SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

HORMEL FOODS CORPORATION

 

 

1 Hormel Place

Austin, Minnesota 55912-3680

Telephone - (507) 437-5611

 

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.

YES

X

NO

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES

X

NO

 

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

 

Class		Outstanding at January 30, 2005
Common Stock		$.0586 par value       138,175,836
Common Stock Non-Voting		$.01 par value                            -0-

 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
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 Disclosure about Market Risks
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
SIGNATURES

 

2

 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(In Thousands of Dollars)

 

 

		January 30,				October 30,
		2005				2004
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	145,205			$	288,881
Accounts receivable		282,359				272,738
Inventories		472,865				425,655
Deferred income taxes		28,811				29,254
Prepaid expenses and other current assets		14,092				12,875
TOTAL CURRENT ASSETS		943,332				1,029,403
DEFERRED INCOME TAXES		2,973				0
GOODWILL		443,740				417,728
OTHER INTANGIBLES		108,491				95,214
NET PENSION ASSETS		63,498				67,037
INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES		58,305				55,232
OTHER ASSETS		167,312				165,117
PROPERTY, PLANT AND EQUIPMENT
Land		36,214				25,872
Buildings		509,664				455,860
Equipment		1,009,787				948,244
Construction in progress		47,370				44,666
		1,603,035				1,474,642
Less allowance for depreciation		(785,282		)		(770,405		)
		817,753				704,237
TOTAL ASSETS		$	2,605,404			$	2,533,968

 

 

See notes to consolidated financial statements

 

3

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(In Thousands of Dollars)

 

		January 30,				October 30,
		2005				2004
		(Unaudited)
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Accounts payable		$	219,599			$	203,563
Accrued expenses		41,899				31,435
Accrued marketing expenses		83,389				71,855
Employee compensation		68,468				94,548
Taxes, other than federal income taxes		15,439				13,569
Dividends payable		18,223				15,673
Federal income tax		25,647				17,963
Current maturities of long-term debt		15,760				15,760
TOTAL CURRENT LIABILITIES		488,424				464,366
LONG-TERM DEBT—less current maturities		361,495				361,510
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION		257,597				257,392
OTHER LONG-TERM LIABILITIES		47,327				47,128
DEFERRED INCOME TAXES		0				4,324
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 138,224,600 shares January 30, 2005
issued 137,875,211 shares October 30, 2004		8,100				8,079
Additional paid-in capital		5,968				0
Accumulated other comprehensive loss		(23,242		)		(23,534		)
Retained earnings		1,461,111				1,414,703
		1,451,937				1,399,248
Shares held in treasury – 48,764 shares		(1,376		)		0
TOTAL SHAREHOLDERS’ INVESTMENT		1,450,561				1,399,248
TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT		$	2,605,404			$	2,533,968

 

See notes to consolidated financial statements

 

4

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

		Three Months Ended
		January 30, 2005				January 24, 2004
Net sales		$	1,271,431			$	1,135,533
Cost of products sold		959,618				863,757
GROSS PROFIT		311,813				271,776
Expenses:
Selling and delivery		169,517				151,640
Administrative and general		40,622				36,618
TOTAL EXPENSES		210,139				188,258
Equity in earnings of affiliates		2,927				1,706
OPERATING INCOME		104,601				85,224
Other income and expenses:
Interest and investment income		4,605				3,202
Interest expense		(6,774		)		(6,810		)
EARNINGS BEFORE INCOME TAXES		102,432				81,616
Provision for income taxes		37,958				29,790
NET EARNINGS		$	64,474			$	51,826
NET EARNINGS PER SHARE:
BASIC		$	0.47			$	0.37
DILUTED		$	0.46			$	0.37
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC		138,036				138,612
DILUTED		139,626				140,102
DIVIDENDS DECLARED PER SHARE:		$	0.1300			$	0.1125

 

 

See notes to consolidated financial statements

 

5

 

HORMEL FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(Unaudited)

 

