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Derivative Financial Instruments
 4 Months Ended
Apr. 20, 2013
Derivative Financial Instruments

7. 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 input to production. In addition, we utilize an immaterial amount of weather derivatives that are not classified as cash-flow hedges.

As of April 20, 2013, the company’s hedge portfolio contained commodity derivatives with a net fair value of $(6.8) 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

    $ —        $ 1.0       $ —         $ 1.0   

Other long-term

      —          0.1         —           0.1   
  

 

 

    

 

 

     

 

 

     

 

 

  

Total

      —          1.1         —           1.1   
  

 

 

    

 

 

     

 

 

     

 

 

  

Liabilities:

           

Other current

      (7.9 )      —           —           (7.9 ) 

Other long-term

      —          —           —           —     
  

 

 

    

 

 

     

 

 

     

 

 

  

Total

      (7.9 )      —           —           (7.9 ) 
  

 

 

    

 

 

     

 

 

     

 

 

  

Net Fair Value

    $ (7.9 )    $ 1.1       $ —         $ (6.8 ) 
  

 

 

    

 

 

     

 

 

     

 

 

  

The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix the price, or limit increases in prices, for a period of time extending into fiscal 2016. 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 the company-held commodity derivatives at April 20, 2013 and December 29, 2012 qualified for hedge accounting, except for certain immaterial weather derivatives.

INTEREST RATE RISK

The company entered into a treasury rate lock on March 28, 2012 to fix the interest rate for the notes issued on April 3, 2012. The derivative position was closed when the notes were 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 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 $33.8 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 will be 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 April 20, 2013, the fair value of the interest rate swaps was $(0.3) 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

    $ —         $ (0.3 )    $ —         $ (0.3 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

Total

      —           (0.3 )      —           (0.3 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

Net Fair Value

    $ —         $ (0.3 )    $ —         $ (0.3 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

During the sixteen weeks ended April 20, 2013, interest expense of $0.5 million was recognized due to periodic settlements of the swap agreements.

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

 

   

Derivative Assets

     Derivative Liabilities  
   

April 20, 2013

    

December 29, 2012

     April 20, 2013     December 29, 2012  

Derivatives
designated as
hedging
instruments

  

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		   $ 331      Other current
liabilities		   $ 867   

Interest rate contracts

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

Commodity contracts

   Other current assets     1,015      Other current assets     —        Other current
liabilities		     7,886      Other current
liabilities		     3.047   

Commodity contracts

   Other long term assets     64      Other long term assets     9      Other long term
liabilities		     39      Other long term
liabilities		     146   
   

 

 

      

 

 

      

 

 

      

 

 

  

Total

     $ 1,079        $ 9        $ 8,256        $ 4,060   
   

 

 

      

 

 

      

 

 

      

 

 

  

The following tables show the effect of the company’s derivative instruments designated as cash-flow hedges in other comprehensive income (loss) (“OCI”) and the condensed consolidated income statement (amounts in thousands and net of tax):

 

Derivatives
designated as
hedging

instruments

    Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective Portion)(Net of tax)		     Location of Gain or (Loss)
Reclassified from AOCI
into Income
(Effective Portion)		    Amount of Gain or (Loss) Reclassified
from Accumulated OCI into Income
(Effective Portion)(Net of tax)		  
   For the sixteen weeks ended        For the sixteen weeks ended  
   April 20, 2013     April 21, 2012        April 20, 2013     April 21, 2012  

Interest rate contracts

    $ (296 )    $ (1,548 )    Interest expense    $ (334 )    $ (590 ) 

Commodity contracts

      (8,325 )      (5,461 )    Production costs(1)      (673 )      (9,446 ) 
  

 

 

    

 

 

       

 

 

    

 

 

  

Total

    $ (8,621 )    $ (7,009 )       $ (1,007 )    $ (10,036 ) 
  

 

 

    

 

 

       

 

 

    

 

 

  

 

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

 

Derivatives in Cash

Flow Hedge Relationships

   

Location of Gain or (Loss) Recognized
in Income on Derivative (Ineffective
Portion and Amount Excluded from
Effectiveness Testing)

    Amount of Gain or (Loss)
Recognized in Income on
Derivative  (Ineffective Portion
and Amount Excluded from
Effectiveness Testing)
For the sixteen weeks ended		  
      April 20, 2013      April 21, 2012  

Interest rate contracts

    Selling, marketing and administrative expenses    $ —         $ (627 ) 

Commodity contracts

    Selling, marketing and administrative expenses      —           —     
     

 

 

     

 

 

  

Total

       $ —         $ (627 ) 
     

 

 

     

 

 

  

 

The balance in accumulated other comprehensive income (loss) related to commodity price risk and interest rate risk derivative transactions that are closed or will expire in the next four years are as follows (amounts in millions and net of tax) at April 20, 2013:

 

     Commodity price
risk derivatives		      Interest rate risk
derivatives		      Totals  

Closed contracts

    $ 5.9       $ 1.3       $ 7.2   

Expiring in 2013

      4.2         0.2         4.4   

Expiring in 2014

      —           —          —    

Expiring in 2015

      —           —          —    

Expiring in 2016

      0.1         —          0.1   
  

 

 

     

 

 

     

 

 

  

Total

    $ 10.2       $ 1.5       $ 11.7   
  

 

 

     

 

 

     

 

 

  

As of April 20, 2013, the company had the following outstanding financial contracts that were entered to hedge commodity and interest rate risk:

 

Derivatives in Cash Flow Hedge Relationships

    Notional amount (millions)  

Interest rate contracts

    $ 33.8   

Wheat contracts

      133.8   

Soybean oil contracts

      23.2   

Natural gas contracts

      18.7   
  

 

 

  

Total

    $ 209.5   
  

 

 

  

The company’s derivative instruments contain no credit-risk-related contingent features at April 20, 2013. As of April 20, 2013 and December 29, 2012, the company had $17.8 million and $9.0 million, respectively, in other current assets representing collateral for hedged positions.