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Derivative Instruments and Hedging Activities | 6 Months Ended
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Jun. 28, 2014
Derivative Instruments and Hedging Activities [Abstract] |
Derivative Instruments and Hedging Activities | Note 9 – Derivative Instruments and Hedging Activities Earnings and cash flows are subject to fluctuations due to changes in commodity prices, foreign currency exchange rates, and interest rates. The Company uses derivative instruments such as commodity futures contracts, foreign currency forward contracts, and interest rate swaps to manage these exposures. All derivatives are recognized on the Condensed Consolidated Balance Sheets at their fair value. On the date the derivative contract is entered into, it is designated as (i) a hedge of a forecasted transaction or the variability of cash flow to be paid (cash flow hedge), or (ii) a hedge of the fair value of a recognized asset or liability (fair value hedge). Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in accumulated other comprehensive income (AOCI), to the extent effective, until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk, are recorded in current earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings. The Company documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the Condensed Consolidated Balance Sheets and linking cash flow hedges to specific forecasted transactions or variability of cash flow. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flow or fair values of hedged items. When a derivative is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively, in accordance with the derecognition criteria for hedge accounting. Commodity Futures Contracts Copper and brass represent the largest component of the Company’s variable costs of production. The cost of these materials is subject to global market fluctuations caused by factors beyond the Company’s control. The Company occasionally enters into forward fixed-price arrangements with certain customers; the risk of these arrangements is generally managed with commodity futures contracts. These futures contracts have been designated as cash flow hedges. At June 28, 2014, the Company held open futures contracts to purchase approximately $19.6 million of copper over the next 13 months related to fixed price sales orders. The fair value of those futures contracts was a $438 thousand gain position, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820, Fair Value Measurements and Disclosures (ASC 820)). In the next twelve months, the Company will reclassify into earnings realized gains or losses of cash flow hedges. At June 28, 2014, this amount was approximately $303 thousand of deferred net gains, net of tax. The Company may also enter into futures contracts to protect the value of inventory against market fluctuations. These futures contracts have been designated as fair value hedges. At June 28, 2014, the Company held open futures contracts to sell approximately $18.7 million of copper over the next six months related to copper inventory. The fair value of those futures contracts was a $24 thousand loss position, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820). During the fourth quarter of 2013, the Company dedesignated previous hedges on its inventory because the hedging relationship was no longer deemed to be highly effective. These contracts no longer qualified as hedging instruments as of December 28, 2013. Foreign Currency Forward Contracts During 2012 and 2013, the Company entered into certain contracts to purchase heavy machinery and equipment denominated in euros. In anticipation of entering into these contracts, the Company has entered into forward contracts to purchase euros to protect itself against adverse foreign exchange rate fluctuations. At June 28, 2014, the Company held open forward contracts to purchase approximately 4.6 million euros over the next nine months. The fair value of these contracts, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820), was a $319 thousand gain position recorded in other current assets at June 28, 2014, and an $836 thousand gain position recorded in other current assets at December 28, 2013. At June 28, 2014, there was $242 thousand of deferred net gains, net of tax, included in AOCI that is expected to be reclassified into property, plant, and equipment, net, when the hedged transactions occur. Interest Rate Swap On February 20, 2013, the Company entered into a two-year forward-starting interest rate swap agreement with an effective date of January 12, 2015, and an underlying notional amount of $200.0 million, pursuant to which the Company receives variable interest payments based on one-month LIBOR and pays fixed interest at a rate of 1.4 percent. Based on the Company’s current variable premium pricing on its Term Loan Facility, the all-in fixed rate on the effective date is 2.7 percent. The interest rate swap will mature on December 11, 2017, and is structured to offset the interest rate risk associated with the Company’s floating-rate, LIBOR-based Term Loan Facility Agreement. The swap was designated and accounted for as a cash flow hedge from inception. The fair value