		Three Months Ended
		January 30, 2005				January 24, 2004
OPERATING ACTIVITIES
Net earnings		$	64,474			$	51,826
Adjustments to reconcile to net cash provided by operating activities:
Depreciation		24,137				21,275
Amortization of intangibles		2,023				1,750
Equity in earnings of affiliates		(2,739		)		(1,358		)
Provision for deferred income taxes		(5,885		)		(2,597		)
Loss on property/equipment sales and plant facilities		181				0
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable		17,084				25,112
Increase in inventories, prepaid expenses, and other current assets		(16,921		)		(44,384		)
Decrease in accounts payable and accrued expenses		(3,894		)		(21,280		)
Other		1,477				806
NET CASH PROVIDED BY OPERATING ACTIVITIES		79,937				31,150
INVESTING ACTIVITIES
Purchase of held-to-maturity securities		0				(3,250		)
Acquisitions of businesses		(188,243		)		(2,070		)
Purchases of property/equipment		(24,761		)		(15,830		)
Proceeds from sales of property/equipment		514				604
Decrease (Increase) in investments, equity in affiliates, net pension assets, and other assets		952				(3,161		)
NET CASH USED IN INVESTING ACTIVITIES		(211,538		)		(23,707		)
FINANCING ACTIVITIES
Principal payments on long-term debt		(15		)		(2,351		)
Dividends paid on Common Stock		(15,516		)		(14,550		)
Stock repurchase		(1,229		)		(8,711		)
Other		4,685				2,131
NET CASH USED IN FINANCING ACTIVITIES		(12,075		)		(23,481		)
DECREASE IN CASH AND CASH EQUIVALENTS		(143,676		)		(16,038		)
Cash and cash equivalents at beginning of year		288,881				97,976
CASH AND CASH EQUIVALENTS AT END OF QUARTER		$	145,205			$	81,938

 

 

See notes to consolidated financial statements

 

6

 

HORMEL FOODS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share and Percentage Amounts)

(Unaudited)

 

 

NOTE A              GENERAL

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.  The balance sheet at October 30, 2004, 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 30, 2004.

 

Stock-Based Compensation

 

In the fourth quarter of fiscal 2003, the Company adopted the fair value method of accounting for employee stock options in accordance with Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”  At that time, the Company elected to use the prospective method to recognize stock-based compensation expense.  The Company has continued to use the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for employee stock options granted prior to fiscal year 2003.  Based on that methodology, the Company recognized $903, net of tax, for stock options expense in the first quarter of fiscal 2005.

 

In the first quarter of fiscal 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment.”   The statement is effective for interim or annual periods beginning after June 15, 2005, and the Company will adopt the statement in the fourth quarter of fiscal 2005.  The provisions of the statement require that the Company begin expensing options using the modified-prospective transition method at that time.  As a result of beginning to expense grants issued prior to fiscal 2003 that are currently vesting, the Company will incur approximately $500, before tax, of additional expense in the fourth quarter of fiscal 2005 than previously projected under the prospective method.

 

In calculating the fair value of options granted in fiscal 2005, the Company has increased the expected life assumption to 8.0 years from 7.0 years used in 2004.  Additionally, the Company reduced the volatility assumption to 22.0% from 24.4% used in 2004.

 

7

 

Pro forma amounts as if the Company had used the fair value method in accounting for all employee stock options are as follows:

 

 

Guarantees

 

The Company enters into various agreements guaranteeing specified obligations of affiliated parties.  Currently, the Company provides a standby letter of credit for obligations of an affiliated party that may arise under worker compensation claims.  The Company’s guarantees either terminate in one year or remain in place until such time as Hormel Foods revokes the agreement.  Total guarantees provided by the Company, as of January 30, 2005, amounted to $1,940.  These potential obligations are not reflected in the Company’s consolidated balance sheet.

 

New Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation,” and supercedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.”  The statement requires that entities measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, as calculated using an accepted valuation model.  In addition, the statement rescinds the use of the prospective transition model for expensing employee stock options.  The impact of adopting this statement is discussed above under the heading “Stock-Based Compensation.”

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29.”  The statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance.  A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.  The statement is effective for fiscal periods beginning after June 15, 2005, and adoption is not expected to have a material impact on the Company’s financial condition.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4.”  The statement requires that idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as a current-period charge to earnings.  Previous guidance mandated that these costs be charged to earnings on a current basis only under certain circumstances.  The statement is effective for annual periods beginning after June 15, 2005, and adoption is not expected to have a material impact on the Company’s financial condition.

 

8

 

NOTE B              ACQUISITIONS

 

On December 29, 2004, the Company purchased all of the outstanding stock of Clougherty Packing Company (Clougherty), for $185.7 million in cash.  Clougherty is a privately held Southern California pork processor and maker of the Farmer John brand of pork products popular throughout the Southwestern United States.  The acquisition is expected to strengthen the Company’s presence in that geographic area and complements many of the Company’s existing product families.  Allocation of the purchase price, including related costs, is presented in the table below.  The allocation is preliminary, pending completion of Clougherty’s annual audit, final asset valuations, and post-closing working capital adjustments.

