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Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 27, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative instruments and hedging activities
Derivative Instruments and Hedging Activities

Interest Rate Risk - The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its debt funding and through the use of derivative financial instruments. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps.
Currency Exchange Rate Risk - The Company is exposed to foreign currency exchange rate risk arising from transactions and balances denominated in currencies other than the U.S. dollar. The Company may use foreign currency forward contracts to manage certain foreign currency exposures.
DESIGNATED HEDGES
Cash Flow Hedges of Interest Rate Risk - On September 9, 2014, the Company entered into variable-to-fixed interest rate swap agreements with eight counterparties to hedge a portion of the cash flows of the Company’s variable rate debt. The swap agreements have an aggregate notional amount of $400.0 million, a start date of June 30, 2015, and mature on May 16, 2019. Under the terms of the swap agreements, the Company pays a weighted-average fixed rate of 2.02% on the $400.0 million notional amount and receive payments from the counterparty based on the 30-day LIBOR rate.

The interest rate swaps, which have been designated and qualify as a cash flow hedge, are recognized on the Company’s Consolidated Balance Sheets at fair value and are classified based on the instruments’ maturity dates. Fair value changes in the interest rate swaps are recognized in AOCL for all effective portions. Balances in AOCL are subsequently reclassified to earnings in the same period that the hedged interest payments affect earnings. The Company estimates $5.5 million will be reclassified to interest expense over the next twelve months.

The following table presents the fair value of the Company’s interest rate swaps as well as their classification on the Company’s Consolidated Balance Sheet:
(dollars in thousands)
DECEMBER 27,
2015
 
DECEMBER 28,
2014
 
CONSOLIDATED BALANCE SHEET CLASSIFICATION
Interest rate swaps - liability
$
5,142

 
$
2,617

 
Accrued and other current liabilities
Interest rate swaps - liability
5,007

 
1,307

 
Other long-term liabilities, net
Total fair value of derivative instruments (1)
$
10,149

 
$
3,924

 
 
 
 
 
 
 
 
Accrued interest
$
556

 
$
—

 
Accrued and other current liabilities
____________________
(1)    See Note 17 - Fair Value Measurements for fair value discussion of the interest rate swaps.

The following table summarizes the effects of the interest rate swaps on Net income for the period indicated:
 
FISCAL YEAR
(dollars in thousands)
2015
Interest rate swap expense recognized in Interest expense, net (1)
$
(3,664
)
Income tax benefit recognized in Provision (benefit) for income taxes
1,429

Total effects of the interest rate swaps on Net income
$
(2,235
)

____________________
(1)
During fiscal years 2015 and 2014, the Company did not recognize any gain or loss as a result of hedge ineffectiveness.

The Company records its derivatives on the Consolidated Balance Sheets on a gross balance basis. The Company’s interest rate swaps are subject to master netting arrangements. As of December 27, 2015, the Company did not have more than one derivative between the same counterparties and as such, there was no netting.

By utilizing the interest rate swaps, the Company is exposed to credit-related losses in the event that the counterparty fails to perform under the terms of the derivative contract. To mitigate this risk, the Company enters into derivative contracts with major financial institutions based upon credit ratings and other factors. The Company continually assesses the creditworthiness of its counterparties. As of December 27, 2015 and December 28, 2014, all counterparties to the interest rate swaps had performed in accordance with their contractual obligations.

The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if the repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on indebtedness.

As of December 27, 2015 and December 28, 2014, the fair value of the Company’s interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, was $10.9 million and $4.0 million, respectively. As of December 27, 2015 and December 28, 2014, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions as of December 27, 2015 and December 28, 2014, it could have been required to settle its obligations under the agreements at their termination value of $10.9 million and $4.0 million, respectively.

NON-DESIGNATED HEDGES

Non-deliverable Foreign Currency Forward Contracts - During the fourth quarter of 2015, the Company entered into non-deliverable foreign currency forward contracts to partially offset the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies. As of December 27, 2015, the Company had $68.5 million of outstanding notional amounts relating to its foreign currency forward contracts. The Company’s foreign currency forward contracts are subject to master netting arrangements.

Interest Rate Cap - Historically, the Company has been required to maintain an interest rate cap to limit the volatility of the floating rate component of the first mortgage loan within the 2012 CMBS loan. In April 2014, the Company’s rate cap expired. In connection with the expiration of the rate cap, the Company entered into a replacement rate cap (the “Replacement Rate Cap”), with a notional amount of $48.7 million. Under the Replacement Rate Cap, if the 30-day LIBOR rate exceeds 7.00% per annum, the counterparty must pay to the Company such excess on the notional amount of the floating rate component. Changes in the fair value of the Replacement Rate Cap were nominal for fiscal years 2015 and 2014.

Commodities - The Company’s restaurants are dependent upon energy to operate and are impacted by changes in energy prices, including natural gas. The Company utilizes derivative instruments with a notional amount of $1.5 million to mitigate some of its overall exposure to material increases in natural gas.

The following table presents the fair value of the Company’s non-designated derivative instruments as well as their classification on its Consolidated Balance Sheets:
(dollars in thousands)
DECEMBER 27, 2015
 
DECEMBER 28, 2014
 
CONSOLIDATED BALANCE SHEET CLASSIFICATION
Derivative assets:
 
 
 
 
 
Foreign currency forward contracts
$
59

 
$
—

 
Other current assets, net
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Foreign currency forward contracts
$
703

 
$
—

 
Accrued and other current liabilities
Commodities
583

 
566

 
Accrued and other current liabilities
 
$
1,286

 
$
566

 
 


The following table summarizes the effects of non-designated derivative instruments on Net income for the periods indicated:
 
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME CLASSIFICATION
 
FISCAL YEAR
(in thousands)
 
2015
 
2014
 
2013
Foreign currency forward contracts
General and administrative
 
$
(644
)
 
$
—

 
$
—

Commodities
Other restaurant operating expense
 
(455
)
 
(629
)
 
(59
)
Total
 
 
$
(1,099
)
 
$
(629
)
 
$
(59
)