of the interest rate swap is estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rate and the expected cash flows at the current market interest rate using observable benchmarks for LIBOR forward rates at the end of the period (Level 2 hierarchy as defined by ASC 820). Interest payable and receivable under the swap agreement will be accrued and recorded as an adjustment to interest expense. The fair value of the interest rate swap was a $664 thousand loss position and was recorded in other liabilities at June 28, 2014. At June 28, 2014, there was $425 thousand of deferred net losses, net of tax, included in AOCI that is expected to be reclassified into interest expense over the term of the hedged item. We present our derivative assets and liabilities in our Condensed Consolidated Balance Sheets on a net basis by counterparty. The following table summarizes the location and fair value of the derivative instruments and disaggregates our net derivative assets and liabilities into gross components on a contract-by-contract basis:
| Asset Derivatives |  | Liability Derivatives |
|  |  | Fair Value |  |  |  | Fair Value |
(In thousands) | Balance Sheet Location |  | June 28, 2014 |  |  | Dec. 28, 2013 |  | Balance Sheet Location |  | June 28, 2014 |  |  | Dec. 28, 2013 |
Hedging instrument: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts - gains | Other current assets |  | $ | 513 |  |  | $ | 448 |  | Other current liabilities |  | $ | — |  |  | $ | 340 |
Commodity contracts - losses | Other current assets |  |  | (52 | ) |  |  | (10 | ) | Other current liabilities |  |  | (47 | ) |  |  | (2,107 | )
Foreign currency contracts | Other current assets |  |  | 319 |  |  |  | 836 |  | Other current liabilities |  |  | — |  |  |  | — |
Interest rate swap | Other assets |  |  | — |  |  |  | 1,324 |  | Other liabilities |  |  | (664 | ) |  |  | — |
Total derivatives (1) |  |  | $ | 780 |  |  | $ | 2,598 |  |  |  | $ | (711 | ) |  | $ | (1,767 | )
(1) Does not include the impact of cash collateral received from or provided to counterparties. |
The following tables summarize the effects of derivative instruments on our Condensed Consolidated Statements of Income:
|  |  | Three Months Ended |  |  | Six Months Ended |
(In thousands) | Location |  | June 28, 2014 |  |  | June 29, 2013 |  |  | June 28, 2014 |  |  | June 29, 2013 |
Fair value hedges: |  |  |  |  |  |  |  |  |  |  |  |  |
(Loss) gain on commodity contracts (qualifying) | Cost of goods sold |  | $ | (20 | ) |  | $ | 1,857 |  |  | $ | 6,271 |  |  | $ | 5,190 |
Gain (loss) on hedged item - Inventory | Cost of goods sold |  |  | 20 |  |  |  | (1,928 | ) |  |  | (5,780 | ) |  |  | (4,813 | )
|  |  | Three Months Ended |  |  | Six Months Ended |
(In thousands) | Location |  | June 28, 2014 |  |  | June 29, 2013 |  |  | June 28, 2014 |  |  | June 29, 2013 |
Undesignated derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Loss) gain on commodity contracts (nonqualifying) | Cost of goods sold |  |  | (72 | ) |  |  | — |  |  |  | 1,466 |  |  |  | — |
The following tables summarize amounts recognized in and reclassified from AOCI during the period:
|  | Three Months Ended June 28, 2014 |  |
(In thousands) |  | Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax |  |  | Classification Gains (Losses) |  | Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax |  |
Cash flow hedges: |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | 578 |  |  | Cost of goods sold |  | $ | 168 |  |
Foreign currency contracts |  |  | (25 | ) |  | Property, plant, and equipment, net |  |  | (63 | ) |
Interest rate swap |  |  | (1,022 | ) |  | Interest expense |  |  | — |  |
|  | Three Months Ended June 29, 2013 |  |
(In thousands) |  | Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax |  |  | Classification Gains (Losses) |  | Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax |  |
Cash flow hedges: |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | (2,876 | ) |  | Cost of goods sold |  | $ | 2,596 |  |
Foreign currency contracts |  |  | (20 | ) |  | Property, plant, and equipment, net |  |  | — |  |
Interest rate swap |  |  | 2,395 |  |  | Interest expense |  |  | — |  |
|  | Six Months Ended June 28, 2014 |  |
(In thousands) |  | Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax |  |  | Classification Gains (Losses) |  | Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax |  |
Cash flow hedges: |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | (432 | ) |  | Cost of goods sold |  | $ | 459 |  |
Foreign currency contracts |  |  | (3 | ) |  | Property, plant, and equipment, net |  |  | (237 | ) |
Interest rate swap |  |  | (1,267 | ) |  | Interest expense |  |  | — |  |
|  | Six Months Ended June 29, 2013 |  |
(In thousands) |  | Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax |  |  | Classification Gains (Losses) |  | Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax |  |
Cash flow hedges: |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | (3,530 | ) |  | Cost of goods sold |  | $ | 2,521 |  |
Foreign currency contracts |  |  | (20 | ) |  | Property, plant, and equipment, net |  |  | — |  |
Interest rate swap |  |  | 1,396 |  |  | Interest expense |  |  | — |  |
