Derivative Instruments and Hedging Activities

3 Months Ended

Nov. 01, 2019

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

7. Derivative Instruments and Hedging Activities

The Company has interest rate risk relative to its outstanding borrowings (see Note 6 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 1, 2019 was 1.00%.

All of the Company’s interest rate swaps are accounted for as cash flow hedges.  For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings and is presented in the same statement of income line item as the earnings effect of the hedged item.  Gains and losses on the derivative instrument representing hedge components excluded from the assessment of effectiveness, if any, will be recognized currently in earnings in the same statement of income line item as the earnings effect of the hedged item.

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.

A summary of the Company’s interest rate swaps at November 1, 2019 is as follows:

Trade Date	Effective Date	Term (in Years)		Notional Amount		Fixed Rate
January 30, 2015	May 3, 2019		2.0	$	60,000		2.16	%
January 30, 2015	May 4, 2021		3.0		120,000		2.41	%
January 30, 2015	May 3, 2019		2.0		60,000		2.15	%
January 30, 2015	May 4, 2021		3.0		80,000		2.40	%
January 16, 2019	May 3, 2019		3.0		115,000		2.63	%
January 16, 2019	May 3, 2019		2.0		115,000		2.68	%
August 6, 2019	November 4, 2019		1.5		50,000		1.50	%
August 7, 2019	May 3, 2021		1.0		35,000		1.32	%
August 7, 2019	May 3, 2022		2.0		100,000		1.40	%
August 7, 2019	May 3, 2022		2.0		100,000		1.36	%

The estimated fair values of the Company’s derivative instruments as of November 1, 2019 and August 2, 2019 were as follows:

(See Note 4)	Balance Sheet Location	November 1, 2019		August 2, 2019
Interest rate swaps	Other assets	$	189	$	—
Total assets		$	189	$	—
Interest rate swaps	Long-term interest rate swap liability	$	11,098	$	10,483
Total liabilities		$	11,098	$	10,483

The following table summarizes the offsetting of the Company’s derivative assets in the Condensed Consolidated Balance Sheets at November 1, 2019 and August 2, 2019:

	Gross Asset Amounts				Liability Amount Offset				Net Asset Amount Presented in the Balance Sheets
(See Note 4)	November 1, 2019		August 2, 2019		November 1, 2019		August 2, 2019		November 1, 2019		August 2, 2019
Interest rate swaps	$	189	$	—	$	—	$	—	$	189	$	—

The following table summarizes the offsetting of the Company’s derivative liabilities in the Condensed Consolidated Balance Sheets at November 1, 2019 and August 2, 2019:

	Gross Liability Amounts				Asset Amount Offset					Net Liability Amount Presented in the Balance Sheets
(See Note 4)	November 1, 2019		August 2, 2019		November 1, 2019			August 2, 2019		November 1, 2019		August 2, 2019
Interest rate swaps	$	11,241	$	10,483	$	(143	)	$	—	$	11,098	$	10,483

The estimated fair value of the Company’s interest rate swap assets and liabilities incorporate the Company’s non-performance risk (see Note 4).  The adjustment related to the Company’s non-performance risk at November 1, 2019 and August 2, 2019 resulted in reductions of $297 and $399, 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 loss (“AOCL”), net of the deferred tax asset, and will be reclassified into earnings over the term of the underlying debt.  As of November 1, 2019, the estimated pre-tax portion of AOCL that is expected to be reclassified into earnings over the next twelve months is $1,176.  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 AOCL for the three months ended November 1, 2019 and the year ended August 2, 2019:

	Amount of Loss Recognized in AOCL on Derivatives
	Three Months Ended November 1, 2019			Year Ended August 2, 2019
Cash flow hedges:
Interest rate swaps	$	(545	)	$	(15,466	)

The following table summarizes the pre-tax effects of the Company’s derivative instruments on income for the quarters ended November 1, 2019 and November 2, 2018:

	Location of Gain Reclassified from AOCL into Income	Amount of Gain Reclassified from AOCL into Income
		Quarter Ended
		November 1, 2019		November 2, 2018
Cash flow hedges:
Interest rate swaps	Interest expense	$	(82)	$	—

The following table summarizes the amounts reclassified out of AOCL related to the Company’s interest rate swaps for the quarter ended November 1, 2019:

Details about AOCL	Amount Reclassified from AOCL			Affected Line Item in the Condensed Consolidated Statement of Income
Gain on cash flow hedges:
Interest rate swaps	$	82		Interest expense
Tax expense		(20	)	Provision for income taxes
	$	62		Net of tax

No gains or losses representing amounts excluded from the assessment of effectiveness were recognized in earnings for the three-month period ended November 1, 2019.

The following table summarizes the changes in AOCL, net of tax, related to the Company’s interest rate swaps for the three months ended November 1, 2019:

	Changes in AOCL
AOCL balance at August 2, 2019	$	(6,913	)
Other comprehensive income before reclassifications		(500	)
Amounts reclassified from AOCL		62
Other comprehensive income, net of tax		(438	)
AOCL balance at November 1, 2019	$	(7,351	)