Derivative Financial Instruments

3 Months Ended

Apr. 04, 2015

Derivative Financial Instruments

Derivative Financial Instruments

4. Derivative Financial Instruments

The Company uses derivative financial instruments to manage certain exposures to the variability of interest rates and foreign currency exchange rates. The Company’s objective is to offset increases and decreases in expenses resulting from these exposures with gains and losses on the derivative contracts, thereby reducing volatility of earnings. The Company does not use derivative contracts for speculative or trading purposes. The Company recognizes derivatives, on a gross basis, in the Consolidated Balance Sheet at fair value. Cash flows from derivatives are classified according to the nature of the cash receipt or payment in the Consolidated Statement of Cash Flows.

Interest Rate Swaps

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 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 as interest expense in the Consolidated Statement of Income when the hedged exposure affects earnings.

The Company estimates the fair values of interest rate swaps 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 April 4, 2015, 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 in cash flow hedging relationships consisted of the following (in thousands):

		Fair Value
	Balance Sheet Location	April 4, 2015		January 3, 2015
Interest rate swap	Other assets, net	$	—	$	331
	Other non-current liabilities	165		—

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
	April 4, 2015			March 29, 2014			Reclassified into Income	April 4, 2015			March 29, 2014
Interest rate swaps	$	(626	)	$	(141	)	Interest expense	$	(130	)	$	(143	)

The Company expects to reclassify $0.4 million of its interest rate swap losses included in accumulated other comprehensive loss as of April 4, 2015 into earnings in the next 12 months, which would be offset by lower interest payments.

Foreign Currency Forward Contracts

The Company uses foreign currency forward contracts to manage exposure to foreign exchange risk. These instruments are used to reduce the earnings impact that exchange rate fluctuations have on non-U.S. dollar balance sheet exposures. The Company recognizes gains and losses on the foreign currency forward contracts in other income (expense), net in the Consolidated Statement of Income in the same period as the remeasurement loss and gain of the related foreign currency denominated asset or liability. The Company does not apply hedge accounting to its foreign currency derivative instruments.

As of April 4, 2015, the Company held one foreign currency forward contract denominated in Norwegian Krone with a notional value of $6.8 million. The fair value of the contract was not material as of April 4, 2015. The contract has a maturity date of July 1, 2015 and it was not designated as a hedging instrument. The Company held no foreign currency forward contracts during the three months ended March 29, 2014.

The before-tax effect of derivative instruments not designated as hedging instruments was as follows (in thousands):

Gain Recognized in Income	Three Months Ended April 4, 2015		Location
Foreign currency forward contracts	$	550	Other income (expense), net