We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusion we use in production. Beginning late in the first quarter of 2020, we began entering into forward contracts to hedge the fluctuations in the price of the delivery component of our aluminum extrusion purchases, known as the Midwest Transaction Premium, or MTP. Our contracts are designated as cash flow hedges since they are highly effective in offsetting changes in the cash flows attributable to forecasted purchases of aluminum and the related MTP.

We record our aluminum hedge contracts at fair value, based on trading values for aluminum forward contracts. Aluminum forward contracts identical to those held by us trade on the London Metal Exchange (“LME”). The LME provides a transparent forum and is the world’s largest center for the trading of futures contracts for non-ferrous metals. The prices are used by the metals industry worldwide as the basis for contracts for the movement of physical material throughout the production cycle. Based on this high degree of volume and liquidity in the LME, we believe the valuation price at any measurement date for contracts with identical terms as to prompt date, trade date and trade price as those we hold at any time represents a contract’s exit price to be used for purposes of determining fair value.

We record our MTP hedge contracts at fair value, based on the Platts MW US Transaction price per pound assessment, which has been a benchmark for decades in the North American aluminum industry. Platts surveys the North American market daily to capture trades, bids and offers on a delivered Midwest basis. Data is normalized to reflect the typical price per pound between the largest number of market participants, for delivery within 7 to 30 days from date of publication, net-30-day payment terms, for typical order quantities, chemistries and freight allowances. The survey is extensive and encompasses both domestic and offshore producers, traders and brokers that are varied in scope. Based on the extensive nature of this pricing mechanism, we believe the Platts MW US Transaction price at any time represents a contract’s exit price to be used for purposes of determining fair value.

Guidance under the Financial Instruments Topic 825 of the Codification requires us to record our hedge contracts at fair value and consider our credit risk for contracts in a liability position, and our counter-party’s credit risk for contracts in an asset position, in determining fair value. We assess our counter-party’s risk of non-performance when measuring the fair value of financial instruments in an asset position by evaluating their financial position, including cash on hand, as well as their credit ratings. We assess our risk of non-performance when measuring the fair value of our financial instruments in a liability position by evaluating our credit ratings, our current liquidity including cash on hand and availability under our revolving credit facility as compared to the maturities of the financial liabilities. Management makes an accounting policy election not to offset the estimated fair value amounts recognized for derivatives executed with the same counterparty under the same master netting arrangement. Our counterparties to our derivative contracts do not require the Company to post collateral against hedge contracts in a liability position, if any.

At January 1, 2022, the fair value of our aluminum forward contracts was in an asset position of $4.8 million. We had 21 outstanding forward contracts for the purchase of 30.7 million pounds of aluminum through December 2022, at an average price of $1.11 per pound, which excludes the Midwest premium, with maturity dates of between one month and twelve months. At January 1, 2022, the fair value of our MTP contracts was in an asset position of $4.6 million. We had 10 outstanding MTP contracts to hedge the Platt US MW Transaction price per pound for the delivery of 23.5 million pounds of aluminum through December 2022, at an average price of $0.12 per pound, with maturity dates of between one month and twelve months. We assessed the risk of non-performance of the Company and our counterparty to these contracts, as applicable, and determined it was immaterial and, therefore, did not record any adjustment to their fair values as of January 1, 2022.

We assess the effectiveness of our cash flow hedges by comparing the change in the fair value of the forward contract to the change in the expected cash to be paid for the hedged item. The gain or loss on our aluminum forward contracts is reported as a component of accumulated other comprehensive income (loss) and is reclassified into earnings in the same line item in the income statement as the hedged item in the same period or periods during which the transaction affects earnings. The amount of income, net, recognized in the “accumulated other comprehensive income (loss)” line item in the accompanying condensed consolidated balance sheet as of January 1, 2022, that we expect will be reclassified to earnings within the next twelve months, is approximately $9.4 million.

The fair values of our aluminum hedges and MTP contracts are classified in the accompanying condensed consolidated balance sheets at January 1, 2022, and January 2, 2021, as follows (in thousands):

Derivative Assets

Derivative (Liabilities)

January 1, 2022

Derivatives designated as hedging

instruments under Subtopic 815-20:

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivative instruments:

Aluminum forward contracts

Other current assets

4,829

Accrued liabilities

—

MTP contracts

Other current assets

4,599

Accrued liabilities

—

Aluminum forward contracts

Other assets

—

Other liabilities

—

MTP contracts

Other assets

—

Other liabilities

—

Total derivative instruments

Total derivative assets

9,428

Total derivative liabilities

—

Derivative Assets

Derivative (Liabilities)

January 2, 2021

Derivatives designated as hedging

instruments under Subtopic 815-20:

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivative instruments:

Aluminum forward contracts

Other current assets

3,243

Accrued liabilities

(28

)

MTP contracts

Other current assets

423

Accrued liabilities

(24

)

Aluminum forward contracts

Other assets

—

Other liabilities

(25

)

MTP contracts

Other assets

Other liabilities

)

Total derivative instruments

Total derivative assets

3,692

Total derivative liabilities

(81

)

The ending accumulated balance for the aluminum forward contracts included in accumulated other comprehensive losses, net of tax, was $7.0 million as of January 1, 2022, and $2.7 million as of January 2, 2021.

The following represents the gains (losses) on derivative financial instruments, and their classifications within the accompanying consolidated financial statements for the three years ended January 1, 2022 (in thousands):


	Derivatives in Cash Flow Hedging Relationships
	Amount of Gain or (Loss) Recognized in OCI(L) on Derivatives	Location of Gain or (Loss) Reclassified from Accumulated OCI(L) into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI(L) into Income
	Year Ended		Year Ended
	December 28, 2019		December 28, 2019
Aluminum contracts	($1,229)	Cost of sales	($5,030)

	January 2, 2021		January 2, 2021
Aluminum contracts	$1,037	Cost of sales	($2,470)

MTP contracts	$532	Cost of sales	$111

	January 1, 2022		January 1, 2022
Aluminum contracts	$14,012	Cost of sales	$12,373

MTP contracts	$10,443	Cost of sales	$6,265