Hormel Foods 2010 Annual Report Download - page 40

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Goodwill and Other Intangibles: Goodwill and other intangible
assets are originally recorded at their estimated fair values
at date of acquisition and are allocated to reporting units that
will receive the related sales and income. The Company’s
reporting units represent operating segments (aggregations
of business units that have similar economic characteristics
and share the same production facilities, raw materials, and
labor force). Definite-lived intangible assets are amortized
over their estimated useful lives and are evaluated for impair-
ment annually, or more frequently if impairment indicators
are present, using a process similar to that used to test long-
lived assets for impairment. Goodwill and indefinite-lived
intangible assets are tested annually for impairment, or more
frequently if impairment indicators arise.
The goodwill impairment test is a two-step process performed
at the reporting unit level. First, the fair value of each reporting
unit is compared to its corresponding carrying value, includ-
ing goodwill. The fair value of each reporting unit is estimated
using discounted cash flow valuations (Level 3), which incorpo-
rate assumptions regarding future growth rates, terminal val-
ues, and discount rates. The estimates and assumptions used
consider historical performance and are consistent with the
assumptions used in determining future profit plans for each
reporting unit, which are approved by the Company’s Board of
Directors. If the first step results in the carrying value exceed-
ing the fair value of any reporting unit, then a second step must
be completed in order to determine the amount of goodwill
impairment that should be recorded. In the second step, the
implied fair value of the reporting unit’s goodwill is determined
by allocating the reporting unit’s fair value to all of its assets
and liabilities other than goodwill in a manner similar to a pur-
chase price allocation. The resulting implied fair value of the
goodwill that results from the application of this second step is
then compared to the carrying amount of the goodwill and an
impairment charge is recorded for the difference. Performance
of the second step was not required for any of the Company’s
reporting units for fiscal 2010, and no goodwill impairment
charges were recorded.
Impairment testing for indefinite-lived intangible assets also
compares the fair value and carrying value of the intangible
asset. The fair value of indefinite-lived intangible assets is
primarily determined on the basis of estimated discounted
value, using the relief from royalty method (Level 3), which
incorporates assumptions regarding future sales projections
and discount rates. If the carrying value exceeds fair value,
the indefinite-lived intangible asset is considered impaired
and an impairment charge is recorded for the difference. No
material impairment charges were recorded for indefinite-
lived intangible assets for fiscal 2010.
Impairment of Long-lived Assets: The Company reviews
long-lived assets and definite-lived intangible assets for
impairment annually, or more frequently 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. During the second quarter of fiscal 2010, the Company
made the decision to close its Valley Fresh plant in Turlock,
California. The facilities in that location were evaluated during
that process and the Company recorded a pretax charge of
$6.6 million to reduce the property, plant, and equipment
to its current estimated fair value. No other material write-
downs were recorded in fiscal years 2010, 2009, or 2008.
Foreign Currency Translation: Assets and liabilities denomi-
nated in foreign currency are translated at the current exchange
rate as of the statement of financial position date, and
amounts in the statement of operations 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.
When calculating foreign currency translation, the Company
deemed its foreign investments to be permanent in nature
and has not provided for taxes on currency translation adjust-
ments arising from converting the investment in a foreign
currency to U.S. dollars.
Derivatives and Hedging Activity: The Company uses com-
modity and currency positions to manage its exposure to price
fluctuations in those markets. The contracts are recorded
at fair value on the Consolidated Statements of Financial
Position within other current assets or accounts payable.
Additional information on hedging activities is presented in
Note L.
Equity Method Investments: The Company has a number of
investments in joint ventures 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 Statements
of Financial Position as part of investments in and receivables
from affiliates. Significant equity method investments include
a 40 percent ownership interest in a Philippines joint venture,
Purefoods-Hormel Company, which had a book value of $63.9
million at October 31, 2010, and $56.6 million at October 25,
2009, and a 49 percent ownership interest in a Vietnam joint
venture, San Miguel Purefoods (Vietnam) Co. Ltd., which had
a book value of $20.5 million at October 31, 2010, and $21.8
million at October 25, 2009. These investments are included
in the All Other segment for purposes of measuring segment
assets and profits.
On October 26, 2009, the Company completed the formation of
MegaMex Foods, LLC, a 50 percent owned joint venture which
markets Mexican Foods in the United States. MegaMex Foods,
LLC had a book value of $122.4 million at October 31, 2010.
This investment is included in the Grocery Products segment
for purposes of measuring segment assets and profits.