Hormel Foods 2011 Annual Report Download - page 15

13
Hormel Foods Corporation
Ex
ecu
tiv
e
O
v
e
rvi
ew
F
iscal 2011: Hormel Foods ach
i
eved record sales and earn
-
in
g
s durin
g
fiscal 2011. Sales
g
rew more than nine percent
compared to fiscal 2010, resultin
g
in total sales of $7.9 billion.
All
fi
ve reportin
g
se
g
ments contributed to the year-over-year
improvement. Earnin
g
s for the year were $474.2 million, an
increase of 1
9
.
9
percent. These results are even more impres
-
s
ive considering the comparisons are based on a 5
2
week
fiscal year in 2011 com
p
ared to a 5
3
week fiscal year in 2010.
E
conomic conditions during the year required significant pric
-
i
ng act
i
ons to keep pace w
i
th r
i
s
i
ng commod
i
ty costs. Desp
i
te
these
p
ressures, sales o
f
our value-added
p
roducts continued
to
p
er
f
orm well. Value-added
p
roducts under key
H
orme
l
®
an
d
Jennie-O Turkey Store
®
brands also bene
fi
tted
f
rom an
i
ncreased
i
nvestment
i
n advert
i
s
i
n
g
campa
ig
ns dur
i
n
g
the year.
O
ur Jennie-
O
Turkey
S
tore se
g
ment delivered outstandin
g
r
esults as improved sales of value-added products and hi
g
her
c
ommodity prices, alon
g
with continued efficiencies in oper
a
-
t
ions and its supply chain, drove the earnings growth.
G
rocery
P
roducts performance was mixed for the year. Earnings for
t
his segment declined compared to adjusted earnings
(
1
)
i
n the
prior year, as sales
g
rowth was unable to counter si
g
ni
fi
cant
i
nput cost pressures.
O
ur Refri
g
erated Foods se
g
ment had
a solid year, as stron
g
pork operatin
g
mar
g
ins and improved
v
alue-added sales more than offset hi
g
her raw material costs.
S
pecialty Foods saw operatin
g
profit decline as pricin
g
actions
and improved sales were unable to cover higher raw material
costs. Our All Other
(
International
)
segment turned in a great
y
ear, as strong pork exports led to double-digit growth for
sales and earn
i
ngs
.
Our strong financial performance continued to generate
substantial cash
fl
ows. We increased our investment in the
Me
g
aMex Foods joint venture with the addition o
f
the
Wh
o
lly
G
uacamol
e
®
line o
f
re
f
ri
g
erated dips and related products.
We also announced our 46th consecutive year o
f
dividend
i
ncreases, raisin
g
our dividend rate by 17.6 percent
f
or
fi
scal
20
1
2
, and repurchased 5.5 million shares of common stock,
spendin
g
$152.9 million.
F
i
sc
al
20
1
2
Ou
tl
oo
k: We antici
p
ate volatile commodity ma
r
-
kets including higher grain costs and lower pork operating
margins in fiscal 2012. Despite these challenges, we expect to
del
i
ver year-over-year
i
m
p
rovements
i
n both sales and ear
n
-
i
ngs, utilizing our balanced port
f
olio to help weather economic
u
ncertainty. A continuing priority will be our
f
ocus on building
branded, value-added
p
roduct l
i
nes wh
i
ch allow us to
p
rov
i
de
c
onsumers with
g
reat tastin
g
, convenient, and healthy
f
ood
options at a
g
ood value.
O
ur stron
g
balance sheet and free
c
ash
fl
ow will
g
ive us the opportunity to build our business
throu
g
h internal expansion or strate
g
ic acquisitions.
(
1
)
G
rocery Products adjusted earnin
g
s for fiscal
20
1
0
exclude a pretax char
g
e
o
f $9.7 million related to the closin
g
of the Company’s Valley Fresh plant in
T
urlock
,
California
.
C
ritical Accountin
g
Policies
T
his discussion and analysis o
f
fi
nancial condition and
results o
f
operations is based upon the consolidated
fi
nancial
s
tatements of Hormel Foods Corporation (the Company),
w
hich have been prepared in accordance with U.
S
.
g
enerally
accepted accountin
g
principles (GAAP). The preparation of
these financial statements requires the
C
ompany to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and ex
p
enses, and related disclo
-
s
ure of contingent assets and liabilities. The Company eval
u
-
ates, on an ongoing basis, its estimates for reasonableness
as changes occur in its business environment. The Company
bases its estimates on ex
p
erience, the use o
f
inde
p
endent
th
i
rd-
p
arty s
p
ec
i
al
i
sts, and var
i
ous other assum
p
t
i
ons that
are bel
i
eved to be reasonable under the c
i
rcumstances
,
the
results o
f
which
f
orm the basis
f
or makin
g
jud
g
ments about
the carryin
g
values o
f
assets and liabilities that are not read
-
ily apparent from other sources. Actual results may differ
materially from these estimates under different assumptions
o
r
co
n
d
iti
o
n
s
.
Critical accounting policies are defined as those that are
reflective of significant judgments, estimates, and uncertain
-
ties, and
p
otentially result in materially di
ff
erent results
under different assum
p
tions and conditions. The Com
p
any
believes the
f
ollowin
g
are its critical accountin
g
policies
:
I
nventor
y
Valuat
i
on:
T
he
C
ompany values its pork inventories
at the lower of cost or USDA market prices (primal values).
Wh
e
n th
e
ca
r
casses
a
r
e
d
i
sasse
m
b
l
ed
a
n
d
tr
a
n
s
f
e
rr
ed
fr
o
m
primal processin
g
to various manufacturin
g
departments,
the primal values, as ad
j
usted by the
C
ompany for product
s
pecifications and further processing, become the basis for
calculating inventory values. Turkey raw materials are repr
e
-
s
ented by the deboned meat
q
uantities. The Com
p
any values
these raw materials using a concept referred to as the “meat
cost pool.” The meat cost pool
i
s determ
i
ned by comb
i
n
i
ng
the cost to
g
row turkeys w
i
th process
i
n
g
costs, less any net
s
ales revenue
f
rom by-products created
f
rom the processin
g
and not used in producin
g
C
ompany products. The
C
ompany
has developed a series o
f
ratios usin
g
historical data and cu
r
-
rent market conditions
(
which themselves involve estimates
and jud
g
ment determinations by the Company) to allocate
the meat cost
p
ool to each meat com
p
onent.
S
ubstantially all
inventoriable expenses, meat, packaging, and supplies are
v
a
l
ue
d
b
y t
h
e average cost met
h
o
d.
G
oodwill and Other Intan
g
ibles: The Com
p
any’s identifiable
intangible assets are amortized over their use
f
ul lives, unless
the use
f
ul li
f
e is determined to be inde
fi
nite. The use
f
ul li
f
e o
f
an identi
fi
able intan
g
ible asset is based on an analysis o
f
se
v
-
eral
f
actors includin
g
: contractual, re
g
ulatory, or le
g
al obli
g
a-
tions, demand, competition, and industry trends.
G
oodwill and
indefinite-lived intan
g
ible assets are not amortized, but are
tested at least annually for impairment
.
MANA
G
E
M
E
NT’S DISCUSSIO
N
AN
D
A
NALY
S
I
S
OF
F
I
NAN
C
I
AL CO
N
D
I
TIO
N
AN
D
RESULTS
O
FOP
E
R
A
TIO
N
S