Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

v3.3.0.814
Derivative Financial Instruments
9 Months Ended
Oct. 04, 2015
Derivative and Other Comprehensive Income  
Derivative Financial Instruments
Derivative Financial Instruments
From time to time, the Company enters into derivative instruments for risk management purposes only, including a derivative designated as cash flow hedge under guidance for derivative instruments and hedging activities. 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 the Company accepts.
The Company had one interest rate swap at December 28, 2014 with a remaining notional amount of $54.4 million. 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 to hedge its floating interest rate borrowings. The notional amount amortized over time from $74.1 million at inception to $50.6 million at its maturity on June 30, 2015. Under the terms of the interest rate swap, the quarterly cash payment or receipt was 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 loss (“AOCL”), in the accompanying condensed consolidated balance sheets. The Company reclassifies the effective gain or loss from Accumulated other comprehensive loss, net of tax, to Interest expense, net and other, 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 other comprehensive loss (“OCL”) and reclassifications from AOCL to earnings for the forty weeks ended October 4, 2015 and for the twelve and forty weeks ended October 5, 2014 (in thousands):
 
 
Losses recognized in OCL on derivative (effective portion)
 
Losses reclassified from AOCL into income (effective portion)
 
 
October 4, 2015
 
October 5, 2014
 
October 4, 2015
 
October 5, 2014
Twelve Weeks Ended
 
$

 
$
(10
)
 
$
(13
)
 
$
(21
)
Forty Weeks Ended
 
$
(3
)
 
$
(87
)
 
$
(36
)
 
$
(72
)

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 October 4, 2015 and December 28, 2014 (in thousands):
 
 
Derivative Liability
Balance Sheet Location
 
Fair Value at October 4, 2015
 
Fair Value at December 28, 2014
Accrued liabilities
 
$

 
$
347

Total derivatives
 
$

 
$
347


The components of Accumulated other comprehensive loss related to the interest rate swap being used to hedge cash flows were immaterial as of October 4, 2015 and December 28, 2014.
The interest rate swap was highly effective during 2015 until it matured on June 30, 2015.