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 November 30, 2014, 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. These derivative financial instruments were also designated and qualified as cash flow hedges.

The following table summarizes agreements for which the Company has recorded cash flow hedge accounting transactions during the three months ended November 30, 2014:

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 Dates

Effective Period of swap

Honduras

23-Oct-14

Citibank, N.A. ("Citi")

Cross currency interest rate swap

5,000,000

Citibank, N.A.

Variable rate 3-month Libor plus 3.5%

11.6

22nd day of January, April, July, and October beginning on January 22, 2015

October 22, 2014 - October 22, 2017

Panama

1-Aug-14

Bank of Nova Scotia ("Scotiabank")

Interest rate swap

5,000,000

Bank of Nova Scotia

Variable rate 30-day Libor plus 3.5%

4.89

21st day of each month beginning on September 22, 2014

August 21, 2014 - August 21, 2019

Panama

22-May-14

Bank of Nova Scotia ("Scotiabank")

Interest rate swap

19,800,000

Bank of Nova Scotia

Variable rate 30-day Libor plus 3.5%

4.98

4th day of each month beginning on June 4, 2014

May 5, 2014 - April 4, 2019

Panama

22-May-14

Bank of Nova Scotia ("Scotiabank")

Interest rate swap

3,970,000

Bank of Nova Scotia

Variable rate 30-day Libor plus 3.5%

4.98

4th day of each month beginning on June 4, 2014

May 5, 2014 - April 4, 2019

Colombia

11-Dec-12

Bank of Nova Scotia ("Scotiabank")

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 ("Scotiabank")

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

21-Oct-11

Bank of Nova Scotia ("Scotiabank")

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 ("Scotiabank")

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 December 29, 2011

September 29, 2011 - April 1, 2016

Colombia

5-May-11

Bank of Nova Scotia ("Scotiabank")

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

For the three-month period ended November 30, 2014 and 2013, 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⁽¹⁾		Cost of swaps ⁽²⁾		Total
Interest expense for the three months ended November 30, 2014	$	349	$	512	$	861
Interest expense for the three months ended November 30, 2013	$	126	$	431	$	557


⁽¹⁾	This amount is representative of the interest expense recognized on the underlying hedged transactions.


⁽²⁾	This amount is representative of the interest expense recognized on the cross-currency interest rate swaps designated as cash flow hedging instruments.

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)	November 30, 2014		August 31, 2014
Scotiabank	$	59,350	$	60,200
Citibank N.A.	5,000		—
Total	$	64,350	$	60,200

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):



	November 30, 2014				August 31, 2014
Derivatives designated as cash flow hedging instruments	Balance Sheet Account	Fair Value			Balance Sheet Account	Fair Value
Cross-currency interest rate swaps⁽¹⁾	Prepaid expenses and current assets	$	1,493		Prepaid expenses and current assets	$	495
Cross-currency interest rate swaps⁽¹⁾	Other non-current assets	3,926			Other non-current assets	970
Interest rate swaps⁽²⁾	Other non-current assets	—			Other non-current assets	125
Interest rate swaps⁽²⁾	Other long-term liabilities	(246		)	Other long-term liabilities	—
Cross-currency interest rate swaps⁽³⁾	Other long-term liabilities	(289		)	Other long-term liabilities	—
Net fair value of derivatives designated as hedging instruments - assets (liability)⁽⁴⁾		$	4,884			$	1,590

⁽¹⁾

The effective portion of the cross-currency interest rate swaps for this subsidiary was recorded to Accumulated other comprehensive (income)/loss for $(3.6) million and $(917,000) net of tax as of November 30, 2014 and August 31, 2014, respectively. The Company has recorded a deferred tax liability amount with an offset to other comprehensive income - tax of $(1.8) million and $(548,000) as of November 30, 2014 and August 31, 2014, respectively, related to asset positions of cross-currency interest rate swaps. However, the equity effect of this deferred tax liability is offset by the full valuation allowance provided for the net deferred tax asset recorded for this subsidiary.

⁽²⁾

The effective portion of the interest rate swaps was recorded to Accumulated other comprehensive loss / (income) for $185,000 and $(94,000) net of tax as of November 30, 2014 and August 31, 2014, respectively. The Company has recorded a deferred tax asset / (liability) amount with an offset to other comprehensive income - tax of $61,000 and $(31,000) as of November 30, 2014 and August 31, 2014, respectively.

⁽³⁾

The effective portion of the cross-currency interest rate swaps for this subsidiary was recorded to Accumulated other comprehensive (income)/loss for $194,000 and $0 net of tax as of November 30, 2014 and August 31, 2014, respectively. The Company has recorded a deferred tax asset amount with an offset to other comprehensive income - tax of $95,000 and $0 as of November 30, 2014 and August 31, 2014, respectively.


⁽⁴⁾	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 entered into non-deliverable forward foreign exchange contracts during the three months ended November 30, 2014. The open contracts as of November 30, 2014 are summarized below:

Subsidiary

Dates entered into

Derivative Financial Counter-party

Derivative Financial Instrument

Notional Amount

(in thousands)

Settlement Date

Effective Period of Forward

Colombia

October - November 2014

Bank of Nova Scotia

Forward foreign exchange contracts

33,000

December - January 2015

October - January 2015

Colombia

October - November 2014

Citibank, N.A.

Forward foreign exchange contracts

5,000

December 2014

October - December 2014

For the three-month periods ended November 30, 2014 and 2013, 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
Income Statement Classification	November 30, 2014		November 30, 2013
Other income (expense), net	$	2,613	$	123

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



	November 30, 2014				August 31, 2014
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	$	1,484		Prepaid expenses and other current assets	$	—
Foreign currency forward contracts	Other accrued expenses	(7		)	Other accrued expenses	(14		)
Net fair value of derivatives designated as hedging instruments that do not qualify for hedge accounting		$	1,477			$	(14	)