Interest Rate Swaps

9 Months Ended

Sep. 30, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Interest Rate Swaps

Interest Rate Swaps:

The Company entered into an interest rate swap agreement which became effective on March 31, 2016, with a maturity date of February 19, 2021. The notional amount of this swap agreement began at $197.5 million (the principal amount of the February 2016 Term Loan borrowings as of March 31, 2016) and will amortize at the same time and in the same amount as the February 2016 Term Loan borrowings as described in Note 6. As of September 30, 2017, the notional amount of the interest rate swap was $182.5 million.

The Company entered into a second interest rate swap agreement which became effective on June 30, 2017, with a maturity date of June 15, 2022. The notional amount of this swap agreement began at $100 million (the principal amount of the June 2017 Term Loan borrowings as of June 30, 2017) and will amortize at the same time and in the same amount as the June 2017 Term Loan borrowings as described in Note 6. As of September 30, 2017, the notional amount of the interest rate swap was $98.8 million.

The Company’s interest rate swap agreements are executed for risk management and are not held for trading purposes. The objective of the interest rate swap agreements is to mitigate interest rate risk associated with future changes in interest rates. To accomplish this objective, the interest rate swap agreements are intended to hedge the variable cash flows associated with the variable rate term loan borrowings under the 2016 Senior Credit Facility. Both interest rate swap agreements entitle the Company to receive, at specified intervals, a variable rate of interest based on LIBOR in exchange for the payment of a fixed rate of interest throughout the life of the agreement, without exchange of the underlying notional amount.

The Company has designated its interest rate swap agreements as cash flow hedges and accounts for the underlying activity in accordance with hedge accounting. The interest rate swaps are presented within the consolidated balance sheets at fair value. In accordance with hedge accounting, the effective portion of gains and losses on interest rate swaps that are designated and qualify as cash flow hedges are recorded as a component of Other Comprehensive Income (Loss) (“OCI” or “OCL”, respectively) and reclassified into earnings in the period during which the hedged transactions affect earnings. The ineffective portion of gains and losses on interest rate swaps, if any, are recognized in current earnings.

The assets and liabilities measured at fair value related to the Company’s interest rate swaps, excluding accrued interest, were as follows (in thousands):

	Balance Sheet Location	September 30, 2017		December 31, 2016			September 24, 2016
Interest rate swaps (short-term portion)	Other current assets / (Other accrued expenses)	$	194	$	(398	)	$	(887	)
Interest rate swaps (long-term portion)	Other assets / (Other long-term liabilities)	2,940		3,215			(935		)
Total net assets (liabilities)		$	3,134	$	2,817		$	(1,822	)

The offset to the interest rate swap asset or liability is recorded as a component of equity, net of deferred taxes, in Accumulated Other Comprehensive Income (Loss) (“AOCI” or “AOCL”, respectively), and will be reclassified into earnings over the term of the underlying debt as interest payments are made.

The following table summarizes the changes in AOCI/AOCL, net of tax, related to the Company’s interest rate swaps (in thousands):

	September 30, 2017		December 31, 2016		September 24, 2016
Beginning fiscal year AOCI balance	$	1,392	$	—	$	—
Current fiscal period gain (loss) recognized in OCI (OCL)	165		1,392		(1,111		)
Amounts reclassified from AOCI (AOCL) into current fiscal period earnings	—		—		—
Other comprehensive gain (loss), net of tax	165		1,392		(1,111		)
Ending fiscal period AOCI (AOCL) balance	$	1,557	$	1,392	$	(1,111	)

As of September 30, 2017, the estimated pre-tax portion of AOCI that is expected to be reclassified into earnings over the next twelve months is $0.2 million. Cash flows related to the interest rate swaps are included in operating activities on the condensed consolidated statements of cash flows.

The following table summarizes the impact of pre-tax gains and losses derived from the Company’s interest rate swaps (in thousands):

		Fiscal three months ended				Fiscal nine months ended
	Financial Statement Location	September 30, 2017		September 24, 2016		September 30, 2017		September 24, 2016
Effective portion of gains (losses) recognized in OCI (OCL) during the period	Other comprehensive income (loss)	$	59	$	412	$	270	$	(1,822	)
Amounts reclassified from AOCI (AOCL) into earnings	Interest expense, net	—		—		—		—
Ineffective portion of gains recognized in earnings during the period	Interest expense, net	25		306		46		—

The following table summarizes the impact of taxes affecting AOCI/AOCL as a result of the Company’s interest rate swaps (in thousands):

	Fiscal three months ended				Fiscal nine months ended
	September 30, 2017		September 24, 2016		September 30, 2017		September 24, 2016
Income tax (benefit) expense of interest rate swaps on AOCI (AOCL)	$	23	$	161	$	105	$	(711	)

Credit-risk-related contingent features

In accordance with the underlying interest rate swap agreements, the Company could be declared in default on its interest rate swap obligations if repayment of the underlying indebtedness (i.e. the Company’s term loans) is accelerated by the lender due to the Company's default on such indebtedness.

If the Company had breached any of the provisions in the underlying agreements at September 30, 2017, it could have been required to post full collateral or settle its obligations under the Company’s interest rate swap agreements. However, as of September 30, 2017, the Company had not breached any of these provisions or posted any collateral related to the underlying interest rate swap agreements. Further, as of September 30, 2017, the net balance of each of the Company’s interest rate swaps were in a net asset position and therefore the Company would have no obligation upon default.