Business Overview: Hormel Foods is engaged in a single business segment designated as "meat and food processing." As a federally inspected food processor, Hormel Foods is engaged in the processing of meat and poultry products, production of prepared foods and the marketing of those products to food wholesalers, retailers and food-service distributors in the United States. The principal raw materials for the company's products are pork and turkey. The company's earnings are influenced by the cyclical nature of these raw material costs.
Principles of Consolidation: The consolidated financial statements include the accounts of Hormel Foods Corporation and all of its majority-owned subsidiaries after elimination of all significant intercompany accounts, transactions and profits. Certain reclassifications of previously reported amounts have been made to conform with the current year presentation. The reclassifications had no impact on the net earnings as previously reported.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Fiscal Year: The company's fiscal year ends on the last Saturday in October. Fiscal years 2000 and 1999 consisted of 52 weeks and fiscal year 1998 consisted of 53 weeks.
Inventories: Inventories are stated at the lower of cost or market. Livestock and the materials portion of products are valued on the first-in, first-out method with the exception of the materials portion of turkey products which is valued on the last-in, first-out method. Substantially all inventoriable expenses, packages and supplies are valued by the last-in, first-out method.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. The company generally uses the straight-line method in computing depreciation. The annual provisions for depreciation have been computed principally in accordance with the following ranges of asset lives: buildings 20 to 40 years, machinery and equipment 5 to 10 years.
Software development and implementation costs are expensed until the company has determined that the software will result in probable future economic benefits, and management has committed to funding the project. Thereafter, all direct, external implementation costs and purchased software costs are capitalized and amortized using the straight-line method over the remaining estimated useful lives, not exceeding five years.
Intangibles: Goodwill and other intangibles are recorded at their estimated fair values at date of acquisition and are amortized on a straight-line basis over periods ranging up to 40 years. Accumulated amortization at October 28, 2000, and October 30, 1999, was $48.0 million and $42.1 million, respectively.
Impairment of Long-lived Assets: The company reviews the long-lived assets, including identifiable intangibles and associated goodwill, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets and any related goodwill, the carrying value is reduced to the estimated fair value as measured by the discounted cash flows.
Foreign Currency Translation: Assets and liabilities denominated in foreign currency are translated at the current exchange rate as of the balance sheet date, and income statement amounts are translated at the average monthly exchange rate. Translation adjustments resulting from fluctuations in exchange rates are recorded as a component of "Accumulated Other Comprehensive Loss" in shareholders' investment. Gains and losses from foreign currency transactions are not material.
Equity Method Investments: The company has a number of investments in joint ventures and other entities where its voting interests are in excess of 20 percent but not greater than 50 percent. The company accounts for such investments under the equity method of accounting, and its underlying share of each investee's equity is reported in the consolidated balance sheet as part of investments in affiliates.
The company's only material equity investments are in the common stock of a Spanish company, Campofrio Alimentacion. S.A. (Campofrio), and a joint venture in the Purefoods-Hormel Company in the Philippines. As of October 28, 2000, the company held an 18.2 percent ownership interest in Campofrio. The company intends and has the ability to regain an ownership interest over 20 percent. The fair value of such publicly traded securities was $75.3 million at October 28, 2000. The company purchased a 40.0 percent interest in the Purefoods-Hormel Company in 1999 for $22.2 million. The company recorded a $3.8 million gain, or $.03 a share, for the sale of land by Campofrio in the first quarter of 1999.
Divestitures and Acquisitions: The company recorded a $28.4 million gain ($17.4 million after tax, or $.12 per share) in the first quarter of 1998 related to the sale of its Davenport (Iowa) gelatin/specialized proteins plant.
Revenue Recognition: The company follows a policy of recognizing sales at the time of product shipment.
Advertising Expenses: Advertising costs are expensed when incurred. Advertising expenses include all media advertising but exclude the costs associated with coupons, samples and market research. Advertising costs for fiscal years 2000, 1999 and 1998 were $260.1 million, $273.2 million and $246.l million, respectively.
Research and Development Expenses: Research and development expenses incurred for fiscal years 2000, 1999 and 1998 were $9.6 million, $9.6 million and $9.0 million, respectively.
Income Taxes: The company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur.
Employee Stock Options: The company uses 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. Under the intrinsic value method, compensation expense is recognized only to the extent the market price of the common stock exceeds the exercise price of the stock option at the date of the grant.
Earnings Per Share: The following table presents information necessary to calculate basic and diluted earnings per common share and common share equivalents:
(In Thousands, Except Per Share Data) 2000 1999 1998 Net earnings $170,217 $163,438 $139,291 Weighted-average shares outstanding for basic earnings per share 140,532 145,794 149,486 Dilutive effect of stock options 991 1,216 920 Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share 141,523 147,010 150,406 Basic earnings per share $ 1.21 $ 1.12 $ 0.93 Diluted earnings per share $ 1.20 $ 1.11 $ 0.93
On November 22, 1999, the Hormel Foods Corporation Board of Directors authorized a two-for-one split of the company's common stock that was approved by the shareholders at the Annual Meeting on January 25, 2000. The calculation of earnings per share in the above table and elsewhere in this Annual Report reflects the impact from this split.
Accounting Changes and Recent Accounting Pronouncements: The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities"; SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133"; and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133." These statements outline the accounting treatment for all derivative activity. The company is required to adopt SFAS No. 133 in the first quarter of fiscal 2001 and does not expect adoption to have a material effect on its results of operations or financial position.