DERIVATIVE | 6 Months Ended |
Jun. 28, 2014 |
Derivative Instruments And Hedging Activities Disclosure [Abstract] | ' |
DERIVATIVE | ' |
NOTE 11. DERIVATIVE |
We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusion we use in production. Our contracts are designated as cash flow hedges since they are highly effective in offsetting changes in the cash flows attributable to forecasted purchases of aluminum. |
In addition, we entered into LIBOR rate hedges on September 16, 2013, to offset the changes in cash flows of the debt interest rate payments that are attributable to the fluctuations of LIBOR rates. With the exception of the time value portion of our caps, these contracts are designated as cash flow hedges since they are highly effective in offsetting the changes in the monthly interest payments attributable to the changes in interest rates during the term of the agreement. |
We net cash collateral from payments of margin calls on deposit with our brokers against the liability position of open contracts for the purchase of hedge instruments on a first-in, first-out basis. For statement of cash flows presentation, we present net cash receipts from and payments to the margin account as investing activities. |
Derivative Financial Instruments – Aluminum Contracts |
Guidance under the Financial Instruments topic of the Codification requires us to record our hedge contracts at fair value and consider our credit risk for contracts in a liability position, and our counter-party’s credit risk for contracts in an asset position, in determining fair value. We assess our counter-party’s risk of non-performance when measuring the fair value of financial instruments in an asset position by evaluating their financial position, including cash on hand, as well as their credit ratings. We assess our risk of non-performance when measuring the fair value of our financial instruments in a liability position by evaluating our credit ratings, our current liquidity including cash on hand and availability under our revolving credit facility as compared to the maturities of the financial liabilities. In addition, we entered into a master netting arrangement (MNA) with our commodities broker that provides for, among other things, the close-out netting of exchange-traded transactions in the event of the insolvency of either party to the MNA. |
We maintain a $2.0 million line of credit with our commodities broker to cover the liability position of open contracts for the purchase of aluminum in the event that the price of aluminum falls. Should the price of aluminum fall to a level which causes our liability for open aluminum contracts to exceed $2.0 million, we are required to fund daily margin calls to cover the excess. |
At June 28, 2014, the fair value of our aluminum forward contracts was in a net liability position of $0.1 million. We had 23 outstanding forward contracts for the purchase of 7.2 million pounds of aluminum, approximately 34% of our anticipated needs through June 2015, at an average price of $0.88 per pound with maturity dates of between less than one month and eleven months. We assessed the risk of non-performance of the Company to these contracts and recorded a de minimis adjustment to fair value as of June 28, 2014. |
As of December 28, 2013, the fair value of our aluminum forward contracts was in a net liability position of approximately $0.5 million. We had 33 outstanding forward contracts for the purchase of 9.5 million pounds of aluminum at an average price of $0.89 per pound with maturity dates of between less than one month and eighteen months through June 2015. We assessed the risk of non-performance of the Company on these contracts and recorded a de minimis adjustment to fair value as of December 28, 2013. |
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Although it is our intent to have our aluminum hedges qualify as highly effective for reporting purposes, for the three months ended June 28, 2014, all 23 outstanding contracts did not qualify as effective. Effectiveness of aluminum forward contracts is determined by comparing the change in the fair value of the forward contract to the change in the expected cash to be paid for the hedged item. The effective portion of the gain or loss on our aluminum forward contracts is reported as a component of accumulated other comprehensive loss in the accompanying Condensed Consolidated Balance Sheets, and is reclassified into earnings in the same line item in the Consolidated Statement of Comprehensive Income as the hedged item in the same period or periods during which the transaction affects earnings. When a cashflow hedge becomes ineffective, and if the forecasted hedged transaction is still probable of occurrence, amounts previously recorded in accumulated other comprehensive loss remain in accumulated other comprehensive loss and are recognized in earnings in the period in which the hedged transaction affects earnings. The change in value of the aluminum forward contracts occurring after ineffectiveness is recognized in Other (income) expense, net on the Condensed Consolidated Statements of Comprehensive Income. We do not expect the gains or losses recognized in accumulated other comprehensive loss as of June 28, 2014, that will be reclassified to earnings within the next three months to be material. |
