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DERIVATIVE FINANCIAL INSTRUMENTS | 12 Months Ended
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Feb. 02, 2019
DERIVATIVE FINANCIAL INSTRUMENTS |
DERIVATIVE FINANCIAL INSTRUMENTS | 7.DERIVATIVE FINANCIAL INSTRUMENTS GAAP requires that derivatives be carried at fair value on the balance sheet, and provides for hedge accounting when certain conditions are met. The Company’s derivative financial instruments are recognized on the balance sheet at fair value. Changes in the fair value of derivative instruments designated as “cash flow” hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of tax effects. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings. Other comprehensive income or loss is reclassified into current period earnings when the hedged transaction affects earnings. Changes in the fair value of derivative instruments designated as “fair value” hedges, along with corresponding changes in the fair values of the hedged assets or liabilities, are recorded in current period earnings. Ineffective portions of fair value hedges, if any, are recognized in current period earnings. The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of the hedged items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company discontinues hedge accounting prospectively. Interest Rate Risk Management The Company is exposed to market risk from fluctuations in interest rates. The Company manages its exposure to interest rate fluctuations through the use of a commercial paper program, interest rate swaps (fair value hedges) and forward-starting interest rate swaps (cash flow hedges). The Company’s current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, the Company uses the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total amount that represents 25% of the carrying value of the Company’s debt portfolio or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status. The Company reviews compliance with these guidelines annually with the Financial Policy Committee of the Board of Directors. These guidelines may change as the Company’s needs dictate. Fair Value Interest Rate Swaps The table below summarizes the outstanding interest rate swaps designated as fair value hedges as of February 3, 2018. We have no outstanding interest rate derivatives classified as fair value hedges as of February 2, 2019.
|  | 2017 |
|  | Pay |  | Pay |
|  | Floating |  | Fixed |
Notional amount |  | $ | 100 |  | $ | — |
Number of contracts |  |  | 2 |  |  | — |
Duration in years |  |  | 0.88 |  |  | — |
Average variable rate |  |  | 7.23 | % |  | — |
Average fixed rate |  |  | 6.80 | % |  | — |
Maturity |  |  | December 2018 |  |  |  |
The gain or loss on these derivative instruments as well as the offsetting gain or loss on the hedged items attributable to the hedged risk is recognized in current earnings as “Interest expense.” These gains and losses for 2018 and 2017 were as follows:
|  | Year-To-Date |
|  | February 2, 2019 |  | February 3, 2018 |
|  | Gain/(Loss) on |  | Gain/(Loss) on |  | Gain/(Loss) on |  | Gain/(Loss) on |
Consolidated Statements of Operations Classification |  | Swaps |  | Borrowings |  | Swaps |  | Borrowings |
Interest Expense |  | $ | 1 |  | $ | — |  | $ | — |  | $ | — |
The following table summarizes the location and fair value of derivative instruments designated as fair value hedges on the Company’s Consolidated Balance Sheets:
|  | Asset Derivatives |
|  | Fair Value |  |  |
|  | February 2, |  | February 3, |  |  |
Derivatives Designated as Fair Value Hedging Instruments |  | 2019 |  | 2018 |  | Balance Sheet Location |
Interest Rate Hedges |  | $ | — |  | $ | (1) |  | Other long-term liabilities |
Cash Flow Forward-Starting Interest Rate Swaps As of February 2, 2019, the Company had five forward-starting interest rate swap agreements with a maturity date of January 2020 with an aggregate notional amount totaling $250. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuance of debt in January 2020. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of February 2, 2019, the fair value of the interest rate swaps was recorded in other assets for $33 and accumulated other comprehensive income for $20 net of tax. As of February 3, 2018, the Company had nine forward-starting interest rate swap agreements with a maturity date of January 2019 with an aggregate notional amount totaling $750 and five forward-starting interest rate swap agreements with maturity dates of January 2020 with an aggregate notional amount totaling $250. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuance of debt in January 2019 and January 2020. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of February 3, 2018, the fair value of the interest rate swaps was recorded in other assets for $103 and accumulated other comprehensive income for $73 net of tax. During 2018, the Company terminated nine forward-starting interest rate swaps with maturity dates of January 2019 with an aggregate notional amount totaling $750. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the fourth quarter of 2018. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized gain of $39, $30 net of tax, has been deferred in AOCI and will be amortized to earnings as the interest payments are made. During 2017, the Company terminated eleven forward-starting interest rate swaps with maturity dates of August 2017, with an aggregate notional amount totaling $600. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the third quarter of 2017. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $20, $12 net of tax, has been deferred in AOCI and will be amortized to earnings as the interest payments are made. The following table summarizes the effect of the Company’s derivative instruments designated as cash flow hedges for 2018 and 2017:
|  | Year-To-Date |  |  |
|  | Amount of Gain/(Loss) in |  | Amount of Gain/(Loss) |  |  |
|  | AOCI on Derivative |  | Reclassified from AOCI into |  | Location of Gain/(Loss) |
Derivatives in Cash Flow Hedging |  | (Effective Portion) |  | Income (Effective Portion) |  | Reclassified into Income |
Relationships |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | (Effective Portion) |
Forward-Starting Interest Rate Swaps, net of tax* |  | $ | 6 |  | $ | 24 |  | $ | (5) |  | $ | (3) |  | Interest expense |
*The amounts of Gain/(Loss) in AOCI on derivatives include unamortized proceeds and payments from forward-starting interest rate swaps once classified as cash flow hedges that were terminated prior to end of 2018 and 2017, respectively. For the above fair value and cash flow interest rate swaps, the Company has entered into International Swaps and Derivatives Association master netting agreements that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. These master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. Collateral is generally not required of the counterparties or of the Company under these master netting agreements. As of February 2, 2019 and February 3, 2018, no cash collateral was received or pledged under the master netting agreements. The effect of the net settlement provisions of these master netting agreements on the Company’s derivative balances upon an event of default or termination event is as follows as of February 2, 2019 and February 3, 2018:
|  |  |  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the |  |  |  |
|  |  |  |  |  |  |  | Net Amount |  | Balance Sheet |  |  |  |
|  | Gross Amount |  | Gross Amounts Offset |  | Presented in the |  | Financial |  |  |  |  |  |  |
February 2, 2019 |  | Recognized |  | in the Balance Sheet |  | Balance Sheet |  | Instruments |  | Cash Collateral |  | Net Amount |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash Flow Forward-Starting Interest Rate Swaps |  | $ | 33 |  | $ | — |  | $ | 33 |  | $ | — |  | $ | — |  | $ | 33 |
|  |  |  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the |  |  |  |
|  |  |  |  |  |  |  | Net Amount |  | Balance Sheet |  |  |  |
|  | Gross Amount |  | Gross Amounts Offset |  | Presented in the |  | Financial |  |  |  |  |  |  |
February 3, 2018 |  | Recognized |  | in the Balance Sheet |  | Balance Sheet |  | Instruments |  | Cash Collateral |  | Net Amount |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash Flow Forward-Starting Interest Rate Swaps |  | $ | 103 |  | $ | — |  | $ | 103 |  | $ | — |  | $ | — |  | $ | 103 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair Value Interest Rate Swaps |  | $ | 1 |  | $ | — |  | $ | 1 |  | $ | — |  | $ | — |  | $ | 1 |

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- Definition 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. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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