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Derivative and Hedging Activities
 6 Months Ended
Jun. 30, 2015
Derivative and Hedging Activities  
Derivative and Hedging Activities

 

(5)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 attempt to 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.  We attempt to 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 borrowings.  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 amended 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 one month LIBOR for a term ending on November 7, 2015, effectively resulting in a fixed rate on the 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 borrowings.  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 amended 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 one month LIBOR for a term ending on January 7, 2016, effectively resulting in a fixed rate on the 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 swaps will be reported as a component of accumulated other comprehensive income or loss (“AOCI”).  Additionally, amounts related to the yield adjustment of the hedged interest payments are subsequently reclassified into interest expense in the same period during which the related interest affects earnings.  We will reclassify any gain or loss from AOCI, net of tax, in our unaudited condensed consolidated balance sheet to interest expense in our unaudited condensed consolidated statement of income and comprehensive income when an interest rate swap expires or at the time we choose to terminate a swap.  See note 10 for fair value discussion of these interest rate swaps.

 

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

 

 

 

 

 

Derivative Assets

 

Derivative Liabilities

 

 

 

Balance
Sheet
Location

 

June 30,
2015

 

December 30, 2014

 

June 30,
2015

 

December 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Contracts Designated as Hedging Instruments under ASC 815

 
(1

)

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

$

—

 

$

—

 

$
697

 

$
1,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivative Contracts

 

 

 

$

—

 

$

—

 

$
697

 

$
1,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

The derivative liabilities are included in other accrued liabilities on the unaudited condensed consolidated balance sheets.

 

The following table summarizes the effect of our interest rate swaps in the unaudited condensed consolidated statements of income and comprehensive income for the 13 and 26 weeks ended June 30, 2015 and July 1, 2014:

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

June 30, 2015

 

July 1, 2014

 

June 30, 2015

 

July 1, 2014

 

 

 

 

 

 

 

 

 

 

 

Gain recognized in AOCI, net of tax (effective portion)

 

$
215 

 

$
196 

 

$
416 

 

$
376 

 

Loss reclassified from AOCI to income (effective portion)

 

$
367 

 

$
383 

 

$
736 

 

$
740 

 

 

The loss reclassified from AOCI to income was recognized in interest expense on our unaudited condensed consolidated statements of income and comprehensive income. For each of the 13 and 26 weeks ended June 30, 2015 and July 1, 2014, we did not recognize any gain or loss due to hedge ineffectiveness related to the derivative instruments in the unaudited condensed consolidated statements of income and comprehensive income.