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Derivative Instruments and Hedging Activities
 9 Months Ended
Apr. 30, 2021
Derivative Instruments and Hedging Activities [Abstract]  
Derivative Instruments and Hedging Activities
6.
Derivative Instruments and Hedging Activities


The Company has interest rate risk relative to its outstanding borrowings (see Note 5 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 April 30, 2021 was 3.50%.


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 April 30, 2021 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 April 30, 2021 and July 31, 2020 were as follows:

(See Note 3)
Balance Sheet Location
  
April 30, 2021
    
July 31, 2020
  
Interest rate swaps
Other current liabilities
  
$
54
    
$
3,886
  
Interest rate swaps
Long-term interest rate swap liability
    
18,388
      
23,860
  
Total liabilities**
    
$
18,442
    
$
27,746
  

**These interest rate swap liabilities are recorded gross at both April 30, 2021 and July 31, 2020 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 incorporates the Company’s non-performance risk (see Note 3).  The adjustment related to the Company’s non-performance risk at April 30, 2021 and July 31, 2020 resulted in reductions of $431 and $978, 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 April 30, 2021, the estimated pre-tax portion of AOCL that is expected to be reclassified into earnings over the next twelve months is $6,230.  Cash flows related to the interest rate swaps are included in the interest expense line 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 nine months ended April 30, 2021 and the year ended July 31, 2020:

  
Amount of Income (Loss) Recognized
in AOCL on Derivatives
  
   
Nine Months Ended
April 30, 2021
    
Year Ended
July 31, 2020
  
Cash flow hedges:
            
Interest rate swaps
  
$
8,827
    
$
(17,740
)


The following table summarizes the pre-tax effects of the Company’s derivative instruments on income for the quarters and nine months ended April 30, 2021 and May 1, 2020:
Location of Loss
Reclassified from
AOCL into Income
(Effective Portion)
  
Amount of Loss Reclassified from AOCL into Income
(Effective Portion)
 
 
 
Quarter Ended
  
Nine Months Ended
     
April 30,
2021
 
May 1,
2020
 
April 30,
2021
 
May 1,
2020
Cash flow hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps
Interest expense
  
$
2,194
  
$
465
  
$
6,179
  
$
559


The following table summarizes the amounts reclassified out of AOCL related to the Company’s interest rate swaps for the quarter and nine months ended April 30, 2021:
 
Amount Reclassified from AOCL
 
Affected Line Item in the
 
 
Quarter Ended
 
 
Nine Months Ended
 
Condensed Consolidated
Financial Statements
Loss on cash flow hedges:
 
 
 
 
 
 
   
Interest rate swaps
 
$
(2,194)
 
 
$
(6,179)
  
Interest expense
Tax benefit
 
 
547
  
 
 
1,542
 
Provision for income taxes
 
 
$
(1,647)
 
 
$
(4,637)
  
Net of tax



No gains or losses representing amounts excluded from the assessment of effectiveness were recognized in earnings for the nine months ended April 30, 2021.


The following table summarizes the changes in AOCL, net of tax, related to the Company’s interest rate swaps for the nine months ended April 30, 2021:

  
Changes in AOCL
  
AOCL balance at July 31, 2020
  
$
(20,346
)
Other comprehensive income before reclassifications
    
11,262
  
Amounts reclassified from AOCL
    
(4,637
)
Other comprehensive income, net of tax
    
6,625
  
AOCL balance at April 30, 2021
  
$
(13,721
)