As of December 28, 2013, our aluminum hedges qualified as effective for reporting purposes, and amounts were recorded in Accumulated other comprehensive loss. |
Derivative Financial Instruments – Interest Rate Contract |
On September 16, 2013, we entered into two interest rate caps and one interest rate swap. The first is a one year interest rate cap agreement with a notional amount of $40.0 million, that was designated as a cash flow hedge that protects the variable rate debt from an increase in the floating one month LIBOR rate of greater than 0.50%. The second is a two year interest rate cap agreement with a notional amount of $20.0 million that was designated as a cash flow hedge that protects the variable rate debt from an increase in the floating one month LIBOR rate of greater than 0.50%. Effectiveness for the interest rate caps will be measured by comparing the changes in the intrinsic value of the cap with the change in the fair value of the forecasted interest payments due to changes in the LIBOR interest rate when LIBOR is greater than 0.50%. The intrinsic value portions of the interest rate caps are expected to be highly effective due to the critical terms of the cap exactly matching those of the hedged debt. The time value portion of the caps are deemed ineffective and will be marked to market in the reporting period. |
The swap is a forward starting three year six months interest rate swap agreement with a notional amount of $40.0 million that effectively converted a portion of the floating rate debt to a fixed rate of 2.15% that starts September 28, 2014, with a termination date of May 18, 2018. Since all of the critical terms of the swap and cap exactly matched those of the hedged debt, no ineffectiveness was identified in the hedging relationship. Consequently, all changes in fair value are recorded as a component of accumulated other comprehensive income. Hedge effectiveness for the interest rate swap is evaluated on a quarterly basis by comparing changes in the cumulative gain or loss from the forward-starting interest rate swap with the cumulative changes in the discounted expected cash flows of future monthly interest related to changes of the swap rate. |
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The impact of the offsetting derivative instrument is depicted below: |
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As of June 28, 2014 | | | | | | | | | | | Gross Amounts not offset in Balance Sheet | |
(in thousands) |
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Description | | Gross Amounts of | | | Gross Amounts offset | | | Net amounts of | | | Financial | | | Cash Collateral | | | Net Amount | |
Recognized Assets | in Balance Sheet | Assets Presented in | Instruments | Received |
| | Balance Sheet | | |
Interest rate caps | | $ | 8 | | | $ | — | | | $ | 8 | | | $ | — | | | $ | — | | | $ | 8 | |
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As of June 28, 2014 | | | | | | | | | | | Gross Amounts not offset in Balance Sheet | |
(in thousands) |
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Description | | Gross Amounts of | | | Gross Amounts offset | | | Net amounts of | | | Financial | | | Cash Collateral | | | Net Amount | |
Recognized Liabilities | in Balance Sheet | Liabilities | Instruments | Pledged |
| | Presented in | | |
| | Balance Sheet | | |
Aluminum Forward Contract | | $ | 72 | | | $ | — | | | $ | 72 | | | $ | — | | | $ | — | | | $ | 72 | |
Interest rate swap | | $ | 1,188 | | | $ | — | | | $ | 1,188 | | | $ | — | | | $ | — | | | $ | 1,188 | |
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As of December 28, 2013 | | | | | | | | | | | Gross Amounts not offset in Balance Sheet | |
(in thousands) |
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Description | | Gross Amounts of | | | Gross Amounts offset | | | Net amounts of | | | Financial | | | Cash Collateral | | | Net Amount | |
Recognized Assets | in Balance Sheet | Assets Presented in | Instruments | Received |
| | Balance Sheet | | |
Interest rate caps | | $ | 34 | | | $ | — | | | $ | 34 | | | $ | — | | | $ | — | | | $ | 34 | |
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As of December 28, 2013 | | | | | | | | | | | Gross Amounts not offset in Balance Sheet | |
(in thousands) |
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Description | | Gross Amounts of | | | Gross Amounts offset | | | Net amounts of | | | Financial | | | Cash Collateral | | | Net Amount | |
Recognized Liabilities | in Balance Sheet | Liabilities | Instruments | Pledged |
| | Presented in | | |
