2. Financial Instruments

Derivative Financial Instruments

The Company utilizes foreign currency forward contracts with a local financial institution in Czech Republic to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations and uses certain interest rate derivative contracts to hedge interest rate exposures on existing floating rate debt. The Company classifies its foreign currency forward contracts and 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 1.04%, as of June 30, 2017. This interest rate swap effectively locks in a fixed interest rate of 3.74% on $10.9 million of the $16.2 million term loan as of June 30, 2017, with a decreasing notional amount based on prorated quarterly principal payments over the remaining period of the term loan. In 2017, Miconex entered into foreign currency forward contracts to hedge certain forecasted costs and expenses transactions denominated in currencies other than Miconex’s local currency. The notional principal of these contracts was approximately $17.6 million as of June 30, 2017. These contracts have maturities of 36 months or less. 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 June 30, 2017, the effective portion of the Company’s cash flow hedge before tax effect was $0.8 million, of which $0.4 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 June 30, 2017 and December 30, 2016.

		June 30, 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:
Forward contracts	Prepaid expenses and other	$	375	$	—	$	375
Interest rate swap	Other non-current assets	$	33	$		$	33
Forward contracts	Other non-current assets	$	466	$	—	$	466
Interest rate swap	Deferred rent and other liabilities	$	—	$	5	$	5

December 30, 2016

Fair Value of

Derivatives

Derivatives Not

Balance Sheet

Designated as

Total

Location

Hedge Instruments

Fair Value

Derivative assets and liabilities:

Level 2:

Interest rate swap

Other non-current assets

—

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						Six Months Ended
	June 30,			June 24,			June 30,		June 24,
	2017			2016			2017		2016
Derivatives in Cash Flow Hedging Relationship
Interest rate swap	$	(2	)	$	(64	)	$	11	$	(128	)
Forward contracts	$	841		$	—		$	841	$	—

	Gains Reclassified from AOCI into Income (Effective Portion)
		Three Months Ended				Six Months Ended
		June 30,		June 24,		June 30,		June 24,
	Income Statement Location	2017		2016		2017		2016
Derivatives in Cash Flow Hedging Relationship
Interest rate swap	Interest and other income (expense), net	$	—	$	24	$	7	$	50
Forward contracts	Interest and other income (expense), net	$	—	$	—	$	—	$	—

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 six months ended June 30, 2017 and June 24, 2016.

The effect of derivative instruments not designated as hedging instruments on income for the three and six months ended June 30, 2017 and June 24, 2016 is not significant to the financial statements.