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DERIVATIVE FINANCIAL INSTRUMENTS
 3 Months Ended
May 05, 2013
DERIVATIVE FINANCIAL INSTRUMENTS

NOTE G. DERIVATIVE FINANCIAL INSTRUMENTS

Substantially all of our purchases and sales are denominated in U.S. Dollars, which limits our exposure to foreign currency exchange rate fluctuations. However, we are exposed to market risk from foreign currency exchange risk related to the transactions of our foreign subsidiaries. To mitigate this risk, beginning in April 2013, we began utilizing foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for trading or speculative purposes.

The assets or liabilities associated with the derivative instruments are recorded at fair value in either other current assets or other current liabilities, respectively, within our Condensed Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative instrument is designated as and qualifies for hedge accounting. The foreign currency forward contracts entered into as of May 5, 2013 were designated as cash flow hedges and, therefore, protect us against the variability of forecasted foreign currency cash flows resulting from purchases in non-functional currencies.

Cash Flow Hedges

We enter into forward contracts designated as cash flow hedges for forecasted inventory purchases in U.S. dollars by our foreign subsidiaries. These hedges generally have terms of up to twelve months. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions. We recognize derivative instruments as either assets or liabilities in our Condensed Consolidated Balance Sheet and measure them at fair value. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) in our Condensed Consolidated Statement of Comprehensive Income until the forecasted inventory purchase occurs. Subsequently, as the inventory is sold to the customer, we reclassify the amounts recorded in OCI to cost of goods sold. Changes in fair value of the forward contract related to interest charges or “forward points” are excluded from the assessment and measurement of hedge effectiveness and are recorded immediately in other income (expense), net in our Condensed Consolidated Statements of Earnings. As of May 5, 2013, we had foreign currency contracts of this type in place to sell Canadian dollars and buy U.S. dollars totaling $16,100,000. Based on the rates in effect on May 5, 2013, we would expect to reclassify a net loss of approximately $169,000 from OCI to cost of goods sold over the next 12 months. However, we do not expect variability in these rates. There were no hedges outstanding as of April 29, 2012.

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measureable ineffectiveness of the hedge is recorded in other income (expense), net in our Condensed Consolidated Statements of Earnings. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and no hedges were designated as ineffective for the thirteen weeks ended May 5, 2013.

The effect of derivative instruments designated as cash flow hedges in our Condensed Consolidated Financial Statements, pre-tax, was as follows:

 

Dollars in thousands    Thirteen Weeks Ended
May 5, 2013		  

Net gain (loss) recognized in OCI (a)

    $ (169 ) 

Net gain (loss) reclassified from OCI into cost of goods sold (a)

      0   

Net Foreign exchange gain (loss) recognized in other income (expense) (b)

      (13 ) 

 

(a) Effective portion
(b) Amount excluded from assessment of hedge effectiveness

The fair values of our derivative financial instruments are presented below. All fair values for these derivatives were measured using Level 2 inputs as defined by the fair value hierarchy described in Note H:

 

Dollars in thousands

 

Derivative Assets/(Liabilities)    Balance sheet location        May 5, 2013      

Derivatives designated as hedging instruments:

      

Cash flow foreign currency forward contracts

    Other current assets    $ 0   

Cash flow foreign currency forward contracts

    Other current liabilities      (182 ) 

Total derivatives designated as hedging instruments

         $ (182 ) 

We did not have any derivative assets or liabilities as of April 29, 2012.

We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.

Amounts recorded within accumulated other comprehensive income (“AOCI”) associated with our derivative instruments were as follows.

 

Dollars in thousands    Thirteen Weeks Ended
May 5, 2013		  

AOCI beginning balance amount of gain (loss)

    $ 0   

Amounts recognized in OCI before reclassifications

      (169 ) 

Amounts reclassified from OCI into cost of goods sold

      0   

AOCI ending balance amount of gain (loss)

    $ (169 )