DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Oct. 04, 2014

DERIVATIVE FINANCIAL INSTRUMENTS

7. DERIVATIVE FINANCIAL INSTRUMENTS

The company measures the fair value of its derivative portfolio by using the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. These measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:

Level 1: Fair value based on unadjusted quoted prices for identical assets or liabilities in active markets

Level 2: Modeled fair value with model inputs that are all observable market values

Level 3: Modeled fair value with at least one model input that is not an observable market value

COMMODITY PRICE RISK

The company enters into commodity derivatives, designated as cash-flow hedges of existing or future exposure to changes in commodity prices. The company’s primary raw materials are flour, sweeteners and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, is also an important commodity input to production.

As of October 4, 2014, the company’s hedge portfolio contained commodity derivatives with a net fair value of $(27.1) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

	Level 1			Level 2			Level 3		Total
Liabilities:
Other current	$	(21.8	)	$	(0.6	)	$	—	$	(22.4	)
Other long-term		(4.2	)		(0.5	)		—		(4.7	)
Total		(26.0	)		(1.1	)		—		(27.1	)
Net Fair Value	$	(26.0	)	$	(1.1	)	$	—	$	(27.1	)

The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix the price, or limit increases in prices, for a period of time extending primarily into fiscal 2016. These instruments are designated as cash-flow hedges. The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income (loss), and any ineffective portion of the change in fair value is recorded to current period earnings in selling, distribution and administrative expenses. All of the company-held commodity derivatives at October 4, 2014 and December 28, 2013 qualified for hedge accounting, except for certain immaterial weather derivatives in fiscal 2013.

INTEREST RATE RISK

The company entered into a treasury rate lock on March 28, 2012 to fix the interest rate for the ten-year 4.375% Senior Notes issued on April 3, 2012. The derivative position was closed when the debt was priced on March 29, 2012 with a cash settlement that offset changes in the benchmark treasury rate between the execution of the treasury rate lock and the debt pricing date. This treasury rate lock was designated as a cash flow hedge and the cash settlement was $3.1 million and is being amortized to interest expense over the term of the notes.

The company has the following derivative instruments located on the Condensed Consolidated Balance Sheet, which are utilized for the risk management purposes detailed above (amounts in thousands):

Derivative Assets

Derivative Liabilities

Derivatives designated as hedging instruments

October 4, 2014

December 28, 2013

October 4, 2014

December 28, 2013

Balance Sheet location

Fair Value

Balance Sheet location

Fair Value

Balance Sheet location

Fair Value

Balance Sheet location

Fair Value

Commodity contracts

Other current assets

—

Other current assets

162

Other current liabilities

22,380

Other current liabilities

10,625

Commodity contracts

Other long term assets

—

Other long term assets

—

Other long term liabilities

4,676

Other long term liabilities

1,095

Total

$

—

$

162

$

27,056

$

11,720

The company has the following derivative instruments located on the Condensed Consolidated Statements of Income, utilized for risk management purposes (amounts in thousands and net of tax):

Derivatives in Cash Flow Hedge Relationships(2)	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) For the twelve weeks ended						Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)(2)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) For the twelve weeks ended
	October 4, 2014			October 5, 2013				October 4, 2014		October 5, 2013
Interest rate contracts	$	36		$	26		Interest (expense) income	$	—	$	(13	)
Commodity contracts		(9,128	)		(1,611	)	Production costs(1)		1,181		(5,893	)
Total	$	(9,092	)	$	(1,585	)		$	1,181	$	(5,906	)

Derivatives in Cash Flow Hedge Relationships(2)	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) For the forty weeks ended						Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)(2)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) For the forty weeks ended
	October 4, 2014			October 5, 2013				October 4, 2014			October 5, 2013
Interest rate contracts	$	119		$	(241	)	Interest (expense) income	$	—		$	(502	)
Commodity contracts		(10,027	)		(16,883	)	Production costs(1)		(2,249	)		(13,298	)
Total	$	(9,908	)	$	(17,124	)		$	(2,249	)	$	(13,800	)

1. Included in materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately).

2. Amounts in parentheses indicate debits to determine net income.

The balance in accumulated other comprehensive loss (income) related to commodity price risk and interest rate risk derivative transactions that are closed or will expire over the next three years are as follows (amounts in millions and net of tax) at October 4, 2014:

	Commodity price risk derivatives			Interest rate risk derivatives		Totals
Closed contracts	$	1.3		$	1.2	$	2.5
Expiring in 2014		(0.3	)		—		(0.3	)
Expiring in 2015		16.1			—		16.1
Expiring in 2016		0.8			—		0.8
Total	$	17.9		$	1.2	$	19.1

As of October 4, 2014, the company had the following outstanding financial contracts that were entered to hedge commodity and interest rate risk (amounts in millions):

	Notional amount
Wheat contracts	$	127.8
Soybean oil contracts		35.4
Natural gas contracts		15.8
Total	$	179.0

The company’s derivative instruments contain no credit-risk-related contingent features at October 4, 2014. As of October 4, 2014 and December 28, 2013, the company had $32.3 million and $16.9 million, respectively, in other current assets representing collateral for hedged positions.