Derivative Financial Instruments and Fair Value Measurement

Interest Rates

We maintain an interest rate swaps portfolio with a total notional value of $650 million and all with a maturity date of March 31, 2017 (the “2017 swaps”). We are the counterparty to the financial institutions under these swap agreements and are responsible for any required settlements, and the sole beneficiary of any receipts of funds, pursuant to their terms. We are subject to market risk with respect to changes in the underlying benchmark interest rate that impact the fair value of the interest rate swaps.

The following table summarizes the terms of the interest rate swap agreements as of June 30, 2015:

We have not designated such contracts as hedging instruments; therefore, the interest rate swap agreements are marked-to-market at the end of each reporting period and a derivative asset or liability is recorded on our unaudited condensed consolidated balance sheets. Losses on these contracts were $1.0 million and $4.8 million for the three and six months ended June 30, 2015, respectively. Losses on these contracts were $3.6 million and $4.4 million for the three and six months ended June 30, 2014, respectively. Gains and losses are recorded in other expense in our unaudited condensed consolidated statements of income. A summary of these open swap agreements recorded at fair value in our unaudited condensed consolidated balance sheets at June 30, 2015 and December 31, 2014 is included in the table below.

Credit risk under these arrangements is believed to be remote as the counterparties to the interest rate swap agreements are major financial institutions; however, if any of the counterparties to the swap agreements become unable to fulfill their obligation, we may lose any financial benefits of these arrangements.

Commodities

We are exposed to commodity and raw material price fluctuations, including organic and conventional milk, butterfat, almonds, organic and non-genetically modified (“non-GMO”) soybeans, sweeteners, and other commodity costs used in the manufacturing, packaging, and distribution of our products, including utilities, natural gas, resin, and diesel fuel. To secure adequate supplies of materials and bring greater stability to the cost of ingredients and their related manufacturing, packaging, and distribution, we routinely enter into forward purchase contracts and other purchase arrangements with suppliers. Under the forward purchase contracts, we commit to purchasing agreed-upon quantities of ingredients and commodities at agreed-upon prices at specified future dates. The outstanding purchase commitment for these commodities at any point in time typically ranges from one month’s to one year’s anticipated requirements, depending on the ingredient or commodity, but can be longer in some cases. These contracts are considered normal purchases.

In addition to entering into forward purchase contracts, from time to time we may purchase over-the-counter contracts from qualified financial institutions for commodities associated with the production and distribution of our products. Certain of the contracts offset the risk of increases in our commodity costs and are designated as cash flow hedges when appropriate. These contracts are recorded as an asset or liability in our unaudited condensed consolidated balance sheets at fair value, with an offset to accumulated other comprehensive loss to the extent the hedge is effective. Derivative gains and losses included in accumulated other comprehensive loss are reclassified into earnings as the underlying transaction occurs. Any ineffectiveness in our commodity hedges is recorded as an adjustment to distribution expense or cost of goods sold, depending on commodity type, in our unaudited condensed consolidated statements of income.

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to commodity price risk but do not meet the authoritative guidance for hedge accounting. From time to time, the Company enters into commodity forward contracts to fix the price of natural gas and diesel fuel purchases and other commodities at a future delivery date. Changes in the fair value of derivatives not designated as hedges are allocated to cost of goods sold and selling, distribution, and marketing expenses in our unaudited condensed consolidated statements of income. For the three and six months ended June 30, 2015, we recorded a gain of $4.2 million and $5.1 million, respectively, related to our unhedged commodities contracts.

There was no material hedge ineffectiveness related to our commodities contracts designated as hedging instruments during the three and six months ended June 30, 2015 and 2014. A summary of our open commodities contracts recorded at fair value in our unaudited condensed consolidated balance sheets at June 30, 2015 and December 31, 2014 is included in the table below.

Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuation, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies.

Foreign Currency

Our international operations represented approximately 19.3% and 18.6% of our long-lived assets as of June 30, 2015 and December 31, 2014, respectively, and 18.8% and 20.0% of net sales for the six months ended June 30, 2015 and 2014, respectively. Sales in foreign countries, as well as certain expenses related to those sales, are transacted in currencies other than our reporting currency, the U.S. Dollar. Our exposures to foreign exchange rates are the Euro, the British Pound, the Canadian dollar, the Mexican peso, and the Chinese RMB against the U.S. dollar. We employ derivative financial instruments to manage our exposure to fluctuations in foreign currency rates related to the purchase of raw materials. We have foreign exchange contracts through July 2016. These contracts are recorded as an asset or liability in our unaudited condensed consolidated balance sheets at fair value, with an offset to accumulated other comprehensive loss to the extent the hedge is effective. Derivative gains and losses included in accumulated other comprehensive loss are reclassified into earnings as the underlying transaction occurs. Any ineffectiveness in our foreign currency exchange hedges is recorded as an adjustment to cost of goods sold in our unaudited condensed consolidated statements of income. There was no material hedge ineffectiveness related to our foreign currency exchange contracts designated as hedging instruments during the three and six months ended June 30, 2015 and 2014.

