Hormel Foods 2011 Annual Report Download - page 32

30
Hormel Foods Corporation
T
he Com
p
any measures its market risk ex
p
osure on its natu
-
ral gas contracts us
i
ng a sens
i
t
i
v
i
ty analys
i
s, wh
i
ch cons
i
ders
a hypothetical 10 percent change in the market prices for
natural gas. A 10 percent decrease in the market price for
natural
g
as would have ne
g
atively impacted the
f
air value o
f
the Company’s October 30, 2011, open natural
g
as contracts
by $0.2 million, which in turn would lower the Company’s
f
uture cost on natural
g
as purchases by a similar amount.
L
on
g
-Term Debt:
A
principal market risk affectin
g
the
C
ompany is the exposure to changes in interest rates on the
C
ompany’s fixed-rate, long-term debt. Market risk for fixed-
rate, long-term debt is estimated as the potential increase in
f
air value, resulting from a hypothetical 10 percent decrease
in interest rates, and amounts to a
pp
roximately
$
7.0 million.
T
he fair value of the Company’s long-term debt was estimated
usin
g
discounted future cash flows based on the Company’s
incremental borrowin
g
rates
f
or similar types o
f
borrowin
g
arran
g
emen
t
s
.
I
nv
es
tm
e
nt
s
:The
C
ompany holds tradin
g
securities as
part of a rabbi trust to fund certain supplemental executive
retirement
p
lans and deferred income
p
lans, and as
p
art of
an investment
p
ortfolio. As of October
3
0, 2011, the balance
of these securities totaled
$
181.4 million. A
p
ortion of these
s
ecurities re
p
resent fixed income funds. The Com
p
any is
s
ub
j
ect to market risk due to
fl
uctuations in the value o
f
the
rema
i
n
i
ng
i
nvestments, as unreal
i
zed ga
i
ns and losses asso
-
ciated with these securities are included in the Company’s net
earnin
g
s on a mark-to-market basis. A 1
0
percent decline in
the value o
f
the investments not held in
fi
xed income
f
unds
w
ould have a direct ne
g
ative impact to the
C
ompany’s pretax
earnin
g
s of approximately $11.1 million, while a 10 percent
increase in value would have a positive impact of the same
a
m
ou
nt.
I
nt
e
rnati
o
nal
:
T
he fair values of certain Com
p
any assets are
s
ubject to fluctuations in foreign currencies. The Company’s
net asset position in foreign currencies as of October 30, 2011,
w
as $141.6 million, com
p
ared to $140.9 million as of October
31, 2010, with most of the exposure existin
g
in Philippine
pesos and
C
hinese yuan.
C
han
g
es in currency exchan
g
e rates
impact the fair values of
C
ompany assets either currently
throu
g
h the
C
onsolidated
S
tatement of
O
perations, as cu
r
-
rency
g
ains/losses, or by affectin
g
other comprehensive loss.
T
he
C
ompany measures its foreign currency exchange risk
by using a 10 percent sensitivity analysis on the Company’s
primary foreign net asset position, the Philippine peso, as of
October 30, 2011. A 10 percent strengthening in the value of
the
p
eso relative to the U.S. dollar would result in other com
-
p
rehensive income of $6.5 million
p
retax. A 10
p
ercent wea
k
-
enin
g
in the value of the peso relative to the U.S. dollar would
result in other comprehensive loss o
f
the same amount.
a
re marked-to-market through earnings and are recorded
o
n th
e
Co
n
so
li
da
t
ed
S
t
a
t
e
m
e
nt
o
f Fin
a
n
c
i
a
l P
os
iti
o
n
as
a
c
urrent asset and liability, res
p
ectively. The
f
air value o
f
the
C
om
p
any’s o
p
en futures contracts as of October 30, 2011, was
$(3.1) million com
p
ared to $0.6 million as of October 31, 2010.
The
C
ompany measures its market risk exposure on its ho
g
f
utures contracts usin
g
a sensitivity analysis, which consi
d
-
e
rs a hypothetical 1
0
percent chan
g
e in market prices. A
10
percent increase in market prices would have ne
g
atively
i
m
p
acted the fair value of the Com
p
any’s October
3
0, 2011,
op
en contracts by
$
12.0 million, which in turn would lower
t
he
C
ompany’s future cost of purchased hogs by a similar
a
m
ou
nt
.
Turkey and Ho
g
Production Costs:
T
he Com
p
any raises or
c
ontracts
f
or live turkeys and hogs to meet some o
f
its raw
mater
i
al supply requ
i
rements. Product
i
on costs
i
n ra
i
s
i
n
g
t
urkeys and ho
g
s are subject primarily to
fl
uctuations in
f
eed prices, and to a lesser extent,
f
uel costs. Under normal,
l
on
g
-term market conditions, chan
g
es in the cost to produce
t
urkeys and ho
g
s are offset by proportional chan
g
es in their
res
p
ective markets.
To reduce the Company’s exposure to changes in grain prices,
t
he Company utilizes a hedge program to offset the fluctua
-
t
ion in the Company’s future direct grain purchases. This
program currently utilizes corn
f
utures, and these contracts
a
re accounted
f
or under cash
fl
ow hedge accounting. The
o
pen contracts are reported at their
f
air value with an unreal
-
i
zed
g
ain of $13.7 million, before tax, on the Consolidated
Statement of Financial Position as of October
3
0
,
2011
,
co
m
-
pared to an unrealized
g
ain of $46.4 million, before tax, as of
O
ctober
3
1, 2010.
The
C
om
p
any measures its market risk ex
p
osure on its
g
rain futures contracts using a sensitivity analysis, which
c
onsiders a hypothetical 10 percent change in the market
prices for grain. A 10 percent decrease in the market price
f
or grain would have negatively impacted the
f
air value o
f
the
C
ompany’s October 30, 2011, open
g
rain contracts by $13.5
million, which in turn would lower the Company’s future cost
o
n purchased
g
ra
i
n by a s
i
m
i
lar amount
.
Nat
u
ral
G
a
s
:Production costs at the
C
ompany’s plants and
feed mills are also sub
j
ect to fluctuations in fuel costs. To
reduce the
C
ompany’s exposure to changes in natural gas
prices, the
C
ompany utilizes a hedge program to offset the
fluctuation in the Company’s future natural gas purchases.
Th
i
s program ut
i
l
i
zes natural gas swaps, and these contracts
a
re accounted
f
or under cash
fl
ow hedge accounting. The
op
en contracts are re
p
orted at their
f
air value with an unre
-
a
lized loss of $0.4 million
,
before tax
,
on the Consolidated
Statement of Financial Position as of October 30
,
2011
,
co
m
-
pared to an unrealized loss of $6.4 million, before tax, as of
O
ctober
3
1
,
2010.