Derivative Financial Instruments

9 Months Ended

Jan. 31, 2014

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

Note 11: Derivative Financial Instruments

We are exposed to market risks, such as changes in commodity prices, foreign currency exchange rates, and interest rates. To manage the volatility related to these exposures, we enter into various derivative transactions. We have policies in place that define acceptable instrument types we may enter into and establish controls to limit our market risk exposure.

Commodity Price Management: We enter into commodity futures and options contracts to manage the price volatility and reduce the variability of future cash flows related to anticipated inventory purchases of key raw materials, notably green coffee, edible oils, and flour. We also enter into commodity futures and options contracts to manage price risk for energy input costs, including natural gas and diesel fuel. The derivative instruments generally have maturities of less than one year.

Certain of the derivative instruments meet the hedge accounting criteria and are accounted for as cash flow hedges. The mark-to-market gains or losses on qualifying hedges are deferred and included as a component of accumulated other comprehensive loss to the extent effective, and reclassified to cost of products sold in the period during which the hedged transaction affects earnings. Cash flows related to qualifying hedges are classified consistently with the cash flows from the hedged item in the Condensed Statements of Consolidated Cash Flows. In order to qualify as a hedge of commodity price risk, it must be demonstrated that the changes in the fair value of the commodity’s futures contracts are highly effective in hedging price risks associated with the commodity purchased. Hedge effectiveness is measured and assessed at inception and on a monthly basis. The realized and unrealized mark-to-market gains or losses on nonqualifying and ineffective portions of commodity hedges are recognized in cost of products sold immediately.

The commodities hedged have a high inverse correlation to price changes of the derivative commodity instrument; thus, we would expect that any gain or loss in the estimated fair value of the derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.

Foreign Currency Exchange Rate Hedging: We utilize foreign currency forwards and options contracts to manage the effect of foreign currency exchange fluctuations on future cash payments primarily related to purchases of certain raw materials, finished goods, and fixed assets in Canada. The contracts generally have maturities of less than one year. At the inception of the contract, the derivative is evaluated and documented for hedge accounting treatment. Instruments currently used to manage foreign currency exchange exposures do not meet the requirements for hedge accounting treatment and the change in value of these instruments is immediately recognized in cost of products sold. If the contract qualifies for hedge accounting treatment, to the extent the hedge is deemed effective, the associated mark-to-market gains and losses are deferred and included as a component of accumulated other comprehensive loss. These deferred gains or losses are reclassified to earnings in the period in which the hedged transaction affects earnings. The ineffective portion of these contracts is immediately recognized in earnings.

Interest Rate Hedging: We utilize derivative instruments to manage changes in the fair value and cash flows of our debt. Interest rate swaps mitigate the risk associated with the underlying hedged item. At the inception of the contract, the instrument is evaluated and documented for hedge accounting treatment. If the contract is designated as a cash flow hedge, the mark-to-market gains or losses on the swap are deferred and included as a component of accumulated other comprehensive loss to the extent effective, and reclassified to interest expense in the period during which the hedged transaction affects earnings. If the contract is designated as a fair value hedge, the interest rate swap would be recognized at fair value on the balance sheet and changes in the fair value would be recognized in interest expense. Generally, gains and losses recognized on the instrument have no net impact to earnings as the change in the fair value of the derivative is equal to the change in the fair value of the underlying debt.

During the second quarter of 2014, we entered into an interest rate swap on the 3.50 percent Senior Notes due October 15, 2021, which was designated as a fair value hedge and used to hedge against the changes in the fair value of the debt. We receive cash flows from the counterparty at a fixed rate and pay the counterparty variable rates based on the LIBOR. The difference between the fixed rate and variable rates resulted in a favorable impact to interest expense for the three and nine months ended January 31, 2014. The interest rate swap was recognized at fair value in the Condensed Consolidated Balance Sheet at January 31, 2014, and changes in the fair value were recognized in interest expense. The net gain of $13.7 recognized on the derivative instrument during the third quarter had no net impact to earnings, as the change in the fair value of the derivative was equal to the change in fair value of the underlying debt. There were no interest rate swaps outstanding at April 30, 2013.

The following table sets forth the gross fair value amounts of derivative instruments recognized in the Condensed Consolidated Balance Sheets.