Fair Value - Derivatives

As of June 30, 2015 and December 31, 2014, derivatives recorded at fair value in our unaudited condensed consolidated balance sheets were as follows:



	Derivative assets				Derivative liabilities
	June 30, 2015		December 31, 2014		June 30, 2015		December 31, 2014
	(In thousands)
Derivatives designated as Hedging Instruments
Foreign currency contracts - current ⁽¹⁾	$	644	$	1,159	$	—	$	—
Derivatives not designated as Hedging Instruments
Interest rate swap contracts - current ⁽¹⁾	—		—		17,219		17,562
Commodities contracts - current⁽¹⁾	—		—		4,834		9,886
Interest rate swap contracts - noncurrent ⁽²⁾	—		—		9,744		13,853
Total derivatives	$	644	$	1,159	$	31,797	$	41,301


(1)	Derivative assets and liabilities that have settlement dates equal to or less than 12 months from the respective balance sheet date were included in prepaid expenses and other current assets and accounts payable and accrued expenses, respectively, in our unaudited condensed consolidated balance sheets.


(2)	Derivative liabilities that have settlement dates greater than 12 months from the respective balance sheet date were included in other long-term liabilities in our unaudited condensed consolidated balance sheets.

Gains and losses on derivatives designated as cash flow hedges reclassified from accumulated other comprehensive loss into income for the three and six months ended June 30, 2015 and 2014 were as follows:



	Three months ended June 30,						Six months ended June 30,
	2015			2014			2015			2014
	(In thousands)
Losses/(gains) on foreign currency contracts ⁽¹⁾	$	(347	)	$	148		$	(359	)	$	308
Losses/(gains) on commodities contracts ⁽²⁾	—			(354		)	—			(1,177		)


(1)	Recorded in cost of goods sold in our unaudited condensed consolidated statements of income.


(2)	Recorded in distribution expense or cost of goods sold, depending on commodity type, in our unaudited condensed consolidated statements of income.

Based on current exchange rates, we estimate that $0.6 million of hedging activity related to our foreign currency contracts will be reclassified from accumulated other comprehensive loss within the next 12 months.

Fair Value Measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, we follow a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:


•	Level 1 — Quoted prices for identical instruments in active markets.


•	Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.


•	Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

A summary of our financial assets and liabilities subject to recurring fair value measurements and the basis for that measurement according to the levels in the fair value hierarchy as of June 30, 2015 and December 31, 2014 is as follows:



	Fair value as of June 30, 2015		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Cash equivalents	$	23	$	23	$	—	$	—
Supplemental Executive Retirement Plan investments	3,164		3,164		—		—
Foreign currency contracts	644		—		644		—
Deferred compensation investments	4,566		—		4,566		—
	$	8,397	$	3,187	$	5,210	$	—
Liabilities:
Senior unsecured notes	$	530,000	$	530,000	$	—	$	—
Commodities contracts	4,834		—		4,834		—
Interest rate swap contracts	26,963		—		26,963		—
	$	561,797	$	530,000	$	31,797	$	—

As of June 30, 2015, we had no transfers between Level 1 and Level 2. New derivative contracts transacted during the six months ended June 30, 2015 were included in Level 2.



	Fair value as of December 31, 2014		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Cash equivalents	$	25	$	25	$	—	$	—
Supplemental Executive Retirement Plan investments	2,635		2,635		—		—
Foreign currency contracts	1,159		—		1,159		—
Deferred compensation investments	4,674		—		4,674		—
	$	8,493	$	2,660	$	5,833	$	—
Liabilities:
Senior unsecured notes	$	516,250	$	516,250	$	—	$	—
Commodities contracts	9,886		—		9,886		—
Interest rate swap contracts	31,415		—		31,415		—
	$	557,551	$	516,250	$	41,301	$	—

The fair value of our interest rate swaps is determined based on the notional amounts of the swaps and the forward LIBOR curve relative to the fixed interest rates under the swap agreements. The fair value of our commodities contracts is based on the quantities and fixed prices under the agreements and quoted forward commodity prices. The fair value of our foreign currency contracts is based on the notional amounts and rates under the contracts and observable market forward exchange rates. We classify these instruments in Level 2 because quoted market prices can be corroborated utilizing observable benchmark market rates at commonly quoted intervals and observable market transactions of spot currency rates, forward currency prices and the forward LIBOR curve. We did not significantly change our valuation techniques from prior periods.

The Supplemental Executive Retirement Plan (“SERP”) investments are classified as trading securities and are primarily invested in money market funds and held at fair value. We classify these assets as Level 1 as fair value can be corroborated based on quoted market prices for identical instruments in active markets.

The deferred compensation investments are primarily invested in mutual funds and are held at fair value. We classify these assets as Level 2 as fair value can be corroborated based on quoted market prices for identical or similar instruments in markets that are not active.

The fair value of the senior unsecured notes is based on fair value and is determined using Level 1 inputs. We classify the senior notes as Level 1 as fair value can be corroborated based on quoted market prices in active markets.

Due to their near-term maturities, the carrying amounts of trade accounts receivable and accounts payable are considered equivalent to fair value. In addition, because the interest rates on our senior secured credit facilities are variable, their fair values approximate their carrying values.

Fixed Interest Rates

Expiration Date

Notional Amount

(In thousands)

2.75% to 3.19%

March 31, 2017