Derivatives

12 Months Ended

Jan. 02, 2021

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. 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 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 January 2, 2021, the Company had foreign currency option and forward contracts, soybean meal 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 2020, fiscal 2019 and fiscal 2018, 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. At January 2, 2021 and December 28, 2019, the aggregate fair value of these foreign exchange contracts was approximately $11.6 million and $1.3 million, respectively. The January 2, 2021 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 2020 and 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 fourth quarter of fiscal 2021. At January 2, 2021 and December 28, 2019, the aggregate fair value of the

corn contracts was $6.8 million and $0.4 million, respectively. The amounts are included in accrued expenses on the balance sheet.

In fiscal 2020, the Company entered into soybean meal forward contracts to hedge a portion of its forecasted poultry meal sales into the second quarter of fiscal 2021. As of January 2, 2021, the aggregate fair value of the soybean meal contracts was $0.4 million and was recorded in other current assets on the balance sheet. As of December 28, 2019 there were no outstanding amounts.

As of January 2, 2021, 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	64,919	Euro	9,645
Brazilian real	1,189,357	U.S. Dollar	257,300
Euro	33,671	U.S. Dollar	40,514
Euro	22,229	Polish zloty	100,000
Euro	4,838	Japanese yen	605,514
Euro	15,360	Chinese renminbi	122,801
Euro	13,349	Australian dollar	21,850
Euro	2,488	British pound	2,269
Euro	32	Canadian dollar	50
Polish zloty	24,824	Euro	5,506
Polish zloty	2,253	U.S. dollar	608
British pound	232	Euro	253
British pound	150	U.S. dollar	200
Japanese yen	258,547	U.S. dollar	2,505
U.S. dollar	531	Japanese yen	55,000
U.S. dollar	114,078	Euro	95,000

Canadian dollar	10,205	U.S. dollar	8,000

The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at January 2, 2021 into earnings over the next 12 months will be approximately $3.0 million. As of January 2, 2021, 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 January 2, 2021, December 28, 2019 and December 29, 2018 (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	January 2, 2021		December 28, 2019		December 29, 2018
Foreign exchange	Foreign currency loss/(gain)	$	(3,840)	$	1,565	$	(2,160)
Foreign exchange	Net sales	(778)		903		2,806
Foreign exchange	Cost of sales and operating expenses	(664)		(452)		(1,005)
Foreign exchange	Selling, general and administrative expense	4,976		1,649		3,040
Corn options and futures	Net sales	(1,091)		670		683
Corn options and futures	Cost of sales and operating expenses	(50)		(1,636)		(543)

Natural gas and heating oil swaps and options	Cost of sales and operating expenses	—		(506)		1,031
Heating oil swaps and options	Net sales	(38)		—		—


Total		$	(1,485)	$	2,193	$	3,852

At January 2, 2021, the Company had forward purchase agreements in place for purchases of approximately $84.7 million of natural gas and diesel fuel. The Company intends to take physical delivery of the commodities under the forward purchase agreements and accordingly, these contracts are not subject to the requirements of fair value accounting because they qualify as normal purchases.