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 1of 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 and City National banks 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 LIBOR rate the Company is required to pay under its term loan, or 1.57%, as of December 29, 2017. This interest rate swap effectively locks in a fixed interest rate of 2.99% on $7.8 million of the $9.9 million term loan as of December 29, 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 $14.2 million as of December 29, 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 income (expense) and/or to cost of goods sold 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, net. As of December 29, 2017, the effective portion of the Company’s cash flow hedge before tax effect was approximately $1.3 million, of which $0.7 million is expected to be reclassified from AOCI into earnings within the next 12 months.

The Company records all derivatives in the 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 December 29, 2017 and December 25, 2015.

		December 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:
Interest rate swap	Other current assets	$	30	$	—	$	30
Forward contracts	Prepaid expenses and other	$	714	$	—	$	714
Forward contracts	Other non-current assets	$	588	$	—	$	588

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)
	Twelve Months Ended
	December 29, 2017			December 30, 2016
Derivatives in Cash Flow Hedging Relationship
Interest rate swap	$	4		$		(60	)
Forward contracts	$	(1,510	)	$	—

	Gains (Losses) Reclassified from AOCI into Income (Effective Portion)
		Twelve Months Ended
	Income Statement Location	December 29, 2017			December 30, 2016
Derivatives in Cash Flow Hedging Relationship
Interest rate swap	Interest and other income (expense), net	$	18		$		88
Forward contracts	Cost of goods sold	$	(255	)	$	—

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 fiscal year ended December 29, 2017 and December 30, 2016.

The effect of derivative instruments not designated as hedging instruments on income for the fiscal years ended December 29, 2017 and December 25, 2015 is immaterial to the financial statements.