 

 

Clougherty’s operating results are included in the Company’s Consolidated Statement of Operations from the date of acquisition, and are reported in the Refrigerated Foods segment.  Pro forma results of operations are not presented for the Clougherty acquisition, as the effects are not material to the consolidated Company.

 

NOTE C              GOODWILL AND INTANGIBLE ASSETS

 

Changes in the carrying value of goodwill for the three month period ended January 30, 2005, are presented in the table below.  The $26,012 of goodwill acquired in the first quarter represents the preliminary purchase price allocation related to the acquisition of Clougherty Packing Company (Clougherty) on December 29, 2004.

 

		Grocery Products				Refrigerated Foods				JOTS				Specialty Foods				Other				Total
Balance as of October 30, 2004		$	40,564			$	5,224			$	203,214			$	166,374			$	2,352			$	417,728
Goodwill acquired						26,012																26,012
Balance as of January 30, 2005		$	40,564			$	31,236			$	203,214			$	166,374			$	2,352			$	443,740

 

 

The gross carrying amount and accumulated amortization for definite-lived intangible assets are presented below.  The increase for the first quarter represents the preliminary valuation of customer lists acquired from Clougherty.

 

		January 30, 2005								October 30, 2004
		Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
Formulas		$	13,195			$	(3,907	)		$	13,195			$	(3,460	)
Non-compete covenants		12,740				(5,152		)		12,740				(4,511		)
Customer lists		10,720				(1,163		)		5,420				(870		)
Proprietary software & Technology		8,870				(1,211		)		8,970				(1,076		)
Distribution network		3,100				(650		)		3,100				(572		)
Other intangibles		6,042				(3,387		)		6,292				(3,308		)
Total		$	54,667			$	(15,470	)		$	49,717			$	(13,797	)

 

9

 

Amortization expense for the three months ended January 30, 2005, and January 24, 2004, was $2,023 and $1,750, respectively.

 

Estimated annual amortization expense for the five fiscal years after October 30, 2004, is as follows:

 

 

The carrying amounts for indefinite-lived intangible assets are presented in the table below.  The $10,000 increase for the first quarter represents the preliminary valuation of trademarks acquired from Clougherty.

 

 

 

NOTE D              SHIPPING AND HANDLING COSTS

 

Shipping and handling costs are recorded as selling and delivery expenses.  Shipping and handling costs were $83,403 for the three months ended January 30, 2005, compared to $73,006 for the three months ended January 24, 2004.  The increase is primarily due to higher fuel related charges as compared to the prior year.

 

NOTE E              EARNINGS PER SHARE DATA

 

The following table sets forth the denominator for the computation of basic and diluted earnings per share:

 

 

NOTE F              COMPREHENSIVE INCOME

 

Components of comprehensive income, net of taxes, are:

 

 

10

 

NOTE G              INVENTORIES

 

Principal components of inventories are:

 

 

NOTE H              DERIVATIVES AND HEDGING

 

The Company uses hedging programs to manage risk associated with commodity purchases and certain foreign currency transactions.  These programs utilize futures contracts and swaps to manage the Company’s exposure to price fluctuations in the commodities markets and fluctuations in foreign currencies.

 

Cash Flow Hedges:  The Company from time to time utilizes corn and soybean meal futures to offset the price fluctuation in the Company’s future commodity purchases.  The Company has entered into various NYMEX-based swaps to hedge the purchase of natural gas at various plant locations.  The Company also utilizes currency futures contracts to reduce its exposure to fluctuations in foreign currencies related to the receipt of royalties that are computed in British pounds.  The financial instruments are designated and accounted for as cash flow hedges, and the Company measures the effectiveness of the hedges on a regular basis.  The Company has determined its hedges to be highly effective and recorded an immaterial amount of ineffectiveness to earnings in the first quarter of fiscal 2005.  Effective gains or losses related to these cash flow hedges are reported as other comprehensive income (loss) and reclassified into earnings, through cost of products sold (commodity positions) or net sales (currency futures), in the period or periods in which the hedged transactions affect earnings.  The Company typically does not hedge its commodity purchases beyond 15 months and currency exposure beyond 12 months.

