Derivative Financial Instruments And Hedging

9 Months Ended

Jun. 30, 2011

Derivative Financial Instruments And Hedging

Derivative Financial Instruments And Hedging

NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING

In the ordinary course of business, the Company is exposed to commodity price risks relating to the acquisition of raw materials and supplies, interest rate risks relating to debt, and foreign currency exchange rate risks relating to its foreign subsidiaries.  Authorized individuals within the Company may utilize derivative financial instruments, including (but not limited to) futures contracts, option contracts, forward contracts and swaps, to manage certain of these exposures by hedging when it is practical to do so.  The terms of these instruments generally do not exceed eighteen months for commodities, ten years for interest rates, and two years for foreign currency.  The Company is not permitted to engage in speculative or leveraged transactions and will not hold or issue financial instruments for trading purposes.

For the nine months ended June 30, 2011, the Company's derivative instruments consisted of commodity contracts (options, futures, and swaps) used as cash flow or fair value hedges on purchases of raw materials (ingredients and packaging) and energy (fuel), an interest rate swap contract used as a cash flow hedge on interest payments related to fixed-rate debt, and foreign currency forward contracts used as cash flow hedges on receipts of foreign currency-denominated accounts receivable. Certain commodity-related derivatives do not meet the criteria for cash flow hedge accounting or simply are not designated as hedging instruments; nonetheless, they are used to manage the future cost of raw materials. The following table shows the notional amounts of derivative instruments held.

	June 30,		Mar. 31,		Dec. 31,		Sept. 30,
	2011		2011		2010		2010
Raw materials (thousands of pounds)		956,084		656,779		714,529		679,393
Natural gas (thousands of MMBTUs)		4,620		5,130		2,075		3,200
Other fuel (thousands of gallons)		3,937		6,445		5,668		8,001
Currency (thousands of dollars)		14,100		22,900		43,700		69,450
Debt (thousands of dollars)		577,500		-		-		-

The Company has a fixed-to-floating interest rate swap with a notional value of $577.5 outstanding as of June 30, 2011, with maturity and fixed rate matching its Fixed Rate Senior Notes maturing 2018. This swap is designated as a fair value hedge of those notes. The change in fair value of the swap not related to accrued interest is offset by a corresponding adjustment to the carrying value of the notes.

The following table shows the fair value and balance sheet location of the Company's derivative instruments as of June 30, 2011 and September 30, 2010, all of which were designated as hedging instruments under ASC Topic 815 except $9.3 of commodity contracts in a net liability position as of June 30, 2011.

		Fair Value
		June 30,	Sept. 30,
		2011		2010	Balance Sheet Location
Asset Derivatives
Foreign exchange					Prepaid expenses and other current
contracts	$	.5	$	.9 assets
					Prepaid expenses and other current
Commodity contracts		2.4		15.8 assets
	$	2.9	$	16.7
Liability Derivatives
Commodity contracts	$	6.2	$	2.6 Other current liabilities
Interest rate contracts		10.4		- Other liabilities
	$	16.6	$	2.6

The following tables illustrate the effect of the Company's derivative instruments on the statements of earnings and other comprehensive income (OCI) for the three months ended June 30, 2011 and 2010.

													Gain (Loss)
							Gain (Loss)						Recognized in
	Amount of Gain						Reclassified from						Earnings [Ineffective
	(Loss) Recognized						Accumulated OCI						Portion and Amount
Derivatives in	in OCI						into Earnings						Excluded from
ASC Topic 815 Cash Flow	[Effective Portion]						[Effective Portion]						Effectiveness Testing]
Hedging Relationships	2011			2010			2011			2010			2011		2010			Location in Earnings
Commodity contracts	$	(2.0	)	$	(.1	)	$	16.0		$	(3.3	)	$	1.6	$	(.1	)	Cost of goods sold
Foreign exchange contracts		.2			(1.2	)		1.4			1.9			-		-		SG&A expenses
Interest rate contracts		-			(5.2	)		(.3	)		(.1	)		-		-		Interest expense, net
	$	(1.8	)	$	(6.5	)	$	17.1		$	(1.5	)	$	1.6	$	(.1	)

Derivatives Not Designated	Amount of Gain (Loss)
as Hedging Instruments	Recognized in Earnings					Location of Gain (Loss)
Under ASC Topic 815	2011			2010		Recognized in Earnings
Commodity contracts	$	(21.2	)	$	-	Cost of goods sold

The following tables illustrate the effect of the Company's derivative instruments on the statements of earnings and other comprehensive income (OCI) for the nine months ended June 30, 2011 and 2010.

												Gain (Loss)
						Gain (Loss)						Recognized in
	Amount of Gain					Reclassified from						Earnings [Ineffective
	(Loss) Recognized					Accumulated OCI						Portion and Amount
Derivatives in	in OCI					into Earnings						Excluded from
ASC Topic 815 Cash Flow	[Effective Portion]					[Effective Portion]						Effectiveness Testing]
Hedging Relationships	2011		2010			2011			2010			2011		2010			Location in Earnings
Commodity contracts	$	25.6	$	.3		$	25.1		$	(11.5	)	$	1.7	$	(.3	)	Cost of goods sold
Foreign exchange contracts		2.7		(.2	)		3.5			5.9			-		-		SG&A expenses
Interest rate contracts		-		(5.2	)		(1.1	)		(1.1	)		-		-		Interest expense, net
	$	28.3	$	(5.1	)	$	27.5		$	(6.7	)	$	1.7	$	(.3	)

Derivatives in	Amount of Gain (Loss)
ASC Topic 815 Fair Value	Recognized in Earnings					Location of Gain (Loss)
Hedging Relationships	2011			2010		Recognized in Earnings
Commodity contracts	$	(.1	)	$	-	Cost of goods sold

Derivatives Not Designated	Amount of Gain (Loss)
as Hedging Instruments	Recognized in Earnings					Location of Gain (Loss)
Under ASC Topic 815	2011			2010		Recognized in Earnings
Commodity contracts	$	(10.4	)	$	-	Cost of goods sold

Approximately $14.9 of the net cash flow hedge gains reported in accumulated OCI at June 30, 2011 are expected to be reclassified into earnings within the next twelve months.  For gains or losses associated with commodity contracts, the reclassification will occur when the products produced with hedged materials are sold.  For gains or losses associated with foreign exchange contracts, the reclassification will occur as hedged foreign currency-denominated accounts receivable are received.  For gains or losses associated with interest rate swaps, the reclassification occurs on a straight-line basis over the term of the related debt.

Certain of the Company's derivative instruments contain provisions that require the Company to post collateral when the derivatives in liability positions exceed a specified threshold, and others require collateral even when the derivatives are in asset positions.  The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on June 30, 2011 and September 30, 2010 was $6.2 and $2.6, respectively, and the related collateral required was $10.6 and $10.0 at June 30, 2011 and September 30, 2010, respectively.