Derivative Financial Instruments

6 Months Ended

Oct. 31, 2015

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

Note 8: 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, corn, edible oils, soybean meal, wheat, and milk. We also enter into commodity futures and options contracts to manage price risk for energy input costs, including diesel fuel and natural gas. The derivative instruments generally have maturities of less than one year.

We do not qualify commodity derivatives for hedge accounting treatment and as a result the derivative gains and losses are immediately recognized in earnings. Although we do not 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 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 and finished goods. The contracts generally have maturities of less than one year. We do not qualify instruments used to manage foreign currency exchange exposures for hedge accounting treatment.

Interest Rate Hedging: We utilize derivative instruments to manage changes in the fair value 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 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 2015, we entered into a series of forward-starting interest rate swaps to hedge a portion of the interest rate risk related to our anticipated issuance of Senior Notes. The notional hedged amount was $1.1 billion, with expected maturity tenors of 10, 20, and 30 years. The swap agreements were designated as cash flow hedges, where changes in fair value are recorded in other comprehensive income (loss). In March 2015, in conjunction with the pricing of the Senior Notes, we terminated the interest rate swaps prior to maturity. The termination resulted in a net loss of $4.0, which will be amortized over the life of the remaining debt as an increase to interest expense and approximately $0.2 per year will be recognized beginning in 2026 through 2045. For additional information, see Note 6: Debt and Financing Arrangements.

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 received cash flows from the counterparty at a fixed rate and paid the counterparty variable rates based on LIBOR. In 2015, we terminated the interest rate swap on the 3.50 percent Senior Notes prior to maturity. As a result of the early termination, we received $58.1 in cash, which included $4.6 of accrued and prepaid interest. The remaining benefit was deferred and will be recognized over the remaining life of the underlying debt as a reduction of future interest expense. We recognized $2.2 in 2015 and an additional $3.7 through October 31, 2015. The remaining will be recognized as follows: $3.7 through the remainder of 2016, $7.6 in 2017, $7.8 in 2018, $8.0 in 2019, $8.1 in 2020, $8.4 in 2021, and $4.0 in 2022. For additional information, see Note 6: Debt and Financing Arrangements.

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

	October 31, 2015
	Other Current Assets		Other Current Liabilities		Other Noncurrent Assets		Other Noncurrent Liabilities
Derivatives not designated as hedging instruments:
Commodity contracts	$	7.8	$	19.0	$	3.3	$	4.7
Foreign currency exchange contracts		2.7		0.5		—		—
Total derivative instruments	$	10.5	$	19.5	$	3.3	$	4.7
	April 30, 2015
	Other Current Assets		Other Current Liabilities		Other Noncurrent Assets		Other Noncurrent Liabilities
Derivatives not designated as hedging instruments:
Commodity contracts	$	6.4	$	23.9	$	0.2	$	3.8
Foreign currency exchange contracts		4.8		1.0		—		—
Total derivative instruments	$	11.2	$	24.9	$	0.2	$	3.8

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 October 31, 2015 and April 30, 2015, we maintained cash margin account balances of $24.8 and $38.2, respectively, included in other current assets in the Condensed Consolidated Balance Sheets. The change in the cash margin account balances is included in other – net, investing activities 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 net gains recognized on derivatives designated as cash flow hedges prior to May 1, 2014, and pre-tax losses related to the termination of prior interest rate swaps.

	Three Months Ended October 31,				Six Months Ended October 31,
	2015		2014		2015		2014
Gains reclassified from accumulated other comprehensive loss to cost of products sold (effective portion)	$	—	$	11.8	$	—	$	18.8
Losses reclassified from accumulated other comprehensive loss to interest expense (effective portion)		(0.2)		(0.2)		(0.3)		(0.3)
Change in accumulated other comprehensive loss	$	0.2	$	(11.6)	$	0.3	$	(18.5)

Included as a component of accumulated other comprehensive loss at October 31, 2015 and April 30, 2015, were deferred pre-tax losses of $7.9 and $8.2, respectively, related to the termination of interest rate swaps. The related tax benefit recognized in accumulated other comprehensive loss was $2.9 at October 31, 2015 and April 30, 2015. 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 October 31,				Six Months Ended October 31,
	2015		2014		2015		2014
(Losses) gains on commodity contracts	$	(7.9)	$	0.7	$	(26.9)	$	(20.4)
Gains on foreign currency exchange contracts		0.3		3.0		8.6		2.4
Total (losses) gains recognized in cost of products sold	$	(7.6)	$	3.7	$	(18.3)	$	(18.0)

Commodity and foreign currency exchange derivative gains and losses are reported in unallocated derivative gains and losses outside of segment operating results until the related inventory is sold. At that time, we reclassify the hedge gains and losses from unallocated derivative gains and losses to segment profit, allowing our segments to realize the economic effect of the hedge without experiencing any mark-to-market volatility.

The following table presents the activity in unallocated derivative gains and losses.

	Three Months Ended October 31,				Six Months Ended October 31,
	2015		2014		2015		2014
Net (losses) gains on mark-to-market valuation of unallocated derivative positions	$	(7.6)	$	3.7	$	(18.3)	$	(18.0)
Net losses on derivative positions reclassified to segment operating profit		13.6		3.9		14.3		4.2
Unallocated derivative gains (losses)	$	6.0	$	7.6	$	(4.0)	$	(13.8)

The net cumulative unallocated derivative losses at October 31, 2015, were $24.4, of which $18.9 were realized and will be reclassified to segment operating profit when the related inventory is sold.

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

	October 31, 2015		April 30, 2015
Commodity contracts	$	601.5	$	640.6
Foreign currency exchange contracts		163.3		136.4