Interest Rate Swaps

6 Months Ended

Jun. 27, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 to the Condensed Consolidated Financial Statements, up to the maturity date of the interest rate swap agreement on February 19, 2021. As of June 27, 2020, the notional amount of the interest rate swap was $135.0 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 to the Condensed Consolidated Financial Statements. As of June 27, 2020, the notional amount of the interest rate swap was $82.5 million.

The Company entered into a third interest rate swap agreement which became effective on March 18, 2020, with a maturity date of March 18, 2025. The notional amount of this swap agreement is fixed at $200 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. The 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 Condensed Consolidated Balance Sheets at fair value. In accordance with hedge accounting, the 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”), net of related income taxes, and reclassified into earnings in the same income statement line and period during which the hedged transactions affect earnings.

As of June 27, 2020, amounts to be reclassified from Accumulated Other Comprehensive Income (“AOCI”) into interest during the next twelve months are not expected to be material. No significant amounts were excluded from the assessment of cash flow hedge effectiveness as of June 27, 2020.

The assets and liabilities measured at fair value related to the Company’s interest rate swaps, excluding accrued interest, were as follows (in thousands):


Derivatives Designated as Cash Flow Hedges	Balance Sheet Location	June 27, 2020		December 28, 2019		June 29, 2019
Interest rate swaps (short-term portion)	Other current assets	$	—	$	558	$	1,052
Interest rate swaps (long-term portion)	Other assets	—		91		276
Total derivative assets		$	—	$	649	$	1,328

Interest rate swaps (short-term portion)	Other accrued expenses	$	3,112	$	90	$	—
Interest rate swaps (long-term portion)	Other long-term liabilities	5,403		292		389
Total derivative liabilities		$	8,515	$	382	$	389

The offset to the interest rate swap asset or liability is recorded as a component of equity, net of deferred taxes, in 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):


	June 27, 2020		December 28, 2019		June 29, 2019
Beginning fiscal year AOCI balance	$	199	$	3,814	$	3,814

Current fiscal period loss recognized in OCI	(6,534)		(4,332)		(3,649)
Cumulative adjustment as a result of ASU 2017-12 adoption	—		717		717
Other comprehensive loss, net of tax	(6,534)		(3,615)		(2,932)
Ending fiscal period AOCI balance	$	(6,335)	$	199	$	882

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						Fiscal Six Months Ended
	Financial Statement Location	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Amount of losses recognized in OCI during the period	Other comprehensive loss	$	(1,726)	$	(2,937)	$	(8,782)	$	(4,884)

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						Fiscal Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Income tax benefit of interest rate swaps on AOCI	$	(442)	$	(752)	$	(2,248)	$	(1,235)

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 June 27, 2020, it could have been required to post full collateral or settle its obligations under the Company’s interest rate swap agreements. However, as of June 27, 2020, the Company had not breached any of these provisions or posted any collateral related to the underlying interest rate swap agreements.