 

As of January 30, 2005, the Company has included in accumulated other comprehensive loss hedging losses of $2,409 (net of tax) relating to its positions.  The Company expects to recognize the majority of these losses over the next twelve months.  Losses in the amount of $2,588, before tax, were reclassified into earnings in the three months ended January 30, 2005.

 

Fair Value Hedges:  The Company utilizes hog futures to minimize the price risk assumed when forward priced contracts are offered to the Company’s hog producers.  The intent of the program is to make the forward priced hogs cost nearly the same as cash market hogs at the date of delivery.

 

The futures contracts are designated and accounted for as fair value hedges, and the Company measures the effectiveness of the hedges on a regular basis.  The Company has determined its hedge program to be highly effective.  In the first quarter of 2005, the Company recorded $80 of ineffectiveness to earnings related to hedge positions.  Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and are recorded on the consolidated statement of financial position as a current asset and liability, respectively.

 

As of January 30, 2005, the fair value of the Company’s open futures contracts was $(1,498).  Losses on closed futures contracts in the amount of $1,953, before tax, were recognized in earnings during the three months ended January 30, 2005.

 

11

 

 

NOTE I             PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

 

Net periodic benefit cost for pension and other postretirement benefit plans consists of the following:

 

		Pension Benefits Three months ended								Other Postretirement Benefits Three months ended
		January 30, 2005				January 24, 2004				January 30, 2005				January 24, 2004
Service cost		$	4,580			$	4,169			$	806			$	796
Interest cost		9,956				9,495				5,604				5,615
Expected return on plan assets		(11,937		)		(9,785		)
Amortization of transition obligation						(52		)
Amortization of prior service cost		228				227				1,414				1,387
Recognized actuarial loss		2,641				2,467				960				531
Net periodic cost		$	5,468			$	6,521			$	8,784			$	8,329

 

During the third quarter of fiscal 2004, the Company determined its prescription drug plan to be actuarially equivalent to Medicare Part D, based on an analysis of the net company cost, and adopted the provisions of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.   This resulted in a reduction of the Company’s accumulated postretirement benefit obligation of $41,451.  That amount represents an actuarial gain that is being amortized over future service periods.  Any subsidies or reductions in covered claims will reduce periodic service costs.  Future guidance issued by the federal government for determining actuarial equivalency could require the Company to review this determination and change previously reported information.

 

NOTE J              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 the accounting standard SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company reports its results in the following five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and All Other.

 

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

 

The Refrigerated Foods segment includes the Meat Products and Foodservice business units.  The segment consists primarily of the processing, marketing, and sale of branded and unbranded pork products for the retail, foodservice, and fresh customer markets.  This segment also includes the Precept Foods, LLC operation, which offers fresh case-ready pork and beef products to its retail customers.  Precept Foods, LLC is a 51 percent owned joint venture between Hormel Foods Corporation and Cargill Meat Solutions Corporation (formerly Excel Corporation), a wholly owned subsidiary of Cargill, Incorporated.  Clougherty Packing Company, which was acquired on December 29, 2004, is also included in this segment.

 

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

 

The Specialty Foods segment includes the Diamond Crystal Brands, Century Foods International, Hormel HealthLabs, and Specialty Products operating segments.  This segment consists of the packaging and sale of various sugar and sugar substitute products, salt and pepper products, dessert mixes, gelatin products, and private label canned meats to retail and foodservice customers.  This segment also includes the processing, marketing, and sale of nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products. Effective November 1, 2004, the Hormel HealthLabs operating segment was consolidated into Diamond Crystal Brands.

 

The All Other segment includes the Dan’s Prize and Hormel Foods International operating segments.  These businesses produce, market, and sell beef products, and manufacture, market, and sell Company products

 

12

 

internationally.  This segment also includes various miscellaneous corporate sales.  Previously, this segment also included Vista International Packaging, a manufacturer of food packaging (i.e., casings for dry sausage), which was sold effective June 30, 2004.

 

Sales between reporting segments are recorded at prices that approximate cost.  Equity in earnings of affiliates is included in segment profit; however, the Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance.  The Company also retains various other income and unallocated expenses at corporate.  These items are included below as “Net interest and investment income” and “General corporate expense” when reconciling to earnings before income taxes.

 

Sales and operating profits for each of the Company’s business segments and reconciliation to earnings before income taxes are set forth below:

 

 

13

 

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 has been no material change in the Company’s Critical Accounting Policies, as disclosed in its Annual Report on Form 10-K for the year ended October 30, 2004.

