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Derivative Financial Instruments
9 Months Ended
Sep. 30, 2017
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 Facility. The interest payments on the facility are calculated using a variable-rate of interest. The Company entered into an interest rate swap agreement with an original notional value of $72.5 million and, effectively, converted the Eurodollar portion of the variable-rate interest payments to fixed-rate interest payments through July 2020. The Company terminated the swap agreement on March 6, 2017 in connection with the payoff of its Credit Facility.

 

The Company’s interest rate swap agreement was designated and qualified as a cash flow hedge. The effective portion of the gain or loss on the interest rate swap was recorded in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity and was subsequently recognized as interest expense in the Consolidated Statement of Income when the hedged exposure affected earnings. The termination of the swap agreement resulted in the reclassification of $1.8 million of unrealized gains that were previously recorded in accumulated other comprehensive income (loss) into earnings during the three months ended April 1, 2017. The Company did not discontinue any other cash flow hedges in 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

 

September 30,
2017

 

December 31,
2016

 

Interest rate swap

 

Other assets, net

 

$

 

$

1,808

 

 

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:

 

 

 

Gain (Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
during the:

 

 

 

Three Months Ended

 

Location of Loss

 

Three Months Ended

 

 

 

September 30,
2017

 

October 1,
2016

 

Reclassified into
Income

 

September 30,
2017

 

October 1,
2016

 

Interest rate swaps

 

$

 

$

202

 

Interest expense

 

$

 

$

(64

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,
2017

 

October 1,
2016

 

 

 

September 30,
2017

 

October 1,
2016

 

Interest rate swaps

 

$

 

$

(211

)

Interest expense

 

$

1,808

 

$

(191

)

 

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 interest income and other, 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 September 30, 2017 and October 1, 2016, the Company held one foreign currency forward contract denominated in Norwegian Krone with a notional value of $3.2 million and $4.9 million, respectively. The fair value of the contracts was not material as of September 30, 2017 or October 1, 2016. The contract held as of September 30, 2017 has a maturity date of December 28, 2017 and it was not designated as a hedging instrument.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Loss Recognized in Income

 

September 30,
2017

 

October 1,
2016

 

September 30,
2017

 

October 1,
2016

 

Location

 

Foreign currency forward contracts

 

$

(203

)

$

(219

)

$

(332

)

$

(471

)

Interest income and other, net