Derivative Instrument |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||
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Jun. 26, 2015 | |||||||||||||||||||||||||||||||||||||||||||
| Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||
| Derivative Instrument | DERIVATIVE INSTRUMENT Risk Management Policy The Company is exposed to the risk that its earnings and cash flows could be adversely impacted due to fluctuations in interest rates applicable to the variable rate portion of its term facility. The Company will periodically enter into interest rate swaps to manage interest costs in which the Company agrees to exchange, at specified intervals, the difference between variable and fixed interest amounts calculated by reference to an agreed-upon notional amount. Derivative instruments are not used for trading purposes or to manage exposure to changes in interest rates for investment securities, and the Company’s outstanding derivative instrument does not contain credit risk related contingent features; collateral is generally not required. Derivative Instrument On May 5, 2015, the Company entered into a derivative instrument to hedge a portion of the Company’s exposure to interest rate risk under its variable-rate borrowing (the "interest rate swap"). The interest rate swap is designated and qualifies as an effective cash flow hedge. The contract, with notional amount of $40.0 million at June 26, 2015, is recorded at fair value. The Company’s interest rate swap is measured at fair value on a recurring basis and is determined using the income approach based on a discounted cash flow model to determine the present value of future cash flows over the remaining terms of the contract incorporating observable market inputs such as prevailing interest rates as of the reporting date. Changes in fair value of the interest rate swap are recorded, net of tax, as a component of accumulated other comprehensive income (loss) in the accompanying condensed consolidated balance sheet. The Company reclassifies the effective gain or loss from accumulated other comprehensive income (loss), net of tax, to Interest expense on the Company’s condensed consolidated and combined statements of income as the interest expense is recognized on the related debt. The ineffective portion of the change in fair value of the interest rate swap, if any, is recognized directly in earnings in Interest expense. The following table summarizes the amount at fair value and location of Vectrus' derivative instrument as of June 26, 2015:
By utilizing an interest rate swap, the Company is exposed to credit-related losses in the event that the counterparty fails to perform under the terms of the derivative contract. To mitigate this risk, the Company entered into the interest rate swap with a major financial institution based upon credit ratings and other factors. The Company continually assesses the creditworthiness of its counterparty. As of June 26, 2015, the counterparty to the interest rate swap had performed in accordance with its contractual obligations. Both the counterparty credit risk and the Company’s credit risk were considered in the fair value determination. |
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