Derivatives

9 Months Ended

Oct. 01, 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 October 1, 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 and fiscal 2022, 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 second quarter of fiscal 2023. At October 1, 2022 and January 1, 2022, the aggregate fair value of these corn option contracts was approximately $1.5 million and $2.8 million, respectively. These amounts are included in current assets and 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 October 1, 2022 and January 1, 2022, the aggregate fair value of these foreign exchange contracts was approximately $6.2 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 October 1, 2022 and January 1, 2022, the aggregate fair value of the soybean meal contracts was less than $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 October 1, 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	8,959	Euro	1,700
Brazilian real	2,232,773	U.S. dollar	459,054

Euro	36,517	U.S. dollar	36,777
Euro	27,815	Polish zloty	133,000
Euro	11,251	Japanese yen	1,568,150
Euro	22,276	Chinese renminbi	156,238
Euro	17,073	Australian dollar	25,050
Euro	2,775	British pound	2,500
Euro	38	Canadian dollar	50
Euro	1,000,000	Brazilian real	5,000,000
Polish zloty	507	U.S. dollar	103
Polish zloty	29,878	Euro	6,250
British pound	335	Euro	371
British pound	350	U.S. dollar	376
Japanese yen	41,996	U.S. dollar	366
U.S. dollar	488	Japanese yen	70,000

Australian dollar	208	Euro	131
Australian dollar	214	U.S. dollar	140

The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at October 1, 2022 into earnings over the next 12 months will be approximately $39.1 million. As of October 1, 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 nine months ended October 1, 2022 and October 2, 2021 (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 1, 2022		October 2, 2021		October 1, 2022		October 2, 2021

Foreign exchange	Foreign currency loss	$	(3,092)	$	5,656	$	39,400	$	13,626
Foreign exchange	Net sales	5,348		323		6,238		895
Foreign exchange	Cost of sales and operating expenses	(597)		(98)		(1,355)		(524)
Foreign exchange	Selling, general and administrative expenses	106		2,732		(2,481)		2,001
Corn options and futures	Net sales	(875)		753		(2,160)		(2,724)
Corn options and futures	Cost of sales and operating expenses	2,526		(1,871)		5,695		3,683




Total		$	3,416	$	7,495	$	45,337	$	16,957

At October 1, 2022, the Company had forward purchase agreements in place for purchases of approximately $241.9 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.