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

Annual report pursuant to Section 13 and 15(d)

Derivative and Other Comprehensive Income

Derivative and Other Comprehensive Income

12 Months Ended

Dec. 30, 2012

Derivative and Other Comprehensive Income

Derivative and Other Comprehensive Income

8. 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. The Company has one interest rate swap at December 30, 2012 and its counterparty is Rabobank. 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.

In August 2011, the Company entered into a variable-to-fixed interest rate swap agreement with Rabobank to hedge the floating interest rate on a portion of the term loan under the Previous 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 $68.4 million decreases quarterly, and 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 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 the loan agreement that was designated as being hedged by this swap, the Company de-designated the original hedging relationship for this swap and consequently reclassified all deferred gains and losses that had been deferred in accumulated other comprehensive loss ("AOCL"), a non-cash pre-tax charge of $1.2 million, recognized through loss on debt refinancing in the consolidated statements of income. On December 14, 2012, the Company re-designated the swap on the New 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 AOCL in the accompanying condensed consolidated balance sheets. The Company reclassifies the effective gain or loss from AOCL, 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 consolidated balance sheets of the interest rate swap as hedging instruments as of December 30, 2012 and December 25, 2011 (in thousands):

	Derivative Liability

Balance Sheet Location	Fair Value at December 30, 2012		Fair Value at December 25, 2011
Accrued liabilities	$	539	$	449
Other non-current liabilities		677		85

Total derivatives	$	1,216	$	534

During 2012, the interest rate swap was highly effective. Amounts reclassified from AOCL 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 during the next twelve months. Additionally, the Company had no obligations at December 30, 2012 to post collateral under the terms of the Interest Rate Swap Agreement.

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

	December 30, 2012			December 25, 2011

Unrealized gain (loss) related to cash flow hedges, pretax	$	9		$	(533	)
Tax effect		(4	)		207

Accumulated other comprehensive income (loss), net	$	5		$	(326	)

- 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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