Quarterly report pursuant to Section 13 or 15(d)

Derivative and Other Comprehensive Income

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Derivative and Other Comprehensive Income
6 Months Ended
Jul. 14, 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 rate-related 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 high-quality counterparties whose credit rating is 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 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 July 14, 2013, and its counterparty is Rabobank International, Utrecht (“Rabobank”). The Company entered into a variable-to-fixed 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 of the initial $74.1 million expired in both the twenty-eight weeks ended July 14, 2013 and the fifty-three weeks ended December 30, 2012 respectively. The remaining notional amount of $63.8 million as of July 14, 2013, is set to fully 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 3-month 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 then-existing credit facility, the Company de-designated the original hedging relationship for this swap and consequently re-designated 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 accumulated other comprehensive income, in the accompanying condensed consolidated balance sheets. See Note 8 for information on the fair value of the interest rate swap. The Company reclassifies the effective gain or loss from accumulated other comprehensive income, 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. During the twelve and twenty-eight week periods ended July 14, 2013, there were no reclassifications from accumulated other comprehensive income to net income.

 

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 July 14, 2013, and December 30, 2012 (in thousands):

 

 

 

Derivative Liability

 

Balance Sheet Location

 

Fair Value at 
July 14, 2013

 

Fair Value at 
December 30, 
2012

 

 

 

 

 

 

 

Accrued liabilities

 

$

490

 

$

539

 

Other non-current liabilities

 

264

 

677

 

Total derivative liability

 

$

754

 

$

1,216

 

 

The components of accumulated other comprehensive income at the end of each period were as follows (in thousands):

 

 

 

July 14, 2013

 

December 30, 2012

 

Unrealized gain related to cash flow hedges, pretax

 

$

98

 

$

9

 

Tax effect

 

(43

)

(4

)

Accumulated other comprehensive income, net

 

$

55

 

$

5

 

 

The interest rate swap was highly effective during the twelve and twenty-eight weeks ended July 14, 2013. The Company expects the swap to continue to be highly effective during the next twelve months. Additionally, the Company had no obligations at July 14, 2013, to post collateral under the terms of the interest rate swap agreement.