Derivative Financial Instruments

Hedging Strategy

Foreign Exchange Currency Contracts

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, China and Mexico are denominated in U.S. dollars, British pounds and Russian roubles 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 currency contracts, to offset some, but not all, of the exchange risk on certain of these anticipated foreign currency transactions.

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

Interest Rate Swap Agreements

The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements 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 floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Refer to Note 9 for further information.

The impact of the credit risk of the counterparties to the derivative contracts is considered in determining the fair value of the foreign exchange currency contracts and interest rate swap agreements. As of November 3, 2018, credit risk has not had a significant effect on the fair value of the Company’s foreign exchange currency contracts and interest rate swap agreements.

Hedge Accounting Policy

Foreign Exchange Currency Contracts

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 that 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 (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 (loss) until the sale or liquidation of the hedged net investment.

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

Interest Rate Swap Agreements

Interest rate swap agreements are used to hedge the variability of the cash flows in interest payments associated with the Company’s floating-rate debt. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.

Periodically, the Company may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense).

Summary of Derivative Instruments

The fair value of derivative instruments in the condensed consolidated balance sheets as of November 3, 2018 and February 3, 2018 is as follows (in thousands):



	Derivative Balance Sheet Location	Fair Value at Nov 3, 2018		Fair Value at Feb 3, 2018
ASSETS:
Derivatives designated as hedging instruments:
Cash flow hedges:
Foreign exchange currency contracts	Other current assets/ Other assets	$	5,254	$	41
Interest rate swap	Other assets	1,707		1,460
Total derivatives designated as hedging instruments		6,961		1,501
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Other current assets	2,273		10
Total		$	9,234	$	1,511
LIABILITIES:
Derivatives designated as hedging instruments:
Cash flow hedges:
Foreign exchange currency contracts	Accrued expenses/ Other long-term liabilities	$	5	$	13,789
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Accrued expenses	2		4,300
Total		$	7	$	18,089

Derivatives Designated as Hedging Instruments

Foreign Exchange Currency Contracts Designated as Cash Flow Hedges

During the nine months ended November 3, 2018, the Company purchased U.S. dollar forward contracts in Europe totaling US$39.3 million that were designated as cash flow hedges. As of November 3, 2018, the Company had forward contracts outstanding for its European and Canadian operations of US$93.7 million and US$8.8 million, respectively, to hedge forecasted merchandise purchases, which are expected to mature over the next 10 months.

As of November 3, 2018, accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a net unrealized gain of approximately $1.6 million, net of tax, which $0.8 million will be recognized in cost of product sales 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.

At February 3, 2018, the Company had forward contracts outstanding for its European and Canadian operations of US$145.8 million and US$38.7 million, respectively, that were designated as cash flow hedges.

Interest Rate Swap Agreement Designated as Cash Flow Hedge

During fiscal 2017, the Company entered into an interest rate swap agreement with a notional amount of $21.5 million, designated as a cash flow hedge, to hedge the variability of cash flows in interest payments associated with the Company’s floating-rate debt. This interest rate swap agreement matures in January 2026 and converts the nature of the Company’s real estate secured term loan from LIBOR floating-rate debt to fixed-rate debt, resulting in a swap fixed rate of approximately 3.06%.

As of November 3, 2018, accumulated other comprehensive income related to the interest rate swap agreement included a net unrealized gain of approximately $1.3 million, net of tax, which will be recognized in interest expense after 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 the gains (losses) before taxes recognized on the derivative instruments designated as cash flow hedges in OCI and net loss for the three and nine months ended November 3, 2018 and October 28, 2017 (in thousands):



	Gains Recognized in OCI				Location of Gain (Loss) Reclassified from Accumulated OCI into Loss¹	Gain (Loss) Reclassified from Accumulated OCI into Loss
	Three Months Ended					Three Months Ended
	Nov 3, 2018		Oct 28, 2017			Nov 3, 2018			Oct 28, 2017
Derivatives designated as cash flow hedges:
Foreign exchange currency contracts	$	1,630	$	3,215	Cost of product sales	$	(1,618	)	$	81
Foreign exchange currency contracts	—		38		Other income (expense)	—			(337		)
Interest rate swap	203		134		Interest expense	21			(57		)



	Gains Recognized in OCI					Location of Gain (Loss) Reclassified from Accumulated OCI into Loss¹	Gain (Loss) Reclassified from Accumulated OCI into Loss
	Nine months ended						Nine months ended
	Nov 3, 2018		Oct 28, 2017				Nov 3, 2018			Oct 28, 2017
Derivatives designated as cash flow hedges:
Foreign exchange currency contracts	$	13,690	$	(10,601	)	Cost of product sales	$	(5,646	)	$	1,360
Foreign exchange currency contracts	2		(958		)	Other income (expense)	(201		)	(244		)
Interest rate swap	308		(143		)	Interest expense	60			(119		)

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Notes:

The Company recognized gains of $0.6 million and $2.0 million resulting from the ineffective portion related to foreign exchange currency contracts in interest income during the three and nine months ended November 3, 2018, respectively. The Company recognized gains of $0.5 million and $2.0 million resulting from the ineffective portion related to foreign exchange currency contracts in interest income during the three and nine months ended October 28, 2017, respectively. There was no ineffectiveness recognized related to the interest rate swap during the three and nine months ended November 3, 2018 and October 28, 2017.

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



	Three Months Ended						Nine Months Ended
	Nov 3, 2018			Oct 28, 2017			Nov 3, 2018			Oct 28, 2017
Beginning balance gain (loss)	$	(142	)	$	(8,751	)	$	(14,369	)	$	5,400
Net gains (losses) from changes in cash flow hedges	1,596			2,749			12,175			(10,220		)
Net (gains) losses reclassified into loss	1,419			235			5,067			(947		)
Ending balance gain (loss)	$	2,873		$	(5,767	)	$	2,873		$	(5,767	)

Foreign Exchange Currency Contracts Not Designated as Hedging Instruments

As of November 3, 2018, the Company had euro foreign exchange currency contracts to purchase US$28.0 million expected to mature over the next 6 months and Canadian dollar foreign exchange currency contracts to purchase US$1.8 million expected to mature over the next 2 months.

The following table summarizes the gains (losses) before taxes recognized on the derivative instruments not designated as hedging instruments in other income (expense) for the three and nine months ended November 3, 2018 and October 28, 2017 (in thousands):



	Location of Gain (Loss) Recognized in Loss	Gain (Loss) Recognized in Loss
		Three Months Ended				Nine Months Ended
		Nov 3, 2018		Oct 28, 2017		Nov 3, 2018		Oct 28, 2017
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Other income (expense)	$	794	$	1,645	$	6,700	$	(5,688	)

At February 3, 2018, the Company had euro foreign exchange currency contracts to purchase US$68.2 million and Canadian dollar foreign exchange currency contracts to purchase US$17.6 million.