NOTE 12
FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION
FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION
The fair values of the Company’s financial instruments are
based on carrying value in the case of
short-term
items, quoted market prices for derivatives and investments, and
in the case of
long-term
debt, incremental borrowing rates currently available on loans
with similar terms and maturities. The carrying amounts of the
Company’s cash, cash equivalents, receivables, and notes
payable approximate fair value. The fair value of the
Company’s
long-term
debt at December 29, 2007, exceeded its carrying value by
approximately $251 million.
The Company is exposed to certain market risks which exist as a
part of its ongoing business operations. Management uses
derivative financial and commodity instruments, where
appropriate, to manage these risks. In general, instruments used
as hedges must be effective at reducing the risk associated with
the exposure being hedged and must be designated as a hedge at
the inception of the contract. In accordance with
SFAS No. 133, the Company designates derivatives as
either cash flow hedges, fair value hedges, net investment
hedges, or other contracts used to reduce volatility in the
translation of foreign currency earnings to U.S. Dollars.
The fair values of all hedges are recorded in accounts
receivable or other current liabilities. Gains and losses
representing either hedge ineffectiveness, hedge components
excluded from the assessment of effectiveness, or hedges of
translational exposure are recorded in other income (expense),
net. Within the Consolidated Statement of Cash Flows,
settlements of cash flow and fair value hedges are classified as
an operating activity; settlements of all other derivatives are
classified as a financing activity.
Cash
flow hedges
Qualifying derivatives are accounted for as cash flow hedges
when the hedged item is a forecasted transaction. Gains and
losses on these instruments are recorded in other comprehensive
income until the underlying transaction is recorded in earnings.
When the hedged item is realized, gains or losses are
reclassified from accumulated other comprehensive income to the
Consolidated Statement of Earnings on the same line item as the
underlying transaction. For all cash flow hedges, gains and
losses representing either hedge ineffectiveness or hedge
components excluded from the assessment of effectiveness were
insignificant during the periods presented.
The total net loss attributable to cash flow hedges recorded in
accumulated other comprehensive income at December 29,
2007, was $6 million, related primarily to forward interest
rate contracts settled during 2001 and 2003 in conjunction with
fixed rate
long-term
debt issuances partially offset by
10-year
natural gas price swaps entered into in 2006. The interest rate
contract losses will be reclassified into interest expense over
the next 24 years. The natural gas swap losses will be
reclassified to cost of goods sold over the next 9 years.
Other insignificant amounts related to foreign currency and
commodity price cash flow hedges will be reclassified into
earnings during the next 18 months.
Fair
value hedges
Qualifying derivatives are accounted for as fair value hedges
when the hedged item is a recognized asset, liability, or firm
commitment. Gains and losses on these instruments are recorded
in earnings, offsetting gains and losses on the hedged item. For
all fair value hedges, gains and losses representing either
hedge ineffectiveness or hedge components excluded from the
assessment of effectiveness were insignificant during the
periods presented.
Net
investment hedges
Qualifying derivative and nonderivative financial instruments
are accounted for as net investment hedges when the hedged item
is a nonfunctional currency investment in a subsidiary. Gains
and losses on these instruments are recorded as a foreign
currency translation adjustment in other comprehensive income.
Other
contracts
The Company also periodically enters into foreign currency
forward contracts and options to reduce volatility in the
translation of foreign currency earnings to U.S. Dollars.
Gains and losses on these instruments are recorded in other
income (expense), net, generally reducing the exposure to
translation volatility during a
full-year
period.
Foreign
exchange risk
The Company is exposed to fluctuations in foreign currency cash
flows related primarily to
third-party
purchases, intercompany transactions, and nonfunctional currency
denominated
third-party
debt. The Company is also exposed to fluctuations in the value
of foreign currency investments in subsidiaries and cash flows
related to repatriation of these investments. Additionally, the
Company is exposed to volatility in the translation of foreign
currency earnings to U.S. Dollars. Management assesses
foreign currency risk based on transactional cash flows and
translational volatility and enters into forward contracts,
options, and currency swaps to reduce fluctuations in net long
or short currency positions. Forward contracts and options are
generally less than 18 months duration. Currency swap
agreements are established in conjunction with the term of
underlying debt issues.
For foreign currency cash flow and fair value hedges, the
assessment of effectiveness is generally based on changes in
spot rates. Changes in time value are reported in other income
(expense), net.
54
Interest
rate risk
The Company is exposed to interest rate volatility with regard
to future issuances of fixed rate debt and existing issuances of
variable rate debt. The Company periodically uses interest rate
swaps, including
forward-starting
swaps, to reduce interest rate volatility and funding costs
associated with certain debt issues, and to achieve a desired
proportion of variable versus fixed rate debt, based on current
and projected market conditions.
Variable-to-fixed
interest rate swaps are accounted for as cash flow hedges and
the assessment of effectiveness is based on changes in the
present value of interest payments on the underlying debt.
Fixed-to-variable
interest rate swaps are accounted for as fair value hedges and
the assessment of effectiveness is based on changes in the fair
value of the underlying debt, using incremental borrowing rates
currently available on loans with similar terms and maturities.
Price
risk
The Company is exposed to price fluctuations primarily as a
result of anticipated purchases of raw and packaging materials,
fuel, and energy. The Company has historically used the
combination of
long-term
contracts with suppliers, and
exchange-traded
futures and option contracts to reduce price fluctuations in a
desired percentage of forecasted raw material purchases over a
duration of generally less than 18 months. During 2006, the
Company entered into two separate
10-year
over-the-counter
commodity swap transactions to reduce fluctuations in the price
of natural gas used principally in its manufacturing processes.
Commodity contracts are accounted for as cash flow hedges. The
assessment of effectiveness for
exchange-traded
instruments is based on changes in futures prices. The
assessment of effectiveness for
over-the-counter
transactions is based on changes in designated indexes.
Credit
risk concentration
The Company is exposed to credit loss in the event of
nonperformance by counterparties on derivative financial and
commodity contracts. This credit loss is limited to the cost of
replacing these contracts at current market rates. Management
believes the probability of such loss is remote.
Financial instruments, which potentially subject the Company to
concentrations of credit risk are primarily cash, cash
equivalents, and accounts receivable. The Company places its
investments in highly rated financial institutions and
investment-grade
short-term
debt instruments, and limits the amount of credit exposure to
any one entity. Management believes concentrations of credit
risk with respect to accounts receivable is limited due to the
generally high credit quality of the Company’s major
customers, as well as the large number and geographic dispersion
of smaller customers. However, the Company conducts a
disproportionate amount of business with a small number of large
multinational grocery retailers, with the five largest accounts
comprising approximately 27% of consolidated accounts receivable
at December 29, 2007.
