Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 28, 2013

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Note 9 – Derivative Instruments and Hedging Activities

Cash Flow Hedges

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.  The Company accounts for these futures contracts in accordance with ASC 815, Derivatives and Hedging (ASC 815).  These futures contracts have been designated as cash flow hedges.  The fair value of open futures contracts is recognized as a component of accumulated other comprehensive income (OCI) until the position is closed, which corresponds to the period when the related hedged transaction is recognized in earnings.  Should these contracts no longer meet hedge criteria in accordance with ASC 815, either through lack of effectiveness or because the hedged transaction is no longer probable of occurring, all deferred gains and losses related to the hedge would be immediately reclassified from accumulated other comprehensive income into earnings.  In the next 12 months, the Company will reclassify into earnings realized gains or losses on cash flow hedges; at September 28, 2013, the net fair value of these contracts was a $172 thousand loss position.

At September 28, 2013, the Company held open futures contracts to purchase approximately $18.5 million of copper over the next 18 months related to fixed price sales orders.  The fair value of those futures contracts was a $140 thousand loss position, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820, Fair Value Measurements and Disclosures (ASC 820)).

Derivative instruments designated as cash flow hedges under ASC 815 are reflected in the Condensed Consolidated Financial Statements as follows:

	September 28, 2013
(In thousands)	Location		Fair Value
Commodity contracts	Other current liabilities:	Gain positions	$	222
		Loss positions		(362	)

	December 29, 2012
(In thousands)	Location		Fair Value
Commodity contracts	Other current liabilities:	Gain positions	$	172
		Loss positions		(420	)

The following tables summarize activities related to the Company’s derivative instruments classified as cash flow hedges in accordance with ASC 815:

	Gain (Loss) Recognized in Accumulated OCI (Effective Portion), Net of Tax
	For the Quarter Ended				For the Nine Months Ended
(In thousands)	September 28, 2013		September 29, 2012		September 28, 2013			September 29, 2012
Commodity contracts	$	474	$	562	$	(3,056	)	$	455

	Loss (Gain) Reclassified from Accumulated OCI into Income (Effective Portion), Net of Tax
	For the Quarter Ended					For the Nine Months Ended
(In thousands)	September 28, 2013		September 29, 2012			September 28, 2013		September 29, 2012
Commodity contracts:
Cost of goods sold	$	788	$	(2	)	$	3,309	$	428

Fair Value Hedges

The Company enters into futures contracts in order to protect the value of inventory against market fluctuations.  These futures contracts have been designated as fair value hedges in accordance with ASC 815.  For fair value hedges, the changes in value of the hedging instrument, as well as the changes in value of the related hedged item, are reflected in current earnings.  Hedge ineffectiveness is reflected in current earnings in the period in which it occurs.

At September 28, 2013, the Company held open futures contracts to sell approximately $61.0 million of copper over the next six months related to inventory.  The fair value of those futures contracts was a $1.2 million loss position and was recorded in other current liabilities.  The fair value was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820).

Derivative instruments designated as fair value hedges under ASC 815 are reflected in the Condensed Consolidated Financial Statements as follows:

	September 28, 2013
(In thousands)	Location		Fair Value
Commodity contracts	Other current liabilities:	Gain positions	$	203
		Loss positions		(1,355	)

	December 29, 2012
(In thousands)	Location		Fair Value
Commodity contracts	Other current assets:	Gain positions	$	1,047
		Loss positions		(548	)

The following tables summarize the gains (losses) on the Company’s fair value hedges:

	(Losses) Gains on Fair Value Hedges for the Three Months Ended September 28, 2013
(In thousands)	Location	Amount
(Loss) on the derivatives in designated and qualifying fair value hedges:
Commodity Contracts	Cost of goods sold	$	(846	)
Gain on the hedged item in designated and qualifying fair value hedges:
Inventory	Cost of goods sold	$	1,042

	(Losses) Gains on Fair Value Hedges for the Three Months Ended September 29, 2012
(In thousands)	Location	Amount
(Loss) on the derivatives in designated and qualifying fair value hedges:
Commodity Contracts	Cost of goods sold	$	(2,261	)
Gain on the hedged item in designated and qualifying fair value hedges:
Inventory	Cost of goods sold	$	2,344

	Gains (Losses) on Fair Value Hedges for the Nine Months Ended September 28, 2013
(In thousands)	Location	Amount
Gain on the derivatives in designated and qualifying fair value hedges:
Commodity Contracts	Cost of goods sold	$	4,344
(Loss) on the hedged item in designated and qualifying fair value hedges:
Inventory	Cost of goods sold	$	(3,770	)

	(Losses) Gains on Fair Value Hedges for the Nine Months Ended September 29, 2012
(In thousands)	Location	Amount
(Loss) on the derivatives in designated and qualifying fair value hedges:
Commodity Contracts	Cost of goods sold	$	(2,261	)
Gain on the hedged item in designated and qualifying fair value hedges:
Inventory	Cost of goods sold	$	2,344

Foreign Currency Hedges

During 2012 and 2013, the Company entered into contracts to purchase heavy machinery and equipment. These contracts are 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 exchange rate fluctuations.  At September 28, 2013, the Company held open forward contracts to purchase approximately 13.7 million euros over the next 18 months.  The fair value of these contracts, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820), was not material to the Company’s financial position, results of operations, or cash flows at September 28, 2013.

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 fix 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).  The effective portion of the mark-to-market gain or loss is reported as a component of accumulated OCI and subsequently reclassified into earnings when the hedged transactions occur and affect earnings.  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 $1.0 million gain position and was recorded in other assets at September 28, 2013.

The following tables summarize the activity related to the interest rate swap:

	Gain (Loss) Recognized in Accumulated OCI (Effective Portion), Net of Tax
	For the Quarter Ended					For the Nine Months Ended
(In thousands)	September 28, 2013			September 29, 2012		September 28, 2013		September 29, 2012
Interest rate swap	$	(747	)	$	—	$	649	$	—

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 cash flow and fair value hedge contracts through September 28, 2013 was not material to the Condensed Consolidated Statements of Income.

The Company does not offset the fair value of amounts for derivative instruments and the fair value amounts recognized for the right to reclaim cash collateral.  At September 28, 2013, the Company had recorded restricted cash of $2.9 million related to open futures contracts.