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Derivative Financial Instruments
3 Months Ended
Mar. 29, 2014
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 an original 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 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 agreement 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 Company did not discontinue any cash flow hedges in any of the periods presented.

 

The Company measures the effectiveness of its cash flow hedge by comparing the change in fair value of the hedged variable interest payments 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 March 29, 2014, no portion of the gains or losses from the Company’s hedging instrument was excluded from the assessment of effectiveness. Hedge ineffectiveness was not material for any of the periods presented.

 

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

 

 

 

 

 

Fair Value

 

 

 

Balance Sheet Location

 

March 29,
2014

 

December 28,
2013

 

Interest rate swap

 

Other assets, net

 

$

514

 

$

513

 

 

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

 

 

 

Gain (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

 

 

 

March 29,
 2014

 

March 30,
 2013

 

 

 

March 29,
 2014

 

March 30,
 2013

 

Interest rate swaps

 

$

(141

)

$

44

 

Interest expense

 

$

(143

)

$

(181

)

 

The Company expects to reclassify $0.5 million of its interest rate swap losses included in accumulated other comprehensive loss as of March 29, 2014 into earnings in the next 12 months, which would be offset by lower interest payments.