Annual report pursuant to Section 13 and 15(d)

Derivatives and Risk Management

v3.8.0.1
Derivatives and Risk Management
12 Months Ended
Dec. 28, 2017
Derivatives and Risk Management  
Derivatives and Risk Management

7. Derivatives and Risk Management

Changes in interest rates impact our results of operations. In an effort to manage our exposure to this risk, we enter into derivative contracts and may adjust our 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

During fiscal 2017, we de-designated one of our interest rate cap derivative contracts as an accounting hedge, as such, 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. The change in fair value of our derivative not designated as a hedge resulted in $154 thousand recorded directly as an increase to interest expense. 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 28, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Final Maturity

 

Other

 

AOCI, Net

(in thousands)

    

Notional Balance

    

Date

    

Assets

    

of Tax

Designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap (cash flow hedge)

 

$

102,500

 

U.S. dollars

 

December 2021

 

$

710

 

$

(133)

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

 

$

102,500

 

U.S. dollars

 

December 2021

 

$

710

 

$

(72)

 

Derivative Position as of December 29, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Final Maturity

 

Other

 

AOCI, Net

(in thousands)

    

Notional Balance

    

Date

    

Assets

 

of Tax

Interest rate caps (cash flow hedges)

 

$

205,000

 

U.S. dollars

 

December 2021

 

$

2,473

    

$

176

Interest rate swaps (cash flow hedges)

 

$

17,500

 

U.S. dollars

 

January 2017

 

$

 —

 

$

 —

 

Designated Hedge Gain (Losses)

Gains (losses) related to our designated hedge contracts are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Portion Reclassified

 

Effective Portion Recognized in

 

 

From AOCI to Earnings

 

Other Comprehensive Income (Loss)

 

 

Year Ended

 

 

December 28,

 

December 29,

 

December 31,

 

December 28,

 

December 29,

 

December 31,

(in thousands)

    

2017

    

2016

    

2015

    

2017

    

2016

    

2015

Interest rate cap (cash flow hedge)

 

$

 —

 

$

 

$

 

$

(381)

 

$

176

 

$

Interest rate swaps (cash flow hedges)

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

100

 

$

43

 

Interest Rate Risk

Our exposure to market risk from adverse changes in interest rates is primarily associated with our long term debt obligations, which carry variable interest rates. Market risk associated with our 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 our exposure to the risk associated with our variable interest rate long term debt, we periodically enter into interest rate derivative contracts. We designate interest rate derivative contracts used to convert the interest rate exposure on a portion of our debt portfolio from a floating rate to a capped rate as cash flow hedges.

Credit Risk

To manage credit risk associated with our interest rate hedging program, we select counterparties based on their credit ratings and limit our exposure to any one counterparty.

The counterparties to our derivative contracts are financial institutions with investment grade credit ratings. To manage our credit risk related to our derivative financial instruments, we periodically monitor the credit risk of our counterparties, limit our exposure in the aggregate and to any single counterparty, and adjust our hedging position, as appropriate. The impact of credit risk, as well as the ability of each party to fulfill its obligations under our 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 our derivative contracts. We do not have any credit risk‑related contingent features or collateral requirements with our derivative financial instruments.