Derivative Instruments and Hedging Activities

6 Months Ended

Jan. 31, 2020

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 January 31, 2020 was 1.25%.

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 January 31, 2020 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		2.5		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 value of the Company’s derivative instruments as of January 31, 2020 and August 2, 2019 were as follows:

(See Note 4)	Balance Sheet Location	January 31, 2020		August 2, 2019
Interest rate swaps	Long-term interest rate swap liability	$	13,479	$	10,483
Total liabilities		$	13,479	$	10,483

**These interest rate swap liabilities are recorded gross at both January 31, 2020 and August 2, 2019 since there were no offsetting assets under the Company’s master netting agreements.

The estimated fair value of the Company’s interest rate swap liabilities incorporate the Company’s non-performance risk (see Note 4).  The adjustment related to the Company’s non-performance risk at January 31, 2020 and August 2, 2019 resulted in reductions of $358 and $399, respectively, in the fair value of the interest rate swap liabilities.  The offset to the interest rate swap 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 January 31, 2020, the estimated pre-tax portion of AOCL that is expected to be reclassified into earnings over the next twelve months is $1,721.  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 six months ended January 31, 2020 and the year ended August 2, 2019:

	Amount of Loss Recognized in AOCL on Derivatives
	Six Months Ended January 31, 2020			Year Ended August 2, 2019
Cash flow hedges:
Interest rate swaps	$	(3,235	)	$	(15,466	)

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 31, 2020 and February 1, 2019:

	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 31, 2020		February 1, 2019		January 31, 2020		February 1, 2019
Cash flow hedges:
Interest rate swaps	Interest expense	$	176	$	141	$	94	$	141

The following table summarizes the amounts reclassified out of AOCL related to the Company’s interest rate swaps for the quarter and six months ended January 31, 2020:

	Amount Reclassified from AOCL						Affected Line Item in the
	Quarter Ended			Six Months Ended			Condensed Consolidated Financial Statements
Loss on cash flow hedges:
Interest rate swaps	$	(176	)	$	(94	)	Interest expense
Tax benefit		44			24		Provision for income taxes
	$	(132	)	$	(70	)	Net of tax

No gains or losses representing amounts excluded from the assessment of effectiveness were recognized in earnings for the six months ended January 31, 2020.

The following table summarizes the changes in AOCL, net of tax, related to the Company’s interest rate swaps for the six months ended January 31, 2020:

	Changes in AOCL
AOCL balance at August 2, 2019	$	(6,913	)
Other comprehensive loss before reclassifications		(2,417	)
Amounts reclassified from AOCL		(70	)
Other comprehensive loss, net of tax		(2,487	)
AOCL balance at January 31, 2020	$	(9,400	)