DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Oct. 08, 2016

Derivative Instruments And Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

8. 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 October 8, 2016, 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	$	1,219		$	—		$	—	$	1,219
Other long-term		161			—			—		161
Total		1,380			—			—		1,380
Liabilities:
Other current		(8,412	)		(202	)		—		(8,614	)
Other long-term		(45	)		—			—		(45	)
Total		(8,457	)		(202	)		—		(8,659	)
Net Fair Value	$	(7,077	)	$	(202	)	$	—	$	(7,279	)

As of January 2, 2016, the company’s commodity hedge portfolio contained derivatives which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):

	Level 1			Level 2			Level 3		Total
Liabilities:
Other current	$	(11,926	)	$	(2,941	)	$	—	$	(14,867	)
Other long-term		(20	)		—			—		(20	)
Total		(11,946	)		(2,941	)		—		(14,887	)
Net Fair Value	$	(11,946	)	$	(2,941	)	$	—	$	(14,887	)

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 2017. 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 October 8, 2016 and January 2, 2016 qualified for hedge accounting.

Interest Rate Risk

The company entered into treasury rate locks on August 5, 2016 and August 8, 2016 to fix the interest rate for the 3.5% senior notes due 2026 (“2026 notes”) issued on September 28, 2016.  The derivative positions were closed when the debt was priced on September 23, 2016 with a cash settlement net receipt of $1.0 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.  During the twelve and forty weeks ended October 8, 2016, the company recognized $0.1 million of ineffectiveness due to issuing the debt earlier than the settlement date of the treasury locks.  The ineffectiveness amount is reported as a selling, distribution, and administrative expense in our Condensed Consolidated Statements of Income.

The company entered into a treasury rate lock on March 28, 2012 to fix the interest rate for the 4.375% senior notes due 2022 (“2022 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.

The following table outlines the company’s derivatives which were hedging the risk of changes in forecasted interest payments on forecasted issuance of long-term debt (amounts in thousands, before tax, and an asset is a positive value and a liability is a negative value):

Terminated	Description	Aggregate Notional Amount		Fair Value When Terminated			Fair Value Deferred in AOCI(1)			Ineffective Portion at Termination
April/2012	Treasury lock	$	500,000	$	(3,137	)	$	2,510		$	627
September/2016	Treasury lock	$	200,000	$	1,298		$	(1,298	)	$	—
September/2016	Treasury lock	$	150,000	$	(323	)	$	215		$	108

(1) The amount reported in AOCI will be reclassified to interest expense as interest payments are made on the related 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
	October 8, 2016			January 2, 2016			October 8, 2016			January 2, 2016
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	$	1,219	Other current assets	$	—	Other current liabilities	$	8,614	Other current liabilities	$	14,867
Commodity contracts	Other long term assets		161	Other long term assets		—	Other long-term liabilities		45	Other long-term liabilities		20
Total		$	1,380		$	—		$	8,659		$	14,887

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 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 Twelve Weeks Ended					Reclassified from AOCI	For the Twelve Weeks Ended
Hedge Relationships(1)	October 8, 2016		October 10, 2015			into Income (Effective Portion)(2)	October 8, 2016		October 10, 2015
Interest rate contracts	$	666	$	—		Interest expense (income)	$	38	$	35
Commodity contracts		2,767		(2,652	)	Production costs(3)		704		1,061
Total	$	3,433	$	(2,652	)		$	742	$	1,096
	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 Forty Weeks Ended					Reclassified from AOCI	For the Forty Weeks Ended
Hedge Relationships(1)	October 8, 2016		October 10, 2015			into Income (Effective Portion)(2)	October 8, 2016		October 10, 2015
Interest rate contracts	$	666	$	—		Interest expense (income)	$	121	$	117
Commodity contracts		1,830		(1,262	)	Production costs(3)		2,567		3,817
Total	$	2,496	$	(1,262	)		$	2,688	$	3,934

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

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

3. 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 8, 2016 and October 10, 2015, respectively, related to the company’s commodity risk hedges.

The balance in accumulated other comprehensive loss 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)(amounts in parenthesis indicate a debit balance) at October 8, 2016:

	Commodity price risk derivatives			Interest rate risk derivatives		Totals
Closed contracts	$	(643	)	$	113	$	(530	)
Expiring in 2016		(213	)		—		(213	)
Expiring in 2017		(4,263	)		—		(4,263	)
Total	$	(5,119	)	$	113	$	(5,006	)

Derivative Transactions Notional Amounts

As of October 8, 2016, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in thousands):

	Notional amount
Wheat contracts	$	52,649
Soybean oil contracts		4,718
Natural gas contracts		4,477
Total	$	61,844

The company’s derivative instruments contain no credit-risk related contingent features at October 8, 2016.  As of October 8, 2016 and January 2, 2016, the company had $9.8 million and $20.7 million, respectively, in other current assets representing collateral for hedged positions.