Derivative Financial Instruments and Fair Value Measurements

9 Months Ended

Oct. 03, 2015

Derivative Instruments And Hedging Activities Disclosure [Abstract]

5. Derivative Financial Instruments and Fair Value Measurements

The following table presents for each of the fair value hierarchies, the assets and liabilities that are measured at fair value on a recurring basis as of October 3, 2015 and January 3, 2015:

			October 3, 2015
			Fair value
			asset (liability)	Level 1	Level 2	Level 3
			$	$	$	$
(a)	Commodity futures and forward contracts⁽¹⁾
		Unrealized short-term derivative asset	1,707	677	1,030	-
		Unrealized long-term derivative asset	10	-	10	-
		Unrealized short-term derivative liability	(1,704)	-	(1,704)	-
		Unrealized long-term derivative liability	(20)	-	(20)	-
(b)	Inventories carried at market⁽²⁾		5,942	-	5,942	-
(c)	Interest rate swaps⁽³⁾		(390)	-	(390)	-
(d)	Forward foreign currency contracts⁽⁴⁾		(48)	-	(48)	-
(e)	Contingent consideration⁽⁵⁾		(22,686)	-	-	(22,686)
(f)	Embedded derivative⁽⁶⁾		3,409	-	-	3,409

			January 3, 2015
			Fair value
			asset (liability)	Level 1	Level 2	Level 3
			$	$	$	$
(a)	Commodity futures and forward contracts⁽¹⁾
		Unrealized short-term derivative asset	2,450	44	2,406	-
		Unrealized long-term derivative asset	50	-	50	-
		Unrealized short-term derivative liability	(2,951)	-	(2,951)	-
		Unrealized long-term derivative liability	(90)	-	(90)	-
(b)	Inventories carried at market⁽²⁾		7,713	-	7,713	-
(c)	Interest rate swaps⁽³⁾		(285)	-	(285)	-
(d)	Forward foreign currency contracts⁽⁴⁾		1,026	-	1,026	-
(e)	Contingent consideration⁽⁵⁾		(396)	-	-	(396)
(f)	Embedded derivative⁽⁶⁾		3,409	-	-	3,409

(1) Unrealized short-term derivative asset is included in prepaid expenses and other current assets, unrealized long-term derivative asset is included in other assets, unrealized short-term derivative liability is included in other current liabilities and unrealized long-term derivative liability is included in long-term liabilities on the consolidated balance sheets.

(2) Inventories carried at market are included in inventories on the consolidated balance sheets.

(3) The interest rate swaps are included in long-term liabilities on the consolidated balance sheets.

(4) The forward foreign currency contracts are included in accounts receivable or accounts payable and accrued liabilities on the consolidated balance sheets.

(5) Contingent consideration obligations are included in long-term liabilities (including the current portion thereof) on the consolidated balance sheets.

(6) The embedded derivative is included in other assets (long-term) on the consolidated balance sheets.

(a) Commodity futures and forward contracts

The Company’s derivative contracts that are measured at fair value include exchange-traded commodity futures and forward commodity purchase and sale contracts. Exchange-traded futures are valued based on unadjusted quotes for identical assets priced in active markets and are classified as level 1. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. Local market adjustments use observable inputs or market transactions for similar assets or liabilities, and, as a result, are classified as level 2. Based on historical experience with the Company’s suppliers and customers, the Company’s own credit risk, and the Company’s knowledge of current market conditions, the Company does not view non-performance risk to be a significant input to fair value for the majority of its forward commodity purchase and sale contracts.

These exchange-traded commodity futures and forward commodity purchase and sale contracts are used as part of the Company’s risk management strategy, and represent economic hedges to limit risk related to fluctuations in the price of certain commodity grains, as well as the prices of cocoa and coffee. These derivative instruments are not designated as hedges for accounting purposes. Gains and losses on changes in fair value of these derivative instruments are included in cost of goods sold on the consolidated statement of operations. For the quarter ended October 3, 2015, the Company recognized a gain of $1,088 (October 4, 2014 – loss of $1,802) and for the three quarters ended October 3, 2015, the Company recognized a gain of $534 (October 4, 2014 – loss of $2,021) related to changes in the fair value of these derivatives.

As at October 3, 2015, the notional amounts of open commodity futures and forward purchase and sale contracts were as follows (in thousands of bushels):

	Number of bushels purchased (sold)
	Corn	Soybeans
Forward commodity purchase contracts	1,133	757
Forward commodity sale contracts	(456)	(974)
Commodity futures contracts	(905)	(310)

In addition, as at October 3, 2015, the Company had net open forward contracts to sell 287 lots of cocoa and to purchase 4 lots of coffee.

(b) Inventories carried at market

Grains inventory carried at fair value is determined using quoted market prices from the Chicago Board of Trade (“CBoT”). Estimated fair market values for grains inventory quantities at period end are valued using the quoted price on the CBoT adjusted for differences in local markets, and broker or dealer quotes. These assets are placed in level 2 of the fair value hierarchy, as there are observable quoted prices for similar assets in active markets. Gains and losses on commodity grains inventory are included in cost of goods sold on the consolidated statements of operations. As at October 3, 2015, the Company had 206,971 bushels of commodity corn and 402,194 bushels of commodity soybeans in inventories carried at market.

