Derivative Financial Instruments | 6 Months Ended |
Oct. 26, 2014 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ' |
Derivative Financial Instruments | ' |
Note 5. Derivative Financial Instruments |
The Company uses interest rate swaps, commodity swaps, futures, option and swaption (an option on a swap) contracts as well as foreign currency forward contracts, to hedge market risks relating to possible adverse changes in interest rates, commodity, transportation, and foreign currency exchange rates and other input price exposures. The Company continually monitors its positions and the credit ratings of the counterparties involved to mitigate the amount of credit exposure to any one party. |
The Company designates each derivative contract as one of the following: (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”) or (2) a hedging instrument for which the change in fair value is recognized to act as an economic hedge but does not meet the requirements to receive hedge accounting treatment (“economic hedge”). As of October 26, 2014, the Company had both cash flow and economic hedges. |
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Interest Rates: The Company’s debt primarily consists of floating rate term loans and fixed rate notes. The Company maintains its floating rate revolver for flexibility and for other general corporate purposes. Interest expense on the Company’s floating rate debt is typically calculated based on a fixed spread over a reference rate, such as LIBOR (also known as the Eurodollar rate). Therefore, fluctuations in market interest rates will cause interest expense increases or decreases on a given amount of floating rate debt. |
The Company from time to time manages a portion of its interest rate risk related to floating rate debt by entering into interest rate swaps in which the Company receives floating rate payments and makes fixed rate payments. Swaps are recorded as an asset or liability in the Condensed Consolidated Balance Sheets at fair value. The Company currently accounts for these interest rate swaps as economic hedges and gains and losses are recorded directly in earnings. |
As of October 26, 2014, the following economic hedge swaps were outstanding: |
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Contract date | | Notional amount | | | Fixed LIBOR rate | | | Effective date | | Maturity date | | | | | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | | | | | |
April 12, 2011 | | $ | 900 | | | | 3.029 | % | | September 4, 2012 | | September 1, 2015 | | | | | | | | | | | | | | | | |
On August 13, 2010, the Company entered into interest rate swaps with a total notional amount of $300.0 million as the fixed rate payer and an effective date of February 1, 2011. The interest rate swaps fixed LIBOR at 1.368% for the term of the swaps and expired during fiscal 2014 on February 3, 2014. |
Commodities: Certain commodities such as soybean meal, corn, wheat, soybean oil, diesel fuel and natural gas (collectively, “commodity contracts”) are used in the production and transportation of the Company’s products. Generally these commodities are purchased based upon market prices that are established with the vendor as part of the purchase process. The Company uses futures, swaps, swaption and option contracts, as deemed appropriate; to reduce the effect of price fluctuations on anticipated purchases. These contracts may have a term of up to 36 months. The Company accounts for these commodities derivatives as either economic or cash flow hedges. Changes in the value of economic hedges are recorded directly in earnings. For cash flow hedges, the effective portion of derivative gains and losses is deferred in equity and recognized as part of cost of products sold in the appropriate period and the ineffective portion is recognized as other (income) expense. |
The table below presents the notional amounts of the Company’s commodity contracts as of the dates indicated (in millions): |
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| | October 26, | | | April 27, | | | | | | | | | | | | | | | | | | | | | |
2014 | 2014 | | | | | | | | | | | | | | | | | | | | |
Commodity contracts | | $ | 194.7 | | | $ | 124.8 | | | | | | | | | | | | | | | | | | | | | |
Foreign Currency: From time to time, the Company manages its exposure to fluctuations in foreign currency exchange rates by entering into forward contracts to cover a portion of its projected expenditures paid in local currency. These contracts may have a term of up to 24 months. The Company accounts for these contracts as either economic or cash flow hedges. Changes in the value of economic hedges are recorded directly in earnings. For cash flow hedges, the effective portion of derivative gains and losses is deferred in equity and recognized as part of cost of products sold in the appropriate period and the ineffective portion is recognized as other (income) expense. |
The table below presents the Company’s foreign currency derivative contracts as of the dates indicated (in millions). As of April 27, 2014, the Company did not have any outstanding foreign currency exchange contracts because the Company did not believe it was in its best interest at the time. All of the foreign currency derivative contracts held on October 26, 2014 are scheduled to mature prior to the end of fiscal 2016. |
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| | October 26, | | | April 27, | | | | | | | | | | | | | | | | | | | | | |
2014 | 2014 | | | | | | | | | | | | | | | | | | | | |
Contract amount | | $ | 13.4 | | | $ | - | | | | | | | | | | | | | | | | | | | | | |
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Fair Value of Derivative Instruments |
The fair value of derivative instruments recorded in the Condensed Consolidated Balance Sheets as of October 26, 2014 was as follows (in millions): |
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Derivatives in cash flow | | Asset derivatives | | | Liability derivatives | | | | | | | | | | | | | | | | | |
hedging relationships | | Balance Sheet location | | Fair value | | | Balance Sheet location | | Fair value | | | | | | | | | | | | | | | | | |
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Interest rate contracts | | Prepaid expenses and other current assets | | $ | - | | | Accounts payable and accrued expenses | | $ | 23.1 | (1) | | | | | | | | | | | | | | | | |
Commodity and other contracts | | Prepaid expenses and other current assets | | | 0.1 | | | Accounts payable and accrued expenses | | | 16.2 | (2) | | | | | | | | | | | | | | | | |
