Quarterly report pursuant to Section 13 or 15(d)

Derivative and Other Comprehensive Income

v2.4.0.6
Derivative and Other Comprehensive Income
4 Months Ended
Apr. 15, 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 April 15, 2012 and its counterparty is Rabobank International, Utrecht (“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 Company’s floating interest rate on half of the remaining term loan that is outstanding at April 15, 2012 under the Company’s amended and restated credit facility, or $71.3 million notional at April 15, 2012.  The interest rate swap has an effective date of August 5, 2011, in accordance with its original terms $1.9 and $0.9 million of the initial $74.1 million expired in 2012 and 2011, respectively. The notional amount of the hedge will decrease quarterly based on the remaining required principal term loan payments, and will expire on June 30, 2015 with a notional hedge amount of $50.6 million.  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.  Accordingly, changes in fair value of the interest rate swap contract are recorded, net of taxes, 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 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.

 

In March 2008, the Company entered into a variable-to-fixed interest rate swap agreement with SunTrust to hedge the Company’s floating interest rate on an aggregate of up to $120 million of debt that was outstanding under the Company’s amended and restated credit facility.  The interest rate swap had an effective date of March 19, 2008, and $50 million of the initial $120 million expired on March 19, 2010, and the remaining $70 million expired on March 19, 2011, in accordance with its original terms.  The Company was required to make payments based on a fixed interest rate of 2.7925%, calculated on the remaining notional amount of $70 million.  In exchange, the Company received interest on $70 million of the notional amount at a variable rate that was based on the 3-month LIBOR rate.  The Company entered into this interest rate swap with the objective of offsetting the variability of its interest expense that arises because of changes in the variable interest rate for the designated interest payments and designated the swap as a cash flow hedge since its inception.  Accordingly, changes in fair value of the interest rate swap contract were recorded, net of taxes, 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 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 condensed consolidated balance sheets of the interest rate swap as hedging instruments as of April 15, 2012 and December 25, 2011 (in thousands):

 

 

 

Derivative Liability

 

Balance Sheet Location

 

Fair value at
April 15, 2012

 

Fair value at
December 25,
2011

 

 

 

 

 

 

 

Accrued liabilities

 

$

442

 

$

449

 

Other non-current liabilities

 

451

 

85

 

Total derivatives

 

$

893

 

$

534

 

 

The following table summarizes the effect of the interest rate swap on the condensed consolidated statements of operations for the sixteen weeks ended April 15, 2012 and April 17, 2011 (in thousands):

 

 

 

Sixteen Weeks Ended

 

 

 

April 15,
2012

 

April 17,
2011

 

Unrealized gain (loss) on swap in AOCL (pretax)

 

$

(491

)

$

 

 

 

 

 

 

 

Realized gain (loss) [pretax effective portion] recognized in interest expense

 

$

(131

)

$

(408

)

 

 

As a result of this activity, AOCL increased by $359,000 and $440,000 on a pretax basis or $219,000 and $197,000 on an after tax basis for the sixteen weeks ended April 15, 2012 and April 17, 2011, respectively.  The interest rate swap had no hedge ineffectiveness, and as a result, no unrealized gains or losses were reclassified into net earnings as a result of hedge ineffectiveness.  The company expects no ineffectiveness in the next twelve months.  Additionally, the Company had no obligations at April 15, 2012 to post collateral under the terms of the Interest Rate Swap Agreement.

 

Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that are excluded from net income.  Comprehensive income consisted of (in thousands):

 

 

 

Sixteen Weeks Ended

 

 

 

April 15,
2012

 

April 17,
2011

 

Net income (loss)

 

$

10,558

 

$

8,708

 

Unrealized gain (loss) on cash flow swap, net of tax

 

(219

)

197

 

Total comprehensive income (loss)

 

$

10,339

 

$

8,905