Derivative Financial Instruments

3 Months Ended

Jul. 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.

Effective May 1, 2014, we elected to no longer qualify commodity derivatives for hedge accounting treatment. Prior to 2015, certain of our derivative instruments met the hedge criteria and were accounted for as cash flow hedges. The mark-to-market gains and losses on qualifying hedges were 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 affected earnings. The deferred net gains included in accumulated other comprehensive loss, net of tax, were $18.3 at April 30, 2014, with $14.0 remaining at July 31, 2014. Although we no longer perform the assessments required to achieve hedge accounting for derivative positions, we believe all of our commodity derivatives are economic hedges of our risk exposure.

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 exposure.

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 and finished goods in Canada. The contracts generally have maturities of less than one year.

Effective May 1, 2014, we elected to no longer qualify instruments used to manage foreign currency exchange exposures for hedge accounting treatment. Prior to 2015, instruments used to manage foreign currency exchange exposures did not qualify for hedge accounting treatment and the change in value of these instruments was immediately recognized in cost of products sold.

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 and 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, changes in the fair value of the derivative are equal to changes in the fair value of the underlying debt and have no impact on earnings.

During 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 LIBOR. The difference between the fixed rate and variable rates resulted in a favorable impact to interest expense for the three months ended July 31, 2014. The interest rate swap was recognized at fair value in the Condensed Consolidated Balance Sheets at July 31, 2014 and April 30, 2014, and changes in the fair value were recognized in interest expense. The net gain of $17.0 recognized on the derivative instrument during the first 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.

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

	July 31, 2014						April 30, 2014
	Other Current Assets		Other Current Liabilities		Other Noncurrent Assets		Other Current Assets		Other Current Liabilities		Other Noncurrent Liabilities
Derivatives designated as hedging instruments:
Interest rate contract	$	12.8	$	—	$	4.2	$	18.0	$	—	$	3.1
Commodity contracts		—		—		—		23.4		10.9		—
Total derivatives designated as hedging instruments	$	12.8	$	—	$	4.2	$	41.4	$	10.9	$	3.1
Derivatives not designated as hedging instruments:
Commodity contracts	$	15.4	$	18.2	$	0.5	$	11.6	$	5.8	$	—
Foreign currency exchange contracts		1.2		0.9		—		1.4		0.7		—
Total derivatives not designated as hedging instruments	$	16.6	$	19.1	$	0.5	$	13.0	$	6.5	$	—
Total derivative instruments	$	29.4	$	19.1	$	4.7	$	54.4	$	17.4	$	3.1

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 July 31, 2014 and April 30, 2014, we maintained cash margin account balances of $12.4 and $8.1, respectively, included in other current assets in the Condensed Consolidated Balance Sheets and other – net, investing in the Condensed Statements of Consolidated Cash Flows. 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 prior to May 1, 2014, and pre-tax losses related to the termination of a prior interest rate swap.

	Three Months Ended July 31,
	2014		2013
Losses recognized in other comprehensive loss (effective portion)	$	—	$	(6.0)
Gains (losses) reclassified from accumulated other comprehensive loss to cost of products sold (effective portion)		7.0		(8.8)
Losses reclassified from accumulated other comprehensive loss to interest expense (effective portion)		(0.1)		(0.1)
Change in accumulated other comprehensive loss	$	(6.9)	$	2.9

Included as a component of accumulated other comprehensive loss were deferred pre-tax net gains of $22.2 and $29.1 at July 31, 2014 and April 30, 2014, respectively, related to commodity contracts. The related tax expense recognized in accumulated other comprehensive loss was expense of $8.1 and $10.8 at July 31, 2014 and April 30, 2014, respectively. 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 were deferred pre-tax losses of $4.8 at both July 31, 2014 and April 30, 2014, 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 $1.7 at both July 31, 2014 and April 30, 2014. Approximately $0.6 of the pre-tax loss will be recognized over the next 12 months.

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 July 31,
	2014		2013
Losses on commodity contracts	$	(21.1)	$	(1.9)
(Losses) gains on foreign currency exchange contracts		(0.6)		1.1
Total losses recognized in cost of products sold	$	(21.7)	$	(0.8)

Unallocated derivative (losses) gains for the quarter ended July 31, 2014, included:

	Three Months Ended July 31,
	2014		2013
Net losses on mark-to-market valuation of unallocated derivative positions	$	(21.7)	$	(0.8)
Net losses on derivative positions reclassified to segment operating profit		0.3		5.4
Net mark-to-market valuation of certain derivative positions recognized in unallocated derivative (losses) gains	$	(21.4)	$	4.6

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

	July 31, 2014		April 30, 2014
Commodity contracts	$	571.3	$	790.3
Foreign currency exchange contracts		250.5		158.1
Interest rate contract		750.0		750.0