Derivative Financial Instruments

12 Months Ended

Dec. 31, 2016

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Note 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 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 December 31, 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
Assets:
Other current	$	1,576		$	—	$	—	$	1,576
Other long-term		35			—		—		35
Total	$	1,611		$	—	$	—	$	1,611
Liabilities:
Other current	$	(2,435	)	$	—	$	—	$	(2,435	)
Other long-term		—			—		—		—
Total		(2,435	)		—		—		(2,435	)
Net Fair Value	$	(824	)	$	—	$	—	$	(824	)

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	)
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 materials and production input prices and effectively fixes the price, or limits increases in prices, for a period of time extending into fiscal 2018. These instruments are designated as cash-flow hedges. See Note 2, Summary of Significant Accounting Policies, for the accounting treatment of these hedged transactions.

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

	Derivative Assets
	December 31, 2016			January 2, 2016
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Other current assets	$	1,576	Other current assets	$	—
Commodity contracts	Other long-term assets		35	Other long-term assets		—
Total		$	1,611		$	—

	Derivative Liabilities
	December 31, 2016			January 2, 2016
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Other current liabilities	$	2,435	Other current liabilities	$	14,867
Commodity contracts	Other long-term liabilities		—	Other long-term liabilities		20
Total		$	2,435		$	14,887

Derivative Accumulated Other Comprehensive Income (“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) Recognized in OCI on Derivatives (Effective Portion)(Net of tax)
Derivatives in Cash Flow Hedging Relationships	Fiscal 2016		Fiscal 2015			Fiscal 2014
Interest rate contracts	$	666	$	—		$	—
Commodity contracts		5,064		(4,195	)		(3,358	)
Total	$	5,730	$	(4,195	)	$	(3,358	)

	Amount of (Gain) or Loss Reclassified from Accumulated OCI into Income (Effective Portion)(Net of tax)						Locationof (Gain) or Loss Reclassified from AOCI into Income
Derivatives in Cash Flow Hedging Relationships	Fiscal 2016		Fiscal 2015		Fiscal 2014		(Effective Portion)
Interest rate contracts	$	135	$	154	$	157	Interest expense (income)
Commodity contracts		3,264		5,259		3,209	Production costs (1)
Total	$	3,399	$	5,413	$	3,366

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 over the next three years are as follows (amounts in thousands and net of tax) at December 31, 2016:

	Commodity Price Risk Derivatives			Interest Rate Risk Derivatives		Totals
Closed contracts	$	392		$	163	$	555
Expiring in 2017		528			—		528
Expiring in 2018 and beyond		(22	)		—		(22	)
Total	$	898		$	163	$	1,061

See Note 2, Summary of Significant Accounting Policies, for the accounting treatment of other comprehensive income for these hedged transactions.

Derivative transactions notional amounts

As of December 31, 2016, the company had entered into the following financial contracts to hedge commodity risks (amounts in thousands):

Derivatives in Cash Flow Hedging Relationships	Notional amount
Wheat contracts	$	26,353
Soybean oil contracts		2,834
Natural gas contracts		3,347
Total	$	32,534

The company’s derivative instruments contained no credit-risk-related contingent features at December 31, 2016. As of December 31, 2016, the company had $3.0 million recorded in other current assets, and on January 2, 2016, the company had $20.7 million recorded in other current assets representing collateral from or with counterparties for hedged positions.