2. Financial Instruments

Cash Equivalents

As of December 25, 2015, the Company had an overnight sweep account invested in money market funds with maturities of less than 90 days from purchase and is thus classified as cash and cash equivalents on the Company’s balance sheet. The carrying value and fair value of these money market funds as of December 25, 2015 was $0.6 million, based on Level 1 inputs. There were no money market funds as of September 23, 2016.

Derivative Financial Instruments

A subsidiary of the Company, Miconex, utilizes foreign currency forward contracts with a local financial institution to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company also uses certain interest rate derivative contracts to hedge interest rate exposures on existing floating rate debt. The Company classifies its foreign currency and interest rate derivative contracts primarily within Level 2 of the fair-value hierarchy discussed in Note 1 of the Company’s Condensed Consolidated Financial Statements as the valuation inputs are based on quoted prices and market observable data of similar instruments. The Company does not use derivatives for speculative or trading purposes.

Cash Flow Hedges

In September 2015, the Company entered into an interest rate swap with East West Bank and City National Bank with a notional amount of $20.0 million pursuant to which the Company pays the counterparty a fixed rate of 0.99% and receives interest at a variable rate equal to the London Interbank Offered Rate (LIBOR) rate the Company is required to pay under its term loan, or 0.52%, as of September 23, 2016. This interest rate swap effectively locks in a fixed interest rate of 3.74% on $15.6 million of the $29.2 million term loan as of September 23, 2016, with a decreasing notional amount based on prorated quarterly principal payments over the remaining period of the term loan. Gains or losses on the effective portion of a cash flow hedge are reflected as a component of AOCI and subsequently recorded to interest and other income (expense) when the hedged transactions are realized. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI would be immediately reclassified to interest and other income (expense), net. As of September 23, 2016, the effective portion of the Company’s cash flow hedge before tax effect was less than $0.1 million, of which less than $0.1 million is expected to be reclassified from AOCI into earnings within the next 12 months.

Non-Designated Derivatives

The Miconex interest swap to convert the variable interest rates on Miconex debt to fixed rates with a total notional amount of $0.4 million is not designated as a hedging instrument. The Company recognizes gains and losses on this contract, as well any related costs in interest and other income (expense), net.

The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value (in thousands) as of September 23, 2016 and December 25, 2015.

September 23, 2016

Fair Value of

Derivatives

Derivatives Not

Balance Sheet

Designated as

Total

Location

Hedge Instruments

Fair Value

Derivative liabilities:

Level 2:

Interest rate swap

Deferred rent and other liabilities

December 25, 2015

Fair Value of

Derivatives

Derivatives Not

Balance Sheet

Designated as

Total

Location

Hedge Instruments

Fair Value

Derivative liabilities:

Level 2:

Interest rate swap

Deferred rent and other liabilities

The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) is summarized below (in thousands):

	Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect (Effective Portion)
	Three Months Ended				Nine Months Ended
	September 23,		September 25,		September 23,			September 25,
	2016		2015		2016			2015
Derivatives in Cash Flow Hedging Relationship
Interest rate swap	$	27	$	87	$	(101	)	$	87

	Gains Reclassified from AOCI into Income (Effective Portion)
		Three Months Ended				Nine Months Ended
		September 23,		September 25,		September 23,		September 25,
	Income Statement Location	2016		2015		2016		2015
Derivatives in Cash Flow Hedging Relationship
Interest rate swap	Interest and other income (expense), net	$	20	$	4	$	71	$	4

There were no gains (losses) recognized in income on derivatives that are excluded from the effectiveness testing and ineffective portion of the cash flow hedge for the three and nine months ended September 23, 2016 and September 25, 2015.

The effect of derivative instruments not designated as hedging instruments on income for the three and nine months ended September 23, 2016 and September 25, 2015 is not significant to the financial statements.