Foreign currency exchange contracts | | Prepaid expenses and other current assets | | | 0.3 | | | Accounts payable and accrued expenses | | | - | | | | | | | | | | | | | | | | | |
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Total | | | | $ | 0.4 | | | | | $ | 39.3 | | | | | | | | | | | | | | | | | |
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-1 | Represents liability derivatives designated as economic hedges. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
-2 | Includes $2.3 million of commodity contracts (liability derivatives) designated as economic hedges. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The fair value of derivative instruments recorded in the Condensed Consolidated Balance Sheets as of April 27, 2014 was as follows (in millions): |
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Derivatives in cash flow | | Asset derivatives | | | Liability derivatives | | | | | | | | | | | | | | | | | |
hedging relationships | | Balance Sheet location | | Fair value | | | Balance Sheet location | | Fair value | | | | | | | | | | | | | | | | | |
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Interest rate contracts | | Other non-current assets | | $ | - | | | Other non-current liabilities | | $ | 9.8 | (2) | | | | | | | | | | | | | | | | |
Interest rate contracts | | Prepaid expenses and other current assets | | | - | | | Accounts payable and accrued expenses | | | 25.4 | (2) | | | | | | | | | | | | | | | | |
Commodity and other contracts | | Prepaid expenses and other current assets | | | 9.4 | (1) | | Accounts payable and accrued expenses | | | - | | | | | | | | | | | | | | | | | |
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Total | | | | $ | 9.4 | | | | | $ | 35.2 | | | | | | | | | | | | | | | | | |
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-1 | Includes $1.8 million of commodity contracts (asset derivatives) designated as economic hedges. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
-2 | Represents liability derivatives designated as economic hedges. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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The effect of the Company’s economic hedges on other (income) expense, net in the Condensed Consolidated Statements of Operations for the periods indicated below was as follows (in millions): |
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| | Three Months Ended | | | Six Months Ended | | | | | | | | | | | | | |
| | October 26, | | | October 27, | | | October 26, | | | October 27, | | | | | | | | | | | | | |
2014 | 2013 | 2014 | 2013 | | | | | | | | | | | | |
Interest rate contracts | | $ | 0.8 | | | $ | 2.1 | | | $ | 0.8 | | | $ | 0.2 | | | | | | | | | | | | | |
Commodity and other contracts | | | 1.9 | | | | (1.7 | ) | | | 2.4 | | | | (8.3 | ) | | | | | | | | | | | | |
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Included in other (income) expense, net | | $ | 2.7 | | | $ | 0.4 | | | $ | 3.2 | | | $ | (8.1 | ) | | | | | | | | | | | | |
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The effect of the Company’s cash flow hedges in the Condensed Consolidated Statements of Operations for the three and six months ended October 26, 2014 was as follows (in millions): |
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Derivatives in cash flow | | (Gain) loss recognized in AOCI | | | Location of (gain) loss | | (Gain) loss reclassified | | | Location of (gain) loss | | (Gain) loss recognized in | |
hedging relationships | reclassified from AOCI | from AOCI into income | recognized in income | income (ineffective portion |
| | | (ineffective portion and | and amount excluded |
| | | amount excluded from | from effectiveness testing) |
| | Three Months | | | Six Months | | | | | Three Months | | | Six Months | | | effectiveness testing) | | Three Months | | | Six Months | |
| Ended | Ended | | Ended | Ended | | Ended | Ended |
| | October 26, | | | October 26, | | | | | October 26, | | | October 26, | | | | | October 26, | | | October 26, | |
| 2014 | 2014 | | 2014 | 2014 | | 2014 | 2014 |
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Commodity and other contracts | | $ | 2.1 | | | $ | 18 | | | Cost of products sold | | $ | 2.7 | | | $ | 3.1 | | | Other (income) expense, net | | $ | 1 | | | $ | 3.5 | |
Foreign currency exchange contracts | | | (0.1 | ) | | | (0.2 | ) | | Cost of products sold | | | - | | | | 0.1 | | | Other (income) expense, net | | | - | | | | - | |
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Total | | $ | 2 | | | $ | 17.8 | | | | | $ | 2.7 | | | $ | 3.2 | | | | | $ | 1 | | | $ | 3.5 | |
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The effect of the Company’s cash flow hedges in the Condensed Consolidated Statements of Operations for the three and six months ended October 27, 2013 was as follows (in millions): |
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Derivatives in cash flow | | (Gain) loss recognized in AOCI | | | Location of (gain) loss | | (Gain) loss reclassified | | | Location of (gain) loss | | (Gain) loss recognized in | |
hedging relationships | reclassified from AOCI | from AOCI into income | recognized in income | income (ineffective portion |
| | | (ineffective portion and | and amount excluded |
| | | amount excluded from | from effectiveness testing) |
| | Three Months | | | Six Months | | | | | Three Months | | | Six Months | | | effectiveness testing) | | Three Months | | | Six Months | |
| Ended | Ended | | Ended | Ended | | Ended | Ended |
| | October 27, | | | October 27, | | | | | October 27, | | | October 27, | | | | | October 27, | | | October 27, | |
| 2013 | 2013 | | 2013 | 2013 | | 2013 | 2013 |
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Commodity and other contracts | | $ | (1.6 | ) | | $ | (1.6 | ) | | Cost of products sold | | $ | 2.2 | | | $ | 1.9 | | | Other (income) expense, net | | $ | (1.3 | ) | | $ | (1.6 | ) |
Foreign currency exchange contracts | | | - | | | | - | | | Cost of products sold | | | - | | | | - | | | Other (income) expense, net | | | - | | | | - | |
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Total | | $ | (1.6 | ) | | $ | (1.6 | ) | | | | $ | 2.2 | | | $ | 1.9 | | | | | $ | (1.3 | ) | | $ | (1.6 | ) |
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At October 26, 2014, $10.9 million is expected to be reclassified from AOCI to cost of products sold within the next 12 months. |