 

RESULTS OF OPERATIONS

Overview

 

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

 

The Company earned $0.46 per share in the first quarter of fiscal 2005, compared to $0.37 per share in the first quarter of fiscal 2004.  Significant factors impacting the quarter were:

 

•                  Acquisition of Clougherty Packing Company (finalized on December 29, 2004) was immediately accretive to Refrigerated Foods segment.

•                  Jennie-O-Turkey Store segment showed strong net sales and segment profit results, driven by value-added growth, favorable market conditions, and decreasing feed costs.

•                  Growth in the chili category and ethnic products improved results in the Grocery Products segment. Recent price increase also allowed for recovery of increasing raw material costs.

•                  Profits decreased in Specialty Foods primarily due to lost contract business and weak sales in the sports nutrition and managed healthcare channels.

 

Consolidated Results

 

Net earnings for the first quarter of fiscal 2005 increased 24.4 percent to $64,474 compared to $51,826 in the same quarter of 2004.  Diluted earnings per share for the quarter increased to $0.46 from $0.37 last year.

 

Net sales for the first quarter increased 12.0 percent to $1,271,431 in 2005 from $1,135,533 in 2004.  Tonnage volume increased 4.2 percent for the first quarter compared to the same quarter of last year.  Improved market conditions and favorable pricing compared to the prior year resulted in sales dollar gains exceeding tonnage gains across several business units.  Net sales and tonnage volume comparisons for the first quarter were also positively impacted by the acquisition of Clougherty Packing Company (Clougherty), which occurred in late December 2004.  Clougherty is the maker of the Farmer John brand, and contributed $39,808 in net sales (or 35,100,000 lbs.) to the quarterly results.

 

Gross profits for the first quarter of fiscal 2005 were $311,813 compared to $271,776 for the same quarter last year.  Gross profit as a percent of net sales for the first quarter increased slightly to 24.5 percent from 23.9 percent in the first quarter of the prior year.  Lower turkey input costs and increased sales of value-added products by the Jennie-O Turkey Store and Refrigerated Foods segments contributed to the increase.  Partially offsetting these gains were lower margins in Grocery Products and Hormel Foods International, which continued to struggle with significantly higher raw material costs.

 

Selling and delivery expenses for the first quarter of fiscal 2005 were $169,517 compared to $151,640 last year.  These increases are primarily due to increased tonnage volume over the prior year, and more aggressive marketing programs implemented in the Grocery Products, Refrigerated Foods and Jennie-O Turkey Store segments.  As a percent of net sales, selling and delivery expenses decreased slightly to 13.3 percent for the fiscal 2005 first quarter compared to 13.4 percent in the comparable quarter of 2004.  This decrease reflects price increases exceeding increases in selling expenses throughout the first quarter.  The Company expects selling and delivery expenses, as a percent of sales, to remain at approximately 13.3 percent throughout fiscal year 2005.

 

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Administrative and general expenses increased to $40,622 for the quarter from $36,618 in fiscal 2004.  As a percentage of sales, administrative and general expenses for the first quarter were 3.2 percent, which is consistent with the first quarter of 2004.  Increases for the quarter include $1,300 of administrative expenses related to Clougherty Packing Company, and approximately $800 of increased professional services primarily related to Sarbanes-Oxley compliance and internal business restructuring projects.  Increased stock option expense and additional amortization of the Company’s affordable housing investments also contributed to the higher expense.  The Company expects administrative and general expenses, as a percent of sales, to approximate 3.1 percent for fiscal year 2005.

 

Equity in earnings of affiliates was $2,927 for the first quarter, compared to $1,706 last year.  The increase in this earnings line for the quarter is primarily due to improved results of the Company’s 49.0 percent owned joint venture, Carapelli USA, LLC (up $225), and the Company’s 40.0 percent owned Philippine joint venture, Purefoods-Hormel Company (up $1,000).  Minority interests in the Company’s consolidated investments are also reflected in these figures but are not significant at this time.

 

The effective tax rate for the first quarter of fiscal 2005 was 37.1 percent compared to 36.5 percent for the comparable quarter of fiscal 2004.  The Company expects the fiscal 2005 effective tax rate will approximate 37.0 percent.

 

Segment Results

 

Segmented net sales and profits for each of the Company’s segments are set forth below.  Additional segment financial information can be found in Note J of the Notes to Consolidated Financial Statements.

 

 

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