8. Derivative and Other Comprehensive Income
The Company enters into derivative instruments for risk management purposes only, including derivatives designated as a cash flow hedge under guidance for derivative instruments and hedging activities. The Company uses interest raterelated derivative instruments to manage its exposure to fluctuations in interest rates. By using these instruments, the Company exposes itself, from time to time, to credit risk and market risk. Credit risk is the failure of either party to the contract to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. The Company minimizes the credit risk by entering into transactions with highquality counterparties whose credit rating is evaluated on a quarterly basis. The Company has one interest rate swap at October 2, 2011 and its counterparty is Rabobank International, Utrecht (Rabobank). Market risk, as it relates to the Companys interestrate derivative, is the adverse effect on the value of a financial instrument that results from changes in interest rates. The Company minimizes market risk by establishing and monitoring parameters that limit the types and degree of market risk that the Company takes.
In August 2011, the Company entered into a variabletofixed interest rate swap agreement with Rabobank to hedge the Companys floating interest rate on half of the remaining term loan that is outstanding at October 2, 2011 under the Companys amended and restated credit facility, or $73.1 million notional at October 2, 2011. The interest rate swap has an effective date of August 5, 2011, and $0.9 million of the initial $74.1 million expired on September 30, 2011, in accordance with its original terms. The notional amount of the hedge will decrease quarterly based on the remaining required principal term loan payments, and will expire on June 30, 2015 with a notional hedge amount of $50.6 million. The Company is required to make quarterly payments based on a fixed interest rate of 1.135%, calculated based on the remaining notional amount, which is half of the outstanding term loan. In exchange, the Company receives interest on the notional amount at a variable rate that is based on the 3month spot LIBOR rate quarterly. The Company entered into this interest rate swap to offset the variability of its interest expense arising out of changes in the variable interest rate for the designated interest payments and designated the swap as a cash flow hedge. Accordingly, changes in fair value of the interest rate swap contract are recorded, net of taxes, as a component of accumulated other comprehensive loss (AOCL) in the accompanying condensed consolidated balance sheets. The Company reclassifies the effective gain or loss from AOCL, net of tax, on the Companys consolidated balance sheet to interest expense on the Companys consolidated statements of income as the interest expense is recognized on the related debt.
In March 2008, the Company entered into a variabletofixed interest rate swap agreement with SunTrust to hedge the Companys floating interest rate on an aggregate of up to $120 million of debt that was outstanding under the Companys amended and restated credit facility. The interest rate swap had an effective date of March 19, 2008, and $50 million of the initial $120 million expired on March 19, 2010, and the remaining $70 million expired on March 19, 2011, in accordance with its original terms. The Company was required to make payments based on a fixed interest rate of 2.7925%, calculated on the remaining notional amount of $70 million. In exchange, the Company received interest on $70 million of the notional amount at a variable rate that was based on the 3month LIBOR rate. The Company entered into this interest rate swap with the objective of offsetting the variability of its interest expense that arises because of changes in the variable interest rate for the designated interest payments and designated the swap as a cash flow hedge since its inception. Accordingly, changes in fair value of the interest rate swap contract were recorded, net of taxes, as a component of accumulated other comprehensive loss (AOCL) in the accompanying condensed consolidated balance sheets. The Company reclassifies the effective gain or loss from AOCL, net of tax, on the Companys consolidated balance sheet to interest expense on the Companys consolidated statements of income as the interest expense is recognized on the related debt.
The following table summarizes the fair value and presentation in the condensed consolidated balance sheets of the interest rate swap as hedging instruments as of October 2, 2011 and December 26, 2010 (in thousands):
Balance Sheet Location


Derivative Liability




Fair value at
October 2,
2011


Fair value at
December 26,
2010








Accrued liabilities


$

446


$

411


Other noncurrent liabilities


227




Total derivatives


$

673


$

411


The following table summarizes the effect of the interest rate swap on the condensed consolidated statements of operations for the twelve and forty weeks ended October 2, 2011 and October 3, 2010 (in thousands):


Twelve Weeks Ended


Forty Weeks Ended




October 2,
2011


October 3,
2010


October 2,
2011


October 3,
2010


Unrealized gain (loss) on swap in AOCL (pretax)


$

(782

)

$

(70

)

$

(782

)

$

(378

)

Realized gain (loss) [pretax effective portion] recognized in interest expense


$

(109

)

$

(375

)

$

299


$

(1,614

)

As a result of this activity, AOCL increased by $673,000 and $262,000 on a pretax basis or $411,000 and $214,000 on an after tax basis for the twelve and forty weeks ended October 2, 2011, respectively. For the twelve and forty weeks ended October 3, 2010, AOCL decreased by $305,000 and $1.2 million on a pretax basis or $114,000 and $888,000 on an after tax basis for the twelve and forty weeks ended October 3, 2010, respectively. The interest rate swap had no hedge ineffectiveness, and as a result, no unrealized gains or losses were reclassified into net earnings as a result of hedge ineffectiveness. The company expects no ineffectiveness in the next twelve months. Additionally, the Company had no obligations at October 2, 2011 to post collateral under the terms of the Interest Rate Swap Agreement.
Comprehensive income consists of net income and other gains and losses affecting stockholders equity that are excluded from net income. Comprehensive income consisted of (in thousands):


Twelve Weeks Ended


Forty Weeks Ended




October 2,
2011


October 3,
2010


October 2,
2011


October 3,
2010


Net income (loss)


$

2,069


$

(4,213

)

$

17,672


$

5,072


Unrealized gain (loss) on cash flow swap, net of tax


(411

)

114


(214

)

888


Total comprehensive income (loss)


$

1,658


$

(4,099

)

$

17,458


$

5,960


