Derivatives | 9 Months Ended |
Sep. 27, 2014 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ' |
Derivatives | ' |
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NOTE 12. DERIVATIVES |
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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. |
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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. |
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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. |
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Derivative Financial Instruments – Aluminum Contracts |
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Guidance under the Financial Instruments topic of the Codification requires us to record our hedge contracts at fair value and consider both our credit risk for contracts in a liability position, as well as our counter-party’s credit risk for contracts in an asset position, when 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. |
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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. |
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At September 27, 2014, the fair value of our aluminum forward contracts was in a net liability position of approximately $30 thousand. We had 32 outstanding forward contracts for the purchase of 10.4 million pounds of aluminum, approximately 34% of our anticipated needs through December 2015, at an average price of $0.90 per pound with maturity dates of between less than one month and fifteen 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 September 27, 2014. |
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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 September 27, 2014, all 32 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 and is reclassified into earnings in the same line item in the income statement 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 expense, net on the Condensed Consolidated Statements of Comprehensive Income. The amount of losses recognized in the “accumulated other comprehensive loss” line item in the accompanying Condensed Consolidated Balance Sheets (unaudited) as of September 27, 2014, that will be reclassified to earnings within the next three months, will be immaterial. |
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As of December 28, 2013, the fair value of our aluminum forward contracts was in a net asset position of approximately $479 thousand. 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 18 months through June 2015. We assessed the risk of non-performance of the counterparty on these contracts and recorded a de minimis adjustment to fair value as of December 28, 2013. |
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As of December 28, 2013, our aluminum hedges did not qualify as effective for reporting purposes. 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 expense, net on the Condensed Consolidated Statements of Comprehensive Income. |
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Derivative Financial Instruments – Interest Rate Contract |
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On September 16, 2013, we entered into two interest rate caps and an interest rate swap to hedge a portion of the 2013 Credit Agreement against volatility in future interest rates. The first interest rate cap expired during the three months ended September 27, 2014. The second interest rate cap is a two-year agreement with a notional amount of $20.0 million; it 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%. |
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The interest rate swap is a forward-starting, three-year, six-month agreement with a notional amount of $40.0 million that effectively converts a portion of the floating rate debt to a fixed rate of 2.15%. It started September 28, 2014, and has a termination date of May 18, 2018. |
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As of September 27, 2014, we have one cap and the swap outstanding. As a result of the termination of the 2013 Credit Agreement, both instruments have been de-designated and will be marked to market in this and future reporting periods. |
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The impact of the offsetting derivative instruments are depicted below: |
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As of September 27, 2014 |
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(in thousands) |
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| | | | | | | | | | | Gross Amounts not offset in Balance Sheet | |
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 | | $ | 6 | | | $ | — | | | $ | 6 | | | $ | — | | | $ | — | | | $ | 6 | |
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As of September 27, 2014 | | | | | | | | | | | | | |
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(in thousands) | | | | | | | | | | | | | |
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| | | | | | | | | | | Gross Amounts not offset in Balance Sheet | |
