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Derivative Financial Instruments
 12 Months Ended
Jan. 03, 2015
Derivative Financial Instruments
Note 9. 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 January 3, 2015, the company’s commodity hedge portfolio contained derivatives with a fair value of $(16.3) 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

      (10.9 )       (2.0 )       —         (12.9 ) 

Other long-term

      (2.0 )       (1.4 )       —         (3.4 ) 
  

 

 

     

 

 

     

 

 

     

 

 

  

Net Fair Value

    $ (12.9 )     $ (3.4 )     $ —       $ (16.3 ) 
  

 

 

     

 

 

     

 

 

     

 

 

  

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 ) 
  

 

 

     

 

 

     

 

 

     

 

 

  

The positions held in the portfolio are used to hedge economic exposure to changes in various raw materials and production input prices and effectively fixes the price, or limits increases in prices, for a period of time extending into fiscal 2015. These instruments are designated as cash-flow hedges. See Note 2, Summary of Significant Accounting Policies, for the accounting treatment of these hedged transactions.

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.

During 2014, 2013 and 2012, interest expense of $0.3 million, $0.8 million, and $2.8 million, respectively, was recognized due to periodic settlements of the interest rate swaps.

Derivative Assets and Liabilities

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  
  January 3, 2015     December 28, 2013     January 3, 2015     December 28, 2013  
  Balance
Sheet Location		     Fair
Value		     Balance
Sheet Location		     Fair
Value		     Balance
Sheet Location		     Fair
Value		     Balance
Sheet Location		     Fair
Value		  

Commodity contracts

     Other current assets        $—        Other current assets      $ 162       

 

 Other current

liabilities

   

  

   $ 12,898       
 		 Other current
liabilities		   
  		   $ 10,626   

Commodity contracts

     Other long term assets        —        Other long term assets        —       
 		 Other long term
liabilities		   
  		     3,355       
 		 Other long term
liabilities		   
  		     1,094   
   

 

 

      

 

 

      

 

 

      

 

 

  

Total

       $—        $ 162        $ 16,253        $ 11,720   
   

 

 

      

 

 

      

 

 

      

 

 

  

Derivative Accumulated Other Comprehensive Income (“AOCI”) transactions

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 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
Derivatives (Effective Portion)(Net of tax)		  
   Fiscal 2014     Fiscal 2013     Fiscal 2012  

Interest rate contracts

    $ 157      $ (205 )    $ (1,221 ) 

Commodity contracts

      (3,358 )      (24,252 )      (325 ) 
  

 

 

    

 

 

    

 

 

  

Total

    $ (3,201 )    $ (24,457 )    $ (1,546 ) 
  

 

 

    

 

 

    

 

 

  

 

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 2014      Fiscal 2013      Fiscal 2012     

Interest rate contracts

    $ —       $ 502       $ 1,732       Interest expense (income)

Commodity contracts

      —         —         —       Selling, distribution and

Commodity contracts

      3,209         16,639         10,622       administrative expenses
Production costs(1)
  

 

 

     

 

 

     

 

 

     

Total

    $ 3,209       $ 17,141       $ 12,354      
  

 

 

     

 

 

     

 

 

     

 

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 January 3, 2015:

 

     Commodity Price
Risk Derivatives		      Interest Rate Risk
Derivatives		      Totals  

Closed contracts

    $ 0.3       $ 1.1       $ 1.4   

Expiring in 2015

      8.5         —         8.5   

Expiring in 2016 and beyond

      1.5         —         1.5   
  

 

 

     

 

 

     

 

 

  

Total

    $ 10.3       $ 1.1       $ 11.4   
  

 

 

     

 

 

     

 

 

  

See Note 2, Summary of Significant Accounting Policies, for the accounting treatment of other comprehensive income for these hedged transactions.

Derivative transactions notional amounts

As of January 3, 2015, 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

    $ 96.3   

Soybean oil contracts

      32.1   

Natural gas contracts

      14.6   
  

 

 

  

Total

    $ 143.0   
  

 

 

  

The company’s derivative instruments contained no credit-risk-related contingent features at January 3, 2015. As of January 3, 2015, the company had $16.1 million recorded in other current assets, and on December 28, 2013, the company had $16.9 million recorded in other current assets representing collateral from or with counterparties for hedged positions.