DERIVATIVE FINANCIAL INSTRUMENTS
|12 Months Ended|
Jan. 28, 2017
|DERIVATIVE FINANCIAL INSTRUMENTS|
|DERIVATIVE FINANCIAL INSTRUMENTS||
16. DERIVATIVE FINANCIAL INSTRUMENTS
As discussed in Note 6, in June 2014, we entered into a Term Loan with variable-rate interest payments. To minimize the impact of changes in interest rates on our interest payments under the Term Loan, in January 2015, we entered into an interest rate swap agreement to swap variable-rate interest payments for fixed-rate interest payments on a notional amount of $520.0 million, effective in February 2015. At January 28, 2017, the notional amount totaled $330.0 million. The interest rate swap agreement matures in August 2018 and has periodic interest settlements. We have designated the interest rate swap as a cash flow hedge of the variability of interest payments under the Term Loan due to changes in the LIBOR benchmark interest rate.
Under this interest rate swap agreement, we receive a floating rate based on the 3‑month LIBOR rate and pay a fixed rate of 5.03% (including the applicable margin of 3.50%) on the outstanding notional amount. The swap fixed rate was structured to mirror the payment terms of the Term Loan. At January 28, 2017, the fair value of the interest rate swap was a liability of $1.1 million recorded in accrued expenses and other current liabilities in our consolidated balance sheet. The effective portion of the loss is reported as a component of accumulated other comprehensive (loss) income. There was no hedge ineffectiveness at January 28, 2017. Changes in fair value are reclassified from accumulated other comprehensive (loss) income into earnings in the same period that the hedged item affects earnings.
Over the next 12 months, approximately $1.1 million of the effective portion of the loss is expected to be reclassified from accumulated other comprehensive (loss) income into earnings. If, at any time, the swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the swap determined to be ineffective will be recognized as a gain or loss in the statement of earnings for the applicable period.
Furthermore, as a result of recent exchange rate fluctuations in Europe, we have entered into derivative instruments to hedge our foreign exchange risk, specifically related to the British pound and Euro. We have designated these instruments as cash flow hedges of the variability in exchange rates for those foreign currencies. These cash flow hedges mature at various dates through January 2018. At January 28, 2017, the fair value of these cash flow hedges was a net liability of $0.8 million with $0.4 million recorded in other current assets and $1.2 million in accrued expenses and other current liabilities in our consolidated balance sheet. The effective portion of the hedges is reported as a component of accumulated other comprehensive (loss) income. Hedge ineffectiveness at January 28, 2017 was immaterial. Changes in fair value are reclassified from accumulated other comprehensive (loss) income into earnings in the same period that the hedged item affects earnings. Over the next 12 months, $1.2 million of the effective portion of the cash flow hedges is expected to be reclassified from accumulated other comprehensive (loss) income into earnings within cost of sales.
Additionally, we are exposed to market risk associated with foreign currency exchange rate fluctuations as a result of our direct sourcing programs and our operations in foreign countries. In connection with our direct sourcing programs, we may enter into merchandise purchase commitments that are denominated in a currency different from the functional currency of the operating entity. As a result, from time to time, we may enter into derivative instruments to hedge our foreign exchange risk. Our risk management policy is to hedge a portion of forecasted merchandise purchases for our direct sourcing programs that bear foreign exchange risk using foreign exchange forward contracts. We have not elected to apply hedge accounting to these transactions denominated in a foreign currency. These foreign currency derivative financial instruments are recorded in the consolidated balance sheet at fair value determined by comparing the cost of the foreign currency to be purchased under the contracts using the exchange rates obtained under the contracts (adjusted for forward points) to the hypothetical cost using the spot rate at period end. The fair value associated with such derivative instruments at January 28, 2017 was a liability of $0.1 million recorded in accrued expenses and other current liabilities and at January 30, 2016, was an asset of $0.4 million included in other current assets in our consolidated balance sheets. For our derivative financial instruments not designated as cash flow hedges we recognized in cost of sales on the consolidated statement of earnings (loss) a pre-tax loss of $0.5 million for fiscal 2016, a pre-tax loss of $0.6 million for fiscal 2015 and a pre-tax gain of $1.4 million for fiscal 2014.
We had no derivative financial instruments with credit-risk-related contingent features underlying the agreements as of January 28, 2017 or January 30, 2016, respectively.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://www.xbrl.org/2003/role/presentationRef