Derivative Instruments and Hedging Activities

6 Months Ended

Jan. 29, 2016

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

5. Derivative Instruments and Hedging Activities

The Company has interest rate risk relative to its outstanding borrowings (see Note 4 for information on the Company’s outstanding borrowings).  The Company’s policy has been to manage interest cost using a mix of fixed and variable rate debt.  To manage this risk in a cost efficient manner, the Company uses derivative instruments, specifically interest rate swaps.

For each of the Company’s interest rate swaps, the Company has agreed to exchange with a counterparty the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount.  The interest rates on the portion of the Company’s outstanding debt covered by its interest rate swaps are fixed at the rates in the table below plus the Company’s credit spread.  The Company’s credit spread at January 29, 2016 was 1.25%.  All of the Company’s interest rate swaps are accounted for as cash flow hedges.

A summary of the Company’s interest rate swaps at January 29, 2016 is as follows:

Trade Date	Effective Date	Term (in Years)	Notional Amount	Fixed Rate
July 25, 2011	May 3, 2013	3	$                50,000	2.45%
December 7, 2011	May 3, 2013	3	50,000	1.40%
March 18, 2013	May 3, 2015	3	50,000	1.51%
April 8, 2013	May 3, 2015	2	50,000	1.05%
April 15, 2013	May 3, 2015	2	50,000	1.03%
April 22, 2013	May 3, 2015	3	25,000	1.30%
April 25, 2013	May 3, 2015	3	25,000	1.29%
June 18, 2014	May 3, 2015	4	40,000	2.51%
June 24, 2014	May 3, 2015	4	30,000	2.51%
July 1, 2014	May 5, 2015	4	30,000	2.43%
January 30, 2015	May 3, 2019	2	80,000	2.15%
January 30, 2015	May 3, 2019	2	60,000	2.16%
January 30, 2015	May 4, 2021	3	120,000	2.41%
January 30, 2015	May 3, 2019	2	60,000	2.15%
January 30, 2015	May 4, 2021	3	80,000	2.40%

The notional amount for the interest rate swap entered into on June 18, 2014 increases by $40,000 each May over the four-year term of the interest rate swap beginning in May 2016 until the notional amount reaches $160,000 in May 2018.  The notional amounts for the interest rate swaps entered into on June 24, 2014 and July 1, 2014 increase by $30,000 each May over the four-year terms of the interest rate swaps beginning in May 2016 until the notional amounts each reach $120,000 in May 2018.

The Company does not hold or use derivative instruments for trading purposes.  The Company also does not have any derivatives not designated as hedging instruments and has not designated any non-derivatives as hedging instruments.

Companies may elect to offset related assets and liabilities and report the net amount on their financial statements if the right of setoff exists.  Under a master netting agreement, the Company has the legal right to offset the amounts owed to the Company against amounts owed by the Company under a derivative instrument that exists between the Company and a counterparty.  When the Company is engaged in more than one outstanding derivative transaction with the same counterparty and also has a legally enforceable master netting agreement with that counterparty, its credit risk exposure is based on the net exposure under the master netting agreement.  If, on a net basis, the Company owes the counterparty, the Company regards its credit exposure to the counterparty as being zero.

The estimated fair values of the Company’s derivative instruments as of January 29, 2016 and July 31, 2015 were as follows:

(See Note 2)	Balance Sheet Location	January 29, 2016		July 31, 2015
Interest rate swaps	Other assets	$	--	$	3,759
Interest rate swaps	Current interest rate swap liability	$	343	$	1,117
Interest rate swaps	Long-term interest rate swap liability		15,649		8,704
	Total	$	15,992	$	9,821

The following table summarizes the offsetting of the Company’s derivative assets in the Condensed Consolidated Balance Sheets at January 29, 2016 and July 31, 2015:

	Gross Asset Amounts				Liability Amount Offset					Net Asset Amount Presented in the Balance Sheets
(See Note 2)	January 29, 2016		July 31,  2015		January 29, 2016		July 31, 2015			January 29, 2016		July 31, 2015
Interest rate swaps	$	--	$	3,878	$	--	$	(119	)	$	--	$	3,759

The following table summarizes the offsetting of the Company’s derivative liabilities in the Condensed Consolidated Balance Sheets at January 29, 2016 and July 31, 2015:

	Gross Liability Amounts				Asset Amount Offset				Net Liability Amount Presented in the Balance Sheets
(See Note 2)	January 29, 2016		July 31, 2015		January 29, 2016		July 31, 2015		January 29, 2016		July 31, 2015
Interest rate swaps	$	15,992	$	9,821	$	--	$	--	$	15,992	$	9,821

The estimated fair value of the Company’s interest rate swap assets and liabilities incorporates the Company’s non-performance risk (see Note 2).  The adjustment related to the Company’s non-performance risk at January 29, 2016 and July 31, 2015 resulted in reductions of $901 and $209, respectively, in the fair value of the interest rate swap assets and liabilities.  The offset to the interest rate swap assets and liabilities is recorded in accumulated other comprehensive loss (“AOCL”), net of the deferred tax asset, and will be reclassified into earnings over the term of the underlying debt.  As of January 29, 2016, the estimated pre-tax portion of AOCL that is expected to be reclassified into earnings over the next twelve months is $3,564.  Cash flows related to the interest rate swap are included in interest expense and in operating activities.

The following table summarizes the pre-tax effects of the Company’s derivative instruments on AOCL for the six months ended January 29, 2016 and the year ended July 31, 2015:

	Amount of Income Recognized in AOCL on Derivatives (Effective Portion)
	Six Months Ended January 29, 2016		Year Ended July 31, 2015
Cash flow hedges:
Interest rate swaps	$	9,930	$	1,641

The following table summarizes the pre-tax effects of the Company’s derivative instruments on income for the quarters and six-month periods ended January 29, 2016 and January 30, 2015:

	Location of Loss Reclassified from AOCL into Income (Effective Portion)	Amount of Loss Reclassified from AOCL into Income (Effective Portion)
		Quarter Ended				Six Months Ended
		January 29, 2016		January 30, 2015		January 29, 2016		January 30, 2015
Cash flow hedges:
Interest rate swaps	Interest expense	$	1,444	$	2,005	$	2,891	$	4,016

Any portion of the fair value of the swaps determined to be ineffective will be recognized currently in earnings.  No ineffectiveness has been recorded in the six-month periods ended January 29, 2016 and January 30, 2015.