Derivatives and Risk Management
|12 Months Ended|
Dec. 30, 2021
|Derivative Instruments and Hedging Activities Disclosure [Abstract]|
|Derivatives and Risk Management||Derivatives and Risk Management
Changes in interest rates impact the Company’s results of operations. In an effort to manage exposure to this risk, the Company enters into derivative contracts and may adjust its derivative portfolio as market conditions change.
Designated as Cash Flow Hedge
For derivative contracts designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Income (“AOCI”) and reclassified into earnings in the same period in which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in earnings.
Not Designated as Accounting Hedge
For derivative contracts de-designated as accounting hedges, the change in the fair value is reflected through earnings. These changes in fair value are mark-to-market adjustments (“MTM adjustments”). MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. The AOCI related to the interest rate cap prior to the de-designation is being amortized over the remaining maturity period.
Derivative Position as of December 30, 2021:
Derivative Position as of December 31, 2020:
Designated Hedge Gain (Losses)
Gains (losses) related to designated hedge contracts are as follows:
No amounts related to the effective portion of the Company’s cash flow hedges were reclassified from accumulated other comprehensive income to earnings during fiscal years 2021, 2020, or 2019.
Interest Rate Risk
The Company’s exposure to market risk from adverse changes in interest rates is primarily associated with its long-term debt obligations, which carry variable interest rates. Market risk associated with the Company’s variable interest rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.
In an effort to manage exposure to the risk associated with variable interest rate long term debt, the Company periodically enters into interest rate derivative contracts. These interest rate derivative contracts are used to convert the interest rate exposure on a portion of the Company’s debt portfolio from a floating rate to a capped rate and are designated as cash flow hedges.
To manage credit risk associated with the Company’s interest rate hedging program, the Company selects counterparties based on their credit ratings and limits exposure to any one counterparty.
The counterparties to the Company’s derivative contracts are financial institutions with investment grade credit ratings. To manage credit risk related to its derivative financial instruments, the Company periodically monitors the credit risk of its counterparties, limits its exposure in the aggregate and to any single counterparty, and adjust its hedging positions, as appropriate. The impact of credit risk, as well as the ability of each party to fulfill its obligations under the derivative financial instruments, is considered in determining the fair value of the contracts. Credit risk has not had a significant effect on the fair value of the Company’s derivative contracts. The Company’s derivative financial instruments do not have any credit risk-related contingent features or collateral requirements.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef