10. Derivatives

Interest Rate Swaps

The Company entered into interest rate swap agreements in 2008 and 2006 to hedge its exposure to variable-rate debt and has designated these agreements as cash flow hedges. On February 13, 2008, the Company entered into a swap agreement (2008 Swap Agreement) to hedge the exposure to movements in the three-month LIBOR rate on future outstanding debt. The 2008 Swap Agreement had a five-year term and a $15,000,000 notional value, which decreased to $10,000,000 on December 31, 2010, and to $5,000,000 on December 30, 2011. Under the 2008 Swap Agreement, on a quarterly basis the Company received a three-month LIBOR rate and paid a fixed rate of interest of 3.265% plus the applicable margin. The 2008 Swap Agreement expired on February 13, 2013.

The Company entered into a swap agreement in 2006 (the 2006 Swap Agreement) to convert a portion of the Company's outstanding debt from a floating to a fixed rate of interest. The swap agreement has the same terms and quarterly payment dates as the corresponding debt, and reduces proportionately in line with the amortization of the debt. Under the 2006 Swap Agreement, the Company receives a three-month LIBOR rate and pays a fixed rate of interest of 5.63% plus an applicable margin. The fair value of the 2006 Swap Agreement as of January 3, 2015 is included in other liabilities, with an offset to accumulated other comprehensive items (net of tax) in the accompanying consolidated balance sheet.

The Company has structured the interest rate swap agreements to be 100% effective, and as a result, there is no current impact to earnings resulting from hedge ineffectiveness. Management believes that any credit risk associated with the swap agreement is remote based on the Company's financial position and the creditworthiness of the financial institution issuing the swap agreement.

The counterparty to the swap agreement could demand an early termination of the swap agreement if the Company is in default under the 2012 Credit Agreement, or any agreement that amends or replaces the 2012 Credit Agreement in which the counterparty is a member, and the Company is unable to cure the default. An event of default under the 2012 Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio of 3.5 to 1 and a minimum consolidated interest charge coverage ratio of 3 to 1. As of January 3, 2015, the Company was in compliance with these covenants. The unrealized loss associated with the swap agreement was $377,000 as of January 3, 2015, which represents the estimated amount that the Company would pay to the counterparty in the event of an early termination.

Forward Currency-Exchange Contracts

The Company uses forward currency-exchange contracts primarily to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result primarily from portions of the Company's operations and assets and liabilities that are denominated in currencies other than the functional currencies of the businesses conducting the operations or holding the assets and liabilities. The Company typically manages its level of exposure to the risk of currency-exchange fluctuations by hedging a portion of its currency exposures anticipated over the ensuing 12-month period, using forward currency-exchange contracts that have maturities of 12 months or less.

Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges. The fair values for these instruments are included in other current assets for unrecognized gains and in other current liabilities for unrecognized losses, with an offset in accumulated other comprehensive items (net of tax). For forward currency-exchange contracts that are designated as fair value hedges, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item are recognized currently in earnings. The fair values of forward currency-exchange contracts that are not designated as hedges are recorded currently in earnings. The Company recognized a loss of $14,000 and gains of $146,000 and $12,000 in 2014, 2013 and 2012, respectively, included in selling, general, and administrative expenses associated with forward currency-exchange contracts that were not designated as hedges. Management believes that any credit risk associated with forward currency-exchange contracts is remote based on the Company's financial position and the creditworthiness of the financial institutions issuing the contracts.

The following table summarizes the fair value of the Company's derivative instruments designated and not designated as hedging instruments, the notional values of the associated derivative contracts, and the location of these instruments in the consolidated balance sheet:



		2014					2013
(In thousands)	Balance Sheet Location	Asset (Liability) (a)			Notional Amount (b)		Asset (Liability) (a)			Notional Amount (b)
Derivatives Designated as Hedging Instruments:
Derivatives in an Asset Position:
Forward currency-exchange contracts	Other Long-Term Assets	$	775		$	17,012	$	—		$	—
Derivatives in a Liability Position:
Forward currency-exchange contracts	Other Current Liabilities	$	—		$	—	$	(22	)	$	1,340
Interest rate swap agreement	Other Long-Term Liabilities	$	(377	)	$	5,750	$	(773	)	$	6,375
Derivatives Not Designated as Hedging Instruments:
Derivatives in an Asset Position:
Forward currency-exchange contracts	Other Current Assets	$	—		$	—	$	97		$	1,419
Derivatives in a Liability Position:
Forward currency-exchange contracts	Other Current Liabilities	$	(12	)	$	784	$	(1	)	$	288


(a)	See Note 11 for the fair value measurements relating to these financial instruments.


(b)	The total notional amount is indicative of the level of the Company's derivative activity during 2014 and 2013.

The following table summarizes the activity in accumulated other comprehensive items associated with the Company's derivative instruments designated as cash flow hedges as of and for the period ended January 3, 2015:



(In thousands)	Interest Rate Swap Agreement			Forward Currency- Exchange Contracts			Total
Unrealized loss, net of tax, at December 28, 2013	$	(618	)	$	(15	)	$	(633	)
Loss (gain) reclassified to earnings (a)	213			(1,102		)	(889		)
Gain recognized in AOCI	39			691			730
Unrealized loss, net of tax, at January 3, 2015	$	(366	)	$	(426	)	$	(792	)


(a)	Included in interest expense for interest rate swap agreement and in revenues for forward currency-exchange contracts in the accompanying consolidated statement of income.

As of January 3, 2015, $217,000 of the net unrealized loss included in AOCI is expected to be reclassified to earnings over the next twelve months.