Derivative Financial Instruments and Fair Value Measurements

3 Months Ended

Mar. 31, 2018

Derivative Instruments And Hedging Activities Disclosure [Abstract]

4. Derivative Financial Instruments and Fair Value Measurements

The following table presents for each of the fair value hierarchies, the assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2018 and December 30, 2017:

		March 31, 2018
		Fair value
		asset (liability)	Level 1	Level 2	Level 3
		$	$	$	$
Commodity futures and forward contracts⁽¹⁾
	Current asset	202	-	202	-
	Long-term asset	45	-	45	-
	Current liability	(1,266)	(56)	(1,210)	-
	Long-term liability	(8)	-	(8)	-
Inventories carried at market⁽²⁾		4,368	-	4,368	-
Forward foreign currency contracts⁽³⁾
	Not designated as hedging instruments	(710)	-	(710)	-
	Designated as hedging instruments	575	-	575	-
Contingent consideration⁽⁴⁾		(8,904)	-	-	(8,904)
Embedded derivative		2,690	-	-	2,690

		December 30, 2017
		Fair value
		asset (liability)	Level 1	Level 2	Level 3
		$	$	$	$
Commodity futures and forward contracts⁽¹⁾
	Current asset	738	-	738	-
	Current liability	(240)	(35)	(205)	-
	Long-term liability	(4)	-	(4)	-
Inventories carried at market⁽²⁾		3,838	-	3,838	-
Forward foreign currency contracts⁽³⁾
	Not designated as hedging instruments	(1,060)	-	(1,060)	-
	Designated as hedging instruments	(435)	-	(435)	-
Contingent consideration⁽⁴⁾		(11,320)	-	-	(11,320)
Embedded derivative		2,690	-	-	2,690

(1) Commodity futures and forward contracts

Represents exchange-traded commodity futures and forward commodity purchase and sale contracts. Exchange-traded futures are fair valued based on unadjusted quotes for identical assets priced in active markets and are classified as level 1. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. Local market adjustments use observable inputs or market transactions for similar assets or liabilities, and, as a result, are classified as level 2. Based on historical experience with the Company’s suppliers and customers, the Company’s own credit risk, and the Company’s knowledge of current market conditions, the Company does not view non-performance risk to be a significant input to fair value for the majority of its forward commodity purchase and sale contracts.

These exchange-traded commodity futures and forward commodity purchase and sale contracts are used as part of the Company’s risk management strategy, and represent economic hedges to limit risk related to fluctuations in the price of certain commodity grains, as well as the prices of cocoa and coffee. These contracts are not designated as hedges for accounting purposes. Gains and losses on changes in fair value of these contracts are included in cost of goods sold on the consolidated statement of operations. For the quarter ended March 31, 2018, the Company recognized a loss of $1.5 million (April 1, 2017 – loss of $0.0 million) related to changes in the fair value of these contracts. Unrealized gains on short-term contracts are included in other current assets; and unrealized losses on short-term and long-term contracts are included in other current liabilities and long-term liabilities, respectively, on the consolidated balance sheets.

As at March 31, 2018, the notional amounts of open commodity futures and forward purchase and sale contracts were as follows (in thousands of bushels):

	Number of bushels purchased (sold)
	Corn	Soybeans
Forward commodity purchase contracts	799	393
Forward commodity sale contracts	(326)	(899)
Commodity futures contracts	(750)	210

In addition, as at March 31, 2018, the Company had net open forward contracts to sell 716 lots (December 30, 2017 – 299 lots sold) of cocoa.

(2) Inventories carried at market

The fair value of grain inventories carried at market is determined using quoted market prices from the Chicago Board of Trade (“CBoT”), as adjusted for differences in local markets, and broker or dealer quotes. As at March 31, 2018, the Company had 235,992 bushels of commodity corn and 292,019 bushels of commodity soybeans included in inventories carried at market. The fair value of these inventories is included in level 2 of the fair value hierarchy, as there are observable quoted prices for similar assets in active markets. Gains and losses on these inventories are included in cost of goods sold on the consolidated statements of operations. Inventories carried at market are included in inventories on the consolidated balance sheets.

