Hormel Foods 2014 Annual Report Download - page 60

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Note N
Fair Value Measurements
Pursuant to the provisions of ASC 820, the Company’s financial assets and liabilities carried at fair value on a recurring basis in
the consolidated financial statements as of October 26, 2014, and October 27, 2013, and their level within the fair value hierarchy,
are presented in the table below.
Fair Value Measurements at October 26, 2014
Quoted Prices in
Fair Value at Active Markets Significant Other Significant
October 26, for Identical Observable Unobservable
(in thousands) 2014 Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
Assets at Fair Value:
Cash and cash equivalents(1) $ 334,174 $ 334,174 $ – $ –
Other trading securities(2) 117,249 39,120 78,129 –
Commodity derivatives(3) 3,461 3,461 – –
Total Assets at Fair Value $ 454,884 $ 376,755 $ 78,129 $ –
Liabilities at Fair Value:
Deferred compensation(2) $ 54,809 $ 23,642 $ 31,167 $ –
Total Liabilities at Fair Value $ 54,809 $ 23,642 $ 31,167 $ –
Fair Value Measurements at October 27, 2013
Quoted Prices in
Fair Value at Active Markets Significant Other Significant
October 27, for Identical Observable Unobservable
(in thousands) 2013 Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
Assets at Fair Value:
Cash and cash equivalents(1) $ 434,014 $ 434,014 $ – $ –
Other trading securities(2) 114,300 38,489 75,811 –
Commodity derivatives(3) 6,086 6,086 – –
Total Assets at Fair Value $ 554,400 $ 478,589 $ 75,811 $ –
Liabilities at Fair Value:
Deferred compensation(2) $ 52,771 $ 21,257 $ 31,514 $ –
Total Liabilities at Fair Value $ 52,771 $ 21,257 $ 31,514 $ –
The following methods and assumptions were used to estimate the fair value of the financial assets and liabilities above:
(1) The Company’s cash equivalents consist primarily of bank deposits, money market funds rated AAA, or other highly liquid investment accounts.
As these investments have a maturity date of three months or less, the carrying value approximates fair value.
(2) The Company holds trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans.
The rabbi trust is included in other assets on the Consolidated Statements of Financial Position and is valued based on the underlying fair value
of each fund held by the trust. A majority of the funds held related to the supplemental executive retirement plans have been invested in fixed
income funds managed by a third party. The declared rate on these funds is set based on a formula using the yield of the general account invest-
ment portfolio that supports the fund, adjusted for expenses and other charges. The rate is guaranteed for one year at issue, and may be reset
annually on the policy anniversary, subject to a guaranteed minimum rate. As the value is based on adjusted market rates, and the fixed rate
is only reset on an annual basis, these funds are classified as Level 2. The remaining funds held are also managed by a third party, and include
equity securities, money market accounts, bond funds, or other portfolios for which there is an active quoted market. Therefore, these securities
are classified as Level 1. The related deferred compensation liabilities are included in other long-term liabilities on the Consolidated Statements
of Financial Position and are valued based on the underlying investment selections held in each participant’s account. Investment options gener-
ally mirror those funds held by the rabbi trust, for which there is an active quoted market. Therefore, these investment balances are classified as
Level 1. The Company also offers a fixed rate investment option to participants. The rate earned on these investments is adjusted annually based
on a specified percentage of the I.R.S. Applicable Federal Rates in effect and therefore these balances are classified as Level 2.
(3) The Company’s commodity derivatives represent futures contracts used in its hedging or other programs to offset price fluctuations associated
with purchases of corn and soybean meal, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s
commodity suppliers. The Company’s futures contracts for corn and soybean meal are traded on the Chicago Board of Trade, while futures
contracts for lean hogs are traded on the Chicago Mercantile Exchange. These are active markets with quoted prices available and therefore
these contracts are classified as Level 1. All derivatives are reviewed for potential credit risk and risk of nonperformance. The Company nets the
derivative assets and liabilities for each of its hedging programs, including cash collateral, when a master netting arrangement exists between
the Company and the counterparty to the derivative contract. The net balance for each program is included in other current assets or accounts
payable, as appropriate, in the Consolidated Statements of Financial Position. As of October 26, 2014, the Company has recognized the right to
reclaim net cash collateral of $11.5 million from various counterparties (including $55.6 million of cash less $44.1 million of realized losses on
closed positions). As of October 27, 2013, the Company had recognized the right to reclaim net cash collateral of $25.8 million from various coun-
terparties (including $35.7 million of cash less $9.9 million of realized losses on closed positions).