Derivative Financial Instruments

9 Months Ended

Sep. 29, 2012

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 Credit Facilities. The interest payments on the facility are calculated using a variable-rate of interest. The Company has entered into an interest rate swap agreement with a notional value of $100 million (equal to the full amount borrowed under the Term Loan Facility) and, effectively, converted the LIBOR portion of the variable-rate interest payments to fixed-rate interest payments through July 2017 (the maturity date of the Term Loan Facility). The Company’s objective is to offset increases and decreases in expenses resulting from changes in interest rates with gains and losses on the derivative contract, thereby reducing volatility of earnings. The Company does not use derivative contracts for speculative purposes.

The Company’s previous swap agreement with a notional value of $50.1 million was terminated on September 28, 2012 in connection with the Company’s purchase of its corporate headquarters facilities. See Note 8, Acquisitions, for additional information.

The Company’s interest rate swap agreement is designated and qualifies as a cash flow hedge. The effective portion of the gain or loss on the interest rate swap 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 according to the nature of the cash receipt or payment 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 Term Loan Facility or the interest rate swap agreements is terminated prior to maturity, the fair value of the interest rate swap 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 termination of the Company’s swap agreement with a notional value of $50.1 million resulted in its remaining fair value of $0.9 million that was previously recorded in accumulated other comprehensive loss to be reclassified into earnings during the three months ended September 29, 2012.

The Company measures the effectiveness of its cash flow hedge 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 September 29, 2012, 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 instruments consisted of the following (in thousands):

		Fair Value
	Balance Sheet Location	September 29,2012		December 31,2011
Interest rate swaps	Other non-current liabilities	$	699	$	1,998

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:						Location of Loss Reclassified into Income	Loss Reclassified from Accumulated OCI into Income (Effective Portion) during the:
	Three Months Ended							Three Months Ended
	September 29,2012			October 1,2011				September 29,2012			October 1,2011
Interest rate swaps	$	(760	)	$	(66	)	Rent expense	$	(1,317	)	$	(481	)

	Nine Months Ended							Nine Months Ended
	September 29,2012			October 1,2011				September 29,2012			October 1,2011
Interest rate swaps	$	(898	)	$	(492	)	Rent expense	$	(2,197	)	$	(1,777	)

The Company expects to reclassify $0.5 million of its interest rate swap losses included in accumulated other comprehensive loss as of September 29, 2012 into earnings in the next 12 months, which is offset by lower interest payments.