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Derivative Instruments and Hedging Activity | 3 Months Ended
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Apr. 01, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activity | Derivative Instruments and Hedging Activity The Company uses derivative contracts to hedge exposure to movements in interest rates associated with borrowings, foreign currency exposures, and precious metal and copper exposures. The objectives and strategies for using derivatives in these areas are as follows: Interest Rate. On March 4, 2022, the Company entered into a $100.0 million interest rate swap to hedge the interest rate risk on the Credit Agreement described in Note P. The swap hedges the change in 1-month LIBOR from March 4, 2022 to November 2, 2026. The purpose of this hedge is to manage the risk of changes in the monthly interest payments attributable to changes in the benchmark interest rate. Foreign Currency. The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions. The purpose of the hedge program is to protect against the reduction in the dollar value of foreign currency sales from adverse exchange rate movements. Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on the hedge contracts. Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S. dollar. The use of forward contracts locks in a firm rate and eliminates any downside from an adverse rate movement as well as any benefit from a favorable rate movement. The Company may from time to time choose to hedge with options or a tandem of options, known as a collar. These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized. Unlike a forward contract, a premium is paid for an option; collars, which are a combination of a put and call option, may have a net premium but can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk. The use of foreign currency derivative contracts is governed by policies approved by the Audit Committee of the Board of Directors. A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and nature of instruments to use to hedge exposures. Management analyzes the effective hedged rates and the actual and projected gains and losses on the hedging transactions against the program objectives, targeted rates, and levels of risk assumed. Foreign currency contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of market rate movements. Precious Metals. The Company maintains the majority of its precious metal production requirements on consignment in order to reduce its working capital investment and the exposure to metal price movements. When a product containing precious metal is fabricated and delivered to the customer, the metal content is purchased out of consignment based on the current market price. The price paid by the Company for the precious metal forms the basis for the price charged to the customer for the metal content in the product. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer and reduces the impact changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by financial institutions that charge the Company consignment fees based upon the value of the metal as it fluctuates while on consignment. Each financial institution retains title to its consigned precious metal until it is purchased by the Company, and it is the Company’s typical practice to purchase metal out of consignment only after a product containing that metal has been purchased by one of our customers. In certain instances, a customer may want to fix the price for the precious metal at the time the sales order is placed rather than at the time of shipment. Setting the sales price at a different date than when the material would be purchased out of consignment potentially creates an exposure to movements in the market price of the metal. Therefore, in these limited situations, the Company may elect to enter into a forward contract to purchase precious metal. The forward contract allows the Company to purchase metal at a fixed price on a specific future date. The price in the forward contract serves as the basis for the price to be charged to the customer. By doing so, the selling price and purchase price are matched, and the Company's price exposure is reduced. The Company refines precious metal-containing materials for its customers and typically will purchase the refined metal from the customer at current market prices. In limited circumstances, the customer may want to fix the price to be paid at the time of the order as opposed to when the material is refined. The customer may also want to fix the price for a set period of time. The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be refined and purchased, thereby reducing the exposure to adverse movements in the price of the metal. The Company may also enter into hedges to mitigate the risk relating to the prices of the metals that we process or refine. In certain circumstances, the Company also refines metal from the customer and may retain a portion of the refined metal as payment. The Company may elect to enter into a forward contract to sell precious metal to reduce the Company's price exposure in these instances. The Company may, from time to time, elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors. These purchases are infrequent and, when made are typically held for a short duration. A forward contract will be secured at the time of the purchase to fix the price to be paid when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned by the Company. The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held to maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses hedge contracts that are denominated in the same currency or metal as the underlying exposure. All derivatives are recorded on the balance sheet at fair value. If a derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (OCI) and reclassified into income in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of a derivative's fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The derivative assets and liabilities are classified as short-term or long-term depending upon the contract maturity date. The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and the balance sheet classification as of April 1, 2022 and December 31, 2021:
|  | April 1, 2022 |  | December 31, 2021
(Thousands) |  | Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
Foreign currency forward contracts |  |  |  |  |  |  |  |
Prepaid and other current assets |  | $ | 91,615 |  |  | $ | 1,350 |  |  | $ | 55,063 |  |  | $ | 2,132 |
Other liabilities and accrued items |  | 18,474 |  |  | 307 |  |  | 9,425 |  |  | 128 |
These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. Other-net included $0.7 million and $1.6 million of foreign currency gains related to derivatives in the first quarter of 2022 and 2021, respectively. The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and the balance sheet classification as of April 1, 2022 and December 31, 2021:
|  | April 1, 2022
|  |  |  | Fair Value
(Thousands) |  | Notional Amount |  | Prepaid and other current assets |  | Other assets |  | Other liabilities and accrued items |  | Other long-term liabilities
Foreign currency forward contracts - yen |  | $ | 4,303 |  |  | $ | 275 |  |  | $ | 22 |  |  | $ | 6 |  |  | $ | — |
Foreign currency forward contracts - euro |  | 31,199 |  |  | 1,238 |  |  | — |  |  | 81 |  |  | 86 |
Precious metal swaps |  | 6,869 |  |  | — |  |  | — |  |  | 298 |  |  | 23 |
Interest rate swap |  | 100,000 |  |  | 120 |  |  | 3,107 |  |  | — |  |  | — |
Total |  | 142,371 |  |  | 1,633 |  |  | 3,129 |  |  | 385 |  |  | 109 |
|  | December 31, 2021
|  |  |  | Fair Value
|  | Notional Amount |  | Prepaid and other current assets |  | Other assets |  | Other liabilities and accrued items |  | Other long-term liabilities
Foreign currency forward contracts - yen |  | 3,907 |  |  | 131 |  |  | 2 |  |  | — |  |  | — |
Foreign currency forward contracts - euro |  | 28,412 |  |  | 1,102 |  |  | — |  |  | — |  |  | 8 |
Precious metal swaps |  | 6,256 |  |  | 116 |  |  | — |  |  | 24 |  |  | — |
Total |  | 38,575 |  |  | 1,349 |  |  | 2 |  |  | 24 |  |  | 8 |
All of the contracts summarized above were designated and effective as cash flow hedges. We expect to reclassify $1.2 million of gains into earnings in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. At April 1, 2022, the maximum term of derivative instruments that hedge forecasted transactions was approximately four years. Refer to Note K for additional OCI details. The following table summarizes the amounts reclassified from accumulated other comprehensive income related to the Company’s outstanding derivatives designated as cash flow hedges and associated income statement classification as of the first quarter of 2022 and 2021:
|  |  |  | First Quarter Ended
(Thousands) |  |  |  | April 1, 2022 |  | April 2, 2021
Hedging relationship |  | Line item |  |  |  |
Foreign currency forward contracts |  | Net sales |  | $ | (19) |  |  | $ | 140 |
Precious metal swaps |  | Cost of sales |  | 107 |  |  | (104) |
Interest rate swap |  | Interest expense - net |  | 115 |  |  | — |
Copper swaps |  | Cost of sales |  | — |  |  | (1,534) |
Total |  |  |  | $ | 203 |  |  | $ | (1,498) |

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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