Derivative Financial Instruments and Fair Value Measurements

9 Months Ended

Oct. 01, 2016

Derivative Instruments And Hedging Activities Disclosure [Abstract]

5. Derivative Financial Instruments and Fair Value Measurements

The following table presents for each of the fair value hierarchies, the assets and liabilities that are measured at fair value on a recurring basis as of October 1, 2016 and January 2, 2016:

			October 1, 2016
			Fair value
			asset (liability)	Level 1	Level 2	Level 3
			$	$	$	$
(a)	Commodity futures and forward contracts⁽¹⁾
		Unrealized short-term derivative asset	1,747	799	948	-
		Unrealized short-term derivative liability	(1,197)	-	(1,197)	-
		Unrealized long-term derivative liability	(12)	-	(12)	-
(b)	Inventories carried at market⁽²⁾		6,647	-	6,647	-
(c)	Forward foreign currency contracts⁽³⁾		(188)	-	(188)	-
(d)	Contingent consideration⁽⁴⁾		(15,175)	-	-	(15,175)
(e)	Embedded derivative⁽⁵⁾		2,944	-	-	2,944
(f)	Long-lived assets⁽⁶⁾		600	-	600	-

			January 2, 2016
			Fair value
			asset (liability)	Level 1	Level 2	Level 3
			$	$	$	$
(a)	Commodity futures and forward contracts⁽¹⁾
		Unrealized short-term derivative asset	748	-	748	-
		Unrealized long-term derivative asset	21	-	21	-
		Unrealized short-term derivative liability	(1,417)	(10)	(1,407)	-
		Unrealized long-term derivative liability	(36)	-	(36)	-
(b)	Inventories carried at market⁽²⁾		5,945	-	5,945	-
(c)	Forward foreign currency contracts⁽³⁾		311	-	311	-
(d)	Contingent consideration⁽⁴⁾		(21,010)	-	-	(21,010)
(e)	Embedded derivative⁽⁵⁾		3,409	-	-	3,409

(1) Unrealized short-term derivative asset is included in prepaid expenses and other current assets, unrealized long-term derivative asset is included in other assets, unrealized short-term derivative liability is included in other current liabilities and unrealized long-term derivative liability is included in long-term liabilities on the consolidated balance sheets.

(2) Inventories carried at market are included in inventories on the consolidated balance sheets.

(3) The forward foreign currency contracts are included in accounts receivable or accounts payable and accrued liabilities on the consolidated balance sheets.

(4) Contingent consideration obligations are included in long-term liabilities (including the current portion thereof) on the consolidated balance sheets.

(5) The embedded derivative is included in other assets (long-term) on the consolidated balance sheets.

(6) Long-lived assets are included in property, plant and equipment on the consolidated balance sheets.

(a) Commodity futures and forward contracts

The Company’s derivative contracts that are measured at fair value include exchange-traded commodity futures and forward commodity purchase and sale contracts. Exchange-traded futures are valued based on unadjusted quotes for identical assets priced in active markets and are classified as level 1. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. Local market adjustments use observable inputs or market transactions for similar assets or liabilities, and, as a result, are classified as level 2. Based on historical experience with the Company’s suppliers and customers, the Company’s own credit risk, and the Company’s knowledge of current market conditions, the Company does not view non-performance risk to be a significant input to fair value for the majority of its forward commodity purchase and sale contracts.

These exchange-traded commodity futures and forward commodity purchase and sale contracts are used as part of the Company’s risk management strategy, and represent economic hedges to limit risk related to fluctuations in the price of certain commodity grains, as well as the prices of cocoa and coffee. These derivative instruments are not designated as hedges for accounting purposes. Gains and losses on changes in fair value of these derivative instruments are included in cost of goods sold on the consolidated statement of operations. For the quarter ended October 1, 2016, the Company recognized a gain of $0.7 million (October 3, 2015 – gain of $1.1 million) and for the three quarters ended October 1, 2016, the Company recognized a gain of $1.2 million (October 3, 2015 – gain of $0.5 million) related to changes in the fair value of these derivatives.

As at October 1, 2016, the notional amounts of open commodity futures and forward purchase and sale contracts were as follows (in thousands of bushels):

	Number of bushels purchased (sold)
	Corn	Soybeans
Forward commodity purchase contracts	414	596
Forward commodity sale contracts	(75)	(599)
Commodity futures contracts	(670)	(440)

In addition, as at October 1, 2016, the Company had net open forward contracts to sell 309 lots of cocoa and 23 lots of coffee.

