Derivative Financial Instruments

9 Months Ended

Oct. 07, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

9. 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 October 7, 2023, 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	$	302		$	—	$	—	$	302
Other long-term		109			—		—		109
Total		411			—		—		411

Liabilities:
Other current		(744	)		—		—		(744	)
Other long-term		(1	)		—		—		(1	)
Total		(745	)		—		—		(745	)
Net Fair Value	$	(334	)	$	—	$	—	$	(334	)

As of December 31, 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	$	782		$	—	$	—	$	782
Other long-term		2			—		—		2
Total		784			—		—		784

Liabilities:
Other current		(1,149	)		—		—		(1,149	)
Other long-term		(86	)		—		—		(86	)
Total		(1,235	)		—		—		(1,235	)
Net Fair Value	$	(451	)	$	—	$	—	$	(451	)

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 2024. 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 October 7, 2023 and December 31, 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
	October 7, 2023			December 31, 2022			October 7, 2023			December 31, 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	$	302	Other current assets	$	782	Other accrued liabilities	$	744	Other accrued liabilities	$	1,149
Commodity contracts	Other assets		109	Other assets		2	Other long-term liabilities		1	Other long-term liabilities		86
Total		$	411		$	784		$	745		$	1,235

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) or Gain						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 Twelve Weeks Ended					Reclassified from AOCI	For the Twelve Weeks Ended
Hedge Relationships(1)	October 7, 2023			October 8, 2022		into Income (Effective Portion)(2)	October 7, 2023			October 8, 2022
Interest rate contracts	$	—		$	—	Interest expense	$	86		$	86
Commodity contracts		(1,579	)		7,851	Production costs(3)		(383	)		1,822
Total	$	(1,579	)	$	7,851		$	(297	)	$	1,908


	Amount of (Loss) or Gain						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 Forty Weeks Ended					Reclassified from AOCI	For the Forty Weeks Ended
Hedge Relationships(1)	October 7, 2023			October 8, 2022		into Income (Effective Portion)(2)	October 7, 2023			October 8, 2022
Interest rate contracts	$	—		$	—	Interest expense	$	287		$	287
Commodity contracts		(1,531	)		2,654	Production costs(3)		(1,819	)		4,220
Total	$	(1,531	)	$	2,654		$	(1,532	)	$	4,507

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 forty weeks ended October 7, 2023 and October 8, 2022, respectively, related to the company’s commodity risk hedges.

At October 7, 2023, 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	$	(52	)	$	2,403	$	2,351
Expiring in 2023		(185	)		—		(185	)
Expiring in 2024		(66	)		—		(66	)
Total	$	(303	)	$	2,403	$	2,100

Derivative Transactions Notional Amounts

As of October 7, 2023, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in thousands):


	Notional Amount
Wheat contracts	$	4,792
Soybean oil contracts		17,417
Natural gas contracts		3,600
Corn contracts		520
Total	$	26,329

The company’s derivative instruments contain no credit-risk related contingent features at October 7, 2023. As of October 7, 2023 and December 31, 2022, the company had $5.7 million and $7.2 million, respectively, in other current assets representing collateral for hedged positions. As of October 7, 2023 and December 31, 2022, the company had $3.4 million and $3.1 million, respectively, recorded in other accrued liabilities representing collateral due to counterparties for hedged positions.