As at October 3, 2015, Opta Minerals held interest rate swaps with a notional value of Cdn $ 33,350 to pay fixed rates of 1.85% to 2.02%, plus a margin of 2.0% to 3.5% based on certain financial ratios of Opta Minerals, and receive a variable rate based on various reference rates including prime, bankers’ acceptances or LIBOR, plus the same margin, until May 2017. The net notional value decreases in accordance with the quarterly principal repayments on Opta Minerals’ non-revolving term credit facility.

At each period end, the Company calculates the marked-to-market fair value of the interest rate swaps using a valuation technique using quoted observable prices for similar instruments as the primary input. Based on this valuation, the previously recorded fair value is adjusted to the current marked-to-market position. The marked-to-market gain or loss is placed in level 2 of the fair value hierarchy. Prior to July 4, 2015, the interest rate swaps were designated as a cash flow hedge for accounting purposes with gains and losses on changes in the fair value of these derivative instruments included on the consolidated statements of comprehensive earnings. As at July 4, 2015, it was determined that the cash flow hedge was no longer highly effective due to the breach by Opta Minerals of certain of its financial covenants (see note 7). As a result, the accumulated amount of the loss recorded in other comprehensive earnings/loss related to the interest rate swaps of $458, net of income tax benefit of $119, was reclassified to interest expense in the second quarter of 2015. Subsequent to July 4, 2015, gains and losses on changes in the fair value of these derivative instruments are included in interest expense on the consolidated statements of operations. For the quarter ended October 3, 2015, the Company recognized a gain of $68 (October 4, 2014 – gain of $62) and for the three quarters ended October 3, 2015, a loss of $105 (October 4, 2014 – gain of $15) related to changes in the fair value of these derivatives.

(d) Foreign forward currency contracts

As part of its risk management strategy, the Company enters into forward foreign exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. For any open forward foreign exchange contracts at period end, the contract rate is compared to the forward rate, and a gain or loss is recorded. These contracts are placed in level 2 of the fair value hierarchy, as the inputs used in making the fair value determination are derived from and are corroborated by observable market data. While these forward foreign exchange contracts typically represent economic hedges that are not designated as hedging instruments, certain of these contracts may be designated as hedges. As at October 3, 2015 the Company had open forward foreign exchange contracts with a notional value of € 23,712 ($ 26,731 ). Gains and losses on changes in the fair value of these derivative instruments are included in foreign exchange loss or gain on the consolidated statement of operations. For the quarter ended October 3, 2015, the Company recognized a loss of $489 (October 4, 2014 – gain of $1,038) and for the three quarters ended October 3, 2015, the Company recognized a loss of $ 1,074 (October 4, 2014 – gain of $1,597) related to changes in the fair value of these derivatives.

(e) Contingent consideration

The fair value measurement of contingent consideration arising from business acquisitions is determined using unobservable (level 3) inputs. These inputs include: (i) the estimated amount and timing of the projected cash flows on which the contingency is based; and (ii) the risk-adjusted discount rate used to present value those cash flows. The following table presents a reconciliation of contingent consideration obligations for the three quarters ended October 3, 2015:

	January 3, 2015			Fair value	Foreign	October 3, 2015
	January 3, 2015	Issuances⁽¹⁾	Payments⁽²⁾	adjustments⁽³⁾	exchange⁽⁴⁾	October 3, 2015
	$	$	$	$	$	$
Contingent consideration	(396)	(22,330)	253	(238)	25	(22,686)

(1) Reflects the fair value of the Citrusource and Niagara Natural contingent consideration arrangements as measured at the respective acquisition dates (see note 2).

(2) Reflects payment made by Opta Minerals related to its acquisition of Babco Industrial Corp. (“Babco”) in February 2010.

(3) Reflects accretion for the time value of money related to the Citrusource and Niagara Natural obligations of $317, partially offset by a reduction in the projected cash flows related to the remaining Babco obligation of $79. Fair value adjustments are included in other income/expense (see note 10).

(4) Foreign exchange adjustments are included in other comprehensive earnings/loss.

(f) Embedded derivative

The Company’s investment in subordinated convertible notes of Enchi includes the value of an accelerated payment option embedded in the notes, which may result in a maximum payout to the Company of $5,100. As at October 3, 2015 and January 3, 2015, the Company determined that the fair value of this embedded derivative was $3,409. Due to a lack of level 1 or level 2 observable market quotes for the notes, the Company used a discounted cash flow analysis (income approach) to estimate the original fair value of the embedded derivative based on unobservable level 3 inputs. The Company assesses changes in the fair value of the embedded derivative based on the performance of actual cash flows derived from certain royalty rights owned by Enchi, which are expected to be the primary source of funds available to settle the embedded derivative, relative to the financial forecasts used in the valuation analysis. As at October 3, 2015, there was no significant change to the expectations related to the royalty rights that would impact the fair value of the embedded derivative.