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Derivative Financial Instruments | 6 Months Ended
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Jul. 29, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Derivative Financial Instruments Hedging Strategy Foreign Exchange Currency Contracts The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company has entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges. The Company’s primary objective is to hedge the variability in forecasted cash flows due to the foreign currency risk. Various transactions that occur primarily in Europe, Canada, South Korea, China and Mexico are denominated in U.S. dollars, British pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar denominated purchases of merchandise and U.S. dollar and British pound denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. The Company enters into derivative financial instruments, including forward exchange currency contracts, to offset some but not all of the exchange risk on certain of these anticipated foreign currency transactions. Periodically, the Company may also use foreign exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries. Interest Rate Swap Agreements The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Refer to Note 9 for further information. The impact of the credit risk of the counterparties to the derivative contracts is considered in determining the fair value of the foreign exchange currency contracts and interest rate swap agreements. As of July 29, 2017, credit risk has not had a significant effect on the fair value of the Company’s foreign exchange currency contracts and interest rate swap agreements. Hedge Accounting Policy Foreign Exchange Currency Contracts U.S. dollar forward contracts are used to hedge forecasted merchandise purchases over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold. The Company also hedges forecasted intercompany royalties over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in other income and expense in the period in which the royalty expense is incurred. The Company has also used U.S. dollar forward contracts to hedge the net investments of certain of the Company’s international subsidiaries over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in earnings (loss) until the sale or liquidation of the hedged net investment. The Company also has foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense. Interest Rate Swap Agreements Interest rate swap agreements are used to hedge the variability of the cash flows in interest payments associated with the Company’s floating-rate debt. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt. Periodically, the Company may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income and expense. Summary of Derivative Instruments The fair value of derivative instruments in the condensed consolidated balance sheets as of July 29, 2017 and January 28, 2017 is as follows (in thousands):
|  | Derivative Balance Sheet Location |  | Fair Value at Jul 29, 2017 |  | Fair Value at Jan 28, 2017
ASSETS: |  |  |  |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |
Cash flow hedges: |  |  |  |  |  |
Foreign exchange currency contracts |  | Other current assets/ Other assets |  | $ | 31 |  |  | $ | 6,072 |
Interest rate swap |  | Other assets |  | 643 |  |  | 876 |
Total derivatives designated as hedging instruments |  |  |  | 674 |  |  | 6,948 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Foreign exchange currency contracts |  | Other current assets/ Other assets |  | 13 |  |  | 3,796 |
Total |  |  |  | $ | 687 |  |  | $ | 10,744 |
LIABILITIES: |  |  |  |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |
Cash flow hedges: |  |  |  |  |  |
Foreign exchange currency contracts |  | Accrued expenses/ Other long-term liabilities |  | $ | 9,620 |  |  | $ | 1,250 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Foreign exchange currency contracts |  | Accrued expenses |  | 4,423 |  |  | 174 |
Total |  |  |  | $ | 14,043 |  |  | $ | 1,424 |
Derivatives Designated as Hedging Instruments Foreign Exchange Currency Contracts Designated as Cash Flow Hedges During the six months ended July 29, 2017, the Company purchased U.S. dollar forward contracts in Europe and Canada totaling US$82.0 million and US$12.3 million, respectively, that were designated as cash flow hedges. As of July 29, 2017, the Company had forward contracts outstanding for its European and Canadian operations of US$142.3 million and US$52.0 million, respectively, to hedge forecasted merchandise purchases and intercompany royalties, which are expected to mature over the next 17 months. As of July 29, 2017, accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a net unrealized loss of approximately $9.2 million, net of tax, of which $4.2 million will be recognized in cost of product sales or other expense over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values. At January 28, 2017, the Company had forward contracts outstanding for its European and Canadian operations of US$104.2 million and US$66.9 million, respectively, that were designated as cash flow hedges. Interest Rate Swap Agreement