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DERIVATIVE FINANCIAL INSTRUMENTS
 9 Months Ended
Nov. 03, 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 measured at fair value and recorded in either other current assets or other current liabilities, respectively. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative instrument is designated as a hedge 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 November 3, 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 record the effective portion of changes in the fair value of our derivative instruments designated as cash flow hedges in other comprehensive income (“OCI”) until the earlier of either the hedged forecasted inventory purchase occurs or the respective contracts reach maturity. 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. As of November 3, 2013, we had foreign currency forward contracts in place to sell Canadian dollars and buy U.S. dollars totaling $23,800,000, consisting of $18,000,000 designated as cash flow hedges and $5,800,000 no longer designated as cash flow hedges due to the related inventory purchases having occurred. Based on the rates in effect on November 3, 2013, we would expect to reclassify a net gain of approximately $211,000 from OCI to cost of goods sold over the next 12 months.

In addition, as of November 3, 2013, we had non-designated foreign currency forward contracts in place to sell Australian dollars and buy U.S. dollars totaling $7,000,000. These contracts allow us to reduce the exchange rate risk associated with our assets and liabilities denominated in a foreign currency. 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 October 28, 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. 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 thirty-nine weeks ended November 3, 2013.

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

 

Dollars in thousands  

Thirteen

Weeks Ended

November 3, 2013

    

Thirty-Nine

Weeks Ended

November 3, 2013

  

Net gain recognized in OCI

   $ 119      $ 242   

Net gain reclassified from OCI into cost of goods sold

     31        31   

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

    

Instruments designated as cash flow hedges (a)

     (36 )      (78 ) 

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

     (291 )      (69 ) 

 

(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 no longer designated as cash flow hedges, 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   November 3, 2013  

Derivatives designated as hedging instruments:

     

Cash flow hedge foreign currency forward contracts

    Other current assets   $ 79   

Cash flow hedge foreign currency forward contracts

    Other current liabilities     0   

Total

        $ 79   

Derivatives not designated as hedging instruments:

     

Foreign currency forward contracts

    Other current assets   $ 106   

Foreign currency forward contracts

    Other current liabilities     0   

Total

        $ 106   

 

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
November 3, 2013		     Thirty-Nine Weeks Ended
November 3, 2013		  

AOCI beginning balance amount of gain (loss)

    $ 123      $ 0   

Amounts recognized in OCI before reclassifications

      119        242   

Amounts reclassified from OCI into cost of goods sold

      (31 )      (31 ) 

AOCI ending balance amount of gain (loss)

    $ 211      $ 211