Hormel Foods 2010 Annual Report Download - page 55

53
Note M
FAIR VALUE MEASUREMENTS
Effective at the beginning of fiscal 2009, the Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures
(ASC 820) for its financial assets and liabilities carried at fair value on a recurring basis in the consolidated financial statements.
The fair value of those assets and liabilities as of October 31, 2010, and October 25, 2009, and their level within the fair value hierar-
chy, are presented in the table below.
Fair Value Measurements at October 31, 2010
Quoted Prices in
Fair Value at Active Markets Significant Other Significant
October 31, for Identical Observable Unobservable
(in thousands) 2010 Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
Assets at Fair Value:
Cash equivalents(1) $ 360,064 $ 360,064 $ – $ –
Short-term marketable securities(2) 50,595 66 50,529 –
Other trading securities(3) 109,153 49,889 59,264 –
Commodity derivatives(4) 11,604 11,604 – –
Total Assets at Fair Value $ 531,416 $ 421,623 $ 109,793 $ –
Liabilities at Fair Value:
Commodity derivatives(4) $ 6,390 $ – $ 6,390 $ –
Deferred compensation(3) 42,141 13,298 28,843 –
Total Liabilities at Fair Value $ 48,531 $ 13,298 $ 35,233 $ –
Fair Value Measurements at October 25, 2009
Quoted Prices in
Active Markets Significant Other Significant
Fair Value at for Identical Observable Unobservable
(in thousands) October 25, 2009 Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
Assets at Fair Value:
Cash equivalents(1) $ 290,476 $ 290,476 $ – $ –
Other trading securities(3) 103,801 49,608 54,193 –
Commodity derivatives(4) 6,776 6,776 – –
Total Assets at Fair Value $ 401,053 $ 346,860 $ 54,193 $ –
Liabilities at Fair Value:
Commodity derivatives(4) $ 17,563 $ – $ 17,563 $ –
Deferred compensation(3) 38,786 10,670 28,116 –
Total Liabilities at Fair Value $ 56,349 $ 10,670 $ 45,679 $ –
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 of money market funds rated AAA. 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 portfolio maintained to generate investment income and to provide cash for operations of the Company, if necessary. The portfolio is
managed by a third party who is responsible for daily trading activities, and all assets within the portfolio are highly liquid. The cash and highly rated money market funds held by the
portfolio are classified as Level 1. The current investment portfolio also includes corporate bonds, agency securities, mortgage-backed securities, and other asset-backed securities for
which there is an active, quoted market. Market prices are obtained from a variety of industry standard providers, large financial institutions, and other third-party sources to calculate a
representative daily market value, and therefore, these securities are classified as Level 2.
(3)
The Company also 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 portion of the funds held related to the sup-
plemental 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 investment 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 generally 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 I.R.S. Applicable Federal Rates in effect and therefore these balances are classified as Level 2.
(4) The Company’s commodity derivatives represent futures contracts, option contracts, and swaps used in its hedging programs to offset price fluctuations associated with purchases of
corn, soybean meal, and natural gas, and to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers. The Company’s futures
and options contracts for corn and soybean meal are traded on the Chicago Board of Trade (CBOT), while futures contracts for lean hogs and bellies are traded on the Chicago Mercantile
Exchange. These are active markets with quoted prices available and therefore the futures contracts are classified as Level 1. The Company’s corn and soybean meal swaps settle based
on quoted prices from the CBOT, while natural gas swaps are settled based on quoted prices from the New York Mercantile Exchange. As the swaps settle based on quoted market prices,
but are not held directly with the exchange, the swaps are classified as Level 2. All derivatives are reviewed for potential credit risk and risk of nonperformance. The Company nets its
derivative assets and liabilities, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The net balance
for each arrangement is included in other current assets or accounts payable, as appropriate, in the Consolidated Statements of Financial Position. As of October 31, 2010, the Company
has recognized the obligation to return cash collateral of $44.9 million to various counterparties. As of October 25, 2009, the Company had recognized the right to reclaim cash collateral
of $2.2 million from, and the obligation to return cash collateral of $16.9 million to, various counterparties.