Hormel Foods 2010 Annual Report Download - page 51

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The weighted-average grant date fair value of stock options
granted and the total intrinsic value of options exercised (in thou-
sands) during each of the past three fiscal years is as follows:
Fiscal Year Ended
October 31, October 25, October 26,
2010 2009 2008
Weighted-average
grant date fair value $ 9.09 $ 5.87 $ 10.38
Intrinsic value of
exercised options $ 32,378 $ 5,049 $ 27,669
The fair value of each ordinary 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 31, October 25, October 26,
2010 2009 2008
Risk-free interest rate 3.4% 3.2% 4.0%
Dividend yield 2.2% 2.5% 1.8%
Stock price volatility 22.0% 22.0% 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 analysis. The expected life assumption is set based
on an analysis of past exercise behavior by option holders.
In performing the valuations for ordinary option grants, the
Company has not stratified option holders as exercise behavior
has historically been consistent across all employee groups.
The Company’s nonvested shares vest after five years or upon
retirement. A reconciliation of the nonvested shares (in thou-
sands) as of October 31, 2010, and changes during the fiscal
year then ended is as follows:
Weighted-
Average
Grant-Date
Shares Fair Value
Nonvested at October 25, 2009 98 $ 34.90
Granted 25 39.12
Vested (20) 33.21
Nonvested at October 31, 2010 103 $ 36.25
As of October 31, 2010, the Company had $39.2 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 a $4.8 million renewable standby letter of
credit for obligations of an affiliated party that may arise under
worker 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 K
STOCK-BASED COMPENSATION
The Company issues stock options and nonvested shares
as part of its stock incentive plans for employees and non-
employee directors. The Company’s policy is to grant options
with the exercise price equal to the market price of the com-
mon stock on the date of grant. Ordinary options 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.
A reconciliation of the number of options outstanding and
exercisable (in thousands) as of October 31, 2010, 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 25, 2009 11,604 $ 30.86
Granted 1,328 38.51
Exercised (1,808) 23.41
Forfeited (100) 37.20
Outstanding at
October 31, 2010 11,024 $ 32.94 5.7 yrs $ 62,959
Exercisable at
October 31, 2010 6,582 $ 30.96 4.4 yrs $ 98,488