(3) Foreign forward currency contracts

As part of its risk management strategy, the Company enters into forward foreign exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. For any open forward foreign exchange contracts at period end, the contract rate is compared to the forward rate, and a gain or loss is recorded. These contracts are included in level 2 of the fair value hierarchy, as the inputs used in making the fair value determination are derived from and are corroborated by observable market data. Certain of these forward foreign exchange contracts may be designated as cash flow hedges for accounting purposes, while other of these contracts represent economic hedges that are not designated as hedging instruments.

(i) Not designated as hedging instruments

As at March 31, 2018, the Company had open forward foreign exchange contracts to sell euros to buy U.S. dollars with a notional value of € 12.8 million ($ 15.2 million), and to sell British pounds to buy euros with a notional value of £ 0.4 million (€ 0.4 million). As these contracts were not designated as hedging instruments, gains and losses on changes in the fair value of these contracts are included in foreign exchange loss or gain on the consolidated statement of operations. For the quarter ended March 31, 2018, the Company recognized a gain of $0.4 million (April 1, 2017 – loss of $0.9 million) related to changes in the fair value of these contracts. Unrealized gains and losses on these contracts are included in accounts receivable and accounts payable, respectively, on the consolidated balance sheets.

(ii) Designated as hedging instruments

As at March 31, 2018, the Company had net open forward foreign exchange contracts to sell U.S. dollars to buy Mexican pesos with a notional value of $ 11.1 million (M$ 214.5 million). These contracts were entered into as part of a hedging program to manage the variability of cash flows associated with a portion of forecasted purchases of raw fruit inventories denominated in Mexican pesos. As these contracts have been designated as hedging instruments, the effective portion of the gains and losses on changes in the fair value of these contracts is included in other comprehensive earnings and reclassified to cost of goods sold in the same period the hedged transaction affects earnings, which is upon the sale of the inventories. For the quarter ended March 31, 2018, the Company recognized a net unrealized gain in other comprehensive earnings of $0.8 million (April 1, 2017 – gain of $1.8 million) related to changes in the fair value of open contracts, and for the quarter ended March 31, 2018, the Company reclassified $0.2 million of realized losses on closed contracts from other comprehensive earnings to cost of goods sold. The Company expects to reclassify the $0.6 million amount of the unrealized losses recorded in accumulated other comprehensive loss as at March 31, 2018, to earnings over the next five months. Unrealized gains and losses on these contracts are included in other current assets and other current liabilities, respectively, on the consolidated balance sheets.

(4) Contingent consideration

The fair value measurement of contingent consideration arising from business acquisitions is determined using unobservable (level 3) inputs. These inputs include: (i) the estimated amount and timing of the projected cash flows on which the contingency is based; and (ii) the risk-adjusted discount rate used to calculate the present value of those cash flows. The table below presents a reconciliation of contingent consideration obligations for the quarter ended March 31, 2018 and April 1, 2017. These obligations are included in long-term liabilities (including the current portion thereof) on the consolidated balance sheets.

		Quarter ended
		March 31, 2018	April 1, 2017
		$	$
Balance, beginning of period		(11,320)	(15,279)
	Fair value adjustments⁽¹⁾	2,416	(120)
	Payments	-	269
Balance, end of period		(8,904)	(15,130)

(1) For the quarter ended March 31, 2018, included an adjustment of $2.5 million to reduce the contingent consideration that may be payable in 2019 under an earn-out arrangement with the former unitholders of Citrusource, LLC (acquired by the Company in March 2015) based on the projected results for the business in fiscal 2018. In addition, for all periods presented, reflected the accretion for the time value of money. (See note 9.)