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 For Quarter Ended July 25, 1998 Commission File Number 1-2402 HORMEL FOODS CORPORATION ------------------------ Incorporated Under the Laws of the State of Delaware Fein #41-0319970 1 Hormel Place Austin, Minnesota 55912-3680 Telephone - (507) 437-5737 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 [XXX] 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 April 25, 1998 - -------------------------------------------------------------------------------- Common Stock - $.1172 par value 73,614,546 Common Stock Non-Voting - $.01 par value - 0 - Pages:This report contains ten pages numbered sequentially from this cover page. -1-
STATEMENTS OF FINANCIAL POSITION Form 10-Q <TABLE> HORMEL FOODS CORPORATION (In Thousands of Dollars) <CAPTION> July 25, October 25, 1998 1997 ------------ ----------- (Unaudited) ASSETS <S> <C> <C> CURRENT ASSETS Cash and cash equivalents ................. $ 141,712 $ 146,853 Short-term marketable securities-- at cost which approximates market ....... 34,524 5,533 Accounts receivable ....................... 208,663 233,966 Inventories ............................... 258,726 265,346 Deferred income taxes ..................... 12,627 12,204 Prepaid expenses .......................... 6,250 7,450 ----------- ----------- TOTAL CURRENT ASSETS 662,502 671,352 DEFERRED INCOME TAXES ....................... 68,353 68,629 INTANGIBLES ................................. 125,917 131,710 INVESTMENTS IN AFFILIATES ................... 116,183 113,372 OTHER ASSETS ................................ 64,562 54,734 PROPERTY, PLANT AND EQUIPMENT Land ...................................... 11,926 11,467 Buildings ................................. 250,596 242,124 Equipment ................................. 603,807 594,159 Construction in progress .................. 44,975 72,179 ----------- ----------- 911,304 919,929 Less allowance for depreciation ........... (440,523) (431,191) ----------- ----------- 470,781 488,738 ----------- ----------- $ 1,508,298 $ 1,528,535 =========== =========== </TABLE> See notes to financial statements -2-
STATEMENTS OF FINANCIAL POSITION Form 10-Q <TABLE> HORMEL FOODS CORPORATION (In Thousands of Dollars) <CAPTION> July 25, October 25, 1998 1997 ---------- ----------- (Unaudited) LIABILITIES AND SHAREHOLDERS' INVESTMENT <S> <C> <C> CURRENT LIABILITIES Accounts payable ........................... $ 106,574 $ 120,385 Accrued expenses ........................... 32,763 34,564 Accrued marketing .......................... 23,058 21,543 Employee compensation ...................... 49,486 46,275 Taxes, other than federal income taxes ..... 16,051 16,524 Dividends payable .......................... 11,977 11,980 Federal income taxes........................ --- 4,712 Current maturities of long-term debt ....... 2,828 4,595 ---------- ---------- TOTAL CURRENT LIABILITIES .................... 242,737 260,578 LONG-TERM DEBT--less current maturities ...... 210,133 198,232 ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION ................................... 247,376 243,343 OTHER LONG-TERM LIABILITIES .................. 22,634 24,180 SHAREHOLDERS' INVESTMENT Preferred Stock, par value $.01 a share-- authorized 40,000,000 shares; issued--none Common Stock, non-voting, par value $.01 a share--authorized 40,000,000 shares; issued--none Common Stock, par value $.1172 a share-- authorized 200,000,000 shares; issued 73,614,546 shares July 25, 1998 issued 75,776,510 shares Oct. 25, 1997 8,628 8,881 Earnings reinvested in business ............ 776,790 793,321 ---------- ---------- 785,418 802,202 ---------- ---------- $1,508,298 $1,528,535 ========== ========== </TABLE> See notes to financial statements -3-
STATEMENTS OF EARNINGS Form 10-Q (Unaudited) <TABLE> HORMEL FOODS CORPORATION (In Thousands, Except Per Share Amounts) <CAPTION> Three Months Ended Nine Months Ended July 25, July 26, July 25, July 26, 1998 1997 1998 1997 ---------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Sales, less returns and allowances ............... $ 755,769 $ 779,679 $ 2,349,008 $ 2,388,443 Cost of products sold ...... 561,144 609,527 1,744 149 1,845,168 ----------- ----------- ----------- ----------- GROSS PROFIT 194,625 170,152 604,859 543,275 Expenses: Selling and delivery ..... 72,676 69,277 226,022 223,084 Marketing ................ 66,481 57,908 199,594 166,574 Administrative and general 21,804 14,832 61,518 51,044 Gain on plant sale ....... --- --- (28,379) --- ----------- ----------- ----------- ----------- OPERATING INCOME 33,664 28,135 146,104 102,573 Other income and expenses: Other income--net ........ 3,499 2,039 10,784 7,369 Equity in earnings of affiliates ............. 615 1,431 3,182 1,949 Interest expense ......... (3,919) (3,415) (10,472) (9,815) ----------- ----------- ----------- ----------- EARNINGS BEFORE INCOME TAXES ...................... 33,859 28,190 149,598 102,076 Provision for income taxes . 12,865 10,037 55,459 37,253 ----------- ----------- ----------- ----------- NET EARNINGS $ 20,994 $ 18,153 $ 94,139 $ 64,823 =========== =========== =========== =========== Earnings per share: NET EARNINGS PER SHARE (DILUTED) .................. $ 0.28 $ 0.24 $ 1.23 $ 0.84 =========== =========== =========== =========== NET EARNINGS PER SHARE (BASIC) .................... $ 0.28 $ 0.24 $ 1.25 $ 0.84 =========== =========== =========== =========== </TABLE> See notes to financial statements -4-
