Derivatives

3 Months Ended

Mar. 28, 2020

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 to 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. Soybean meal options are entered into with the intent of managing the impact of changing prices for poultry meal sales. Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of bakery by-products (“BBP”) by reducing the impact of changing prices. Foreign currency forward and option contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. At March 28, 2020, the Company had corn option contracts and foreign exchange forward and 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 2019 and fiscal 2020, the Company entered into corn option contracts on the Chicago Board of Trade that are designated as cash flow hedges. Under the terms of the corn option contracts, the Company hedged a portion of its U.S. forecasted sales of BBP into the fourth quarter of fiscal 2021. At March 28, 2020 and December 28, 2019, the aggregate fair value of these corn option contracts was approximately $0.8 million and $0.4 million, respectively. These amounts are included in other current assets on the balance sheet, with an offset recorded in accumulated other comprehensive income. The Company may enter into corn option contracts in the future from time to time.

In fiscal 2019 and fiscal 2020, the Company entered into foreign exchange forward and option 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. At March 28, 2020 and December 28, 2019, the aggregate fair value of these foreign exchange contracts was approximately $10.4 million and $1.3 million, respectively. The March 28, 2020 amounts are included in other current assets, accrued expense and other assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss. The December 28, 2019 amounts are included in other current assets, accrued expense and noncurrent assets on the balance sheet, with an offset recorded in accumulated other comprehensive gain.

As of March 28, 2020, the Company had the following outstanding forward and option contract amounts that were entered into to hedge 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	38,179	Euro	8,100
Brazilian real	1,055,921	U.S. dollar	292,149
Euro	59,386	U.S. dollar	65,693
Euro	18,314	Polish zloty	80,500
Euro	8,992	Japanese yen	1,076,265
Euro	10,967	Chinese renminbi	84,048
Euro	16,514	Australian dollar	27,850
Euro	5,977	British pound	5,248
Polish zloty	24,133	Euro	5,264
British pound	37	Euro	40
British pound	108	U.S. dollar	126
Japanese yen	137,644	U.S. dollar	1,271
U.S. dollar	932	Japanese yen	103,000
U.S. dollar	49,766	Euro	45,000

The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at March 28, 2020 into earnings over the next 12 months will be approximately $6.6 million. As of March 28, 2020, 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 three months ended March 28, 2020 and March 30, 2019 (in thousands):



		Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges
		Three Months Ended
Derivatives not designated as hedging instruments	Location	March 28, 2020			March 30, 2019

Foreign exchange	Foreign currency loss	$	(1,295	)	$	1,871
Foreign exchange	Net sales	730			296
Foreign exchange	Cost of sales and operating expenses	(887		)	(245		)
Foreign exchange	Selling, general and administrative expense	5,724			873
Corn options and futures	Net sales	855			350
Corn options and futures	Cost of sales and operating expenses	(1,841		)	(873		)
Heating Oil swaps and options	Cost of sales and operating expenses	—			(506		)
Total		$	3,286		$	1,766

At March 28, 2020, the Company had forward purchase agreements in place for purchases of approximately $36.2 million of natural gas and diesel fuel. These forward purchase agreements have no net settlement provisions and the Company intends to take physical delivery of the underlying product. Accordingly, the forward purchase agreements are not subject to the requirements of fair value accounting because they qualify and the Company has elected to account for these as normal purchases as defined in the FASB authoritative guidance.