Derivative Financial Instruments

6 Months Ended

Jul. 13, 2019

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 July 13, 2019, 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	$	179		$	—	$	—	$	179
Other long-term		140			—		—		140
Total		319			—		—		319

Liabilities:
Other current		(5,819	)		—		—		(5,819	)
Other long-term		(842	)		—		—		(842	)
Total		(6,661	)		—		—		(6,661	)
Net Fair Value	$	(6,342	)	$	—	$	—	$	(6,342	)

As of December 29, 2018, 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	$	501		$	—	$	—	$	501
Other long-term		—			—		—		—
Total		501			—		—		501

Liabilities:
Other current		(7,732	)		—		—		(7,732	)
Other long-term		(1,203	)		—		—		(1,203	)
Total		(8,935	)		—		—		(8,935	)
Net Fair Value	$	(8,434	)	$	—	$	—	$	(8,434	)

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 2021. 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 July 13, 2019 and December 29, 2018, respectively, qualified for hedge accounting.

Interest Rate Risk

The company previously entered into treasury rate locks at the time we executed the 2022 and 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
	July 13, 2019			December 29, 2018			July 13, 2019			December 29, 2018
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	$	179	Other current assets	$	501	Other accrued liabilities	$	5,819	Other accrued liabilities	$	7,732
Commodity contracts	Other assets		140	Other assets		—	Other long-term liabilities		842	Other long-term liabilities		1,203
Total		$	319		$	501		$	6,661		$	8,935

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 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)	July 13, 2019		July 14, 2018			into Income (Effective Portion)(2)	July 13, 2019			July 14, 2018
Interest rate contracts	$	—	$	—		Interest expense	$	25		$	25
Commodity contracts		12,140		(8,809	)	Production costs(3)		(970	)		101
Total	$	12,140	$	(8,809	)		$	(945	)	$	126

	Amount of Gain or (Loss)						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 Twenty-Eight Weeks Ended					Reclassified from AOCI	For the Twenty-Eight Weeks Ended
Hedge Relationships(1)	July 13, 2019		July 14, 2018			into Income (Effective Portion)(2)	July 13, 2019			July 14, 2018
Interest rate contracts	$	—	$	—		Interest expense	$	58		$	58
Commodity contracts		2,547		1,661		Production costs(3)		(3,181	)		365
Total	$	2,547	$	1,661			$	(3,123	)	$	423

1.	Amounts in parentheses indicate debits to determine net income (loss).

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

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 twenty-eight weeks ended July 13, 2019 and July 14, 2018, respectively, related to the company’s commodity risk hedges.

At July 13, 2019, 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	$	(44	)	$	73	$	29
Expiring in 2019		(3,765	)		—		(3,765	)
Expiring in 2020		(846	)		—		(846	)
Expiring in 2021		(95	)		—		(95	)
Expiring in 2022		(34	)		—		(34	)
Total	$	(4,784	)	$	73	$	(4,711	)

Derivative Transactions Notional Amounts

As of July 13, 2019, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in thousands):

	Notional Amount
Wheat contracts	$	119,780
Soybean oil contracts		16,135
Natural gas contracts		14,236
Corn contracts		7,857
Total	$	158,008

The company’s derivative instruments contain no credit-risk related contingent features at July 13, 2019. As of July 13, 2019 and December 29, 2018, the company had $14.8 million and $15.4 million, respectively, in other current assets representing collateral for hedged positions. There were no amounts representing collateral recorded in other accrued liabilities for hedged positions as of July 13, 2019 and December 29, 2018.