Derivative Instruments and Hedging Activities

6 Months Ended

Jan. 01, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments & Hedging Activities

The Company enters into derivative contracts designated as cash flow hedges to manage certain interest rate, foreign currency and commodity exposures. Company policy allows derivatives to be used only for identifiable exposures and, therefore, the Company does not enter into hedges for trading purposes where the sole objective is to generate profits.

The Company formally designates the financial instrument as a hedge of a specific underlying exposure and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses, both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Derivative financial instruments are recorded within the Condensed Consolidated Balance Sheets as assets or liabilities, measured at fair value. The effective portion of gains or losses on derivatives designated as cash flow hedges are reported as a component of Accumulated Other Comprehensive Income (Loss) (AOCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of a financial instrument's change in fair value is immediately recognized in earnings.

The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is dedesignated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge.

In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income related to the hedging relationship.

The Company enters into interest rate swaps to manage a portion of its interest rate risk from financing certain dealer and distributor inventories through a third party financing source. The swaps are designated as cash flow hedges and are used to effectively fix the interest payments to a third party financing source, exclusive of lender spreads, ranging from 0.98% to 1.60% for a notional principal amount of $157.5 million with expiration dates ranging from July 2017 through July 2021.

The Company enters into forward foreign currency contracts to hedge the risk from forecasted third party and intercompany sales or payments denominated in foreign currencies. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Australian Dollars, Brazilian Real, Canadian Dollars, Chinese Renminbi, Euros, Japanese Yen, or Mexican Pesos. These contracts generally do not have a maturity of more than twenty-four months.

The Company uses raw materials that are subject to price volatility. The Company hedges a portion of its exposure to the variability of cash flows associated with commodities used in the manufacturing process by entering into forward purchase contracts or commodity swaps. Derivative contracts designated as cash flow hedges are used by the Company to reduce exposure to variability in cash flows associated with future purchases of natural gas. These contracts generally do not have a maturity of more than thirty-six months.

The Company has considered the counterparty credit risk related to all of its interest rate, foreign currency and commodity derivative contracts and deems any risk of counterparty default to be minimal.

As of January 1, 2017 and July 3, 2016, the Company had the following outstanding derivative contracts (in thousands):

Contract		Notional Amount
		January 1, 2017	July 3, 2016
Interest Rate:
LIBOR Interest Rate (U.S. Dollars)	Fixed	157,500	145,000
Foreign Currency:
Australian Dollar	Sell	37,058	39,935
Brazilian Real	Buy	26,066	16,436
Canadian Dollar	Sell	14,180	8,675
Chinese Renminbi	Buy	141,025	171,475
Euro	Sell	48,650	41,730
Japanese Yen	Buy	1,500,000	587,000
Mexican Peso	Sell	—	3,500
Commodity:
Natural Gas (Therms)	Buy	10,022	11,771

The location and fair value of derivative instruments reported in the Condensed Consolidated Balance Sheets are as follows (in thousands):

Balance Sheet Location	Asset (Liability) Fair Value
	January 1, 2017			July 3, 2016
Interest rate contracts
Other Long-Term Assets	$	2,080		$	—
Accrued Liabilities	(280		)	—
Other Long-Term Liabilities	(84		)	(1,367		)
Foreign currency contracts
Other Current Assets	4,615			1,356
Other Long-Term Assets	192			2
Accrued Liabilities	(2,932		)	(2,601		)
Other Long-Term Liabilities	(256		)	(185		)
Commodity contracts
Other Current Assets	222			—
Other Long-Term Assets	107			64
Accrued Liabilities	—			(190		)
Other Long-Term Liabilities	(12		)	(16		)
	$	3,652		$	(2,937	)

The effect of derivative instruments on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows (in thousands):

	Three Months Ended January 1, 2017
	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives, Net of Taxes (Effective Portion)			Classification of Gain (Loss)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contracts	$	1,565		Net Sales	$	(217	)	$	—
Foreign currency contracts - sell	2,079			Net Sales	706			—
Foreign currency contracts - buy	(1,169		)	Cost of Goods Sold	(724		)	—
Commodity contracts	340			Cost of Goods Sold	(120		)	—
	$	2,815			$	(355	)	$	—

	Three Months Ended December 27, 2015
	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives, Net of Taxes (Effective Portion)			Classification of Gain (Loss)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contracts	$	329		Net Sales	$	(298	)	$	—
Foreign currency contracts - sell	(721		)	Net Sales	2,231			—
Foreign currency contracts - buy	(324		)	Cost of Goods Sold	(158		)	—
Commodity contracts	(234		)	Cost of Goods Sold	(260		)	—
	$	(950	)		$	1,515		$	—

	Six Months Ended January 1, 2017
	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives, Net of Taxes (Effective Portion)			Classification of Gain (Loss)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contracts	$	1,929		Net Sales	$	(449	)	$	—
Foreign currency contracts - sell	1,953			Net Sales	400			—
Foreign currency contracts - buy	(1,401		)	Cost of Goods Sold	(347		)	—
Commodity contracts	287			Cost of Goods Sold	(200		)	—
	$	2,768			$	(596	)	$	—

	Six Months Ended December 27, 2015
	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives, Net of Taxes (Effective Portion)			Classification of Gain (Loss)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contracts	$	60		Net Sales	$	(600	)	$	—
Foreign currency contracts - sell	(331		)	Net Sales	5,538			—
Foreign currency contracts - buy	(690		)	Cost of Goods Sold	(294		)	—
Commodity contracts	(340		)	Cost of Goods Sold	(392		)	—
	$	(1,301	)		$	4,252		$	—

During the next twelve months, the estimated net amount of losses on cash flow hedges as of January 1, 2017 expected to be reclassified out of AOCI into earnings is $0.3 million.