company with its principal source of liquidity.  The Company does not anticipate a significant risk to cash flow from this source in the foreseeable future because the Company operates in a relatively stable industry and has strong products across many product lines.  However, due to the credit market conditions that began in the latter half of fiscal 2008, the Company has continued to manage its capital conservatively during fiscal 2009.  Certain capital projects that were not time critical were delayed, and notable efforts have been made to improve working capital balances.  The Company repaid its $60,000 outstanding short-term line of credit balance subsequent to the end of the third quarter, and intends to renew its credit facility in fiscal 2010.  The Company is also evaluating an additional discretionary contribution to its pension plans during the fourth quarter.  Additional share repurchases also remain a strategic option that will be considered as a use of free cash flows.

 

Contractual Obligations and Commercial Commitments
 

As discussed in Note K of the Notes to Consolidated Financial Statements, the Company adopted the provisions of FIN 48 at the beginning of fiscal 2008.  The Company is unable to determine its exact 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 July 26, 2009, was $41,321.

 

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There have been no other material changes to the information regarding the Company’s future contractual financial obligations that was disclosed in the Company’s Annual Report on Form 10-K for the year ended October 26, 2008.

 

Off-Balance Sheet Arrangements

 

The Company currently provides a revocable standby letter of credit for $3,890 to guarantee obligations that may arise under workers compensation claims of an affiliated party.  This potential obligation is not reflected in the Company’s Consolidated Statements of Financial Position.

 

The Company has also guaranteed a $9,000 loan of an independent farm operator, of which approximately $2,900 of the loan proceeds have been spent to date with the remaining $6,100 being held in an escrow account.  The Company is obligated to make payments if the farm operator fails to do so, and the Company has made immaterial payments in fiscal 2008 and 2009.  The portion of the potential obligation currently held in escrow does not represent a risk to the Company and is therefore not reflected in the Company’s Consolidated Statements of Financial Position.

 

FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking” information within the meaning of the federal securities laws.  The “forward-looking” information may include statements concerning the Company’s outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts.

 

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

 

In connection with the “safe harbor” provisions of the Reform Act, the Company is identifying risk factors that could affect financial performance and cause the Company’s actual results to differ materially from opinions or statements expressed with respect to future periods.  The discussion of risk factors in Part II, Item 1