DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

9 Months Ended

May 31, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to certain risks relating to its ongoing business operations. One risk managed by the Company using derivative instruments is interest rate risk.  To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments.  The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans.  As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.

In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to a non-functional currency long-term debt of one of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company’s subsidiary entered into a cross-currency interest rate swap that converts its foreign currency denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument.  As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedge is intended to offset changes in cash flows attributable to interest rate and foreign exchange movements.

These derivative instruments (cash flow hedging instruments) are designated and qualify as cash flow hedges, with the effective portion of the gain or loss on the derivative reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is determined to be ineffective.  There were no such amounts recorded for ineffectiveness for the periods reported herein related to the interest rate or cross-currency interest rate swaps of long-term debt.

The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business, particularly in the case of U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar.  The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flow attributable to currency exchange movements.  These contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features.

Cash Flow Hedges

The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting. As of May 31, 2013, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges.  The cross-currency interest rate swap agreements convert the Company's subsidiary's foreign currency United States dollar denominated floating interest payments on long-term debt to the functional currency fixed interest payments during the life of the hedging instrument.  As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedge is intended to offset changes in cash flows attributable to interest rate and foreign currency exchange movements.  Various subsidiaries entered into interest rate swap agreements that fix the interest rate over the life of the underlying loans.

The following table summarizes agreements for which the Company has recorded cash flow hedge accounting transactions during the nine months ended May 31, 2013:

Subsidiary	Date entered into	Derivative Financial Counter-party	Derivative Financial Instruments	Initial US Notional Amount		Bank US loan Held with	Floating Leg (swap counter-party)	Fixed Rate for PSMT Subsidiary		Settlement Reset Date	Effective Period of Swap
Colombia	11-Dec-12	Bank of Nova Scotia	Cross currency interest rate swap	$	8,000,000	Bank of Nova Scotia	Variable rate 3-month Libor plus 0.7%	4.79	%	March, June, September and December, beginning on March 5, 2013	December 5, 2012 - December 5, 2014
Colombia	21-Feb-12	Bank of Nova Scotia	Cross currency interest rate swap	$	8,000,000	Bank of Nova Scotia	Variable rate 3-month Libor plus 0.6%	6.02	%	February, May, August and November beginning on May 22, 2012	February 21, 2012 - February 21, 2017
Colombia	17-Nov-11	Bank of Nova Scotia	Cross currency interest rate swap	$	8,000,000	Citibank, N.A.	Variable rate 6-month Eurodollar Libor plus 2.4%	5.85	%	May 3, 2012 and semi-annually thereafter	November 3, 2011 - November 3, 2013
Colombia	21-Oct-11	Bank of Nova Scotia	Cross currency interest rate swap	$	2,000,000	Bank of Nova Scotia	Variable rate 3-month Libor plus 0.7%	5.30	%	January, April, July and October, beginning on October 29, 2011	July 29, 2011 - April 1, 2016
Colombia	21-Oct-11	Bank of Nova Scotia	Cross currency interest rate swap	$	6,000,000	Bank of Nova Scotia	Variable rate 3-month Libor plus 0.7%	5.45	%	March, June, September and December, beginning on October 29, 2011	September 29, 2011 - April 1, 2016
Colombia	5-May-11	Bank of Nova Scotia	Cross currency interest rate swap	$	8,000,000	Bank of Nova Scotia	Variable rate 3-month Libor plus 0.7%	6.09	%	January, April, July and October, beginning on July 5, 2011	April 1, 2011 - April 1, 2016
Trinidad	20-Nov-08	Royal Bank of Trinidad & Tobago	Interest rate swaps	$	8,900,000	Royal Bank of Trinidad & Tobago	Variable rate 1-year Libor plus 2.75%	7.05	%	Annually on August 26	September 25, 2008 - September 26, 2013
Barbados	13-Feb-08	Citibank, N.A.	Interest rate swaps	$	4,500,000	Citibank, N.A.	Variable rate 9-month Libor plus 1.5%	5.22	%	Semi-annually on November 15 and May 15	November 15, 2007 - November 14, 2012

For the three and nine-month period ended May 31, 2013 and 2012, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):

Income Statement Classification	Interest expense on Borrowings		Cost of Swaps		Interest expense
Interest expense for the three months ended May 31, 2013	$	182	$	482	$	664
Interest expense for the three months ended May 31, 2012	216		401		617
Interest expense for the nine months ended May 31, 2013	559		1,341		1,900
Interest expense for the nine months ended May 31, 2012	555		957		1,512

