Derivatives

6 Months Ended

Jul. 02, 2022

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, 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 July 2, 2022, the Company had corn option contracts, soybean meal forward 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 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 July 2, 2022 and January 1, 2022, the aggregate fair value of these corn option contracts was approximately $2.4 million and $2.8 million, respectively. These amounts are included in accrued expenses 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 2021 and fiscal 2022, 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 2023. At July 2, 2022 and January 1, 2022, the aggregate fair value of these foreign exchange contracts was approximately $10.5 million and $0.6 million, respectively. These amounts are included in other current assets, noncurrent assets, accrued expense and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

In fiscal 2021 and fiscal 2022, the Company entered into soybean meal forward contracts to hedge a portion of its forecasted poultry meal sales into the fourth quarter of fiscal 2022. At July 2, 2022 and January 1, 2022, the aggregate fair value of the soybean meal contracts was $0.1 million and $0.1 million, respectively. These amounts are included in other current assets and accrued expenses on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

As of July 2, 2022, 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	2,599	Euro	468
Brazilian real	3,121,236	U.S. dollar	746,850

Euro	38,298	U.S. dollar	41,403
Euro	26,873	Polish zloty	126,000
Euro	5,363	Japanese yen	750,820
Euro	15,349	Chinese renminbi	109,671
Euro	15,059	Australian dollar	22,350
Euro	3,274	British pound	2,826
Euro	37	Canadian dollar	50
Euro	500,000	Brazilian real	2,500,000
Polish zloty	2,495	U.S. dollar	559
Polish zloty	40,387	Euro	8,544
British pound	263	Euro	305

Japanese yen	216,550	U.S. dollar	1,665
U.S. dollar	482	Japanese yen	65,000
U.S. dollar	252,729	Euro	240,000
Australian dollar	1,495	Euro	986
Australian dollar	190	U.S. dollar	132

The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at July 2, 2022 into earnings over the next 12 months will be approximately $6.1 million. As of July 2, 2022, 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 six months ended July 2, 2022 and July 3, 2021 (in thousands):


		Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges
		Three Months Ended				Six Months Ended
Derivatives not designated as hedging instruments	Location	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021

Foreign exchange	Foreign currency loss	$	35,025	$	2,581	$	42,492	$	7,970
Foreign exchange	Net sales	732		(157)		890		572
Foreign exchange	Cost of sales and operating expenses	(503)		18		(758)		(426)
Foreign exchange	Selling, general and administrative expenses	3,937		(3,262)		(2,587)		(731)
Corn options and futures	Net sales	850		(2,479)		(1,286)		(3,477)
Corn options and futures	Cost of sales and operating expenses	(2,384)		4,085		3,169		5,554




Total		$	37,657	$	786	$	41,920	$	9,462

At July 2, 2022, the Company had forward purchase agreements in place for purchases of approximately $185.0 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.