Fair Value of Financial Instruments

6 Months Ended

Jul. 28, 2017

Fair Value of Financial Instruments

Fair Value of Financial Instruments

7.           Fair Value of Financial Instruments

The Company complies with authoritative guidance for fair value measurement and disclosures which establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described below:

Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level 2: Defined as observable inputs other than Level 1 prices.  These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company uses the best available information in measuring fair value.  The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis (in thousands) as of July 28, 2017:

	July 28, 2017
	Total		Level 1		Level 2		Level 3
ASSETS
Other assets — assets that fund deferred compensation	$	912	$	912	$	—	$	—
LIABILITIES
Other current liabilities — transition payments	$	213	$	—	$	—	$	213
Other long-term liabilities — transition payments	$	39	$	—	$	—	$	39
Other long-term liabilities — deferred compensation	$	912	$	912	$	—	$	—

Level 1 measurements include $0.9 million of deferred compensation assets that fund the liabilities related to the Company’s deferred compensation plan, including investments in trust funds.  The fair values of these funds are based on quoted market prices in an active market.

There were no Level 2 assets or liabilities as of July 28, 2017.

Level 3 measurements include transition payments to Mr. Covert (See Note 6, “Derivative Financial Instruments”) estimated using a valuation model that includes Level 3 unobservable inputs.  Significant assumptions used in the analysis include projected stock prices, stock volatility and the Company’s credit spread.

The Company did not have any transfers in and out of Levels 1 and 2 during the first half of fiscal 2018.

The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis (in thousands) as of January 27, 2017:

	January 27, 2017
	Total		Level 1		Level 2		Level 3
ASSETS
Other assets — assets that fund deferred compensation	$	816	$	816	$	—	$	—
LIABILITIES
Other current liabilities — transition payments	$	831	$	—	$	—	$	831
Other long-term liabilities — transition payments interest rate swap	$	217	$	—	$	—	$	217
Other long-term liabilities — deferred compensation	$	816	$	816	$	—	$	—

Level 1 measurements include $0.8 million of deferred compensation assets that fund the liabilities related to the Company’s deferred compensation plan, including investments in trust funds.  The fair values of these funds are based on quoted market prices in an active market.

There were no Level 2 assets or liabilities as of January 27, 2017.

Level 3 measurements include transition payments to Mr. Covert estimated using a valuation model that includes Level 3 unobservable inputs.  Significant assumptions used in the analysis include projected stock prices, stock volatility and the Company’s credit spread.

The following table summarizes the activity for the period of changes in fair value of the Company’s Level 3 instruments (in thousands):

	For the Second Quarter Ended						For the First Half Ended
Transition Payments	July 28, 2017			July 29, 2016			July 28, 2017			July 29, 2016
Description
Beginning balance	$	(759	)	$	(1,222	)	$	(1,048	)	$	(1,205	)
Transfers in and/or out of Level 3	—			—			—			—
Total realized/unrealized gains (loss):
Included in earnings (1)	98			(665		)	(38		)	(1,534		)
Included in other comprehensive loss	—			—			—			—
Purchases, redemptions and settlements:
Settlements	409			1,060			834			1,912
Ending balance	$	(252	)	$	(827	)	$	(252	)	$	(827	)
Total amount of unrealized gains (losses) for the period included in earnings relating to liabilities held at the reporting period	$	18		$	(314	)	$	(35	)	$	(564	)

(1) Gains (losses) are included in selling, general and administrative expenses.

The outstanding debt under the Credit Facilities and the Senior Notes is recorded in the financial statements at historical cost, net of applicable unamortized discounts and deferred financing costs.

The ABL Facility is tied directly to market rates and fluctuates as market rates change; as a result, the carrying value of the ABL Facility approximates fair value as of July 28, 2017 and January 27, 2017.

The fair value of the First Lien Term Loan Facility was estimated at $584.4 million, or $5.9 million lower than its carrying value, as of July 28, 2017, based on quoted market prices of the debt (Level 1 inputs).  The fair value of the First Lien Term Loan Facility was estimated at $516.7 million, or $77.2 million lower than its carrying value, as of January 27, 2017, based on quoted market prices of the debt (Level 1 inputs).

The fair value of the Senior Notes was estimated at $207.5 million, or $42.5 million lower than the carrying value, as of July 28, 2017, based on quoted market prices of the debt (Level 1 inputs).  The fair value of the Senior Notes was estimated at $166.9 million, or $83.1 million lower than the carrying value, as of January 27, 2017, based on quoted market prices of the debt (Level 1 inputs).

See Note 5, “Debt” for more information on the Company’s debt.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

During the second quarter of fiscal 2018, the Company recognized an impairment charge of approximately $1.5 million relating to the anticipated closure of three stores by the end of fiscal 2018 or early fiscal 2019.  The remaining net book value of assets measured at fair value was $0.1 million.  The fair value measurements used in these impairment evaluations were based on discounted cash flow estimates using unobservable inputs (Level 3).