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Derivative Financial Instruments
 12 Months Ended
Dec. 28, 2013
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 28, 2013, the company’s commodity hedge portfolio contained derivatives with a fair value of $(11.5) 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

    $ —      $ 0.2      $ —       $ 0.2   
  

 

 

    

 

 

    

 

 

     

 

 

  

Total

      —        0.2        —         0.2   
  

 

 

    

 

 

    

 

 

     

 

 

  

Liabilities:

          

Other current

      (10.4 )      (0.2 )      —         (10.6 ) 

Other long-term

      (0.7 )      (0.4 )      —         (1.1 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Total

      (11.1 )      (0.6 )      —         (11.7 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Net Fair Value

    $ (11.1 )    $ (0.4 )    $ —       $ (11.5 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

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 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

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 28, 2013 qualified for hedge accounting. During fiscal years 2013, 2012, and 2011 there was no material income or expense recorded due to ineffectiveness in current earnings due to changes in the 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 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 was 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 was 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. There were no interest rate swaps outstanding on December 28, 2013 because the underlying instrument was paid in full.

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 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

During 2013, 2012 and 2011, interest expense of $0.8 million, $2.8 million, and $4.0 million, respectively, was recognized due to periodic settlements of the interest rate 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 28, 2013     December 29, 2012     December 28, 2013     December 29, 2012  
  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		   
  		   $ —       
 		 Other current
liabilities		   
  		   $ 867   

Interest rate contracts

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

Commodity contracts

     Other current assets        162        Other current assets        —       
 		 Other current
liabilities		   
  		     10,625       
 		 Other current
liabilities		   
  		     3,047   

Commodity contracts

     Other long term assets        —        Other long term assets        9       
 		 Other long term
liabilities		   
  		     1,095       
 		 Other long term
liabilities		   
  		     146   
   

 

 

      

 

 

      

 

 

      

 

 

  

Total

       $162        $ 9        $ 11,720        $ 4,060   
   

 

 

      

 

 

      

 

 

      

 

 

  

 

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):

 

Derivatives in

Cash Flow Hedging

Relationships

    Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective Portion)(Net of tax)		  
      Fiscal 2013     Fiscal 2012     Fiscal 2011  

Interest rate contracts

    $ (205 )    $ (1,221 )    $ (547 ) 

Commodity contracts

      (24,252 )      (325 )      (17,304 ) 
  

 

 

    

 

 

    

 

 

  

Total

    $ (24,457 )    $ (1,546 )    $ (17,851 ) 
  

 

 

    

 

 

    

 

 

  

 

Derivatives in

Cash Flow Hedging

Relationships

    Amount of (Gain) or Loss Reclassified
from Accumulated OCI into Income
(Effective Portion)(Net of tax)		     Location of (Gain) or Loss
Reclassified from AOCI
into Income
(Effective Portion)
   Fiscal
2013		      Fiscal
2012		      Fiscal
2011		    

Interest rate contracts

    $ 502       $ 1,732       $ 2,431      Interest expense (income)
Selling, distribution and
administrative expenses
Production costs(1)

Commodity contracts

      —         —         —     

Commodity contracts

      16,639         10,622         (23,393 )   
  

 

 

     

 

 

     

 

 

    

Total

    $ 17,141       $ 12,354       $ (20,962 )   
  

 

 

     

 

 

     

 

 

    

 

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 28, 2013:

 

     Commodity Price
Risk Derivatives		      Interest Rate Risk
Derivatives		      Totals  

Closed contracts

    $ 3.0       $ 1.3       $ 4.3   

Expiring in 2014

      6.6         —         6.6   

Expiring in 2015

      0.4         —         0.4   

Expiring in 2016 and beyond

      0.1         —         0.1   
  

 

 

     

 

 

     

 

 

  

Total

    $ 10.1       $ 1.3       $ 11.4   
  

 

 

     

 

 

     

 

 

  

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 2013, 2012, and 2011 there were no discontinued hedge positions.

 

As of December 28, 2013, 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)  

Wheat contracts

    $ 105.8   

Soybean oil contracts

      19.1   

Natural gas contracts

      17.9   
  

 

 

  

Total

    $ 142.8   
  

 

 

  

The company’s derivative instruments contained no credit-risk-related contingent features at December 28, 2013. As of December 28, 2013, the company had $16.9 million recorded in other current assets, and on December 29, 2012, the company had $9.0 million recorded in other current assets representing collateral from or with counterparties for hedged positions.