	January 31, 2014				April 30, 2013
	Other Current Assets		Other Current Liabilities		Other Current Assets		Other Current Liabilities
Derivatives designated as hedging instruments:
Interest rate contract	$	13.7	$	—	$	—	$	—
Commodity contracts		4.6		0.9		2.1		2.0
Total derivatives designated as hedging instruments	$	18.3	$	0.9	$	2.1	$	2.0
Derivatives not designated as hedging instruments:
Commodity contracts	$	6.1	$	3.7	$	3.6	$	2.3
Foreign currency exchange contracts		3.5		0.1		0.7		0.2
Total derivatives not designated as hedging instruments	$	9.6	$	3.8	$	4.3	$	2.5
Total derivative instruments	$	27.9	$	4.7	$	6.4	$	4.5

During the first quarter of 2014, we adopted FASB ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, as clarified by ASU 2013-01, Scope Clarification of Disclosures about Offsetting Assets and Liabilities. ASU 2011-11, as clarified by ASU 2013-01, requires additional disclosures around netting of derivatives. We have elected to not offset fair value amounts recognized for our exchange-traded commodity derivative instruments and our cash margin accounts executed with the same counterparty that are generally subject to enforceable netting agreements. We are required to maintain cash margin accounts in connection with funding the settlement of our open positions. At January 31, 2014 and April 30, 2013, we maintained cash margin account balances of $6.7 and $5.5, respectively, included in other current assets in the Condensed Consolidated Balance Sheets. In the event of default and immediate net settlement of all of our open positions with individual counterparties, all of our derivative liabilities would be fully offset by either our derivative asset positions or margin accounts based on the net asset or liability position with our individual counterparties.

The following table presents information on pre-tax commodity contract gains and losses recognized on derivatives designated as cash flow hedges.

	Three Months Ended January 31,				Nine Months Ended January 31,
	2014		2013		2014		2013
Gains (losses) recognized in other comprehensive (loss) income (effective portion)	$	4.5	$	(8.0)	$	(6.1)	$	(23.3)
Losses reclassified from accumulated other comprehensive loss to cost of products sold (effective portion)		(5.7)		(12.0)		(18.4)		(31.0)
Change in accumulated other comprehensive loss	$	10.2	$	4.0	$	12.3	$	7.7
Losses recognized in cost of products sold (ineffective portion)	$	(0.1)	$	(0.4)	$	—	$	(0.6)

Included as a component of accumulated other comprehensive loss was a minimal deferred pre-tax gain and related tax impact at January 31, 2014 and a deferred pretax loss of $12.2 at April 30, 2013, related to commodity contracts. The related tax benefit recognized in accumulated other comprehensive loss was $4.4 at April 30, 2013. The entire amount included in accumulated other comprehensive loss is expected to be recognized in earnings within one year as the related commodities are sold.

Included as a component of accumulated other comprehensive loss at January 31, 2014 and April 30, 2013, were deferred pre-tax losses of $5.0 and $5.4, respectively, related to the termination of a prior interest rate swap in October 2011 on the 3.50 percent Senior Notes due October 15, 2021. The related tax benefit recognized in accumulated other comprehensive loss was $1.8 and $1.9 at January 31, 2014 and April 30, 2013, respectively. Approximately $0.6 of the pre-tax loss will be recognized over the next 12 months. We reclassified $0.1 of the loss recognized on the interest rate swap designated as a cash flow hedge from other comprehensive (loss) income to interest expense during the three months ended January 31, 2014 and 2013, respectively, and $0.4 during the nine months ended January 31, 2014 and 2013, respectively.

The following table presents the net gains and losses recognized in cost of products sold on derivatives not designated as qualified hedging instruments.

	Three Months Ended January 31,				Nine Months Ended January 31,
	2014		2013		2014		2013
Unrealized gains (losses) on commodity contracts	$	1.8	$	(0.4)	$	4.8	$	8.0
Unrealized gains (losses) on foreign currency exchange contracts		2.2		(0.1)		2.3		0.9
Total unrealized gains (losses) recognized in cost of products sold	$	4.0	$	(0.5)	$	7.1	$	8.9
Realized (losses) gains on commodity contracts	$	(0.9)	$	0.2	$	(7.0)	$	(0.4)
Realized gains (losses) on foreign currency exchange contracts		0.7		0.1		2.5		(0.1)
Total realized (losses) gains recognized in cost of products sold	$	(0.2)	$	0.3	$	(4.5)	$	(0.5)
Total gains (losses) recognized in cost of products sold	$	3.8	$	(0.2)	$	2.6	$	8.4

The following table presents the gross contract notional value of outstanding derivative contracts.

	January 31, 2014		April 30, 2013
Commodity contracts	$	369.0	$	347.6
Foreign currency exchange contracts		95.1		56.8
Interest rate contract		750.0		—