Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2016

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Note 6 – Derivative Instruments and Hedging Activities

The Company's earnings and cash flows are subject to fluctuations due to changes in commodity prices, foreign currency exchange rates, and interest rates.  The Company uses derivative instruments such as commodity futures contracts, foreign currency forward contracts, and interest rate swaps to manage these exposures.

Commodity Futures Contracts

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.  

At December 31, 2016, the Company held open futures contracts to purchase approximately $10.2 million of copper over the next 12 months related to fixed price sales orders.  The fair value of those futures contracts was a $0.8 million net gain position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy).  In the next twelve months, the Company will reclassify into earnings realized gains or losses relating to cash flow hedges.  At December 31, 2016, this amount was approximately $0.3 million of deferred net gains, net of tax.

The Company may also enter into futures contracts to protect the value of inventory against market fluctuations.  At December 31, 2016, the Company held open futures contracts to sell approximately $28.7 million of copper over the next three months related to copper inventory.  The fair value of those futures contracts was a $0.3 million net loss position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy).  

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 revolving credit facility, the all-in fixed rate  is 2.49 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 revolving credit facility.   The swap was designated and accounted for as a cash flow hedge at inception. During the fourth quarter of 2016 the Company discontinued hedge accounting prospectively.

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 within the fair value hierarchy).  Interest payable and receivable under the swap agreement is accrued and recorded as an adjustment to interest expense.  The fair value of the interest rate swap was a $0.8 million loss position recorded in other current liabilities at December 31, 2016, and there was $0.6 million of deferred net losses, net of tax, included in AOCI that are expected to be reclassified into interest expense over the term of the interest rate swap.

The Company presents its derivative assets and liabilities in the Consolidated Balance Sheets on a net basis by counterparty.  The following table summarizes the location and fair value of the derivative instruments and disaggregates the net derivative assets and liabilities into gross components on a contract-by-contract basis:

	Asset Derivatives						Liability Derivatives
		Fair Value						Fair Value
(In thousands)	Balance Sheet Location	2016			2015		Balance Sheet Location	2016			2015
Hedging instrument:
Commodity contracts - gains	Other current assets	$	1,013		$	60	Other current liabilities	$	564		$	238
Commodity contracts - losses	Other current assets		(148	)		—	Other current liabilities		(920	)		(1,864	)
Interest rate swap	Other current assets		—				Other current liabilities		(787	)		—
Interest rate swap	Other assets		—			—	Other liabilities		—			(1,692	)
Total derivatives (1)		$	865		$	60		$	(1,143	)	$	(3,318	)
(1) Does not include the impact of cash collateral provided to counterparties.

The following tables summarize the effects of derivative instruments on the Consolidated Statements of Income:

(In thousands)	Location	2016			2015
Fair value hedges:
(Loss) gain on commodity contracts (qualifying)	Cost of goods sold	$	(420	)		$	3,374
Gain (loss) on hedged item - Inventory	Cost of goods sold		382				(3,665	)

Undesignated derivatives:
Gain on commodity contracts (nonqualifying)	Cost of goods sold	$	4,068	$	3,474

The following tables summarize amounts recognized in and reclassified from AOCI during the period:

	Year Ended December 31, 2016
(In thousands)	Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax			Classification Gains  (Losses)	Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:
Commodity contracts	$	308		Cost of goods sold	$	1,078
Interest rate swap		305		Interest expense		231
Other		(213	)	Other		—
Total	$	400		Total	$	1,309

	Year Ended December 26, 2015
(In thousands)	(Loss) Gain Recognized in AOCI (Effective Portion), Net of Tax			Classification Gains (Losses)	Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:
Commodity contracts	$	(3,817	)	Cost of goods sold	$	3,310
Interest rate swap		(727	)	Interest expense		238
Other		(60	)	Other		—
Total	$	(4,604	)	Total	$	3,548

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 hedge contracts through December 31, 2016 was not material to the Consolidated Statements of Income.

The Company primarily enters into International Swaps and Derivatives Association master netting agreements with major financial institutions that permit the net settlement of amounts owed under their respective derivative contracts.  Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions.  The master netting agreements generally also provide for net settlement of all outstanding contracts with the counterparty in the case of an event of default or a termination event.  The Company does not offset fair value amounts for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral.  At December 31, 2016 and December 26, 2015, the Company had recorded restricted cash in other current assets of $1.4 million and $2.6 million, respectively, as collateral related to open derivative contracts under the master netting arrangements.