Derivative Financial Instruments and Fair Value Measurements

9 Months Ended

Sep. 29, 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 September 29, 2018 and December 30, 2017:

		September 29, 2018
		Fair value
		asset (liability)	Level 1	Level 2	Level 3
		$	$	$	$
Commodity futures and forward contracts⁽¹⁾
	Current asset	1,109	-	1,109	-
	Long-term asset	4	-	4	-
	Current liability	(1,485)	(387)	(1,098)	-
	Long-term liability	(1)	-	(1)	-
Inventories carried at market⁽²⁾		1,700	-	1,700	-
Forward foreign currency contracts⁽³⁾
	Not designated as hedging instruments	561	-	561	-
Contingent consideration⁽⁴⁾		(4,573)	-	-	(4,573)
Embedded derivative		2,532	-	-	2,532

		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 September 29, 2018, the Company recognized a loss of $2.1 million (September 30, 2017 – loss of $0.1 million), and for the three quarters ended September 29, 2018, the Company recognized a loss of $0.9 million (September 30, 2017 – gain of $0.3 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 September 29, 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	702	166
Forward commodity sale contracts	(609)	(705)
Commodity futures contracts	(230)	485

In addition, as at September 29, 2018, the Company had net open futures contracts to purchase 1,113 metric tons (“MT”) of cocoa (December 30, 2017 – 2,990 MT sold) and to purchase 238 MT of coffee (December 30, 2017 – 51 MT sold).

(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 September 29, 2018, the Company had 156,924 bushels of commodity corn and 73,953 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 September 29, 2018, the Company had open forward foreign exchange contracts to sell euros to buy U.S. dollars with a notional value of € 17.0 million ($ 20.5 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 September 29, 2018, the Company recognized a gain of $0.2 million (September 30, 2017 – gain of $0.3 million), and for the three quarters ended September 29, 2018, the Company recognized a gain of $1.6 million (September 30, 2017 – loss of $2.6 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

From time to time, the Company enters into forward foreign exchange contracts to sell U.S. dollars to buy Mexican pesos, 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 are 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 September 29, 2018, no amount (September 30, 2017 – gain of $0.2 million) was recognized in other comprehensive earnings related to changes in the fair value of open contracts. For the three quarters ended September 29, 2018, the Company recognized a net gain of $0.5 million (September 30, 2017 – gain of $2.3 million) in other comprehensive earnings related to changes in the fair value of open contracts. The Company reclassified from other comprehensive earnings to cost of goods sold realized losses on closed contracts of $0.0 million for the quarter ended September 29, 2018 and realized gains of $0.1 million for the three quarters ended September 29, 2018. For the quarter and three quarters ended September 30, 2017, the Company reclassified from other comprehensive earnings to cost of goods sold realized gains on closed contracts of $0.2 million and $1.0 million, respectively. In addition, in the first three quarters of 2017, the Company reclassified to foreign exchange loss an unrealized gain of $0.9 million related to the ineffective portion of the hedge. As at September 29, 2018, the Company had no open Mexican peso forward foreign exchange contracts.

(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 and three quarters ended September 29, 2018 and September 30, 2017. These obligations are included in long-term liabilities (including the current portion thereof) on the consolidated balance sheets.

		Quarter ended		Three quarters ended
		September 29, 2018	September 30, 2017	September 29, 2018	September 30, 2017
		$	$	$	$
Balance, beginning of period		(4,548)	(11,153)	(11,320)	(15,279)
	Fair value adjustments⁽¹⁾	(25)	(83)	2,348	(287)
	Payments⁽²⁾	-	-	4,399	4,330
Balance, end of period		(4,573)	(11,236)	(4,573)	(11,236)

(1) For the three quarters ended September 29, 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 (“Citrusource”) based on the projected results for the business in fiscal 2018. Citrusource was acquired by the Company in March 2011. In addition, for all periods presented, reflected the accretion for the time value of money. (See note 9.)

(2) For the three quarters ended September 29, 2018, reflected the third installment payment of deferred consideration to the former unitholders of Citrusource. For the three quarters ended September 30, 2017, reflected the second installment payment related to Citrusource and payment of the remaining deferred consideration to a former shareholder of Organic Land Corporation OOD, which was acquired by the Company in December 2012.