(b) Inventories carried at market

Grains inventory carried at fair value is determined using quoted market prices from the Chicago Board of Trade (“CBoT”). Estimated fair market values for grains inventory quantities at period end are valued using the quoted price on the CBoT adjusted for differences in local markets, and broker or dealer quotes. These assets are placed in level 2 of the fair value hierarchy, as there are observable quoted prices for similar assets in active markets. Gains and losses on commodity grains inventory are included in cost of goods sold on the consolidated statements of operations. As at October 1, 2016, the Company had 340,399 bushels of commodity corn and 386,737 bushels of commodity soybeans in inventories carried at market.

As part of its risk management strategy, the Company enters into forward foreign exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. For any open forward foreign exchange contracts at period end, the contract rate is compared to the forward rate, and a gain or loss is recorded. These contracts are placed in level 2 of the fair value hierarchy, as the inputs used in making the fair value determination are derived from and are corroborated by observable market data. While these forward foreign exchange contracts typically represent economic hedges that are not designated as hedging instruments, certain of these contracts may be designated as hedges. As at October 1, 2016 the Company had open forward foreign exchange contracts with a notional value of € 29.4 million ($ 33.0 million). Gains and losses on changes in the fair value of these derivative instruments are included in foreign exchange loss or gain on the consolidated statement of operations. For the quarter ended October 1, 2016, the Company recognized a loss of $0.3 million (October 3, 2015 – loss of $0.5 million) and for the three quarters ended October 1, 2016, the Company recognized a loss of $0.5 million (October 3, 2015 – loss of $1.1 million) related to changes in the fair value of these derivatives.

(d) Contingent consideration

The fair value measurement of contingent consideration arising from business acquisitions is determined using unobservable (level 3) inputs. These inputs include: (i) the estimated amount and timing of the projected cash flows on which the contingency is based; and (ii) the risk-adjusted discount rate used to present value those cash flows. The following table presents a reconciliation of contingent consideration obligations for the three quarters ended October 1, 2016:

	January 2, 2016		Fair Value		October 1, 2016
	January 2, 2016	Issuances	Adjustments⁽¹⁾	Payments⁽²⁾	October 1, 2016
	$	$	$	$	$
Contingent consideration	(21,010)	-	1,281	4,554	(15,175)

Reflects the gain on settlement of the contingent consideration obligation related to the acquisition of Niagara Natural (see note 2) and an adjustment to the contractual amount owing to a former shareholder of Organic Land Corporation OOD, which was acquired by the Company on December 31, 2012, as well as the accretion for the time value of money related to the Citrusource and Niagara Natural obligations. Fair value adjustments are included in other income/expense (see note 9).
Reflects the payment of deferred consideration to the former unitholders of Citrusource and cash settlement of the contingent consideration obligation related to the acquisition of Niagara Natural (see note 2).

(e) Embedded derivative

On August 5, 2011 and August 29, 2014, the Company invested $0.5 million and $0.9 million, respectively, in convertible subordinated notes issued by Enchi Corporation (“Enchi”), a developer of advanced bioconversion products for the renewable fuels industry, of which $0.2 million principal amount remained outstanding as at January 2, 2016. The Company’s investment in subordinated convertible notes of Enchi includes the value of an accelerated payment option embedded in the notes, which may result in a maximum payout to the Company of $5.1 million. Due to a lack of level 1 or level 2 observable market quotes for the notes, the Company used a discounted cash flow analysis (income approach) to estimate the original fair value of the embedded derivative based on unobservable level 3 inputs. The Company assesses changes in the fair value of the embedded derivative based on the performance of actual cash flows derived from certain royalty rights owned by Enchi, which are expected to be the primary source of funds available to settle the embedded derivative, relative to the financial forecasts used in the valuation analysis. On April 15, 2016, the Company received a distribution from Enchi of $0.7 million, which has been applied to repay the remaining $0.2 million principal amount of the convertible subordinated notes, with the balance of $0.5 million applied against the carrying value of the embedded derivative. As at October 1, 2016 and January 2, 2016, the Company determined that the fair value of this embedded derivative was $2.9 million and $3.4 million, respectively, based on expectations related to the remaining royalty rights.

(f) Long-lived assets

Long-lived assets associated with the Company’s juice facility located in San Bernardino, California with a carrying value of $10.9 million were written down to their fair value of $0.6 million, resulting in an impairment charge of $10.3 million, which was included in other expense for the quarter and three quarters ended October 1, 2016 (see note 9). Fair value was determined based on market prices for comparable assets, which represent level 2 inputs.