Form 10-Q CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> HORMEL FOODS CORPORATION (In Thousands of Dollars) <CAPTION> Nine Months Ended July 25, 1998 July 26, 1997 -------------- -------------- OPERATING ACTIVITIES <S> <C> <C> Net earnings ................................. $ 94,139 $ 64,823 Adjustments to reconcile to net cash provided by operating activities: Depreciation ............................. 37,896 32,611 Amortization of intangibles .............. 5,344 5,624 Equity in earnings of affiliates ......... (3,182) --- Provision for deferred income taxes ...... (147) 1,545 Loss on property/equipment sales ......... 1,974 56 Gain on plant sale ....................... (17,592) --- Changes in operating assets and liabilities: Decrease in accounts receivable........... 25,303 23,227 Decrease in inventories and prepaid expenses .................... 7,820 2,710 Decrease in accounts payable and accrued expenses .................... (13,584) (32,979) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 137,971 97,617 INVESTING ACTIVITIES Sale of held-to-maturity securities ......... 54,065 41,241 Purchase of held-to-maturity securities ..... (83,056) (53,081) Acquisitions of businesses .................. --- (140) Purchases of property/equipment ............. (43,788) (87,232) Proceeds from sales of property/equipment ... 39,467 3,459 Increase in investments and other assets .... (10,678) (73,843) Dividends from affiliate .................... 1,670 --- --------- --------- NET CASH USED IN INVESTING ACTIVITIES .......... (42,320) (169,596) FINANCING ACTIVITIES Proceeds from long-term borrowings .......... 18,694 69,318 Principal payments on long-term debt ........ (8,560) (2,540) Dividends paid on Common Stock .............. (35,896) (35,514) Stock Repurchase ............................ (76,518) (40,350) Other ....................................... 1,488 201 --------- --------- NET CASH PROVIDED USED IN FINANCING ACTIVITIES ........................... (100,792) (8,885) --------- --------- DECREASE IN CASH AND CASH EQUIVALENTS ............................... (5,141) (80,864) Cash and cash equivalents at beginning of year . 146,853 188,473 --------- --------- CASH AND CASH EQUIVALENTS AT END OF QUARTER............................. $ 141,712 $ 107,609 ========= ========= </TABLE> See notes to financial statements -5-
FORM 10-Q NOTES TO FINANCIAL STATEMENTS (UNAUDITED) HORMEL FOODS CORPORATION NOTE A In the opinion of the Company, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation. The accounting policies followed by the Company are set forth in Note A to the Company's Financial Statements in the 1997 Hormel Foods Corporation Annual Report to Shareholders, which is incorporated by reference on Form 10-K. NOTE B The results of operations for the three and nine month periods ended July 25, 1998, and July 26, 1997 are not necessarily indicative of the results to be expected for the full year. - 6 -
Form 10-Q MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In Thousands) HORMEL FOODS CORPORATION RESULTS OF OPERATIONS Net earnings in the third quarter increased 15.7 percent to $20,994 from $18,153 during the same quarter of 1997. Sales for the quarter decreased 3.1 percent to $755,769 from $779,679 last year. Sales tonnage for the period increased 8.6 percent compared to the same period of 1997. Reduced selling prices for fresh pork and turkey products contributed to the decline in dollar sales despite the increased tonnage volume. While live spot market prices paid for hogs continued at levels substantially less than the third quarter of 1997, procurement contracts limited the overall reduction in live hog costs. Contract buying is already reducing the historical volatility in the supply and price of hogs. While Jennie-O's turkey tonnage increased over 20 percent for the quarter, large freezer inventories and low commodity prices continued to have a negative influence on the Company's third quarter performance. Earnings for the first three quarters of fiscal 1998 were $94,139 compared to $64,823 in 1997. The 1998 results include a gain, net of taxes, of $17,402 on the sale of the Davenport, Iowa gelatin plant to Goodman Fielder, LTD., of