Derivative Financial Instruments

6 Months Ended

Jul. 16, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

7. DERIVATIVE FINANCIAL INSTRUMENTS

The company measures the fair value of its derivative portfolio by using 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 at the measurement date

Level 2: Modeled fair value with model inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3: Modeled fair value with unobservable model inputs that are used to estimate the fair value of the asset or liability

Commodity 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, and diesel fuel are also important commodity inputs.

As of July 16, 2022, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):


	Level 1			Level 2		Level 3		Total
Assets:
Other current	$	2,748		$	—	$	—	$	2,748
Other long-term		35			—		—		35
Total		2,783			—		—		2,783

Liabilities:
Other current		(8,483	)		—		—		(8,483	)
Other long-term		(572	)		—		—		(572	)
Total		(9,055	)		—		—		(9,055	)
Net Fair Value	$	(6,272	)	$	—	$	—	$	(6,272	)

As of January 1, 2022, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):


	Level 1			Level 2		Level 3		Total
Assets:
Other current	$	3,955		$	—	$	—	$	3,955
Other long-term		—			—		—		—
Total		3,955			—		—		3,955

Liabilities:
Other current		(220	)		—		—		(220	)
Other long-term		—			—		—		—
Total		(220	)		—		—		(220	)
Net Fair Value	$	3,735		$	—	$	—	$	3,735

The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix, or limit increases in, prices for a period extending into Fiscal 2023. These instruments are designated as cash-flow hedges. The change in the fair value for these derivatives is reported in AOCI. All the company-held commodity derivatives at July 16, 2022 and January 1, 2022, respectively, qualified for hedge accounting.

Interest Rate Risk

During the first quarter of Fiscal 2021, the company entered into treasury locks to fix the interest rate for the 2031 notes issued on March 9, 2021. The derivative positions were closed when the debt was priced on March 2, 2021 with a cash settlement net receipt of $3.9 million that offset changes in the benchmark treasury rate between execution of the treasury rate locks and the debt pricing date. These rate locks were designated as a cash flow hedge and the deferred amount reported in AOCI is being reclassified to interest expense as interest payments are made on the notes through the maturity date.

The company previously entered into treasury rate locks at the time we executed the 2026 notes. These rate locks were designated as a cash flow hedge and the fair value at termination was deferred in AOCI. The deferred amount reported in AOCI is being reclassified to interest expense as interest payments are made on the related notes through the maturity date.

Derivative Assets and Liabilities

The company has the following derivative instruments located on the Condensed Consolidated Balance Sheets, which are utilized for the risk management purposes detailed above (amounts in thousands):


	Derivative Assets						Derivative Liabilities
	July 16, 2022			January 1, 2022			July 16, 2022			January 1, 2022
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
Commodity contracts	Other current assets	$	2,748	Other current assets	$	3,955	Other accrued liabilities	$	8,483	Other accrued liabilities	$	220
Commodity contracts	Other assets		35	Other assets		—	Other long-term liabilities		572	Other long-term liabilities		—
Total		$	2,783		$	3,955		$	9,055		$	220

Derivative 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 (no amounts were excluded from the effectiveness test), all of which are utilized for the risk management purposes detailed above (amounts in thousands and net of tax):


	Amount of Loss							Amount of Gain
	Recognized in AOCI on Derivatives							Reclassified from AOCI
	(Effective Portion)						Location of Gain or (Loss)	into Income (Effective Portion)
Derivatives in Cash Flow	For the Twelve Weeks Ended						Reclassified from AOCI	For the Twelve Weeks Ended
Hedge Relationships(1)	July 16, 2022			July 17, 2021			into Income (Effective Portion)(2)	July 16, 2022		July 17, 2021
Interest rate contracts	$	—		$	—		Interest expense	$	86	$	86
Commodity contracts		(16,417	)		(4,342	)	Production costs(3)		1,544		508
Total	$	(16,417	)	$	(4,342	)		$	1,630	$	594


	Amount of Gain or (Loss)							Amount of Gain or (Loss)
	Recognized in AOCI on Derivatives							Reclassified from AOCI
	(Effective Portion)						Location of Gain or (Loss)	into Income (Effective Portion)
Derivatives in Cash Flow	For the Twenty-Eight Weeks Ended						Reclassified from AOCI	For the Twenty-Eight Weeks Ended
Hedge Relationships(1)	July 16, 2022			July 17, 2021			into Income (Effective Portion)(2)	July 16, 2022		July 17, 2021
Interest rate contracts	$	—		$	2,927		Interest expense	$	201	$	(78	)
Commodity contracts		(5,197	)		(2,524	)	Production costs(3)		2,398		452
Total	$	(5,197	)	$	403			$	2,599	$	374

Amounts in parentheses indicate debits to determine net income.

Amounts in parentheses, if any, indicate credits to determine net income.

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

There was no hedging ineffectiveness, and no amounts were excluded from the ineffectiveness testing, during the twelve and twenty-eight weeks ended July 16, 2022 and July 17, 2021, respectively, related to the company’s commodity risk hedges.

At July 16, 2022, the balance in AOCI related to commodity price risk and interest rate risk derivative transactions that closed or will expire over the following years are as follows (amounts in thousands and net of tax) (amounts in parenthesis indicate a debit balance):


	Commodity Price Risk Derivatives			Interest Rate Risk Derivatives		Totals
Closed contracts	$	89		$	2,863	$	2,952
Expiring in 2022		(3,323	)		—		(3,323	)
Expiring in 2023		(1,382	)		—		(1,382	)
Total	$	(4,616	)	$	2,863	$	(1,753	)

Derivative Transactions Notional Amounts

As of July 16, 2022, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in thousands):


	Notional Amount
Wheat contracts	$	49,512
Soybean oil contracts		14,785
Natural gas contracts		3,446
Corn contracts		4,658
Total	$	72,401

The company’s derivative instruments contain no credit-risk related contingent features at July 16, 2022. As of July 16, 2022 and January 1, 2022, the company had $12.2 million and $2.0 million, respectively, in other current assets representing collateral for hedged positions. There were no amounts at July 16, 2022 and $3.4 million at January 1, 2022 recorded in other accrued liabilities representing collateral due to counterparties for hedged positions.