2. Financial Instruments

Derivative Financial Instruments

The Company utilizes foreign currency forward contracts with a local financial institution in the Czech Republic to reduce the risk that its cash flows and earnings of its FDS subsidiary 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. September 28, 2018. 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. In August 2018, the Company extinguished its debt with East West Bank thus the interest rate swap contract was consequently cancelled.

Non-Designated Derivatives

A portion of FDS’s forward contracts with a total notional amount of $3.6 million is not designated as a hedging instrument. The Company recognizes gains and losses on these contracts, 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 28, 2018 and December 29, 2017.

September 28, 2018

Fair Value of

Derivatives

Derivatives Not

Balance Sheet

Designated as

Total

Location

Hedge Instruments

Fair Value

Derivative assets and liabilities:

Level 2:

Forward contracts

Prepaid expenses and other

194

282

Forward contracts

Other non-current assets

108

129

		December 29, 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	Prepaid expenses and other	$	30	$	—	$	30
Forward contracts	Prepaid expenses and other	$	714	$	—	$	714
Forward contracts	Other non-current assets	$	588	$	—	$	588

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 28,		September 29,			September 28,			September 29,
	2018		2017			2018			2017
Derivatives in Cash Flow Hedging Relationship
Interest rate swap	$	—	$	(11	)	$	(36	)	$	—
Forward contracts	$	27	$	356		$	(44	)	$	1,197

	Gains Reclassified from AOCI into Income (Effective Portion)
		Three Months Ended						Nine Months Ended
		September 28,			September 29,			September 28,			September 29,
	Income Statement Location	2018			2017			2018			2017
Derivatives in Cash Flow Hedging Relationship
Interest rate swap	Interest and other income (expense), net	$	(14	)	$	(6	)	$	6		$	(13	)
Forward contracts	Cost of goods sold	$	(323	)	$	106		$	(1,253	)	$	106

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 28, 2018 and September 29, 2017.

The effect of derivative instruments not designated as hedging instruments on income for the three and nine months ended September 28, 2018was $(0.1) million and none for the three and nine months ended September 29, 2017.