Derivatives

3 Months Ended

Apr. 01, 2023

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 interest rates, natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Interest rate swaps are entered into with the intent of managing overall borrowing costs by reducing the potential impact of increases in interest rates on floating-rate long-term debt. 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 April 1, 2023, the Company had corn option contracts, soybean meal forward contracts, foreign exchange forward and option contracts and interest rate swaps outstanding that qualified and were designated for hedge accounting as well as corn forward contracts, soybean meal forwards and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.

In the first quarter of fiscal 2023 and 2022, the Company's DGD Joint Venture entered into heating oil derivatives that were deemed to be cash flow hedges. As a result, the Company has accrued the other comprehensive income/(loss) portion belonging to Darling with an offset to the investment in DGD as required by FASB ASC Topic 323.

Cash Flow Hedges

In the first quarter of fiscal 2023, the Company entered into interest rate swaps that are designated as cash flow hedges. The notional amount of these swaps totaled $600.0 million. Under the contracts, the Company is obligated to pay a weighted average rate of 3.774% while receiving the 1-month SOFR rate, which excludes margin. Under the terms of the interest rate swaps, the Company hedged a portion of its variable rate debt into the first quarter of 2026. At April 1, 2023, the aggregate fair value of these interest rate swaps was approximately $0.5 million. These amounts are included in noncurrent assets and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

In the first quarter of fiscal 2023, the Company also entered into cross currency swaps that are designated as cash flow hedges. The notional amount of these swaps was €519.2 million. Under the contracts, the Company is obligated to pay 4.6% euro denominated fixed rate while receiving a weighted average U.S. dollar fixed rate of 5.799%. Under the terms of the cross currency swaps, the Company hedged its intercompany notes receivable into the first quarter of 2025. Accordingly, changes in the fair value of the cash flow hedge are initially recorded as gains and/or losses as a component of accumulated other comprehensive loss. We immediately reclassify from accumulated other comprehensive loss to earnings an amount to offset the remeasurement recognized in earnings associated with the respective intercompany loan. Additionally, we reclassify amounts from accumulated other comprehensive income/(loss) associated with the interest rate differential between the U.S. dollar and a Euro denominated intercompany loan to interest expense. At April 1, 2023, the aggregate fair value of these cross currency swaps was approximately $1.4 million. These amounts are included in noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

In 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 April 1, 2023 and December 31, 2022, the aggregate fair value of these corn option contracts was approximately $1.0 million and $0.9 million, respectively. These amounts are included in current assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

In fiscal 2022 and the first quarter of fiscal 2023, 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 2024. At April 1, 2023 and December 31, 2022, the aggregate fair value of these foreign exchange contracts was approximately $22.1 million and $13.8 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 2022 and fiscal 2023, the Company entered into soybean meal forward contracts to hedge a portion of its forecasted poultry meal sales into the third quarter of fiscal 2023. At April 1, 2023 and December 31, 2022, the aggregate fair value of the soybean meal contracts was approximately $0.3 million and $0.6 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 April 1, 2023, 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	30,298	Euro	5,224
Brazilian real	3,402,802	U.S. dollar	798,104

Euro	24,362	U.S. dollar	26,447
Euro	30,074	Polish zloty	141,500
Euro	14,101	Japanese yen	1,999,700
Euro	22,410	Chinese renminbi	165,442
Euro	17,042	Australian dollar	26,950
Euro	3,127	British pound	2,750
Euro	34	Canadian dollar	50

Polish zloty	2,218	U.S. dollar	509
Polish zloty	38,254	Euro	8,143

British pound	313	U.S. dollar	384
Japanese yen	275,514	U.S. dollar	2,113
U.S. dollar	1,069	Japanese yen	140,000
U.S. dollar	562,502	Euro	519,332
Australian dollar	259	Euro	160
Australian dollar	165	U.S. dollar	110

The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at April 1, 2023 into earnings over the next 12 months will be approximately $47.1 million. As of April 1, 2023, 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 months ended April 1, 2023 and April 2, 2022 (in thousands):


		Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges
		Three Months Ended
Derivatives not designated as hedging instruments	Location	April 1, 2023		April 2, 2022

Foreign exchange	Foreign currency loss	$	800	$	7,466
Foreign exchange	Net sales	(671)		158
Foreign exchange	Cost of sales and operating expenses	(17)		(256)
Foreign exchange	Selling, general and administrative expenses	(1,385)		(6,524)
Corn options and futures	Net sales	271		(2,136)
Corn options and futures	Cost of sales and operating expenses	(417)		5,553


Heating Oil swaps and options	Selling, general and administrative expenses	49		—
Soybean meal	Net sales	(217)		—

Total		$	(1,587)	$	4,261

At April 1, 2023, the Company had forward purchase agreements in place for purchases of approximately $210.6 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.