Derivatives

12 Months Ended

Dec. 28, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company’s operations are exposed to market risks relating to commodity prices that affect the Company’s cost of raw materials, finished product prices and energy costs and the risk of changes in interest rates and foreign currency exchange rates.

The Company makes limited use of derivative instruments to manage cash flow risks related natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Corn options and future contracts are entered into with the intent of managing forecasted sales of BBP by reducing the impact of changing prices. Foreign currency forward contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. At December 28, 2019, the Company had foreign currency option and forward contracts and corn option contracts outstanding that qualified and were designated for hedge accounting as well as corn forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.

Entities are required to report all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair value, cash flows or foreign currencies. If the hedged exposure is a cash flow exposure, the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside of earnings) and is subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.

Cash Flow Hedges

In fiscal 2018 and fiscal 2019, the Company entered into foreign exchange option and forward contracts that are considered cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted collagen sales in currencies other than the functional currency through the fourth quarter of fiscal 2022. As of December 28, 2019, the contract positions and activity are not significant to the Company. At December 28, 2019 and December 29, 2018, the aggregate fair value of these foreign exchange contracts was approximately $1.3 million and $1.6 million, respectively. The December 28, 2019 amounts are included in other current assets, other noncurrent assets and accrued expenses on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

In fiscal 2019, the Company entered into corn option contracts that are considered cash flow hedges. Under the terms of the corn option contracts the Company hedged a portion of its forecasted sales of BBP into the second quarter of fiscal 2020. At December 28, 2019, the aggregate fair value of the corn contracts was $0.4 million. As of December 29, 2018 there were no outstanding amounts. The amounts are included in other current assets on the balance sheet.

As of December 28, 2019, the Company had the following outstanding forward contract amounts that were entered into to hedge the future payments of intercompany note transactions, foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency (in thousands):



Functional Currency		Contract Currency
Type	Amount	Type	Amount
Brazilian real	45,908	Euro	9,983
Brazilian real	1,106,077	U.S. Dollar	308,320
Euro	71,203	U.S. Dollar	79,664
Euro	26,943	Polish zloty	115,500
Euro	5,159	Japanese yen	624,510
Euro	21,074	Chinese renminbi	166,146
Euro	13,441	Australian dollar	21,850
Euro	6,905	British pound	5,930
Polish zloty	26,647	Euro	6,233
British pound	94	Euro	113
Japanese yen	204,824	U.S. dollar	1,909
U.S. dollar	705	Japanese yen	77,000
U.S. dollar	49,833	Euro	45,000
Australian dollar	432	Euro	267

The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at December 28, 2019 into earnings over the next 12 months will be approximately $3.1 million. As of December 28, 2019, no amounts have been reclassified into earnings as a result of the discontinuance of cash flow hedges.

The table below summarizes the effect of derivatives not designated as hedges on the Company's consolidated statements of operations for the year ended December 28, 2019, December 29, 2018 and December 30, 2017 (in thousands):



		Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges
		For The Year Ended
Derivatives not designated as hedging instruments	Location	December 28, 2019			December 29, 2018			December 30, 2017
Foreign exchange	Foreign currency loss/(gain)	$	1,565		$	(2,160	)	$	13,460
Foreign exchange	Net sales	903			2,806			—
Foreign exchange	Cost of sales and operating expenses	(452		)	(1,005		)	—
Foreign exchange	Selling, general and administrative expense	1,649			3,040			(2,763		)
Corn options and futures	Net sales	670			683			212
Corn options and futures	Cost of sales and operating expenses	(1,636		)	(543		)	(1,659		)
Natural gas and heating oil swaps and options	Cost of sales and operating expenses	(506		)	1,031			—
Heating oil swaps and options	Net sales	—			—			492
Soybean meal	Net sales	—			—			(405		)
Soybean oil	Net sales	—			—			45
Total		$	2,193		$	3,852		$	9,382

At December 28, 2019, the Company had forward purchase agreements in place for purchases of approximately $43.5 million of natural gas and diesel fuel. These forward purchase agreements have no net settlement provisions and the Company intends to take physical delivery. Accordingly, the forward purchase agreements are not subject to the requirements of fair value accounting because they qualify as normal purchases as defined.