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DERIVATIVE FINANCIAL INSTRUMENTS
 6 Months Ended
Aug. 04, 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 foreign currency exchange risk related to the transactions of our foreign subsidiaries. To mitigate this risk, 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 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 in accordance with the Financial Accounting Standards Board Accounting Standard Codification (“ASC”) 815, Derivatives and Hedging. The majority of our foreign currency forward contracts entered into as of August 4, 2013 are 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 foreign currency 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 derivative instruments designated as cash flow hedging instruments in other comprehensive income (“OCI”) in our Condensed Consolidated Statement of Comprehensive Income until the earlier of either the hedged forecasted inventory purchase or the maturity of the respective contract. Subsequently, as the inventory is sold to the customer, we reclassify the amounts previously 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 August 4, 2013, we had foreign currency forward contracts in place to sell Canadian dollars and buy U.S. dollars totaling $23,200,000, consisting of $19,400,000 designated as cash flow hedges and $3,800,000 which have been de-designated due to the related inventory purchases having occurred. Based on the rates in effect on August 4, 2013, we would expect to reclassify a net gain of approximately $123,000 from OCI to cost of goods sold over the next 12 months.

In addition, as of August 4, 2013, we had non-designated foreign currency forward contracts to sell Australian dollars and buy U.S. dollars totaling $5,000,000. Any foreign exchange gains (losses) related to these contracts are recognized in other income (expense). There were no foreign currency forward contracts outstanding as of July 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 all hedges were deemed effective for assessment purposes for the thirteen and twenty-six weeks ended August 4, 2013.

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

 

Dollars in thousands    Thirteen
Weeks Ended
August 4, 2013		     Twenty-Six
Weeks Ended
August 4, 2013		  

Net gain (loss) recognized in OCI

    $ 292      $ 123   

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

      0        0   

Net foreign exchange gain (loss) recognized in other income (expense):

     

Instruments designated as cash flow hedges (a)

      (29 )      (42 ) 

Instruments not designated or de-designated during the period (b)

      222        222   

 

(a) Changes in fair value of the forward contract related to interest charges or “forward points”
(b) Changes in fair value subsequent to de-designation for instruments de-designated as cash flow hedges during the period, and changes in fair value related to instruments not designated as cash flow hedges

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    Balance sheet location        August 4, 2013  

Derivatives designated as hedging instruments:

      

Cash flow hedge foreign currency forward contracts

    Other current assets    $ 107   

Cash flow hedge foreign currency forward contracts

    Other current liabilities      (48 ) 

Total derivatives designated as hedging instruments

         $ 59   

Derivatives not designated as hedging instruments:

      

Foreign currency forward contracts

    Other current assets    $ 204   

Foreign currency forward contracts

    Other current liabilities      0   

Total derivatives not designated as hedging instruments

         $ 204   

 

We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210, Balance Sheet, 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
August 4, 2013		     Twenty-Six Weeks Ended
August 4, 2013		  

AOCI beginning balance amount of gain (loss)

    $ (169 )    $ 0   

Amounts recognized in OCI before reclassifications

      292        123   

Amounts reclassified from OCI into cost of goods sold

      0        0   

AOCI ending balance amount of gain (loss)

    $ 123      $ 123