Derivative Financial Instruments and Fair Value Measurements

6 Months Ended

Jul. 01, 2017

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 July 1, 2017 and December 31, 2016:

			July 1, 2017
			Fair value
			asset (liability)	Level 1	Level 2	Level 3
			$	$	$	$
(a)	Commodity futures and forward contracts⁽¹⁾
		Unrealized short-term derivative asset	544	5	539	-
		Unrealized long-term derivative asset	3	-	3	-
		Unrealized short-term derivative liability	(323)	-	(323)	-
		Unrealized long-term derivative liability	(9)	-	(9)	-
(b)	Inventories carried at market⁽²⁾		4,107	-	4,107	-
(c)	Forward foreign currency contracts
		Not designated as hedging instruments⁽³⁾	(1,579)	-	(1,579)	-
		Designated as a hedging instruments⁽⁴⁾	1,176	-	1,176	-
(d)	Contingent consideration⁽⁵⁾		(11,153)	-	-	(11,153)
(e)	Embedded derivative⁽⁶⁾		2,690	-	-	2,690

			December 31, 2016
			Fair value
			asset (liability)	Level 1	Level 2	Level 3
			$	$	$	$
(a)	Commodity futures and forward contracts⁽¹⁾
		Unrealized short-term derivative asset	787	43	744	-
		Unrealized short-term derivative liability	(916)	-	(916)	-
		Unrealized long-term derivative liability	(8)	-	(8)	-
(b)	Inventories carried at market⁽²⁾		8,231	-	8,231	-
(c)	Forward foreign currency contracts
		Not designated as hedging instruments⁽³⁾	1,345	-	1,345	-
(d)	Contingent consideration⁽⁵⁾		(15,279)	-	-	(15,279)
(e)	Embedded derivative⁽⁶⁾		2,944	-	-	2,944

(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) Forward foreign currency contracts not designated as a hedge are included in accounts receivable or accounts payable and accrued liabilities on the consolidated balance sheets.

(4) Forward foreign currency contracts designated as a hedge are included in other assets or other current 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 July 1, 2017, the Company recognized a gain of $0.4 million (July 2, 2016 – gain of $0.3 million) and for the two quarters ended July 1, 2017, the Company recognized a gain of $0.4 million (July 2, 2016 – gain of $0.5 million) related to changes in the fair value of these derivatives.

As at July 1, 2017, 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	49	119
Forward commodity sale contracts	(261)	(782)
Commodity futures contracts	(100)	375

In addition, as at July 1, 2017, the Company had net open forward contracts to sell 102 lots of cocoa and sell 8 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 July 1, 2017, the Company had 377,303 bushels of commodity corn and 294,468 bushels of commodity soybeans in inventories carried at market.

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. Certain of these forward foreign exchange contracts may be designated as cash flow hedges for accounting purposes, while other of these contracts represent economic hedges that are not designated as hedging instruments.

(i) Not designated as hedging instruments

As at July 1, 2017, the Company had open forward foreign exchange contracts to sell euros to buy U.S. dollars with a notional value of € 32.3 million ($ 35.5 million). As these contracts were not designated as hedging instruments, gains and losses on changes in the fair value of the derivative instruments are included in foreign exchange loss or gain on the consolidated statement of operations. For the quarter ended July 1, 2017, the Company recognized a loss of $2.0 million (July 2, 2016 – gain of $1.0 million) related to changes in the fair value of these derivatives and for the two quarters ended July 1, 2017, the Company recognized a loss of $2.9 million (July 2, 2016 – loss of $0.2 million) related to changes in the fair value of these derivatives.

(ii) Designated as hedging instruments

In the first quarter of 2017, the Company initiated a foreign currency cash flow hedging program with the objective of managing the variability of cash flows associated with a portion of forecasted purchases of raw fruit inventories denominated in Mexican pesos. As at July 1, 2017, the Company had net open forward foreign exchange contracts to sell U.S. dollars to buy Mexican pesos with a net notional value of $ 1.9 million (M$ 56.5 million). As these contracts have been designated as hedging instruments, the effective portion of the gains and losses on changes in the fair value of the derivative instruments are included in other comprehensive earnings and reclassified to cost of goods sold in the same period the hedged transaction affects earnings, which is upon the sale of the inventories. For the quarter and two quarters ended July 1, 2017, the Company recognized unrealized gains in other comprehensive earnings of $0.2 million and $2.0 million, respectively, related to changes in the fair value of these derivatives. For the quarter and two quarters ended July 1, 2017, the Company reclassified from other comprehensive earnings a realized gain on these derivatives of $0.8 million to cost of goods sold, and an unrealized gain of $0.9 million related to the ineffective portion of the hedge to foreign exchange loss on the consolidated statements of operations. During the second half of 2017, the Company expects to reclassify the $0.3 million remaining amount of the unrealized gain recorded in accumulated other comprehensive loss to earnings.

(d) 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 calculate the present value of those cash flows. The following table presents a reconciliation of contingent consideration obligations for the quarters and two quarters ended July 1, 2017 and July 2, 2016:

		Quarter ended		Two quarters ended
		July 1, 2017	July 2, 2016	July 1, 2017	July 2, 2016
		$	$	$	$
Balance, beginning of period		(15,130)	(21,208)	(15,279)	(21,010)
	Issuances	-	-	-	-
	Fair value adjustments⁽¹⁾	(84)	1,603	(204)	1,405
	Payments⁽²⁾	4,061	4,554	4,330	4,554
Balance, end of period		(11,153)	(15,051)	(11,153)	(15,051)

(1) For all periods presented, reflects the accretion for the time value of money, which is included in other income/expense (see note 11). In addition, for the quarter and two quarters ended July 2, 2016, included a gain of $1.7 million on the settlement of the contingent consideration obligation related to the Company’s acquisition of Niagara Natural Fruit Snack Company Inc. (“Niagara Natural”) in August 2015.

(2) For the quarter and two quarters ended July 1, 2017, reflects the second installment payment of deferred consideration to the former unitholders of Citrusource, LLC (“Citrusource”), which was acquired by the Company in March 2015, and payment of the remaining deferred consideration to a former shareholder of Organic Land Corporation OOD, which was acquired by the Company in December 2012. For the quarter and two quarters ended July 2, 2016, reflects the first installment payment related to Citrusource and cash settlement of the remaining obligation related to Niagara Natural.

(e) Embedded derivative

On August 5, 2011 and August 29, 2014, the Company invested $0.5 million and $0.9 million, respectively, in convertible subordinated notes issued by Enchi Corporation (“Enchi”), a developer of advanced bioconversion products for the renewable fuels industry. The Company’s investment includes the value of an accelerated payment option embedded in the notes, which may result in a maximum payout to the Company of $5.1 million. 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 July 1, 2017 and December 31, 2016, the Company determined that the fair value of this embedded derivative was $2.7 million and $2.9 million, respectively, based on distributions received from Enchi on the notes up to those dates and on expectations related to the remaining royalty rights.