Hormel Foods 2014 Annual Report Download - page 56

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A reconciliation of the number of options outstanding and
exercisable (in thousands) as of October 26, 2014, and
changes during the fiscal year then ended, is as follows:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
Outstanding at
October 27, 2013 18,466 $ 22.09
Granted 1,400 45.43
Exercised 2,447 17.45
Forfeited 17 32.40
Outstanding at
October 26, 2014 17,402 $ 24.61 5.3 yrs $ 486,023
Exercisable at
October 26, 2014 12,444 $ 20.76 4.3 yrs $ 395,462
The weighted-average grant date fair value of stock options
granted and the total intrinsic value of options exercised
(in thousands) during each of the past three fiscal years is
as follows:
Fiscal Year Ended
October 26, October 27, October 28,
2014 2013 2012
Weighted-average
grant date fair value $ 9.70 $ 5.50 $ 5.64
Intrinsic value of
exercised options $ 74,972 $ 77,610 $ 30,210
The fair value of each option award is calculated on the date
of grant using the Black-Scholes valuation model utilizing the
following weighted-average assumptions:
Fiscal Year Ended
October 26, October 27, October 28,
2014 2013 2012
Risk-free interest rate 2.5% 1.4% 1.8%
Dividend yield 1.8% 2.1% 2.0%
Stock price volatility 20.0% 20.0% 21.0%
Expected option life 8 years 8 years 8 years
As part of the annual valuation process, the Company reas-
sesses the appropriateness of the inputs used in the valuation
models. The Company establishes the risk-free interest rate
using stripped U.S. Treasury yields as of the grant date where
the remaining term is approximately the expected life of the
option. The dividend yield is set based on the dividend rate
approved by the Company’s Board of Directors and the stock
price on the grant date. The expected volatility assumption is set
based primarily on historical volatility. As a reasonableness test,
implied volatility from exchange traded options is also examined
to validate the volatility range obtained from the historical anal-
ysis. The expected life assumption is set based on an analysis of
past exercise behavior by option holders. In performing the val-
uations for option grants, the Company has not stratified option
holders as exercise behavior has historically been consistent
across all employee and non-employee director groups.
The Company also has purchase obligations that are not
reflected in the consolidated statements of financial position,
representing open purchase orders and contracts related to
the procurement of materials, supplies, and various services.
As of October 26, 2014, commitments related to those pur-
chase orders, and all known contracts exceeding $1.0 million,
are shown below. The Company primarily purchases goods
and services on an as-needed basis and therefore, amounts
in the table represent only a portion of expected future cash
expenditures.
(in thousands)
2015 $403,459
2016 25,835
2017 31,855
2018 35,350
2019 28,725
Later Years 10,019
Total $535,243
As of October 26, 2014, the Company has $41.7 million of
standby letters of credit issued on its behalf. The standby
letters of credit are primarily related to the Company’s
self-insured workers compensation programs. However, that
amount also includes revocable standby letters of credit total-
ing $3.5 million for obligations of an affiliated party that may
arise under workers compensation claims. Letters of credit
are not reflected in the Company’s consolidated statements of
financial position.
The Company is involved on an ongoing basis in litigation
arising in the ordinary course of business. In the opinion of
management, the outcome of litigation currently pending will
not materially affect the Company’s results of operations,
financial condition, or liquidity.
Note L
Stock-Based Compensation
The Company issues stock options and nonvested shares as
part of its stock incentive plans for employees and non-em-
ployee directors. The Company’s policy is to grant options with
the exercise price equal to the market price of the common
stock on the date of grant. Options typically vest over periods
ranging from six months to four years and expire ten years
after the date of the grant. The Company recognizes stock-
based compensation expense ratably over the shorter of the
requisite service period or vesting period. The fair value of
stock-based compensation granted to retirement-eligible
individuals is expensed at the time of grant.