DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jul. 02, 2016

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

8.DERIVATIVE FINANCIAL INSTRUMENTS

We periodically enter into swap agreements to mitigate our exposure to fluctuations in the price of natural gas and diesel fuel, and, designate these derivatives as cash flow hedges. Such derivatives are recognized in our unaudited Condensed Consolidated Balance Sheets at fair value.

Diesel Fuel Risk.  We use independent freight carriers to deliver our products.  These carriers charge a basic rate per mile that is generally subject to a mileage surcharge for diesel fuel price increases.  From time to time, we enter into variable to fixed rate commodity swap agreements with financial counterparties to hedge our diesel fuel costs.  These hedge agreements are generally not for speculative purposes. Instead, such hedge agreements mitigate the variability in monthly cash flows attributable to changes in fuel surcharge rates that are caused by changes in U.S. No 2 Diesel Retail pricing.  These hedging instruments usually consist of a series of financially settled fixed forward contracts with varying expiration dates that generally span a period of up to twelve months from the effective dates.  The net amounts paid or received upon monthly settlement are generally recorded as adjustments to freight expense, while the effective changes in fair values are generally recorded as components of Accumulated Other Comprehensive Income or Loss (“AOCI”).  There were no diesel fuel hedge agreements in place at July 2, 2016 and January 2, 2016 and accordingly, at these dates, there were no amounts in AOCI related to the diesel fuel hedges.

Natural Gas Risk.  We utilize multiple providers of natural gas and sometimes enter into variable to fixed rate commodity swap agreements with financial counterparties to manage the fluctuations in the cost of natural gas. These hedge agreements are generally not for speculative purposes. Instead, such hedge agreements mitigate the variability in monthly cash flows attributable to natural gas price changes that are caused by changes in NYMEX pricing.  The hedging instruments generally consist of a series of financially settled fixed forward contracts with varying expiration dates that generally span a period of up to twelve months.  The net amounts paid or received upon monthly settlement are usually recorded as adjustments to utilities expense, while the effective changes in fair values are generally recorded as components of AOCI.  There were no such hedge agreements in place between January 2, 2016 and July 2, 2016, and accordingly, at these dates, there were no amounts in AOCI related to any natural gas hedges.

In connection with certain hedge agreements related to diesel fuel and natural gas that we entered into during fiscal 2014 and that remained in effect at July 4, 2015, we recorded the following amounts in 2nd Quarter 2015 and in the year to date period ended July 4, 2015:

	Fiscal Quarter			Fiscal Year to Date
	Ended July 4, 2015
Gain recognized in OCI:
Diesel fuel swap	$	722		$	780
Natural gas swap	64			210
	$	786		$	990
Loss reclassified from AOCI to Income
Diesel fuel swap	$	(802	)	$	(1,196	)
Natural gas swap	(96		)	(245		)
	$	(898	)	$	(1,441	)

Within the unaudited Condensed Consolidated Statements of Operations, the amounts in the table that relate to the diesel fuel swap are included in distribution expenses, whereas the amounts that relate to the natural gas swap are included in cost of goods sold.  The related tax impact of such amounts were determined to be immaterial.