Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 29, 2014

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Note 8 – 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.   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 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, Derivatives and Hedging (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 twelve months, the Company will reclassify into earnings realized gains or losses of cash flow hedges; at March 29, 2014, this amount was approximately a $664 thousand loss.

At March 29, 2014, the Company held open futures contracts to purchase approximately $34.9 million of copper over the next 16 months related to fixed price sales orders.  The fair value of those futures contracts was a $664 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:

	March 29, 2014
(In thousands)	Location		Fair value
Commodity contracts	Other current assets:	Gain positions	$	46
		Loss positions		(6	)
	Other current liabilities:	Gain positions		277
		Loss positions		(981	)

	December 28, 2013
(In thousands)	Location		Fair value
Commodity contracts	Other current assets:	Gain positions	$	448
		Loss positions		(10	)

The following tables summarize activities related to the Company’s commodity contract derivative instruments classified as cash flow hedges:

	Loss Recognized in Accumulated OCI (Effective Portion), Net of Tax
		For the Quarter Ended
(In thousands)		March 29, 2014			March 30, 2013
Commodity contracts		$	(1,010	)	$	(654	)

	Loss (Gain) Reclassified from Accumulated OCI into Income (Effective Portion), Net of Tax
		For the Quarter Ended
(In thousands)		March 29, 2014		March 30, 2013
Commodity contracts:
Cost of goods sold		$	291	$	(74	)

Inventory Fair Value Hedges

The Company may enter into futures contracts to protect the value of inventory against market fluctuations.   These futures contracts have been designated as fair value hedges.  For fair value hedges, the changes in value of the hedging derivative, as well as the changes in value of the related hedged item due to the risk being hedged, are reflected in current earnings.  Hedge ineffectiveness is reflected in current earnings in the period in which it occurs.

At March 29, 2014, the Company held open futures contracts to sell approximately $5.2 million of copper over the next six months related to copper inventory. The fair value of those futures contracts was a $294 thousand gain 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.

Derivative commodity instruments are reflected in the Condensed Consolidated Financial Statements as follows:

	March 29, 2014
(In thousands)	Location		Fair Value
Commodity contracts - Qualifying	Other current assets:	Gain positions	$	294

	December 28, 2013
(In thousands)	Location		Fair Value
Commodity contracts - Nonqualifying	Other current liabilities:	Gain positions	$	318
		Loss positions		(2,057	)
Commodity contracts - Qualifying	Other current liabilities:	Gain positions		22
		Loss positions		(50	)

Gains and losses related to the change in the value of the commodity contracts, the change in the value of the inventory being hedged, and hedge ineffectiveness are recorded in cost of goods sold. During the first quarter of 2014 and 2013, gains of $0.5 million and $0.4 million, respectively, were recorded. Also, as a result of the Company’s dedesignation of previous hedges on its inventory during the fourth quarter of 2013, a net gain of $1.5 million was recorded in current earnings to record these contracts at fair value during the first quarter of 2014.

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

	Gains (Losses) on Fair Value Hedges for the Quarter Ended March 29, 2014
(In thousands)	Location	Amount
Gain on the derivatives designated and qualifying fair value hedges:
Commodity contracts	Cost of goods sold	$	6,291
Loss on the hedged item designated and qualifying fair value hedges:
Inventory	Cost of goods sold		(5,800	)

	Gains (Losses) on Fair Value Hedges for the Quarter Ended March 30, 2013
(In thousands)	Location	Amount
Gain on the derivatives designated and qualifying fair value hedges:
Commodity contracts	Cost of goods sold	$	3,333
Loss on the hedged item designated and qualifying fair value hedges:
Inventory	Cost of goods sold		(2,885	)

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.  The fair value of open contracts are recognized as a component of OCI until the position is closed which corresponds to the period when the related hedged transaction is recognized in the Company’s Condensed Consolidated Financial Statements.  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 OCI into earnings.  

At March 29, 2014, the Company held open forward contracts to purchase approximately 6.8 million euros over the next 12 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 $571 thousand gain position recorded in other current assets at March 29, 2014, and an $836 thousand gain position recorded in other current assets at December 28, 2013.

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

	Gain Recognized in Accumulated OCI (Effective Portion), Net of Tax
		For the Quarter Ended
(In thousands)		March 29, 2014			March 30, 2013
Foreign currency contracts		$	22		$	—
	(Gain) Reclassified from Accumulated OCI into Income (Effective Portion), Net of Tax
		For the Quarter Ended
(In thousands)	Location	March 29, 2014			March 30, 2013
Foreign currency contracts	Property, plant, and equipment, net	$	(174	)	$	—

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).  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 $0.9 million gain position and was recorded in other assets at March 29, 2014.

The following table summarizes activities related to the interest rate swap agreement derivative instruments classified as a cash flow hedge:

	Loss Recognized in Accumulated OCI (Effective Portion), Net of Tax
		For the Quarter Ended
(In thousands)		March 29, 2014			March 30, 2013
Interest rate swap		$	(245	)	$	(999	)

The Company enters into futures 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 March 29, 2014 was not material to the Condensed Consolidated Statements of Income.

The Company does not offset fair value of amounts for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral.  At March 29, 2014, the Company had recorded restricted cash of $0.8 million related to open futures contracts.