| | Balance Sheet | | |
Aluminum Forward Contract | | $ | 479 | | | $ | — | | | $ | 479 | | | $ | — | | | $ | — | | | $ | 479 | |
Interest rate swap | | $ | 630 | | | $ | — | | | $ | 630 | | | $ | — | | | $ | — | | | $ | 630 | |
The fair value of the aluminium hedges and interest rate cap are classified in the accompanying Condensed Consolidated Balance Sheets as follows: |
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| | | | June 28, | | | December 28, | | | | | | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | | | | | |
| | | | (in thousands) | | | | | | | | | | | | | | | |
Derivatives in a net asset (liability) position | | Balance Sheet Location | | | | | | | | | | | | | | | | | | | | |
Hedging Instruments: | | | | | | | | | | | | | | | | | | | | | | | | |
Aluminum forward contracts | | Accrued Liabilities | | $ | (72 | ) | | $ | (441 | ) | | | | | | | | | | | | | | |
Aluminum forward contracts | | Other Liabilities | | | — | | | | (38 | ) | | | | | | | | | | | | | | |
Interest rate cap | | Other Current Assets | | | 5 | | | | 21 | | | | | | | | | | | | | | | |
Interest rate cap | | Other Assets | | | 3 | | | | 13 | | | | | | | | | | | | | | | |
Interest rate swap | | Other Liabilities | | | (1,188 | ) | | | (630 | ) | | | | | | | | | | | | | | |
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Total hedging instruments | | | | $ | (1,252 | ) | | $ | (1,075 | ) | | | | | | | | | | | | | | |
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The following represents the gains/(losses) on derivative financial instruments for the three and six months ended June 28, 2014, and June 29, 2013, and their classifications within the accompanying condensed consolidated financial statements: |
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| | Derivatives in Cash Flow Hedging Relationships | | | | | | | |
| | Amount of Gain or (Loss) | | | Location of Gain or (Loss) Reclassified from | | Amount of Gain or (Loss) | | | | | | | |
Recognized in OCI on Derivatives | Accumulated OCI into Income (Effective | Reclassified from Accumulated OCI | | | | | | |
(Effective Portion) | Portion) | into Income (Effective Portion) | | | | | | |
| | Three Months Ended | | | | | Three Months Ended | | | | | | | |
| | (in thousands) | | | | | (in thousands) | | | | | | | |
| | June 28, | | | June 29, | | | | | June 28, | | | June 29, | | | | | | | |
| | 2014 | | | 2013 | | | | | 2014 | | | 2013 | | | | | | | |
Aluminum contracts | | $ | 308 | | | $ | (498 | ) | | Cost of sales | | $ | (136 | ) | | $ | 33 | | | | | | | |
Interest rate swap | | $ | (403 | ) | | $ | — | | | Interest expense, net | | $ | — | | | $ | — | | | | | | | |
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| | | | | Location of Gain or (Loss) Recognized in | | Amount of Gain (Loss) Recognized | | | | | | | |
Income on Derivatives (Ineffective | in Income on Derivatives (Ineffective | | | | | | |
Portion) | Portion) | | | | | | |
| | | | | | | Three Months Ended | | | | | | | |
| | | | | | | (in thousands) | | | | | | | |
| | | | | | | | | | June 28, | | | June 29, | | | | | | | |
| | | | | | | | | | 2014 | | | 2013 | | | | | | | |
Aluminum contracts | | | | | | | | | | Other Expense, net | | $ | 291 | | | $ | (116 | ) | | | | | | |
Interest rate swap | | | | | | | | | | Other Expense, net | | $ | — | | | $ | — | | | | | | | |
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| | Derivatives in Cash Flow Hedging Relationships | | | | | | | |
| | Amount of Gain or (Loss) | | | Location of Gain or (Loss) Reclassified from | | Amount of Gain or (Loss) | | | | | | | |
Recognized in OCI on Derivatives | Accumulated OCI into Income (Effective | Reclassified from Accumulated OCI | | | | | | |
(Effective Portion) | Portion) | into Income (Effective Portion) | | | | | | |
| | Six Months Ended | | | | | Six Months Ended | | | | | | | |
| | (in thousands) | | | | | (in thousands) | | | | | | | |
| | June 28, | | | June 29, | | | | | June 28, | | | June 29, | | | | | | | |
| | 2014 | | | 2013 | | | | | 2014 | | | 2013 | | | | | | | |
Aluminum contracts | | $ | (47 | ) | | $ | (656 | ) | | Cost of sales | | $ | (392 | ) | | $ | 33 | | | | | | | |
Interest rate swap | | $ | (557 | ) | | $ | — | | | Interest expense, net | | $ | — | | | $ | — | | | | | | | |
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| | | | | Location of Gain or (Loss) Recognized in | | Amount of Gain or (Loss) | | | | | | | |
Income on Derivatives (Ineffective Portion) | Recognized in Income on Derivatives | | | | | | |
| (Ineffective Portion) | | | | | | |
| | | | | | | Six Months Ended | | | | | | | |
| | | | | | | (in thousands) | | | | | | | |
| | | | | | | | | | June 28, | | | June 29, | | | | | | | |
| | | | | | | | | | 2014 | | | 2013 | | | | | | | |
Aluminum contracts | | | | | | | | | | Other Expense, net | | $ | 128 | | | $ | (368 | ) | | | | | | |
Interest rate swap | | | | | | | | | | Other Expense, net | | $ | — | | | $ | — | | | | | | | |