Hormel Foods 2010 Annual Report Download - page 41

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Income Taxes: The Company records income taxes in accor-
dance 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.
Beginning in fiscal year 2008, the Company adopted the provi-
sions of ASC 740, Income Taxes. In accordance with this stan-
dard, the Company recognizes a tax position in its financial
statements when it is more likely than not that the position
will be sustained upon examination based on the technical
merits of the position. That position is then measured at the
largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement.
Employee Stock Options: The Company records stock-
based compensation expense in accordance with ASC 718,
Compensation — Stock Compensation. For options subject
to graded vesting, the Company recognizes stock-based
compensation expense ratably over the shorter of the vesting
period or requisite service period. Stock-based compensation
expense for grants made to retirement-eligible employees is
recognized on the date of grant.
Share Repurchases: On October 2, 2002, the Company
announced that its Board of Directors had authorized the
Company to repurchase up to 10.0 million shares of common
stock with no expiration date. During fiscal 2010, the 1.1 mil-
lion shares remaining under this program were purchased at
an average price per share of $39.78, which fully depleted the
10.0 million share authorization. The Company had also pur-
chased 1.2 million shares at an average price of $33.10 during
fiscal 2009, and 1.9 million shares at an average price per
share of $36.48 during fiscal 2008 under this authorization.
On May 26, 2010, the Company announced that its Board of
Directors had authorized the Company to repurchase an addi-
tional 5.0 million shares of common stock with no expiration
date. During fiscal 2010, 585,500 shares at an average price of
$42.86 were purchased under this new authorization.
Supplemental Statement of Operations Information: Net
earnings for the fiscal year ended October 31, 2010, include two
non-recurring charges recorded by the Company. During the
second quarter, the Company made the decision to close its
Valley Fresh plant in Turlock, California. Valley Fresh® canned
meats were produced at this facility. A write-down of fixed
assets and the recording of employee related costs resulted in
a charge of $6.3 million after tax ($0.05 per diluted share). New
health care laws enacted in 2010 also required the Company
to reduce the value of its deferred tax assets as a result of a
change to the tax treatment of Medicare Part D subsidies. As
a result, the Company recorded a charge of $7.1 million ($0.05
per diluted share) to income tax expense during the second
quarter, primarily related to these new health care laws.
The Company regularly monitors and evaluates the fair
value of our equity investments. If events and circumstances
indicate that a decline in the fair value of these assets has
occurred and is other than temporary, the Company will
record a charge in equity in earnings of affiliates in the
Consolidated Statements of Operations. The Company’s equity
investments do not have a readily determinable fair value
as none of them are publicly traded. The fair values of the
Company’s private equity investments are determined by dis-
counting the estimated future cash flows of each entity. These
cash flow estimates include assumptions on growth rates and
future currency exchange rates. The Company did not record
an impairment charge on any of its equity investments in fis-
cal years 2010, 2009, or 2008.
Revenue Recognition: The Company recognizes sales when
title passes upon delivery of its products to customers, net of
applicable provisions for discounts, returns, and allowances.
Products are delivered upon receipt of customer purchase
orders with acceptable terms, including price and collectabil-
ity that is reasonably assured.
The Company offers various sales incentives to customers
and consumers. Incentives that are offered off-invoice include
prompt pay allowances, spoilage allowances, and temporary
price reductions. These incentives are recognized as reduc-
tion of revenue at the time title passes. Coupons are used as
an incentive for consumers to purchase various products. The
coupons reduce revenues at the time they are offered, based
on estimated redemption rates. Promotional contracts are
performed by customers to promote the Company’s products
to the consumers. These incentives reduce revenues at the
time of performance through direct payments and accrued
promotional funds. Accrued promotional funds are unpaid
liabilities for promotional contracts in process or completed
at the end of a quarter or fiscal year. Promotional contract
accruals are based on a review of the unpaid outstanding
contracts on which performance has taken place. Estimates
used to determine the revenue reduction include the level of
customer performance and the historical spend rate versus
contracted rates.
Advertising Expenses: Advertising costs are expensed
when incurred. Advertising expenses include all media
advertising but exclude the costs associated with samples
and market research. Advertising costs for fiscal years 2010,
2009, and 2008 were $112.3 million, $93.6 million, and $98.5
million, respectively.
Shipping and Handling Costs: The Company’s shipping and
handling expenses are included in cost of products sold.
Research and Development Expenses: Research and develop-
ment costs are expensed as incurred and are included in selling,
general and administrative expenses. Research and develop-
ment expenses incurred for fiscal years 2010, 2009, and 2008
were $27.6 million, $25.4 million, and $22.7 million, respectively.