Designated as Cash Flow Hedge During fiscal 2017, the Company entered into an interest rate swap agreement with a notional amount of $21.5 million, designated as a cash flow hedge, to hedge the variability of cash flows in interest payments associated with the Company’s floating-rate debt. This interest rate swap agreement matures in January 2026 and converts the nature of the Company’s real estate secured term loan from LIBOR floating-rate debt to fixed-rate debt, resulting in a swap fixed rate of approximately 3.06%. As of July 29, 2017, accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized gain of approximately $0.4 million, net of tax, which will be recognized in interest expense after the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values. The following table summarizes the gains (losses) before taxes recognized on the derivative instruments designated as cash flow hedges in OCI and net earnings (loss) for the three and six months ended July 29, 2017 and July 30, 2016 (in thousands):
| Gain (Loss) Recognized in OCI |  | Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings (1) |  | Gain (Loss) Reclassified from Accumulated OCI into Earnings
| Three Months Ended |  |  | Three Months Ended
| Jul 29, 2017 |  | Jul 30, 2016 |  |  | Jul 29, 2017 |  | Jul 30, 2016
Derivatives designated as cash flow hedges: |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange currency contracts | $ | (14,673 | ) |  | $ | 5,762 |  |  | Cost of product sales |  | $ | 661 |  |  | $ | 1,141 |
Foreign exchange currency contracts | $ | (785 | ) |  | $ | 343 |  |  | Other income/expense |  | $ | 14 |  |  | $ | 49 |
Interest rate swap | $ | (77 | ) |  | $ | (685 | ) |  | Interest expense |  | $ | (26 | ) |  | $ | (59 | )
| Loss Recognized in OCI |  | Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Loss) (1) |  | Gain (Loss) Reclassified from Accumulated OCI into Earnings (Loss)
| Six Months Ended |  |  | Six Months Ended
| Jul 29, 2017 |  | Jul 30, 2016 |  |  | Jul 29, 2017 |  | Jul 30, 2016
Derivatives designated as cash flow hedges: |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange currency contracts | $ | (13,816 | ) |  | $ | (5,650 | ) |  | Cost of product sales |  | $ | 1,279 |  |  | $ | 2,576 |
Foreign exchange currency contracts | $ | (996 | ) |  | $ | (356 | ) |  | Other income/expense |  | $ | 93 |  |  | $ | 81 |
Interest rate swap | $ | (277 | ) |  | $ | (817 | ) |  | Interest expense |  | $ | (62 | ) |  | $ | (110 | )
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(1) | The Company recognized gains of $0.9 million and $1.5 million resulting from the ineffective portion related to foreign exchange currency contracts in interest income during the three and six months ended July 29, 2017, respectively. The Company recognized gains of $0.1 million and $0.5 million resulting from the ineffective portion related to foreign exchange currency contracts in interest income during the three and six months ended July 30, 2016, respectively. There was no ineffectiveness recognized related to the interest rate swap during the three and six months ended July 29, 2017 and July 30, 2016.
The following table summarizes net after-tax derivative activity recorded in accumulated other comprehensive income (loss) (in thousands):
| Three Months Ended |  | Six Months Ended
| Jul 29, 2017 |  | Jul 30, 2016 |  | Jul 29, 2017 |  | Jul 30, 2016
Beginning balance gain (loss) | $ | 4,948 |  |  | $ | (3,773 | ) |  | $ | 5,400 |  |  | $ | 7,252 |
Net gains (losses) from changes in cash flow hedges | (13,093 | ) |  | 4,617 |  |  | (12,969 | ) |  | (5,263 | )
Net gains reclassified to earnings (loss) | (606 | ) |  | (881 | ) |  | (1,182 | ) |  | (2,026 | )
Ending balance loss | $ | (8,751 | ) |  | $ | (37 | ) |  | $ | (8,751 | ) |  | $ | (37 | )
Derivatives Not Designated as Hedging Instruments As of July 29, 2017, the Company had euro foreign exchange currency contracts to purchase US$69.7 million expected to mature over the next 11 months and Canadian dollar foreign exchange currency contracts to purchase US$11.3 million expected to mature over the next eight months. The following table summarizes the gains (losses) before taxes recognized on the derivative instruments not designated as hedging instruments in other income and expense for the three and six months ended July 29, 2017 and July 30, 2016 (in thousands):
|  | Location of Gain (Loss) Recognized in Earnings (Loss) |  | Gain (Loss) Recognized in Earnings |  | Gain (Loss) Recognized in Earnings (Loss)
|  |  | Three Months Ended |  | Six Months Ended
|  |  | Jul 29, 2017 |  | Jul 30, 2016 |  | Jul 29, 2017 |  | Jul 30, 2016
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange currency contracts |  | Other income/expense |  | $ | (6,540 | ) |  | $ | 2,885 |  |  | $ | (7,333 | ) |  | $ | (3,144 | )
Interest rate swap |  | Other income/expense |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 38 |
At January 28, 2017, the Company had euro foreign exchange currency contracts to purchase US$81.4 million and Canadian dollar foreign exchange currency contracts to purchase US$13.9 million.

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