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Derivative Financial Instruments
 12 Months Ended
Dec. 29, 2012
Derivative Financial Instruments
Note 8.    Derivative Financial Instruments

The company measures the fair value of its derivative portfolio using the fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. These measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:

Level 1:     Fair value based on unadjusted quoted prices for identical assets or liabilities in active markets

Level 2:     Modeled fair value with model inputs that are all observable market values

Level 3:     Modeled fair value with at least one model input that is not an observable market value

Commodity Price Risk

The company enters into commodity derivatives, designated as cash-flow hedges of existing or future exposure to changes in commodity prices. The company’s primary raw materials are flour, sweeteners and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, is also an important commodity used for production.

 

As of December 29, 2012, the company’s commodity hedge portfolio contained derivatives with a fair value of $(3.2) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

 

     Level 1     Level 2     Level 3      Total  

Liabilities:

          

Other current

      (2.5 )      (0.5 )      —         (3.0 ) 

Other long-term

      (0.1 )      (0.1 )      —         (0.2 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Total

      (2.6 )      (0.6 )      —         (3.2 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Net Fair Value

    $ (2.6 )    $ (0.6 )    $ —       $ (3.2 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

As of December 31, 2011, the company’s commodity hedge portfolio contained derivatives with a fair value of $(5.7) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

 

     Level 1     Level 2     Level 3      Total  

Assets:

          

Other current

    $ 0.1      $ —      $ —       $ 0.1   
  

 

 

    

 

 

    

 

 

     

 

 

  

Total

      0.1        —        —         0.1   
  

 

 

    

 

 

    

 

 

     

 

 

  

Liabilities:

          

Other current

      (2.6 )      (2.9 )      —         (5.5 ) 

Other long-term

      —        (0.3 )      —         (0.3 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Total

      (2.6 )      (3.2 )      —         (5.8 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Net Fair Value

    $ (2.5 )    $ (3.2 )    $ —       $ (5.7 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

The positions held in the portfolio are used to hedge economic exposure to changes in various raw material and production input prices and effectively fix the price, or limit increases in prices, for a period of time extending into fiscal 2013. These instruments are designated as cash-flow hedges. The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income (loss), and any ineffective portion of the change in fair value is recorded to current period earnings in selling, distribution and administrative expenses. All of our commodity derivatives at December 29, 2012 qualified for hedge accounting. During fiscal years 2012, 2011 and 2010 there was no material income or expense recorded due to ineffectiveness in current earnings due to changes in fair value of these instruments.

Interest Rate Risk

The company entered into a treasury rate lock on March 28, 2012 to fix the interest rate for the ten-year 4.375% Senior Notes issued on April 3, 2012. The derivative position was closed when the debt was priced on March 29, 2012 with a cash settlement that offset changes in the benchmark treasury rate between the execution of the treasury rate lock and the debt pricing date. This treasury rate lock was designated as a cash flow hedge and the cash settlement was $3.1 million and is being amortized to interest expense over the term of the notes.

The company entered into interest rate swaps with notional amounts of $85.0 million, and $65.0 million, respectively, to fix the interest rate on the $150.0 million term loan secured on August 1, 2008 to fund the acquisitions of ButterKrust Bakery and Holsum Bakery, Inc. The current notional amount for the swaps of this amortizing loan is $67.5 million.

 

The interest rate swap agreements result in the company paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amount. The interest rate differential to be paid or received is being recorded as interest expense. These swap transactions are designated as cash-flow hedges. Accordingly, the effective portion of changes in the fair value of the swaps is recorded each period in other comprehensive income. Any ineffective portions of changes in fair value are recorded to current period earnings in selling, distribution and administrative expenses.

As of December 29, 2012, the fair value of the interest rate swaps was $(0.9) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

 

     Level 1      Level 2     Level 3      Total  

Liabilities:

           

Other current

    $ —       $ (0.9 )    $ —       $ (0.9 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

Total

      —         (0.9 )      —         (0.9 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

Net Fair Value

    $ —       $ (0.9 )    $ —       $ (0.9 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

As of December 31, 2011, the fair value of the interest rate swaps was $(3.4) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

 

     Level 1      Level 2     Level 3      Total  

Liabilities:

           

Other current

    $ —       $ (2.6 )    $ —       $ (2.6 ) 

Other long-term

      —         (0.8 )      —         (0.8 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

Total

      —         (3.4 )      —         (3.4 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

Net Fair Value

    $ —       $ (3.4 )    $ —       $ (3.4 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

During 2012, 2011 and 2010, interest expense of $2.8 million, $4.0 million and $4.6 million, respectively, was recognized due to periodic settlements of the swaps.