Sydney, Australia. Excluding the one-time gain from the Davenport sale, sales and earnings for the first nine months were $2,349,008 and $76,737 respectively, compared to $2,388,443 and $64,823 for the same period last year. Tonnage volume for the three quarters increased 7.4 percent over 1997 to 2,026,547 pounds. Gross margins for the quarter and first nine months as a percentage of sales were 25.8 percent compared to 21.8 and 22.8 percent for the corresponding periods of 1997. The effect of lower price levels for finished goods was more than offset by increased tonnage volume with a significant portion of the volume increase being higher margin manufactured items. Marketing expenses for the quarter and to-date were $66,481 and $199,594, respectively, compared to $57,908 and $166,574 for 1997. Company promotional programs continue to focus on increasing sales of higher margin processed items. Selling and delivery expenses for the quarter and nine months as a percentage of sales were 9.6 percent compared to 8.9 and 9.3 percent last year. Administrative and general expenses increased to 2.9 percent for the quarter and 2.6 percent to-date compared to 1.9 and 2.1 percent for the same periods in 1997 due to adjustments in 1997 to the accruals for selling Farm Fresh Catfish and reduced dollar sales in 1998. The Company's core Hormel business continues to be the major contributor to earnings with Prepared Foods, Meat Products and Foodservice Groups all experiencing significant gains in sales of branded product lines. Export sales were up 31.4 percent in the third quarter compared to last year. Significant tonnage increases were accomplished in both Japan and the Philippines. Results in Canada, Australia and the U.K. continue to exceed expectations. Joint ventures in Shanghai and Beijing continue to expand their product offerings and distribution. -7-
Form 10-Q MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In Thousands) HORMEL FOODS CORPORATION RESULTS OF OPERATIONS The effective tax rate for the quarter and three quarters to-date was 38.0 and 37.1 percent compared to 35.6 and 36.5 percent for the same periods last year. The increase is due primarily to a reduction in 1998 of non-U.S. taxed income of a foreign affiliate. <TABLE> FINANCIAL CONDITION <CAPTION> Ratio comparisons presented below as of the end of the third quarter reflect the continued strong financial condition of the Company. End of Quarter 3rd Quarter 3rd Quarter 1998 1997 ------------ ----------- <S> <C> <C> Liquidity Ratios Current ratio 2.7 2.8 Receivables turnover 14.2 14.5 Days sales in receivables 24.3 days 23.8 days Inventory turnover 8.9 9.1 Days sales in inventory 40.6 days 40.0 days Leverage Ratio Long-term debt to equity 27.1% 25.4% Operating Ratios Pre-tax profit to net worth 25.1% 17.5% Pre-tax profit to total assets 13.1% 9.4% </TABLE> Changes during the first nine months in current asset and liability balances followed normal seasonal patterns. Inventory levels are considered adequate for traditional promotional activities that occur during the fourth quarter. During the first three quarters, the Company invested $43,788 in new plant and equipment. Investment in plant and equipment emphasizes productivity gains and efficient product flow while improving ergonomics and safety conditions for employees. The Company completed a new manufacturing plant and distribution center in Osceola, Iowa in 1997 which accounts for the increased investment level last year. As mentioned previously, the Company sold the Davenport gelatin plant late in the first quarter. -8-
Form 10-Q MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In Thousands) HORMEL FOODS CORPORATION FINANCIAL CONDITION Long-term debt primarily consists of small issue Industrial Revenue Bonds of varying maturities, debt used for investment in the Federal Affordable Housing Program, $110,000 in Senior Notes and $64,400 of long-term notes denominated in Spanish Pesetas used to purchase the equity interest in Campofrio. The leverage ratio indicates significant borrowing capacity remains to take advantage of any business opportunities that may arise through acquisitions or internal expansion. During the first nine months of fiscal 1998, 2,251,600 shares of Hormel Common Stock were purchased under the share repurchase program at an average price per share of $33.98. This completes the five million share repurchase program announced in March of 1996. . -9-
FORM 10-Q PART II - OTHER INFORMATION Item 4. Results of Votes of Security Holders. None Item 6. Exhibits and Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HORMEL FOODS CORPORATION Date:------------------------- By:------------------------- D. J. HODAPP Executive Vice President & Chief Financial Officer Date:------------------------- By:------------------------- J. M. ETTINGER Treasurer -10-