DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jul. 18, 2015

Derivative Instruments And Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

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, is also an important commodity input for production.

As of July 18, 2015, 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	$	—		$	—		$	—	$	-
Other long-term		76			—			—		76
Total		76			—			—		76
Liabilities:
Other current		(5,260	)		(2,563	)		—		(7,823	)
Other long-term		(418	)		(747	)		—		(1,165	)
Total		(5,678	)		(3,310	)		—		(8,988	)
Net Fair Value	$	(5,602	)	$	(3,310	)	$	—	$	(8,912	)

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 July 18, 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 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 has the following derivative instruments located on the Condensed Consolidated Balance Sheet, which are utilized for the risk management purposes detailed above (amounts in thousands):

	Derivative Assets						Derivative Liabilities
	July 18, 2015			January 3, 2015			July 18, 2015			January 3, 2015
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	$	—	Other current assets	$	—	Other current liabilities	$	7,823	Other current liabilities	$	12,898
Commodity contracts	Other long term assets	$	76	Other long term assets		—	Other long-term liabilities		1,165	Other long-term liabilities		3,355
Total		$	76		$	—		$	8,988		$	16,253

Derivative Accumulated Other Comprehensive Income (“AOCI”) transactions

The company has the following derivative instruments located on the Condensed Consolidated Statements of Income, utilized for risk management purposes (amounts in thousands and net of tax):

	Recognized in OCI on Derivative						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 (2)	July18, 2015		July 12, 2014			into Income (Effective Portion)(2)	July 18, 2015		July 12, 2014
Interest rate contracts	$	—	$	—		Interest (expense) income	$	35	$	35
Commodity contracts		5,818		(16,202	)	Production costs(1)		1,216		407
Total	$	5,818	$	(16,202	)		$	1,251	$	442
	Amount of Gain or (Loss)						Amount of (Gain) or Loss
	Recognized in OCI on Derivative						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 (2)	July18, 2015		July 12, 2014			into Income (Effective Portion)(2)	July 18, 2015		July 12, 2014
Interest rate contracts	$	—	$	—		Interest (expense) income	$	82	$	82
Commodity contracts		1,390		(900	)	Production costs(1)		2,756		3,432
Total	$	1,390	$	(900	)		$	2,838	$	3,514

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

2. Amounts in parentheses indicate debits to determine net income.

There was no hedging ineffectiveness during the twelve and twenty-eight weeks ended July 18, 2015 and July 12, 2014, respectively.

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 over the following years are as follows (amounts in thousands and net of tax) at July 18, 2015:

	Commodity price risk derivatives		Interest rate risk derivatives		Totals
Closed contracts	$	663	$	1,035	$	1,698
Expiring in 2015		3,923		—		3,923
Expiring in 2016		1,559		—		1,559
Total	$	6,145	$	1,035	$	7,180

Derivative Transactions Notional Amounts

As of July 18, 2015, the company had the following outstanding financial contracts that were entered to hedge commodity and interest rate risk (amounts in thousands):

	Notional amount
Wheat contracts	$	89,546
Soybean oil contracts		18,130
Natural gas contracts		11,450
Total	$	119,126

The company’s derivative instruments contain no credit-risk-related contingent features at July 18, 2015. As of July 18, 2015 and January 3, 2015, the company had $10.5 million and $16.1 million, respectively, in other current assets representing collateral for hedged positions.