 

The company had the following derivative instruments recorded on the consolidated balance sheet, all of which are utilized for the risk management purposes detailed above (amounts in thousands):

 

Derivatives

Designated as

Hedging

Instruments

    Derivative Assets     Derivative Liabilities  
   December 29, 2012     December 31, 2011     December 29, 2012     December 31, 2011  
   Balance
Sheet Location		     Fair
Value		     Balance
Sheet Location		     Fair
Value		     Balance
Sheet Location		     Fair
Value		     Balance
Sheet Location		     Fair
Value		  

Interest rate contracts

      —        $—        —      $ —       
 		 Other current
liabilities		   
  		   $ 867       
 		 Other current
liabilities		   
  		   $ 2,639   

Interest rate contracts

      —        —        —        —       
 		 Other long term
liabilities		   
  		     —       
 		 Other long term
liabilities		   
  		     765   

Commodity contracts

      Other current assets        —        Other current assets        —       
 		 Other current
liabilities		   
  		     3,047       
 		 Other current
liabilities		   
  		     5,439   

Commodity contracts

      Other long term assets        9        Other long term assets        61       
 		 Other long term
liabilities		   
  		     146       
 		 Other long term
liabilities		   
  		     278   
    

 

 

      

 

 

      

 

 

      

 

 

  

Total

      $ 9        $ 61        $ 4,060        $ 9,121   
    

 

 

      

 

 

      

 

 

      

 

 

  

The company had the following derivative instruments for deferred gains and (losses) on closed contracts and the effective portion for changes in fair value recorded in accumulated other comprehensive income (“AOCI”), all of which are utilized for the risk management purposes detailed above (amounts in thousands and net of tax):

 

     Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective Portion)(Net of tax)		  

Derivatives in

Cash Flow Hedging

Relationships

    For the 52
Weeks Ended
December 29,
2012		     For the 52
Weeks Ended
December 31,
2011		     For the 52
Weeks Ended
January 1,
2011		  

Interest rate contracts

    $ (1,221 )    $ (547 )    $ (2,684 ) 

Commodity contracts

      (325 )      (17,304 )      30,384   
  

 

 

    

 

 

    

 

 

  

Total

    $ (1,546 )    $ (17,851 )    $ 27,700   
  

 

 

    

 

 

    

 

 

  

 

     Amount of (Gain) or Loss Reclassified
from Accumulated OCI into Income
(Effective Portion)(Net of tax)		       

Derivatives in

Cash Flow Hedging

Relationships

    For the 52
Weeks Ended
December 29,
2012		      For the 52
Weeks Ended
December 31,
2011		     For the 52
Weeks Ended
January 1,
2011		      Location of (Gain) or Loss
Reclassified from AOCI
into Income
(Effective Portion)

Interest rate contracts

    $ 1,732       $ 2,431      $ 2,857       Interest expense (income)
Selling, distribution and

administrative expenses

Production costs(1)

Commodity contracts

      —         —        —      

Commodity contracts

      10,622         (23,393 )      5,212      
  

 

 

     

 

 

    

 

 

     

Total

    $ 12,354       $ (20,962 )    $ 8,069      
  

 

 

     

 

 

    

 

 

     

 

 

1. Included in Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately).

 

The balance in accumulated other comprehensive loss (income) related to commodity price risk and interest rate risk derivative transactions that are closed or will expire over the next three years are as follows (amounts in millions and net of tax) at December 29, 2012:

 

     Commodity price
risk derivatives		      Interest rate risk
derivatives		      Totals  

Closed contracts

    $ 0.1       $ 1.0       $ 1.1   

Expiring in 2013 and beyond

      2.4         0.6         3.0   
  

 

 

     

 

 

     

 

 

  

Total

    $ 2.5       $ 1.6       $ 4.1   
  

 

 

     

 

 

     

 

 

  

The company routinely transfers amounts from other comprehensive income (“OCI”) to earnings as transactions for which cash flow hedges were held occur and impact earnings. Significant situations which do not routinely occur that could cause transfers from OCI to earnings are as follows: (i) an event that causes a hedge to be suddenly ineffective and significant enough that hedge accounting must be discontinued or (ii) cancellation of a forecasted transaction for which a derivative was held as a hedge or a significant and material reduction in volume used of a hedged ingredient such that the company is overhedged and must discontinue hedge accounting. During fiscal 2012, 2011 and 2010 there were no discontinued hedge positions.

As of December 29, 2012, the company had entered into the following financial contracts to hedge commodity and interest rate risks:

 

Derivatives in Cash Flow Hedging Relationships

    Notional amount  
     (Millions)  

Interest rate contracts

    $ 67.5   

Wheat contracts

      88.0   

Soybean oil contracts

      20.6   

Natural gas contracts

      11.1   
  

 

 

  

Total

    $ 187.2   
  

 

 

  

The company’s derivative instruments contained no credit-risk-related contingent features at December 29, 2012. As of December 29, 2012, the company had $9.0 million recorded in other current assets, and on December 31, 2011, the company had $11.8 million recorded in other current assets representing collateral from or with counterparties for hedged positions.