Financial Instruments

3 Months Ended

Mar. 31, 2017

Investments All Other Investments [Abstract]

Financial Instruments

2. Financial Instruments

Derivative Financial Instruments

The Company uses certain interest rate derivative contracts to hedge interest rate exposures on existing floating rate debt. The Company classifies its interest rate derivative contracts primarily within Level 2 of the fair-value hierarchy discussed in Note 1 of the Company’s 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 0.78%, as of March 31, 2017. This interest rate swap effectively locks in a fixed interest rate of 3.74% on $12.4 million of the $23.3 million term loan as of March 31, 2017, 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 March 31, 2017, 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 $0.3 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 March 31, 2017 and December 30, 2016.

		March 31, 2017
		Fair Value of		Fair Value of
		Derivatives		Derivatives Not
	Balance Sheet	Designated as		Designated as		Total
	Location	Hedge Instruments		Hedge Instruments		Fair Value
Derivative assets and liabilities:
Level 2:
Interest rate swap	Other non-current assets	$	35	$	—	$	35
Interest rate swap	Deferred rent and other liabilities	$	—	$	5	$	5

		December 30, 2016
		Fair Value of		Fair Value of
		Derivatives		Derivatives Not
	Balance Sheet	Designated as		Designated as		Total
	Location	Hedge Instruments		Hedge Instruments		Fair Value
Derivative assets and liabilities:
Level 2:
Interest rate swap	Other non-current assets	$	15	$	—	$	15
Interest rate swap	Deferred rent and other liabilities	$	—	$	6	$	6

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
	March 31,		March 25,
	2017		2016
Derivatives in Cash Flow Hedging Relationship
Interest rate swap	$	13	$	(64	)

	Gains Reclassified from AOCI into Income (Effective Portion)
		Three Months Ended
		March 31,		March 25,
	Income Statement Location	2017		2016
Derivatives in Cash Flow Hedging    Relationship
Interest rate swap	Interest and other income (expense), net	$	7	$	27

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 months ended March 31, 2017 and March 25, 2016.

The effect of derivative instruments not designated as hedging instruments on income for the three months ended March 31, 2017 and March 25, 2016 is not significant to the financial statements.