Derivatives

9 Months Ended

Sep. 26, 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 September 26, 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 September 26, 2020 and December 28, 2019, the aggregate fair value of these corn option contracts was approximately $0.2 million and $0.4 million, respectively. These amounts are included in other current assets, accrued expenses, noncurrent assets and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss. 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 designated as 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 September 26, 2020 and December 28, 2019, the aggregate fair value of these foreign exchange contracts was approximately $0.1 million and $1.3 million, respectively. The September 26, 2020 amounts are included in other current assets, accrued expense and noncurrent 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 loss.

As of September 26, 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	25,116	Euro	3,970
Brazilian real	1,380,739	U.S. dollar	312,563

Euro	44,794	U.S. dollar	52,350
Euro	39,191	Polish zloty	175,000
Euro	4,962	Japanese yen	610,249
Euro	9,953	Chinese renminbi	80,042
Euro	15,354	Australian dollar	24,850
Euro	4,118	British pound	3,730
Euro	33	Canadian dollar	50
Euro	4,789	Brazilian real	30,000
Polish zloty	19,226	Euro	4,295
British pound	77	Euro	84

Japanese yen	205,545	U.S. dollar	1,944
U.S. dollar	864	Japanese yen	90,000
U.S. dollar	94,415	Euro	80,000

The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at September 26, 2020 into earnings over the next 12 months will be approximately $6.5 million. As of September 26, 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 and nine months ended September 26, 2020 and September 28, 2019 (in thousands):


		Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges
		Three Months Ended				Nine Months Ended
Derivatives not designated as hedging instruments	Location	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019

Foreign exchange	Foreign currency loss	$	(1,957)	$	95	$	(1,995)	$	1,632
Foreign exchange	Net sales	(566)		1,244		57		1,306
Foreign exchange	Cost of sales and operating expenses	111		(567)		(946)		(661)
Foreign exchange	Selling, general and administrative expense	1,187		1,915		8,091		2,437
Corn options and futures	Net sales	(914)		881		876		619
Corn options and futures	Cost of sales and operating expenses	754		(2,509)		(2,332)		(1,866)
Heating oil swaps and options	Net sales	—		—		(38)		—
Heating Oil swaps and options	Cost of sales and operating expenses	—		—		—		(506)


Total		$	(1,385)	$	1,059	$	3,713	$	2,961

At September 26, 2020, the Company had forward purchase agreements in place for purchases of approximately $27.7 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 and the Company has elected to account for these as normal purchases as defined in the FASB authoritative guidance.