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 May 3, 2019 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 May 3, 2019 is as follows:

Trade Date	Effective Date	Term (in Years)		Notional Amount		Fixed Rate
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	%
January 16, 2019	May 3, 2019		3		115,000		2.63	%
January 16, 2019	May 3, 2019		2		115,000		2.68	%

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 May 3, 2019 and August 3, 2018 were as follows:

(See Note 2)	Balance Sheet Location	May 3, 2019		August 3, 2018
Interest rate swaps	Prepaid expenses and other current assets	$	--	$	169
Interest rate swaps	Other assets		38		6,086
Total assets		$	38	$	6,255
Interest rate swaps	Long-term interest rate swap liability	$	1,684	$	--
Total liabilities		$	1,684	$	--

The following table summarizes the offsetting of the Company’s derivative assets in the Condensed Consolidated Balance Sheets at May 3, 2019 and August 3, 2018:

	Gross Asset Amounts				Liability Amount Offset					Net Asset Amount Presented in the Balance Sheets
(See Note 2)	May 3, 2019		August 3, 2018		May 3, 2019			August 3, 2018		May 3, 2019		August 3, 2018
Interest rate swaps	$	295	$	6,255	$	(257	)	$	--	$	38	$	6,255

The following table summarizes the offsetting of the Company’s derivative liabilities in the Condensed Consolidated Balance Sheets at May 3, 2019 and August 3, 2018:

	Gross Liability Amounts				Asset Amount Offset					Net Liability Amount Presented in the Balance Sheets
(See Note 2)	May 3, 2019		August 3, 2018		May 3, 2019			August 3, 2018		May 3, 2019		August 3, 2018
Interest rate swaps	$	1,966	$	--	$	(282	)	$	--	$	1,684	$	--

The estimated fair value of the Company’s interest rate swap assets and liabilities incorporate the Company’s non-performance risk (see Note 2). The adjustment related to the Company’s non-performance risk at May 3, 2019 and August 3, 2018 resulted in reductions of $62 and $213, respectively, in the fair value of the interest rate swap assets and liabilities. The offset to the interest rate swap assets and liabilities are recorded in accumulated other comprehensive income (loss) (“AOCIL”), net of the deferred tax asset, and will be reclassified into earnings over the term of the underlying debt. As of May 3, 2019, the estimated pre-tax portion of AOCIL that is expected to be reclassified into earnings over the next twelve months is $530. Cash flows related to the interest rate swaps are included in interest expense in the Condensed Consolidated Statements of Income and in operating activities in the Condensed Consolidated Statements of Cash Flows.

The following table summarizes the pre-tax effects of the Company’s derivative instruments on AOCIL for the nine months ended May 3, 2019 and the year ended August 3, 2018:

	Amount of (Loss) Income Recognized in AOCIL on Derivatives (Effective Portion)
	Nine Months Ended May 3, 2019			Year Ended August 3, 2018
Cash flow hedges:
Interest rate swaps	$	(6,629	)	$	13,103

The following table summarizes the pre-tax effects of the Company’s derivative instruments on income for the quarters and nine-month periods ended May 3, 2019 and April 27, 2018:

	Location of Loss (Gain) Reclassified from AOCIL into Income (Effective Portion)	Amount of Loss (Gain) Reclassified from AOCIL into Income (Effective Portion)
		Quarter Ended					Nine Months Ended
		May 3, 2019			April 27, 2018		May 3, 2019		April 27, 2018
Cash flow hedges:
Interest rate swaps	Interest expense	$	(99	)	$	865	$	43	$	2,852

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 nine-month periods ended May 3, 2019 and April 27, 2018.

The following table summarizes the changes in AOCIL, net of tax, related to the Company’s interest rate swaps for the nine months ended May 3, 2019 (see Notes 2 and 5):

	Changes in AOCIL
AOCIL balance at August 3, 2018	$	4,685
Other comprehensive loss before reclassifications		(4,934	)
Amounts reclassified from AOCIL		(32	)
Other comprehensive loss, net of tax		(4,966	)
AOCIL balance at May 3, 2019	$	(281	)

The following table summarizes the amounts reclassified out of AOCIL related to the Company’s interest rate swaps for the quarter and nine months ended May 3, 2019:

	Amount Reclassified from AOCIL						Affected Line Item in the Condensed Consolidated Financial Statements
	Quarter Ended			Nine Months Ended
Gain (loss) on cash flow hedges:
Interest rate swaps	$	99		$	(43	)	Interest expense
Tax benefit (expense)		(25	)		11		Provision for income taxes
	$	74		$	(32	)	Net of tax