Derivatives

9 Months Ended

Oct. 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. 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 October 2, 2021, 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.

Cash Flow Hedges

In fiscal 2020 and fiscal 2021, 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 2022. At October 2, 2021 and January 2, 2021, the aggregate fair value of these corn option contracts was approximately $2.2 million and $6.8 million, respectively. These amounts are included in other current assets, accrued expenses 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 2020 and fiscal 2021, 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 October 2, 2021 and January 2, 2021, the aggregate fair value of these foreign exchange contracts was approximately $2.5 million and $11.6 million, respectively. These 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.

In fiscal 2020 and fiscal 2021, the Company entered into soybean meal forward contracts to hedge a portion of its forecasted poultry meal sales into the third quarter of fiscal 2021. At October 2, 2021 and January 2, 2021, the aggregate fair value of the soybean meal contracts was zero 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 loss.

As of October 2, 2021, the Company had the following designated and non-designated 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	22,978	Euro	3,536
Brazilian real	1,116,635	U.S. dollar	237,950

Euro	33,298	U.S. dollar	39,070
Euro	24,960	Polish zloty	114,000
Euro	7,160	Japanese yen	929,960
Euro	20,692	Chinese renminbi	157,474
Euro	13,670	Australian dollar	21,850
Euro	2,810	British pound	2,400
Euro	34	Canadian dollar	50

Polish zloty	2,057	U.S. dollar	524
Polish zloty	20,589	Euro	4,483
British pound	179	Euro	210

Japanese yen	228,482	U.S. dollar	2,070
U.S. dollar	514	Japanese yen	57,000
U.S. dollar	293,089	Euro	250,000

The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at October 2, 2021 into earnings over the next 12 months will be approximately $14.3 million. As of October 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 three and nine months ended October 2, 2021 and September 26, 2020 (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	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020

Foreign exchange	Foreign currency loss	$	5,656	$	(1,957)	$	13,626	$	(1,995)
Foreign exchange	Net sales	323		(566)		895		57
Foreign exchange	Cost of sales and operating expenses	(98)		111		(524)		(946)
Foreign exchange	Selling, general and administrative expenses	2,732		1,187		2,001		8,091
Corn options and futures	Net sales	753		(914)		(2,724)		876
Corn options and futures	Cost of sales and operating expenses	(1,871)		754		3,683		(2,332)
Heating oil swaps and options	Net sales	—		—		—		(38)



Total		$	7,495	$	(1,385)	$	16,957	$	3,713

At October 2, 2021, the Company had forward purchase agreements in place for purchases of approximately $118.8 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.