Derivative Financial Instruments

9 Months Ended

Oct. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

Hedging Strategy

The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company has entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges.

The Company’s primary objective is to hedge the variability in forecasted cash flows due to the foreign currency risk. Various transactions that occur primarily in Europe, Canada, South Korea and Mexico are denominated in U.S. dollars and British pounds and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar denominated purchases of merchandise and U.S. dollar and British pound denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency.The Company enters into derivative financial instruments, including forward exchange contracts, to offset some but not all of the exchange riskon certain of these anticipated foreign currency transactions.

Periodically, the Company may also use foreign currency forward contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries.

The impact of the credit risk of the counterparties to the derivative contracts is considered in determining the fair value of the foreign currency forward contracts. As of October 31, 2015, credit risk has not had a significant effect on the fair value of the Company’s foreign currency contracts.

The Company also has interest rate swap agreements, which are not designated as hedges for accounting purposes, to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s variable-rate capital lease obligation, thus reducing the impact of interest rate changes on future interest payment cash flows. Refer to Note 9 for further information. 

Hedge Accounting Policy

U.S. dollar forward contracts are used to hedge forecasted merchandise purchases over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold. The Company also hedges forecasted intercompany royalties over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in other income and expense in the period in which the royalty expense is incurred.

The Company has also used U.S. dollar forward contracts to hedge the net investments of certain of the Company’s international subsidiaries over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in earnings until the sale or liquidation of the hedged net investment.

The Company also has foreign currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign currency contracts not designated as hedging instruments are reported in net earnings as part of other income and expense.

Summary of Derivative Instruments

The fair value of derivative instruments in the condensed consolidated balance sheets as of October 31, 2015 and January 31, 2015 is as follows (in thousands):

	Derivative Balance Sheet Location	Fair Value at Oct 31, 2015		Fair Value at Jan 31, 2015
ASSETS:
Derivatives designated as hedging instruments:
Foreign exchange currency contracts:
Cash flow hedges	Other current assets/ Other assets	$	4,307	$	6,597
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Other current assets	1,973		8,945
Total		$	6,280	$	15,542
LIABILITIES:
Derivatives designated as hedging instruments:
Foreign exchange currency contracts:
Cash flow hedges	Accrued expenses	$	36	$	—
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Accrued expenses	109		—
Interest rate swaps	Accrued expenses/ Other long-term liabilities	118		270
Total derivatives not designated as hedging instruments		227		270
Total		$	263	$	270

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

During the nine months ended October 31, 2015, the Company purchased U.S. dollar forward contracts in Europe and Canada totaling US$110.6 million and US$70.6 million, respectively, to hedge forecasted merchandise purchases and intercompany royalties that were designated as cash flow hedges.As ofOctober 31, 2015, the Company had forward contracts outstanding for its European and Canadian operations of US$107.4 million and US$55.6 million, respectively, which are expected to mature over the next 18 months.

The following table summarizes the gains (losses) before taxes recognized on the derivative instruments designated as cash flow hedges in OCI and net earnings for the three and nine months ended October 31, 2015 and November 1, 2014 (in thousands): 

	Gain Recognized in OCI				Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings(1)	Gain (Loss) Reclassified from Accumulated OCI into Earnings
	Three Months Ended					Three Months Ended
	Oct 31, 2015		Nov 1, 2014			Oct 31, 2015			Nov 1, 2014
Derivatives designated as cash flow hedges:
Foreign exchange currency contracts	$	363	$	3,869	Cost of product sales	$	2,507		$	(800	)
Foreign exchange currency contracts	$	46	$	487	Other income/expense	$	(40	)	$	—

	Gain Recognized in OCI				Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings(1)	Gain (Loss) Reclassified from Accumulated OCI into Earnings
	Nine Months Ended					Nine Months Ended
	Oct 31, 2015		Nov 1, 2014			Oct 31, 2015		Nov 1, 2014
Derivatives designated as cash flow hedges:
Foreign exchange currency contracts	$	4,559	$	3,163	Cost of product sales	$	7,450	$	(1,559	)
Foreign exchange currency contracts	$	276	$	381	Other income/expense	$	776	$	(56	)

 __________________________________

(1) The ineffective portion was immaterial during the three and nine months ended October 31, 2015 and November 1, 2014 and was recorded in net earnings and included in interest income/expense.

As of October 31, 2015, accumulated other comprehensive income (loss) included a net unrealized gainof approximately $4.0 million, net of tax, of which $3.2 million will be recognized in cost of product sales or other income over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values.

The following table summarizes net after-tax derivative activity recorded in accumulated other comprehensive income (loss) (in thousands):

	Three Months Ended					Nine Months Ended
	Oct 31, 2015			Nov 1, 2014		Oct 31, 2015			Nov 1, 2014
Beginning balance gain (loss)	$	5,868		$	366	$	7,157		$	(113	)
Net gainsfrom changes in cash flow hedges	330			3,805		3,988			3,099
Net (gains) losses reclassified to earnings	(2,158		)	713		(7,105		)	1,898
Ending balance gain	$	4,040		$	4,884	$	4,040		$	4,884

At January 31, 2015, the Company had forward contracts outstanding for its European and Canadian operations of US$50.8 millionand US$24.5 million, respectively, that were designated as cash flow hedges.

Derivatives Not Designated as Hedging Instruments

As of October 31, 2015, the Company had euro foreign currency contracts to purchase US$67.5 millionexpected to mature over the next 11 months and Canadian dollar foreign currency contracts to purchase US$19.9 million expected to mature over the next ten months.

The following table summarizes the gains before taxes recognized on the derivative instruments not designated as hedging instruments in other income for the three and nine months ended October 31, 2015 and November 1, 2014 (in thousands):

	Location of Gain Recognized in Earnings	Gain Recognized in Earnings				Gain Recognized in Earnings
		Three Months Ended				Nine Months Ended
		Oct 31, 2015		Nov 1, 2014		Oct 31, 2015		Nov 1, 2014
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Other income/expense	$	286	$	6,262	$	2,445	$	7,457
Interest rate swaps	Other income/expense	$	44	$	54	$	140	$	186

At January 31, 2015, the Company had euro foreign currency contracts to purchase US$59.3 millionand Canadian dollar foreign currency contracts to purchase US$19.9 million.