Fair Value Measurements and Interest Rate Swap

9 Months Ended

Nov. 23, 2012

Fair Value Measurements and Interest Rate Swap [Abstract]

Fair Value Measurements and Interest Rate Swap

9. Fair Value Measurements and Interest Rate Swap

Our assets and liabilities that are measured at fair value on a recurring basis include the unrealized gains or losses on interest rate swap contracts.  We use significant other observable market data or assumptions (Level 2 inputs as defined in the accounting guidance) that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk.  Our fair value estimates reflect an income approach based on the terms of the interest rate contracts and inputs corroborated by observable market data including interest rate curves.

As of November 23, 2012, we had one interest rate swap contract in place to reduce our exposure to fluctuations in interest rates on our Term Loan.  The swap converts the variable interest rate to a fixed interest rate initially on $5,000 of our $15,000 Term Loan.  The effective date of the interest rate swap was September 28, 2012, and it is scheduled to expire on September 28, 2017.  The notional amount of $5,000 will decrease ratably over the duration of the interest rate swap agreement.  The interest rate swap effectively fixes our LIBOR interest rate on the notional amount at a rate of 0.74% in excess of the margin.  We have recognized the fair value of our interest rate swap as a long-term liability of approximately $28 as of November 23, 2012.

We recognize any differences between the variable interest rate payments and the fixed interest rate settlements from our swap counterparty as an adjustment to interest expense over the life of the swap.  We have designated the swap as a cash flow hedge and we record the changes in the estimated fair value of the swap to accumulated other comprehensive loss.  If our interest rate swap became ineffective, we would immediately recognize the change in the estimated fair value of our swap in earnings.  Since inception, we have not recognized any gains or losses on these swaps through income and there has been no effect on income from hedge ineffectiveness.

Failure of our swap counterparty would result in the loss of any potential benefit to us under our swap contracts.  In this case, we would still be obligated to pay the variable interest payments underlying the Term Loan.  Additionally, failure of our swap counterparty would not eliminate our obligation to continue to make payments under our existing swap contract if we continue to be in a net pay position.