Derivatives

6 Months Ended

Jun. 29, 2019

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 contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. At June 29, 2019, 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.

Entities are required to report all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair value, cash flows or foreign currencies. If the hedged exposure is a cash flow exposure, the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside of earnings) and is subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.

Cash Flow Hedges

In the first six months of fiscal 2019, 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 2020. As of June 29, 2019, some of the contracts have been settled while the remaining contract positions and activity are not significant to the Company. At June 29, 2019, the aggregate fair value of these corn option contracts was approximately $0.1 million. As of December 29, 2018 there were no outstanding amounts. These amounts are included in other current assets on the balance sheet, with an offset recorded in accumulated other comprehensive income. The Company may enter into corn option contracts in the future from time to time.

In fiscal 2018 and the first six months of fiscal 2019, the Company entered into foreign exchange forward and option contracts that are considered 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 June 29, 2019 and December 29, 2018, the aggregate fair value of these foreign exchange contracts was approximately $5.6 million and $1.6 million, respectively. The June 29, 2019 amounts are included in other current assets, accrued expense, other assets and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss. The December 29, 2018 amounts are included in other current assets, accrued expense and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

As of June 29, 2019, the Company had the following 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	30,685	Euro	6,824
Brazilian real	1,116,681	U.S. dollar	316,673
Euro	59,848	U.S. dollar	68,213
Euro	21,080	Polish zloty	90,280
Euro	5,146	Japanese yen	640,000
Euro	32,821	Chinese renminbi	256,486
Euro	13,542	Australian dollar	21,850
Euro	4,280	British pound	3,789
Polish zloty	17,722	Euro	4,159
British pound	316	Euro	353
British pound	60	U.S. dollar	76
Japanese yen	217,385	U.S. dollar	1,999
U.S. dollar	1,037	Japanese yen	111,000
U.S. dollar	1,677	Euro	1,500

The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at June 29, 2019 into earnings over the next 12 months will be approximately $0.8 million. As of June 29, 2019, 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 June 29, 2019 and June 30, 2018 (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	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018

Foreign exchange	Foreign currency loss	$	(335	)	$	(3,481	)	$	1,536		$	(1,827	)
Foreign exchange	Net sales	(234		)	—			62			—
Foreign exchange	Cost of sales and operating expenses	151			—			(94		)	—
Foreign exchange	Selling, general and administrative expense	(351		)	2,506			522			2,995
Corn options and futures	Net sales	(612		)	763			(262		)	454
Corn options and futures	Cost of sales and operating expenses	1,516			(818		)	643			(306		)
Heating Oil swaps and options	Cost of sales and operating expenses	—			—			(506		)	—
Total		$	135		$	(1,030	)	$	1,901		$	1,316

At June 29, 2019, the Company had forward purchase agreements in place for purchases of approximately $37.8 million of natural gas and diesel fuel. These forward purchase agreements have no net settlement provisions and the Company intends to take physical delivery of the underlying product. Accordingly, the forward purchase agreements are not subject to the requirements of fair value accounting because they qualify and the Company has elected to account for these as normal purchases as defined in the FASB authoritative guidance.