The total notional balance of the Company’s pay-fixed/receive-variable interest rate swaps and cross-currency interest rate swaps was as follows (in thousands):

Floating Rate Payer (Swap Counterparty)	May 31, 2013		August 31, 2012
RBTT	$	4,725	$	5,400
Scotiabank	40,000		32,000
Citibank N.A.	—		2,475
Total	$	44,725	$	39,875

The following table summarizes the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting (in thousands, except footnote data):

	May 31, 2013				August 31, 2012
Derivatives designated as cash flow hedging instruments	Balance Sheet Account	Fair Value			Balance Sheet Account	Fair Value
Cross currency interest rate swaps(1)(2)	Other non-current assets	$	987		Other non-current assets	$	—
Interest rate swaps(3)	Other long-term liabilities	(53		)	Other long-term  liabilities	(216		)
Cross currency interest rate swaps(1)(4)	Other long-term liabilities	(159		)	Other long-term liabilities	(983		)
Net fair value of derivatives designated as hedging instruments - assets (liability)(5)		$	775			$	(1,199	)

⁽¹⁾  The effective portion of the cross-currency interest rate swaps was recorded to Accumulated other comprehensive (income)/ loss for $(502,000) and $983,000 as of May 31, 2013 and August 31, 2012, respectively.  

⁽²⁾  The Company has recorded a deferred tax liability amount with an offset to other comprehensive income - tax of $(326,000) as of May 31, 2013 related to Other non-current assets for the cross-currency interest rate swap.

⁽³⁾  The effective portion of the interest rate swaps was recorded to Accumulated other comprehensive loss for $40,000 and $162,000 net of tax as of May 31, 2013 and August 31, 2012, respectively.  The Company has recorded a deferred tax asset amount with an offset to other comprehensive income - tax of $13,000 and $54,000 as of May 31, 2013 and August 31, 2012, respectively.

⁽⁴⁾  The Company has recorded a deferred tax asset amount with an offset to the tax valuation allowance of $53,000 and $117,000 as of May 31, 2013 and August 31, 2012, respectively, related to Other long-term liabilities for the cross currency interest rate swaps.

⁽⁵⁾  Derivatives listed on the above table were designated as cash flow hedging instruments.

Fair Value Instruments

The Company has entered into non-deliverable forward foreign-exchange contracts.  These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting.  The use of non-deliverable forward foreign-exchange contracts is intended to offset changes in cash flow attributable to currency exchange movements.  These contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. The Company has entered into the forward foreign exchange contracts summarized below as of May 31, 2013:

Subsidiary	Date entered into	Derivative Financial Counter-party	Derivative Financial Instruments	Notional Amount (in thousands)		Settlement Date	Effective Period
Colombia	April 2013 through May 2013	Bank of Nova Scotia	Forward foreign exchange contracts	$	17,500	May 1, 2013 through June 30, 2013	April through June 2013
Colombia	April 2013 through May 2013	Citibank N.A.	Forward foreign exchange contracts	$	1,000	May 1, 2013 through June 30, 2013	April through June 2013
Costa Rica	April 2013 through May 2013	Citibank N.A.	Forward foreign exchange contracts	$	4,000	May 1, 2013 through June 30, 2013	April through June 2013

For the three and nine-month periods ended May 31, 2013 and 2012, the Company included in its consolidated statements of income the forward derivative (gain) or loss on the non-deliverable forward foreign-exchange contracts as follows (in thousands):

	Three Months Ended				Nine Months Ended
Income Statement Classification	May 31, 2013		May 31, 2012		May 31, 2013		May 31, 2012
Other income (expense), net	$	168	$	—	$	300	$	—

The following table summarizes the fair value of foreign currency forward contracts that do not qualify for derivative hedge accounting (in thousands):

	May 31, 2013				August 31, 2012
Derivatives designated as fair value hedging instruments	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Foreign currency forward contracts	Prepaid expenses and other current assets	$	393		Prepaid expenses and other current assets	$	27
Foreign currency forward contracts	Other accrued expenses	(53		)	Other accrued expenses	(3		)
Net fair value of derivatives designated as hedging instruments that do not qualify for hedge accounting		$	340			$	24