Hormel Foods 2015 Annual Report Download - page 59

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A reconciliation of the number of options outstanding and
exercisable (in thousands) as of October 25, 2015, and
changes during the fi scal year then ended, is as follows:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
Outstanding at
October 26, 2014 17,402 $ 24.61
Granted 1,514 52.55
Exercised 1,716 18.61
Forfeited 1 18.71
Outstanding at
October 25, 2015 17,199 $ 27.67 5.0 yrs $ 699,294
Exercisable at
October 25, 2015 12,899 $ 22.83 4.1 yrs $ 586,844
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 fi scal years is as follows:
Fiscal Year Ended
October 25, October 26, October 27,
2015 2014 2013
Weighted-average
grant date fair value $ 9.84 $ 9.70 $ 5.50
Intrinsic value of
exercised options $ 67,516 $ 74,972 $ 77,610
The fair value of each 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 25, October 26, October 27,
2015 2014 2013
Risk-free interest rate 2.1% 2.5% 1.4%
Dividend yield 1.9% 1.8% 2.1%
Stock price volatility 19.0% 20.0% 20.0%
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
The amount of unrecognized tax benefi ts, including interest
and penalties, at October 25, 2015, recorded in other long-
term liabilities was $24.6 million, of which $16.0 million would
impact the Company’s effective tax rate if recognized. The
Company includes accrued interest and penalties related to
uncertain tax positions in income tax expense, with losses
of $1.0 million included in expense for fi scal year 2015. The
amount of accrued interest and penalties at October 25, 2015,
associated with unrecognized tax benefi ts was $3.2 million.
The Company is regularly audited by federal and state taxing
authorities. The United States Internal Revenue Service
(I.R.S.) is currently examining fi scal years 2013, 2014, and
2015. During the fi rst quarter of fi scal year 2015, the Company
entered into a voluntary program to work with the I.R.S. called
Compliance Assurance Process (CAP). The objective of CAP is
to contemporaneously work with the I.R.S. to achieve federal
tax compliance and resolve all or most of the issues prior to
fi ling of the tax return. The Company has elected to participate
in the CAP program for 2015 and may elect to continue partici-
pating in CAP for future tax years; the Company may withdraw
from the program at any time.
The Company is in various stages of audit by several state
taxing authorities on a variety of fi scal years, as far back as
2010. While it is reasonably possible that one or more of these
audits may be completed within the next 12 months and the
related unrecognized tax benefi ts may change based on the
status of the examinations, it is not possible to reasonably
estimate the effect of any amount of such change to previously
recorded uncertain tax positions.
NOTE L
Stock-Based Compensation
The Company issues stock options and nonvested shares as
part of its stock incentive plans for employees and non-em-
ployee directors. The Company’s policy is to grant options with
the exercise price equal to the market price of the common
stock on the date of grant. Options typically vest over 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-eligi-
ble individuals is expensed at the time of grant.