Financial Instruments

9 Months Ended

Sep. 26, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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.

All derivatives are recognized in the Condensed Consolidated Balance Sheets at their fair value. On the date the derivative contract is entered into, it is either a) designated as a hedge of a forecasted transaction or the variability of cash flow to be paid (cash flow hedge) or b) not designated in a hedge accounting relationship, even though the derivative contract was executed to mitigate an economic exposure (economic hedge), as the Company does not enter into derivative contracts for trading purposes. Changes in the fair value of a derivative that is qualified, designated, and highly effective as a cash flow hedge are recorded in stockholders’ equity within AOCI, to the extent effective, until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of undesignated derivatives executed as economic hedges are reported in current earnings.

The Company documents all relationships between derivative instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value hedges to specific assets and liabilities in the Condensed Consolidated Balance Sheets and linking cash flow hedges to specific forecasted transactions or variability of cash flow.

The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivative instruments that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. When a derivative instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable of occurring, hedge accounting is discontinued prospectively in accordance with the derecognition criteria for hedge accounting.

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 September 26, 2020, the Company held open futures contracts to purchase approximately $7.0 million of copper over the next 15 months related to fixed price sales orders. The fair value of those futures contracts was a $0.7 million net gain position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy). In the next 12 months, the Company will reclassify into earnings realized gains or losses relating to cash flow hedges. At September 26, 2020, this amount was approximately $0.5 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 September 26, 2020, the Company held open futures contracts to sell approximately $0.6 million of copper over the next six months related to copper inventory. The fair value of those futures contracts was a $35 thousand net gain position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy).

The Company presents its derivative assets and liabilities in the Condensed 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	September 26, 2020		December 28, 2019		Balance Sheet Location	September 26, 2020		December 28, 2019

Commodity contracts - gains	Other current assets	$	791	$	1,435	Other current liabilities	$	—	$	50
Commodity contracts - losses	Other current assets	(18)		(12)		Other current liabilities	—		(159)

Total derivatives ⁽¹⁾		$	773	$	1,423		$	—	$	(109)

⁽¹⁾ Does not include the impact of cash collateral provided to counterparties.

The following tables summarize the effects of derivative instruments on the Company’s Condensed Consolidated Statements of Income:

For the Quarter Ended

For the Nine Months Ended

(In thousands)

Location

September 26, 2020

September 28, 2019

September 26, 2020

September 28, 2019

Undesignated derivatives:

Gain (loss) on commodity contracts (nonqualifying)

Cost of goods sold

843

(467)

(3,596)

1,425

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


	For the Quarter Ended September 26, 2020
(In thousands)	Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax		Classification Gains (Losses)	Gain Reclassified from AOCI (Effective Portion), Net of Tax

Cash flow hedges:
Commodity contracts	$	337	Cost of goods sold	$	(180)
Other	(6)		Other	—

Total	$	331	Total	$	(180)


	For the Quarter Ended September 28, 2019
(In thousands)	Gain Recognized in AOCI (Effective Portion), Net of Tax		Classification Gains (Losses)	Gain Reclassified from AOCI (Effective Portion), Net of Tax

Cash flow hedges:
Commodity contracts	$	130	Cost of goods sold	$	(332)
Other	8		Other	(1)

Total	$	138	Total	$	(333)

Changes recognized in and reclassified from AOCI (continued):


	For the Nine Months Ended September 26, 2020
(In thousands)	(Loss) Gain Recognized in AOCI (Effective Portion), Net of Tax		Classification Gains (Losses)	Loss Reclassified from AOCI (Effective Portion), Net of Tax

Cash flow hedges:
Commodity contracts	$	(5,084)	Cost of goods sold	$	5,273
Other	2		Other	1

Total	$	(5,082)	Total	$	5,274


	For the Nine Months Ended September 28, 2019
(In thousands)	Gain Recognized in AOCI (Effective Portion), Net of Tax		Classification Gains (Losses)	Gain Reclassified from AOCI (Effective Portion), Net of Tax

Cash flow hedges:
Commodity contracts	$	749	Cost of goods sold	$	(629)
Other	14		Other	(1)

Total	$	763	Total	$	(630)

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 a 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 September 26, 2020 and December 28, 2019, the amount of restricted cash recorded in other current assets as collateral related to open derivative contracts under the master netting arrangements was immaterial.

Long-Term Debt

The fair value of long-term debt at September 26, 2020 approximates the carrying value on that date. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of long-term debt is classified as level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.