Derivative and Other Comprehensive Income

4 Months Ended  

Apr. 19, 2015


Derivative and Other Comprehensive Income  
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 raterelated 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 highquality counterparties whose credit ratings are evaluated on a quarterly basis. Market risk, as it relates to the Company's interestrate 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 April 19, 2015 and December 28, 2014 with Rabobank to hedge its floating interest rate borrowings. The Company entered into this variabletofixed 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 April 19, 2015 and December 28, 2014 was $52.5 million and $54.4 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.
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 condensed 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 condensed 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 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 sixteen weeks ended April 19, 2015 and April 20, 2014 (in thousands):
The following table summarizes the fair value and presentation of the interest rate swap in the accompanying condensed consolidated balance sheets as hedging instruments as of April 19, 2015 and December 28, 2014 (in thousands):
The components of accumulated other comprehensive income related to the interest rate swap being used to hedge cash flows were immaterial as of April 19, 2015 and December 28, 2014.
The interest rate swap was highly effective during the sixteen weeks ended April 19, 2015. 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 $13 thousand of the deferred losses included in accumulated other comprehensive loss on the accompanying condensed consolidated balance sheets at April 19, 2015 is expected to be reclassified into earnings before the swap matures on June 30, 2015. Additionally, the Company had no obligations as of April 19, 2015 to post collateral under the terms of the interest rate swap agreements. If the Company had breached any of its provisions at April 19, 2015, it could have been required to settle its obligations on the interest rate swap at a termination value of $0.1 million.
