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 November 2, 2018 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 November 2, 2018 is as follows:

Trade Date	Effective Date	Term (in Years)	Notional Amount		Fixed Rate
June 18, 2014	May 3, 2015	4	$	160,000		2.51	%
June 24, 2014	May 3, 2015	4		120,000		2.51	%
July 1, 2014	May 5, 2015	4		120,000		2.43	%
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 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 November 2, 2018 and August 3, 2018 were as follows:

(See Note 2)	Balance Sheet Location	November 2, 2018		August 3, 2018
Interest rate swaps	Prepaid expenses and other current assets	$	437	$	169
Interest rate swaps	Other assets		6,245		6,086
Total assets		$	6,682	$	6,255

*These interest rate swap assets are recorded at gross at both November 2, 2018 and August 3, 2018 since there were no offsetting liabilities under the Company’s master netting agreements.

The estimated fair value of the Company’s interest rate swap assets incorporates the Company’s non-performance risk (see Note 2). The adjustment related to the Company’s non-performance risk at November 2, 2018 and August 3, 2018 resulted in reductions of $244 and $213, respectively, in the fair value of the interest rate swap assets. The offset to the interest rate swap asset is recorded in accumulated other comprehensive income (“AOCI”), net of the deferred tax asset, and will be reclassified into earnings over the term of the underlying debt. As of November 2, 2018, the estimated pre-tax portion of AOCI that is expected to be reclassified into earnings over the next twelve months is $813. Cash flows related to the interest rate swaps are included in interest expense and in operating activities.

The following table summarizes the pre-tax effects of the Company’s derivative instruments on AOCI for the three months ended November 2, 2018 and the year ended August 3, 2018:

	Amount of Income Recognized in AOCI on Derivatives (Effective Portion)
	Three Months Ended November 2, 2018		Year Ended August 3, 2018
Cash flow hedges:
Interest rate swaps	$	1,699	$	13,103

The following table summarizes the changes in AOCI, net of tax, related to the Company’s interest rate swaps for the three months ended November 2, 2018 (see Notes 2 and 5):

	Changes in AOCI
AOCI balance at August 3, 2018	$	4,685
Other comprehensive income before reclassifications		1,293
Amounts reclassified from AOCI		--
Other comprehensive income, net of tax		1,293
AOCI balance at November 2, 2018	$	5,978

The following table summarizes the pre-tax effects of the Company’s derivative instruments on income for the quarters ended November 2, 2018 and October 27, 2017:

	Location of Loss Reclassified from AOCI into Income (Effective Portion)	Amount of Loss Reclassified from AOCI into Income (Effective Portion)
		Quarter Ended
		November 2, 2018		October 27, 2017
Cash flow hedges:
Interest rate swaps	Interest expense	$	--	$	1,064

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 three-month periods ended November 2, 2018 and October 27, 2017.