Derivative Financial Instruments

6 Months Ended

Jul. 28, 2017

Derivative Financial Instruments

Derivative Financial Instruments

6.           Derivative Financial Instruments

The Company entered into derivative instruments for risk management purposes and uses these derivatives to manage exposure to fluctuation in interest rates.

Interest Rate Swap

In May 2012, the Company entered into a floating-to-fixed interest rate swap agreement for an initial aggregate notional amount of $261.8 million to limit exposure to interest rate increases related to a portion of the Company’s floating rate indebtedness once the Company’s interest rate cap agreement expires.  The swap agreement, effective November 2013, hedged a portion of contractual floating rate interest commitments through the expiration of the swap agreement in May 2016.  As a result of the agreement, the Company’s effective fixed interest rate on the notional amount of floating rate indebtedness was 1.36% plus an applicable margin of 3.50%.

The Company designated the interest rate swap agreement as a cash flow hedge.  The interest rate swap agreement was highly correlated to the changes in interest rates to which the Company is exposed.  Unrealized gains and losses on the interest rate swap were designated as effective or ineffective.  The effective portion of such gains or losses was recorded as a component of AOCI or loss, while the ineffective portion of such gains or losses was recorded as a component of interest expense.  Realized gains and losses in connection with each required interest payment were reclassified from AOCI or loss to interest expense.

Payments

In September 2015, the Company entered into an employment agreement with Geoffrey J. Covert as the President and Chief Executive Officer of each of the Company and Parent. In connection with this agreement, Mr. Covert is entitled to receive amounts under a transition program based on the value of certain equity awards from his former employer that he forfeited in connection with his previous employment.  The maximum amount of payments due under this agreement is approximately $5.0 million, payable over a period of four years. The Company accounts for these transition payments as derivatives that are not designated as hedging instruments and has measured the obligation at fair value at July 28, 2017 and January 27, 2017. The Company recognizes the expense associated with these payments over the requisite service period.

Fair Value

The fair value of the transition payments is estimated using a valuation model that includes unobservable inputs (Level 3, as defined in Note 7, “Fair Value of Financial Instruments”).

A summary of the recorded amounts included in the consolidated balance sheets is as follows (in thousands):

	July 28, 2017		January 27, 2017
Derivatives not designated as hedging instruments
Transition payments (included in other current liabilities)	$	213	$	831
Transition payments (included in other long-term liabilities)	$	39	$	217

A summary of recorded amounts included in the unaudited consolidated statements of comprehensive loss is as follows (in thousands):

	For the Second Quarter Ended						For the First Half Ended
	July 28, 2017			July 29, 2016			July 28, 2017		July 29, 2016
Derivatives designated as cash flow hedging instruments:
(Gain) loss related to effective portion of derivative recognized in OCI	$	—		$	(46	)	$	—	$	168
(Gain) loss related to effective portion of derivatives reclassified from AOCI to interest expense	$	—		$	(49	)	$	—	$	330
Gain related to ineffective portion of derivative recognized in interest expense	$	—		$	65		$	—	$	36
Derivatives not designated as hedging instruments:
(Gain) loss recognized in selling, general and administrative expenses	$	(98	)	$	665		$	38	$	1,534