Description | | Gross Amounts of | | | Gross Amounts offset | | | Net amounts of | | | Financial | | | Cash Collateral | | | Net Amount | |
Recognized | in Balance Sheet | Liabilities | Instruments | Pledged |
Liabilities | | Presented in | | |
| | Balance Sheet | | |
Aluminum Forward Contract | | $ | 30 | | | $ | — | | | $ | 30 | | | $ | — | | | $ | — | | | $ | 30 | |
Interest Rate Swap | | $ | 1,073 | | | $ | — | | | $ | 1,073 | | | $ | — | | | $ | — | | | $ | 1,073 | |
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As of December 28, 2013 | | | | | | | | | | | | | |
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(in thousands) | | | | | | | | | | | | | |
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| | | | | | | | | | | Gross Amounts not offset in Balance Sheet | |
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 | | | | | | | | | | | | | |
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(in thousands) | | | | | | | | | | | | | |
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| | | | | | | | | | | Gross Amounts not offset in Balance Sheet | |
Description | | Gross Amounts of | | | Gross Amounts offset | | | Net amounts of | | | Financial | | | Cash Collateral | | | Net Amount | |
Recognized | in Balance Sheet | Liabilities | Instruments | Pledged |
Liabilities | | Presented in | | |
| | Balance Sheet | | |
Aluminum Forward Contract | | $ | 479 | | | $ | — | | | $ | 479 | | | $ | — | | | $ | — | | | $ | 479 | |
Interest Rate Swap | | $ | 630 | | | $ | — | | | $ | 630 | | | $ | — | | | $ | — | | | $ | 630 | |
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The fair value of our derivatives are classified in the accompanying Condensed Consolidated Balance Sheets as follows: |
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| | | | September 27, | | | December 28, | | | | | | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | | | | | |
| | | | (in thousands) | | | | | | | | | | | | | | | |
Derivatives in a net asset (liability) position | | Balance Sheet Location | | | | | | | | | | | | | | | | | | | | | | |
Interest rate cap | | Other Current Assets | | $ | 6 | | | $ | 21 | | | | | | | | | | | | | | | |
Interest rate cap | | Other Assets | | $ | — | | | $ | 13 | | | | | | | | | | | | | | | |
Interest rate swap | | Other Liabilities | | $ | (1,073 | ) | | $ | (630 | ) | | | | | | | | | | | | | | |
Aluminum forward contracts | | Accrued Liabilities | | $ | (30 | ) | | $ | (441 | ) | | | | | | | | | | | | | | |
Aluminum forward contracts | | Other Liabilities | | $ | — | | | $ | (38 | ) | | | | | | | | | | | | | | |
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The following represents the gains (losses) on derivative financial instruments for the three and nine months ended September 27, 2014, and September 28, 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 | | Amount of Gain or (Loss) | | | | | | | |
Recognized in OCI on Derivatives | from Accumulated OCI into | Reclassified from Accumulated OCI | | | | | | |
(Effective Portion) | Income (Effective Portion) | into Income (Effective Portion) | | | | | | |
| | Three Months Ended | | | | | Three Months Ended | | | | | | | |
| | (in thousands) | | | | | (in thousands) | | | | | | | |
| | September 27, | | | September 28, | | | | | September 27, 2014 | | | September 28, 2013 | | | | | | | |
2014 | 2013 | | | | | | |
Aluminum contracts | | $ | — | | | $ | 196 | | | Cost of sales | | $ | (63 | ) | | $ | (36 | ) | | | | | | |
Interest rate swap | | $ | — | | | $ | (727 | ) | | 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) | | | | | | |
| | | | | | | Three Months Ended | | | | | | | |
| | | | | | | (in thousands) | | | | | | | |
| | | | | | | | | | 27-Sep-14 | | | 28-Sep-13 | | | | | | | |
Aluminum contracts | | | | | | | | | | Other Expense, net | | $ | 16 | | | $ | 18 | | | | | | | |
Interest rate swap | | | | | | | | | | Other Expense, net | | $ | (1,188 | ) | | $ | — | | | | | | | |
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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 | Reclassified from Accumulated OCI | | | | | | |
(Effective Portion) | (Effective Portion) | into Income (Effective Portion) | | | | | | |
| | Nine Months Ended | | | | | Nine Months Ended | | | | | | | |
| | (in thousands) | | | | | (in thousands) | | | | | | | |
| | September 27, | | | September 28, | | | | | 27-Sep-14 | | | 28-Sep-13 | | | | | | | |
2014 | 2013 | | | | | | |
Aluminum contracts | | $ | 346 | | | $ | (460 | ) | | Cost of sales | | $ | 66 | | | $ | (69 | ) | | | | | | |
Interest rate swap | | $ | (557 | ) | | $ | (727 | ) | | 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) | | | | | | |
| | | | | | | Nine Months Ended | | | | | | | |
| | | | | | | (in thousands) | | | | | | | |
| | | | | | | | | | 27-Sep-14 | | | 28-Sep-13 | | | | | | | |
Aluminum contracts | | | | | | | | | | Other Expense, net | | $ | 144 | | | $ | (350 | ) | | | | | | |
Interest rate swap | | | | | | | | | | Other Expense, net | | $ | (1,188 | ) | | $ | — | | | | | | | |