Derivative and Other Comprehensive Income

4 Months Ended  

Apr. 21, 2013


Derivative and Other Comprehensive Income  
Derivative and Other Comprehensive Income 
7. 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. Market risk, as it relates to the Company’s 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.
The Company had one interest rate swap at April 21, 2013, and its counterparty is Rabobank International, Utrecht (“Rabobank”). The Company entered into a variabletofixed interest rate swap agreement with Rabobank in August 2011 to hedge the floating interest rate on a portion of the term loan under the Company’s credit facility. The interest rate swap was effective August 5, 2011, with an initial notional amount of $74.1 million. In accordance with its original terms $4.7 million and $0.9 million of the initial $74.1 million expired in 2012 and 2011 respectively. The remaining notional amount of $65.5 million as of April 21, 2013, is set to expire on June 30, 2015, with a notional hedge amount of $50.6 million. Under the swap, the Company is required to make quarterly payments based on a fixed interest rate of 1.135%, calculated based on the remaining notional amount. 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. Concurrent with the December 14, 2012, refinancing of its thenexisting credit facility, the Company dedesignated the original hedging relationship for this swap and consequently redesignated the swap on the amended credit facility’s $225 million revolver. Accordingly, changes in fair value of the interest rate swap contract are recorded, net of taxes, as a component of AOCI, in the accompanying condensed consolidated balance sheets. The Company reclassifies the effective gain or loss from AOCI, net of tax, on the Company’s consolidated balance sheet to interest expense on the Company’s 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 April 21, 2013, and December 30, 2012 (in thousands):
During the first quarter 2013, the interest rate swap was highly effective. The Company expects the swap to continue to be highly effective during the next twelve months. Additionally, the Company had no obligations at April 21, 2013, to post collateral under the terms of the interest rate swap agreement.
The components of AOCI at the end of each period was as follows (in thousands):
