Hormel Foods 2013 Annual Report Download - page 24

22
insurance related expenses also decreased during fiscal 2012,
but were partially offset by increases in brokerage and pro-
fessional service expenses compared to fiscal 2011.
Research and development expenses were $8.1 million and
$29.8 million for the fiscal 2012 fourth quarter and year,
respectively, compared to $8.2 million and $29.4 million in
fiscal 2011.
Equity in Earnings of Affiliates: Equity in earnings of affiliates
was $10.1 million and $38.7 million for the fiscal 2012 fourth
quarter and year, respectively, compared to $7.6 million
and $26.8 million in fiscal 2011. Strong results from the
Company’s 50 percent owned MegaMex joint venture were
the primary driver of the increase for both the fourth quarter
and year compared to fiscal 2011. Results were mixed for
the Company’s international joint ventures, resulting in an
overall decline for those operations for fiscal 2012 compared
to fiscal 2011.
The Company accounts for its majority-owned operations
under the consolidation method. Investments in which the
Company owns a minority interest, and for which there are
no other indicators of control, are accounted for under the
equity or cost method. These investments, along with receiv-
ables from other affiliates, are included in the Consolidated
Statements of Financial Position as investments in and
receivables from affiliates. The composition of this line item at
October 28, 2012, was as follows:
(in thousands)
Country Investments/Receivables
United States $205,315
Philippines 60,728
Vietnam 11,470
Mexico 5,518
Japan 3,506
Total $286,537
Income Taxes: The Company’s effective tax rate for the fiscal
2012 fourth quarter and year was 33.1 percent and 33.4 per-
cent, respectively, compared to 34.3 percent and 33.3 percent,
respectively, for the quarter and year in fiscal 2011.
Segment Results
Net sales and operating profits for each of the Company’s
reportable segments are set forth below. The Company
is an integrated enterprise, characterized by substantial
intersegment cooperation, cost allocations, and sharing of
assets. Therefore, the Company does not represent that
these segments, if operated independently, would report the
operating profit and other financial information shown below.
(Additional segment financial information can be found in
Note O “Segment Reporting.”)
The record sales results for fiscal year 2012 reflected ongoing
support of the Company’s key Hormel® and Jennie-O Turkey
Store® brands through effective media campaigns. The
Company also benefitted from a new advertising campaign
celebrating the 75th anniversary of the iconic SPAM® brand
featuring the Sir-Can-A-Lot™ character. Top-line results for
Grocery Products were further enhanced by the inclusion of
sales of Don Miguel Foods Corp. products (additional product
lines within the MegaMex joint venture), as the Company’s
retail sales force assumed responsibility for these sales
beginning in the third quarter of fiscal 2012. These sales
contributed $95.9 million to the top line results for fiscal 2012.
In addition, the Company achieved its remarkable goal of gen-
erating more than $2 billion in sales from new products that
did not exist 12 years ago.
Gross Profit: Gross profit was $351.8 million and $1.33 billion
for the 2012 fourth quarter and fiscal year, respectively, com-
pared to $336.0 million and $1.33 billion in fiscal 2011. As a
percentage of net sales, gross profit increased to 16.2 percent
for the fourth quarter of fiscal 2012 compared to 16.0 percent
in the fourth quarter of fiscal 2011, but decreased to 16.2
percent for fiscal year 2012 compared to 16.9 percent in fiscal
2011. Shipping and handling expenses increased compared to
fiscal 2011 across all segments of the Company. Additionally,
the spread between hog costs and primal values remained
well below prior year levels throughout fiscal 2012, resulting
in substantial declines in pork operating margins compared
to fiscal 2011. Losses in the Company’s live hog operations
and the negative impact of grain based procurement contracts
also decreased margins for Refrigerated Foods. Although
value-added sales growth for that segment was strong for
fiscal 2012, it was unable to fully offset the losses in opera-
tions. Jennie-O Turkey Store generated strong margins for
fiscal year 2012, as value-added sales growth and ongoing
operational efficiencies were able to overcome the impact
of significantly higher feed costs. Lower raw material costs
and an improved product mix also enhanced margins for the
Company’s international business.
Selling, General and Administrative: Selling, general and
administrative expenses for the 2012 fourth quarter and fiscal
year were $159.7 million and $605.9 million, respectively,
compared to $156.7 million and $618.6 million in fiscal 2011.
Selling, general and administrative expenses as a percentage
of net sales for the fourth quarter remained flat compared
to the fourth quarter of fiscal year 2011 at 7.4 percent. For
fiscal year 2012, these expenses decreased to 7.4 percent of
net sales from 7.8 percent in fiscal 2011. The lower expense
incurred in fiscal 2012 was primarily due to a reduction in
advertising. In fiscal 2011, the Company invested significantly
in “Make the Switch” media campaigns for Jennie-O Turkey
Store® products. In fiscal 2012, the Company was able to build
upon this successful media campaign by introducing new
turkey bacon and breakfast sausage products, but overall
spending did not reach fiscal year 2011 levels. Pension and