Derivatives

The Company’s operations are exposed to market risks relating to commodity prices that affect the Company’s cost of raw materials, finished product prices and energy costs and the risk of changes in interest rates and foreign currency exchange rates.

The Company makes limited use of derivative instruments to manage cash flow risks related to natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of bakery by-products (“BBP”) by reducing the impact of changing prices. Foreign currency forward contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. At July 1, 2017, the Company had corn option contracts outstanding that qualified and were designated for hedge accounting as well as corn option and forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.

Entities are required to report all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair value, cash flows or foreign currencies. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside of earnings) and is subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of the gain or loss, are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.

Cash Flow Hedges

In fiscal 2016 and the first six months of fiscal 2017, the Company entered into corn option contracts on the Chicago Board of Trade that are designated as cash flow hedges. Under the terms of the corn option contracts, the Company hedged a portion of its U.S. forecasted sales of BBP into the fourth quarter of fiscal 2018. As of July 1, 2017, some of the contracts have been settled while the remaining contract positions and activity are disclosed below. From time to time, the Company may enter into corn option contracts in the future.

As of July 1, 2017, the Company had the following outstanding forward contract amounts that were entered into to hedge the future payments of intercompany note transactions, foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency. All of these transactions are currently not designated for hedge accounting (in thousands):



Functional Currency		Contract Currency
Type	Amount	Type	Amount
Brazilian real	28,302	Euro	7,710
Brazilian real	83,615	U.S. dollar	25,010
Brazilian real	328	Mexican peso	1,824
Euro	140,552	U.S. dollar	155,711
Euro	9,649	Polish zloty	40,444
Euro	3,848	Japanese yen	464,300
Euro	37,637	Chinese renminbi	287,736
Euro	11,064	Australian dollar	16,700
Polish zloty	23,992	Euro	5,678
Japanese yen	22,550	U.S. dollar	203

The Company estimates the amount that will be reclassified from accumulated other comprehensive gain at July 1, 2017 into earnings over the next 12 months will be approximately $0.8 million. As of July 1, 2017, no amounts have been reclassified into earnings as a result of the discontinuance of cash flow hedges.

The following table presents the fair value of the Company’s derivative instruments under FASB authoritative guidance as of July 1, 2017 and December 31, 2016 (in thousands):



Derivatives Designated	Balance Sheet	Asset Derivatives Fair Value
as Hedges	Location	July 1, 2017		December 31, 2016
Corn options	Other current assets	$	1,033	$	4,235

Total asset derivatives designated as hedges		$	1,033	$	4,235

Derivatives Not Designated as Hedges
Foreign currency contracts	Other current assets	$	1,468	$	8,939
Corn options and futures	Other current assets	144		151

Total asset derivatives not designated as hedges		$	1,612	$	9,090

Total asset derivatives		$	2,645	$	13,325



Derivatives Designated	Balance Sheet	Liability Derivatives Fair Value
as Hedges	Location	July 1, 2017		December 31, 2016
Corn options	Accrued expenses	$	447	$	—
Corn options	Other non-current liabilities	624		—

Total liability derivatives designated as hedges		$	1,071	$	—

Derivatives Not Designated as Hedges
Foreign currency contracts	Accrued expenses	$	5,771	$	608
Corn options and futures	Accrued expenses	119		122

Total liability derivatives not designated as hedges		$	5,890	$	730

Total liability derivatives		$	6,961	$	730

The effect of the Company’s derivative instruments on the consolidated financial statements as of and for the three months ended July 1, 2017 and July 2, 2016 is as follows (in thousands):



Derivatives Designated as Cash Flow Hedges	Gain or (Loss) Recognized in Other Comprehensive Income (“OCI”) on Derivatives (Effective Portion) (a)					Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (b)				Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) (c)
	2017			2016		2017		2016		2017			2016
Corn options	$	(207	)	$	2,875	$	1,213	$	869	$	(1,394	)	$	162

Total	$	(207	)	$	2,875	$	1,213	$	869	$	(1,394	)	$	162


(a)	Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive income/(loss) of approximately $(0.2) million and $2.9 million recorded net of taxes of approximately $0.1 million and $(1.1) million as of July 1, 2017 and July 2, 2016, respectively.


(b)	Gains and (losses) reclassified from accumulated OCI into income (effective portion) for corn options are included in cost of sales, respectively, in the Company’s consolidated statements of operations.


(c)	Gains and (losses) recognized in income on derivatives (ineffective portion) for corn options are included in other income/ (expense), net in the Company’s consolidated statements of operations.

The effect of the Company’s derivative instruments on the consolidated financial statements as of and for the six months ended July 1, 2017 and July 2, 2016 is as follows (in thousands):



Derivatives Designated as Cash Flow Hedges	Gain or (Loss) Recognized in Other Comprehensive Income (“OCI”) on Derivatives (Effective Portion) (a)					Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (b)				Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) (c)
	2017			2016		2017		2016		2017			2016
Corn options	$	(822	)	$	3,195	$	2,398	$	2,343	$	(1,305	)	$	214

Total	$	(822	)	$	3,195	$	2,398	$	2,343	$	(1,305	)	$	214


(a)	Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive income/(loss) of approximately $(0.8) million and $3.2 million recorded net of taxes of approximately $0.3 million and $(1.2) million as of July 1, 2017 and July 2, 2016, respectively.


(b)	Gains and (losses) reclassified from accumulated OCI into income (effective portion) for corn options are included in cost of sales, respectively, in the Company’s consolidated statements of operations.


(c)	Gains and (losses) recognized in income on derivatives (ineffective portion) for corn options are included in other income/ (expense), net in the Company’s consolidated statements of operations.

The table below summarizes the effect of derivatives not designated as hedges on the Company's consolidated statements of operations for the three and six months months ended July 1, 2017 and July 2, 2016 (in thousands):



		Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges
		Three Months Ended						Six Months Ended
Derivatives not designated as hedging instruments	Location	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016

Foreign Exchange	Foreign currency loss/(gain)	$	6,130		$	(7,204	)	$	9,276		$	4,083
Foreign Exchange	Selling, general and administrative expense	492			(3,868		)	(989		)	(6,779		)
Corn options and futures	Net sales	(18		)	344			(40		)	345
Corn options and futures	Cost of sales and operating expenses	46			(81		)	316			(613		)
Heating Oil swaps and options	Net sales	—			226			—			153
Soybean Meal	Net sales	(9		)	7			(281		)	7
Soybean Oil	Net sales	—			—			45			—
Total		$	6,641		$	(10,576	)	$	8,327		$	(2,804	)

At July 1, 2017, the Company had forward purchase agreements in place for purchases of approximately $43.7 million of natural gas and diesel fuel. These forward purchase agreements have no net settlement provisions and the Company intends to take physical delivery of the underlying product. Accordingly, the forward purchase agreements are not subject to the requirements of fair value accounting because they qualify and the Company has elected to account for these as normal purchases as defined in the FASB authoritative guidance.