Hormel Foods 2011 Annual Report Download - page 58

56 Hormel Foods Corporation
Note N
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 30, 2011, and October 31, 2010, and their level within the
fair value hierarchy, are presented in the tables below.
Fair Value Measurements at October 30, 2011
Quoted Prices in
Fair Value at Active Markets Significant Other Significant
October 30, for Identical Observable Unobservable
(in thousands) 2011 Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
Assets at Fair Value:
Cash equivalents(1) $ 341,447 $ 341,447 $ – $ –
Short-term marketable securities (2) 76,077 358 75,719 –
Other trading securities (3) 105,367 34,588 70,779 –
Commodity derivatives (4) 7,174 7,174 – –
Total Assets at Fair Value $ 530,065 $ 383,567 $ 146,498 $ –
Liabilities at Fair Value:
Commodity derivatives (4) $ 351 $ – $ 351 $ –
Deferred compensation (3) 44,956 15,379 29,577 –
Total Liabilities at Fair Value $ 45,307 $ 15,379 $ 29,928 $ –
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 $ –
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 or other programs to offset price fluctuations associated with pur-
chases 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 are traded on the Chicago Mercantile
Exchange. These are active markets with quoted prices available and therefore these contracts are classified as Level 1. The Company’s 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 the derivative assets and liabilities for each of its hedging programs, including cash col-
lateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The net balance for each program is included in other current
assets or accounts payable, as appropriate, in the Consolidated Statements of Financial Position. As of October 30, 2011, the Company has recognized the right to reclaim cash collateral
of $20.1 million from, and the obligation to return cash collateral of $71.8 million to, various counterparties. As of October 31, 2010, the Company had recognized the obligation to return
cash collateral of $44.9 million to various counterparties.