DERIVATIVE FINANCIAL INSTRUMENTS

4 Months Ended

Apr. 25, 2015

DERIVATIVE FINANCIAL INSTRUMENTS

7. 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 April 25, 2015, the company’s hedge portfolio contained commodity derivatives with a net fair value of $(20.9) 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	$	(14.9	)	$	(2.3	)	$	—	$	(17.2	)
Other long-term		(2.0	)		(1.7	)		—		(3.7	)
Total		(16.9	)		(4.0	)		—		(20.9	)
Net Fair Value	$	(16.9	)	$	(4.0	)	$	—	$	(20.9	)

The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix the price, or limit increases in prices, for a period of time extending primarily into fiscal 2016. These instruments are designated as cash-flow hedges. The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income (loss), and any ineffective portion of the change in fair value is recorded to current period earnings in selling, distribution and administrative expenses. All of the company-held commodity derivatives at April 25, 2015 and January 3, 2015 qualified for hedge accounting.

Interest Rate Risk

The company entered into a treasury rate lock on March 28, 2012 to fix the interest rate for the company’s 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, of which $0.6 million was recognized after debt issuance and $2.5 million ($1.5 million, net of tax) is being amortized to interest expense over the term of the notes.

Derivative Assets and Liabilities

The company had the following derivative instruments recorded on the Condensed Consolidated Balance Sheet, all of which are utilized for the risk management purposes detailed above (amounts in thousands):

Derivative Assets

Derivative Liabilities

Derivatives designated as hedging instruments

April 25, 2015

January 3, 2015

April 25, 2015

January 3, 2015

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

—

Other current liabilities

17,233

Other current liabilities

12,898

Commodity contracts

Other long term assets

—

Other long term assets

—

Other long term liabilities

3,714

Other long term liabilities

3,355

Total

$

—

$

—

$

20,947

$

16,253

Derivative Accumulated Other Comprehensive Income (“AOCI”) Transactions

The following tables show the effect of the company’s derivative instruments designated as cash-flow hedges in other comprehensive income (loss) (“OCI”) and the Condensed consolidated income statement (amounts in thousands and net of tax):

Derivatives designated as hedging instruments	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)(Net of tax)					Location of (Gain) or Loss Reclassified from AOCI into Income (Effective Portion)	Amount of (Gain) or Loss Reclassified from Accumulated OCI into Income (Effective Portion)(Net of tax)
	For the sixteen weeks ended						For the sixteen weeks ended
	April 25, 2015			April 19, 2014			April 25, 2015		April 19, 2014
Interest rate contracts	$	—		$	—	Interest expense	$	47	$	47
Commodity contracts		(4,428	)		15,302	Production costs(1)		1,540		3,024
Total	$	(4,428	)	$	15,302		$	1,587	$	3,071

(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 in the next three years are as follows (amounts in millions and net of tax) at April 25, 2015:

	Commodity price risk derivatives		Interest rate risk derivatives		Totals
Closed contracts	$	0.3	$	1.1	$	1.4
Expiring in 2015		10.2		—		10.2
Expiring in 2016		2.7		—		2.7
Total	$	13.2	$	1.1	$	14.3

Derivative Transactions Notional Amounts

As of April 25, 2015, the company had the following outstanding financial contracts that were entered into to hedge commodity and interest rate risk:

Derivatives in Cash Flow Hedge Relationships	Notional amount (millions)
Wheat contracts	$	90.8
Soybean oil contracts		25.2
Natural gas contracts		13.5
Total	$	129.5

The company’s derivative instruments contain no credit-risk-related contingent features at April 25, 2015. As of April 25, 2015 and January 3, 2015, the company had $19.8 million and $16.1 million, respectively, in other current assets representing collateral for hedged positions.