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Interest Rate Swaps
 3 Months Ended
Mar. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Interest Rate Swaps
Interest Rate Swaps:

The Company entered into an interest rate swap agreement which became effective on March 31, 2016, with a maturity date of February 19, 2021. The notional amount of this swap agreement began at $197.5 million (the principal amount of the February 2016 Term Loan borrowings as of March 31, 2016) and will amortize at the same time and in the same amount as the February 2016 Term Loan borrowings as described in Note 5, up to the maturity date of the interest rate swap agreement on February 19, 2021. As of March 31, 2018, the notional amount of the interest rate swap was $175.0 million.

The Company entered into a second interest rate swap agreement which became effective on June 30, 2017, with a maturity date of June 15, 2022. The notional amount of this swap agreement began at $100 million (the principal amount of the June 2017 Term Loan borrowings as of June 30, 2017) and will amortize at the same time and in the same amount as the June 2017 Term Loan borrowings as described in Note 5. As of March 31, 2018, the notional amount of the interest rate swap was $96.3 million.

The Company’s interest rate swap agreements are executed for risk management and are not held for trading purposes. The objective of the interest rate swap agreements is to mitigate interest rate risk associated with future changes in interest rates. To accomplish this objective, the interest rate swap agreements are intended to hedge the variable cash flows associated with the variable rate term loan borrowings under the 2016 Senior Credit Facility. Both interest rate swap agreements entitle the Company to receive, at specified intervals, a variable rate of interest based on LIBOR in exchange for the payment of a fixed rate of interest throughout the life of the agreement, without exchange of the underlying notional amount.

The Company has designated its interest rate swap agreements as cash flow hedges and accounts for the underlying activity in accordance with hedge accounting. The interest rate swaps are presented within the consolidated balance sheets at fair value. In accordance with hedge accounting, the effective portion of gains and losses on interest rate swaps that are designated and qualify as cash flow hedges are recorded as a component of Other Comprehensive Income (“OCI”) and reclassified into earnings in the period during which the hedged transactions affect earnings. The ineffective portion of gains and losses on interest rate swaps, if any, are recognized in current earnings.

The assets and liabilities measured at fair value related to the Company’s interest rate swaps, excluding accrued interest, were as follows (in thousands):
 
Balance Sheet Location
 
March 31,
2018
 
December 30,
2017
 
April 1,
2017
Interest rate swaps (short-term portion)
Other current assets
 
$
1,950

 
$
900

 
$
101

Interest rate swaps (long-term portion)
Other assets
 
5,698

 
4,252

 
3,183

Total net assets
 
 
$
7,648

 
$
5,152

 
$
3,284



The offset to the interest rate swap asset or liability is recorded as a component of equity, net of deferred taxes, in Accumulated Other Comprehensive Income (“AOCI”), and will be reclassified into earnings over the term of the underlying debt as interest payments are made.

The following table summarizes the changes in AOCI, net of tax, related to the Company’s interest rate swaps (in thousands):
 
 
March 31,
2018
 
December 30,
2017
 
April 1,
2017
Beginning fiscal year AOCI balance
 
$
3,358

 
$
1,392

 
$
1,392

Current fiscal period gain recognized in OCI
 
1,832

 
1,371

 
281

Amounts reclassified from AOCI into current fiscal period earnings
 
—

 
—

 
—

Reclassification of stranded tax effects to retained earnings (a)
 
—

 
595

 
—

Other comprehensive gain, net of tax
 
1,832

 
1,966

 
281

Ending fiscal period AOCI balance
 
$
5,190

 
$
3,358

 
$
1,673


(a) AOCI for the period ended December 30, 2017 has been adjusted from previously reported amounts as a result of the adoption of ASU 2018-02 as discussed in Notes 1 and 12.  

As of March 31, 2018, the estimated pre-tax portion of AOCI that is expected to be reclassified into earnings over the next twelve months is $2.0 million. Cash flows related to the interest rate swaps are included in operating activities on the condensed consolidated statements of cash flows.


The following table summarizes the impact of pre-tax gains and losses derived from the Company’s interest rate swaps (in thousands):
 
 
 
Fiscal three months ended
 
Financial Statement Location
 
March 31,
2018
 
April 1,
2017
Effective portion of gains recognized in OCI during the period
Other comprehensive income
 
$
2,468

 
$
461

Amounts reclassified from AOCI into earnings
Interest expense, net
 
—

 
—

Ineffective portion of gains recognized in earnings during the period
Interest expense, net
 
28

 
6



The following table summarizes the impact of taxes affecting AOCI as a result of the Company’s interest rate swaps (in thousands):
 
 
Fiscal three months ended
 
 
March 31,
2018
 
April 1,
2017
Income tax expense of interest rate swaps on AOCI
 
$
636

 
$
180



Credit-risk-related contingent features

In accordance with the underlying interest rate swap agreements, the Company could be declared in default on its interest rate swap obligations if repayment of the underlying indebtedness (i.e. the Company’s term loans) is accelerated by the lender due to the Company's default on such indebtedness.

If the Company had breached any of the provisions in the underlying agreements at March 31, 2018, it could have been required to post full collateral or settle its obligations under the Company’s interest rate swap agreements. However, as of March 31, 2018, the Company had not breached any of these provisions or posted any collateral related to the underlying interest rate swap agreements. Further, as of March 31, 2018, the net balance of each of the Company’s interest rate swaps were in a net asset position and therefore the Company would have no obligation upon default.