Derivative Financial Instruments

9 Months Ended

Oct. 01, 2011

Derivative Financial Instruments

Derivative Financial Instruments

4. Derivative Financial Instruments

The Company is exposed to interest rate fluctuations in the normal course of its business, including through its corporate headquarters leases. The base rents for these leases are calculated using a variable interest rate based on the three-month LIBOR. The Company has entered into interest rate swap agreements with notional values of $44.3 million and $50.1 million and, effectively, fixed the rent payment amounts on these leases through March 2011 and March 2013, respectively. The Company’s swap agreement with a notional value of $44.3 million matured in March 2011 and was not renewed. The Company’s objective in entering into such swap agreements was to offset increases and decreases in expenses resulting from changes in interest rates with gains and losses on the derivative contracts, thereby reducing volatility of earnings. The Company does not use derivative contracts for speculative purposes.

The interest rate swap agreements are designated and qualify as cash flow hedges. The effective portion of the gain or loss on interest rate swaps is recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity and is subsequently recognized in earnings when the hedged exposure affects earnings. Cash flows from derivatives are classified as cash flows from operating activities in the Consolidated Statement of Cash Flows.

The Company estimates the fair values of derivatives based on quoted prices and market observable data of similar instruments. If the lease agreements or the interest rate swap agreements are terminated prior to maturity, the fair value of the interest rate swaps recorded in accumulated other comprehensive loss may be recognized in the Consolidated Statement of Income based on an assessment of the agreements at the time of termination. The Company did not discontinue any cash flow hedges in any of the periods presented.

The Company measures the effectiveness of its cash flow hedges by comparing the change in fair value of the hedged item with the change in fair value of the interest rate swap. The Company recognizes ineffective portions of the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated Statement of Income. As of October 1, 2011, no portion of the gains or losses from the Company’s hedging instrument was excluded from the assessment of effectiveness. There was no hedge ineffectiveness for any of the periods presented.

The Company’s derivative financial instrument consisted of the following (in thousands):

	October 1, 2011
	Balance Sheet Location	Fair Value
Interest rate swap:	Long-term obligations and other liabilities	$	2,526

The before-tax effect of derivative instruments in cash flow hedging relationships was as follows (in thousands):

	Loss Recognized in OCI on Derivatives (Effective Portion) during the:							Loss Reclassified from Accumulated OCI into Income (Effective Portion) during the:
	Three Months Ended						Location of Loss	Three Months Ended
	October 1,2011			October 2,2010			Reclassified into Income	October 1,2011			October 2,2010
Interest rate swaps	$	(66	)	$	(835	)	Rent expense	$	(481	)	$	(791	)
	Nine Months Ended							Nine Months Ended
	October 1,2011			October 2,2010				October 1,2011			October 2,2010
Interest rate swaps	$	(492	)	$	(2,734	)	Rent expense	$	(1,777	)	$	(2,480	)

The Company expects to reclassify $1.8 million of its interest rate swap losses included in accumulated other comprehensive loss as of October 1, 2011 into earnings in the next 12 months, which is offset by lower rent payments.

The Company’s interest rate swap agreement contains provisions that require it to maintain unencumbered cash and highly-rated short-term investments of at least $150 million. If the Company’s unencumbered cash and highly-rated short-term investments are less than $150 million, it would be required to post collateral with the counterparty in the amount of the fair value of the interest rate swap agreements in net liability positions. The Company’s interest rate swap was in a net liability position at October 1, 2011. No collateral has been posted with the counterparty as of October 1, 2011.