Hormel Foods 2010 Annual Report Download - page 52

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50
Note L
DERIVATIVES AND HEDGING
The Company uses hedging programs to manage price risk
associated with commodity purchases. These programs utilize
futures contracts and swaps to manage the Company’s expo-
sure to price fluctuations in the commodities markets. The
Company has determined that its programs which are desig-
nated as hedges are highly effective in offsetting the changes
in fair value or cash flows generated by the items hedged.
Cash Flow Hedges: The Company utilizes corn and soybean
meal futures to offset the price fluctuation in the Company’s
future direct grain purchases, and has entered into various
swaps to hedge the purchases of grain and natural gas at cer-
tain plant locations. The financial instruments are designated
and accounted for as cash flow hedges, and the Company
measures the effectiveness of the hedges on a regular basis.
Effective gains or losses related to these cash flow hedges
are reported in accumulated other comprehensive loss and
reclassified into earnings, through cost of products sold, in
the period or periods in which the hedged transactions affect
earnings. Any gains or losses related to hedge ineffectiveness
are recognized in the current period cost of products sold.
The Company typically does not hedge its grain or natural gas
exposure beyond the next two upcoming fiscal years. As of
October 31, 2010, and October 25, 2009, the Company had the
following outstanding commodity futures contracts and swaps
that were entered into to hedge forecasted purchases:
Volume
Commodity October 31, 2010 October 25, 2009
Corn 21.1 million bushels 20.3 million bushels
Soybean meal 190,400 tons 148,100 tons
Natural gas 1.6 million MMBTU’s 4.6 million MMBTU’s
As of October 31, 2010, the Company has included in accu-
mulated other comprehensive loss, hedging gains of $32.9
million (before tax) relating to its positions, compared to
losses of $19.2 million (before tax) as of October 25, 2009.
The Company expects to recognize the majority of these gains
over the next 12 months.
Fair Value Hedges: The Company utilizes futures to minimize
the price risk assumed when forward priced contracts are
offered to the Company’s commodity suppliers. The intent
of the program is to make the forward priced commodities
cost nearly the same as cash market purchases at the date of
delivery. The futures contracts are designated and accounted
for as fair value hedges, and the Company measures the
effectiveness of the hedges on a regular basis. Changes in the
fair value of the futures contracts, along with the gain or loss
The weighted-average grant date fair value of nonvested
shares granted, the total fair value (in thousands) of non-
vested shares granted, and the fair value (in thousands) of
shares that have vested 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 $ 39.12 $ 30.54 $ 38.97
Fair value of nonvested
shares granted $ 978 $ 865 $ 974
Fair value of shares vested $ 664 $ 204 $ 43
Stock-based compensation expense, along with the related
income tax benefit, for each of the past three fiscal years is
presented in the table below:
Fiscal Year Ended
October 31, October 25, October 26,
(in thousands) 2010 2009 2008
Stock-based compensation
expense recognized $ 14,402 $ 12,054 $ 14,691
Income tax benefit
recognized (5,510) (4,633) (5,611)
After-tax stock-based
compensation expense $ 8,892 $ 7,421 $ 9,080
At October 31, 2010, there was $12.5 million of total unrec-
ognized compensation cost from stock-based compensation
arrangements granted under the plans. This compensation
is expected to be recognized over a weighted-average period
of approximately 2.3 years. During fiscal years 2010, 2009,
and 2008, cash received from stock option exercises was
$22.9 million, $2.4 million, and $11.3 million, respectively.
The total tax benefit to be realized for tax deductions from
these option exercises was $18.9 million, $1.3 million, and
$10.6 million, respectively.
Shares issued for option exercises and nonvested shares
may be either authorized but unissued shares, or shares of
treasury stock acquired in the open market or otherwise. The
number of shares available for future grants (in thousands)
was 17,647 at October 25, 2010, 18,998 at October 25, 2009,
and 7,161 at October 26, 2008.