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Derivative and Hedging Activities
 6 Months Ended
Jun. 26, 2012
Derivative and Hedging Activities  
Derivative and Hedging Activities

(4)           Derivative and Hedging Activities

 

We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”).  We use interest rate-related derivative instruments to manage our exposure to fluctuations of interest rates.  By using these instruments, we expose ourselves, from time to time, to credit risk and market risk.  Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us.  We minimize the credit risk by entering into transactions with high-quality counterparties whose credit rating is evaluated on a quarterly basis.  Our counterparty in the interest rate swaps is JPMorgan Chase Bank, N.A.  Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices or the market price of our common stock.  We minimize market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be taken.

 

Interest Rate Swaps

 

On October 22, 2008, we entered into an interest rate swap, starting on November 7, 2008, with a notional amount of $25.0 million to hedge a portion of the cash flows of our variable rate credit facility.  We have designated the interest rate swap as a cash flow hedge of our exposure to variability in future cash flows attributable to interest payments on a $25.0 million tranche of floating rate debt borrowed under our revolving credit facility.  Under the terms of the swap, we pay a fixed rate of 3.83% on the $25.0 million notional amount and receive payments from the counterparty based on the 1-month LIBOR rate for a term ending on November 7, 2015, effectively resulting in a fixed rate LIBOR component of the $25.0 million notional amount.

 

On January 7, 2009, we entered into an interest rate swap, starting on February 7, 2009, with a notional amount of $25.0 million to hedge a portion of the cash flows of our variable rate credit facility.  We have designated the interest rate swap as a cash flow hedge of our exposure to variability in future cash flows attributable to interest payments on a $25.0 million tranche of floating rate debt borrowed under our revolving credit facility.  Under the terms of the swap, we pay a fixed rate of 2.34% on the $25.0 million notional amount and receive payments from the counterparty based on the 1-month LIBOR rate for a term ending on January 7, 2016, effectively resulting in a fixed rate LIBOR component of the $25.0 million notional amount.

 

We entered into the above interest rate swaps with the objective of eliminating the variability of our interest cost that arises because of changes in the variable interest rate for the designated interest payments.  Changes in the fair value of the interest rate swap will be reported as a component of accumulated other comprehensive income.  We will reclassify any gain or loss from accumulated other comprehensive income (“AOCI”), net of tax, in our condensed consolidated balance sheet to interest expense in our condensed consolidated statement of income and comprehensive income when the interest rate swap expires or at the time we choose to terminate the swap.  See note 9 for fair value discussion of these interest rate swaps.

 

The following table summarizes the fair value and presentation in the condensed consolidated balance sheets for derivatives designated as hedging instruments under FASB ASC 815:

 

 

 

Balance
Sheet

 

Derivative Assets

 

Derivative Liabilities

 

 

 

Location

 

June 26, 2012

 

December 27, 2011

 

June 26, 2012

 

December 27, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Contracts Designated as Hedging Instruments under ASC 815

 

 

(1)

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

$

—

 

$

—

 

$

4,429

 

$

4,247

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivative Contracts

 

 

 

$

—

 

$

—

 

$

4,429

 

$

4,247

 

 

 

(1)                             Derivative assets and liabilities are included in fair value of derivative financial instruments in the condensed consolidated balance sheets.

 

The following table summarizes the effect of derivative instruments in the condensed consolidated statements of income and comprehensive income for the 26 weeks ended June 26, 2012 and June 28, 2011:

 

 

 

Amount of Loss
Recognized in AOCI
(effective portion)

 

Location of
Gain
Reclassified
from AOCI

 

Amount of Gain
Reclassified from AOCI
to Income (effective
portion)

 

Location of
Gain (Loss)
Recognized
in Income
(ineffective

 

Amount of Gain (Loss)
Recognized in Income
(ineffective portion)

 

 

 

2012

 

2011

 

to Income

 

2012

 

2011

 

portion)

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

(106

)

$

(682

)

Interest expense, net

 

$

66

 

$

63

 

—

 

$

—

 

$

—