Red Robin Gourmet Burgers, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Derivative and Other Comprehensive Income

Derivative and Other Comprehensive Income

9 Months Ended

Oct. 05, 2014

Derivative and Other Comprehensive Income

Derivative and Other Comprehensive Income

The Company enters into derivative instruments for risk management purposes only, including a derivative designated as a cash flow hedge under guidance for derivative instruments and hedging activities. The Company uses interest rate-related derivative instruments to manage the exposure to fluctuations in interest rates. By using these instruments, the Company exposes itself, from time to time, to both credit 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, creating credit risk for the Company. The Company minimizes credit risk by entering into transactions with high-quality counterparties whose credit ratings are evaluated on a quarterly basis. Market risk, as it relates to the Company's interest-rate derivative, is the adverse effect on the value of a financial instrument resulting 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 accepts.

The Company had one interest rate swap at October 5, 2014 and December 29, 2013 with Rabobank to hedge its floating interest rate borrowings. The Company entered into this variable-to-fixed interest rate swap agreement with Rabobank in August 2011 with an initial notional amount of $74.1 million. The notional amount amortizes over time from $74.1 million at inception to $50.6 million at its maturity on June 30, 2015. The remaining notional amount as of October 5, 2014 and December 29, 2013 was $54.4 million and $61.9 million. Under the terms of the interest rate swap, the quarterly cash payment or receipt is equal to the net of (1) the fixed interest rate of 1.135% paid by the Company and (2) the 3 month LIBOR rate for the applicable interest period received by the Company multiplied by the remaining notional amount as of the payment date. The Company’s hedging relationship with Rabobank was not affected by the replacement of the Previous Credit Facility with the New Credit Facility on July 2, 2014. The designation of the interest rate swap applied on the New Credit Facility as the hedging relationship is still highly effective. Changes in fair value of the interest rate swap are recorded, net of tax, as a component of Accumulated other comprehensive income (“AOCI”), in the accompanying consolidated balance sheets. The Company reclassifies the effective gain or loss from accumulated other comprehensive income, net of tax, to Interest expense on the Company’s consolidated 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 presents gains and losses on the interest rate swap designated as a cash flow hedge recognized in the Other comprehensive income (“OCI”) and reclassifications from AOCI to earnings for the twelve and forty weeks ended October 5, 2014 and October 6, 2013 (in thousands):



	Gains (Losses) recognized in OCI on derivative (effective portion)						Losses reclassified from AOCI into income (effective portion)						Gains (Losses) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
	October 5, 2014			October 6, 2013			October 5, 2014			October 6, 2013			October 5, 2014		October 6, 2013
Twelve Weeks Ended	$	(10	)	$	(129	)	$	(21	)	$	(19	)	$	—	$	3
Forty Weeks Ended	$	(87	)	$	(80	)	$	(72	)	$	(58	)	$	2	$	3

The following table summarizes the fair value and presentation of the interest rate swap in the accompanying consolidated balance sheets as hedging instruments as of October 5, 2014 and December 29, 2013 (in thousands):



	Derivative Liability
Balance Sheet Location	Fair Value at October 5, 2014		Fair Value at December 29, 2013
Accrued liabilities	$	341	$	516
Other non-current liabilities	—		271
Total derivatives	$	341	$	787

The components of accumulated other comprehensive income related to the interest rate swap being used to hedge cash flows as of October 5, 2014 and December 29, 2013 were as follows (in thousands):



	October 5, 2014			December 29, 2013
Unrealized loss related to cash flow hedges, pretax	$	(48	)	$	(43	)
Tax benefit	14			13
Accumulated other comprehensive loss related to interest rate swap	$	(34	)	$	(30	)

The interest rate swap was highly effective during the twelve and forty weeks ended October 5, 2014. Amounts reclassified from accumulated other comprehensive loss into interest expense represent payments made to the counterparty for the effective portion of the interest rate swap. The Company expects the swap to continue to be highly effective until it matures on June 30, 2015. Approximately $48 thousand of the deferred losses included in accumulated other comprehensive loss on the accompanying consolidated balance sheets at October 5, 2014 is expected to be reclassified into earnings during the next twelve months. Additionally, the Company had no obligations as of October 5, 2014 to post collateral under the terms of the interest rate swap agreements. If the Company had breached any of its provisions at October 5, 2014, it could have been required to settle its obligations on the interest rate swap at a termination value of $0.3 million.

- Definition

This element can be used to disclose the entity's entire derivative instruments and hedging activities disclosure as a single block of text. Describes the entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising there from, and the amounts of and methodologies and assumptions used in determining the amounts of such items. In addition, this label may include the following: 1) the amount of income tax expense or benefit allocated to each component of other comprehensive income, including reclassification adjustments, 2) the reclassification adjustments for each classification of other comprehensive income and 3) the ending accumulated balances for each component of comprehensive income. Components of comprehensive income include: (1) foreign currency translation adjustments; (2) gains and losses on foreign currency transactions that are designated as, and are effective as, economic hedges of a net investment in a foreign entity; (3) gains and losses on intercompany foreign currency transactions that are of a long-term-investment nature, when the entities to the transaction are consolidated, combined, or accounted for by the equity method in the reporting enterprise's financial statements; (4) change in the market value of a futures contract that qualifies as a hedge of an asset reported at fair value; (5) unrealized holding gains and losses on available-for-sale securities and that resulting from transfers of debt securities from the held-to-maturity category to the available-for-sale category; (6) a net loss recognized as an additional pension liability not yet recognized as net periodic pension cost; and (7) the net gain or loss and net prior service cost or credit for pension plans and other postretirement benefit plans. In addition, this label may include the following: 1) the amount of income tax expense or benefit allocated to each component of other comprehensive income, including reclassification adjustments, 2) the reclassification adjustments for each classification of other comprehensive income and 3) the ending accumulated balances for each component of comprehensive income. Components of comprehensive income include: (1) foreign currency translation adjustments; (2) gains and losses on foreign currency transactions that are designated as, and are effective as, economic hedges of a net investment in a foreign entity; (3) gains and losses on intercompany foreign currency transactions that are of a long-term-investment nature, when the entities to the transaction are consolidated, combined, or accounted for by the equity method in the reporting enterprise's financial statements; (4) change in the market value of a futures contract that qualifies as a hedge of an asset reported at fair value; (5) unrealized holding gains and losses on available-for-sale securities and that resulting from transfers of debt securities from the held-to-maturity category to the available-for-sale category; (6) a net loss recognized as an additional pension liability not yet recognized as net periodic pension cost; and (7) the net gain or loss and net prior service cost or credit for pension plans and other postretirement benefit plans.

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