The Company enters into futures and forward contracts that closely match the terms of the underlying transactions. As a result, the ineffective portion of the open hedge contracts through June 28, 2014 was not material to the Condensed Consolidated Statements of Income. The Company primarily enters into International Swaps and Derivatives Association (ISDA) master netting agreements with major financial institutions that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. The Company does not offset fair value amounts for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral. At June 28, 2014 and December 28, 2013, the Company had recorded restricted cash of $1.0 million and $2.1 million as collateral related to open derivative contracts under the master netting arrangements. The effect of the net settlement provisions of the master netting agreements on our derivative balances upon an event of default or termination event is as follows:
|  | June 28, 2014 |
|  |  |  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the Condensed Consolidating Balance Sheet |  |  |  |
(In thousands) |  | Gross Amounts Recognized in Assets |  |  | Gross Amounts Offset in the Condensed Consolidating Balance Sheet |  |  | Net Amounts of Assets Presented in the Condensed Consolidating Balance Sheet |  |  | Financial Instruments |  |  | Cash Collateral Provided |  |  | Net Amounts of Assets |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | 513 |  |  | $ | (52 | ) |  | $ | 461 |  |  | $ | — |  |  | $ | 972 |  |  | $ | 1,433 |
Foreign currency contracts |  |  | 319 |  |  |  | — |  |  |  | 319 |  |  |  | — |  |  |  | — |  |  |  | 319 |
Interest rate swap |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 832 |  |  | $ | (52 | ) |  | $ | 780 |  |  | $ | — |  |  | $ | 972 |  |  | $ | 1,752 |
|  | June 28, 2014 |
|  |  |  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the Condensed Consolidating Balance Sheet |  |  |  |
(In thousands) |  | Gross Amounts Recognized in Liabilities |  |  | Gross Amounts Offset in the Condensed Consolidating Balance Sheet |  |  | Net Amounts of Liabilities Presented in the Condensed Consolidating Balance Sheet |  |  | Financial Instruments |  |  | Cash Collateral Provided |  |  | Net Amounts of Liabilities |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | (47 | ) |  | $ | — |  |  | $ | (47 | ) |  | $ | — |  |  | $ | — |  |  | $ | (47 | )
Foreign currency contracts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Interest rate swap |  |  | (664 | ) |  |  | — |  |  |  | (664 | ) |  |  | — |  |  |  | — |  |  |  | (664 | )
Total |  | $ | (711 | ) |  | $ | — |  |  | $ | (711 | ) |  | $ | — |  |  | $ | — |  |  | $ | (711 | )
|  | December 28, 2013 |
|  |  |  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the Condensed Consolidating Balance Sheet |  |  |  |
(In thousands) |  | Gross Amounts Recognized in Assets |  |  | Gross Amounts Offset in the Condensed Consolidating Balance Sheet |  |  | Net Amounts of Assets Presented in the Condensed Consolidating Balance Sheet |  |  | Financial Instruments |  |  | Cash Collateral Provided |  |  | Net Amounts of Assets |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | 448 |  |  | $ | (10 | ) |  | $ | 438 |  |  | $ | — |  |  | $ | 2,051 |  |  | $ | 2,489 |
Foreign currency contracts |  |  | 836 |  |  |  | — |  |  |  | 836 |  |  |  | — |  |  |  | — |  |  |  | 836 |
Interest rate swap |  |  | 1,324 |  |  |  | — |  |  |  | 1,324 |  |  |  | — |  |  |  | — |  |  |  | 1,324 |
Total |  | $ | 2,608 |  |  | $ | (10 | ) |  | $ | 2,598 |  |  | $ | — |  |  | $ | 2,051 |  |  | $ | 4,649 |
|  | December 28,2013 |
|  |  |  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the Condensed Consolidating Balance Sheet |  |  |  |
(In thousands) |  | Gross Amounts Recognized in Liabilities |  |  | Gross Amounts Offset in the Condensed Consolidating Balance Sheet |  |  | Net Amounts of Liabilities Presented in the Condensed Consolidating Balance Sheet |  |  | Financial Instruments |  |  | Cash Collateral Provided |  |  | Net Amounts of Liabilities |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | (2,107 | ) |  | $ | 340 |  |  | $ | (1,767 | ) |  | $ | — |  |  | $ | — |  |  | $ | (1,767 | )
Foreign currency contracts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Interest rate swap |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | (2,107 | ) |  | $ | 340 |  |  | $ | (1,767 | ) |  | $ | — |  |  | $ | — |  |  | $ | (1,767 | )

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5618551-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708775-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624181-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624258-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624163-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708773-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624177-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41620-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579245-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579240-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41641-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624171-113959 + Details
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