Derivatives and Hedging Activities

6 Months Ended

Jul. 30, 2011

Derivatives and Hedging Activities [Abstract]

Derivatives and Hedging Activities

5. Derivatives and Hedging Activities

The Company formally designates and documents the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transaction. The Company formally assesses both at inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure. The Company measures the effectiveness of its cash flow hedges by evaluating the following criteria: (i) the re-pricing dates of the derivative instrument match those of the debt obligation; (ii) the interest rates of the derivative instrument and the debt obligation are based on the same interest rate index and tenor; (iii) the variable interest rate of the derivative instrument does not contain a floor or cap, or other provisions that cause a basis difference with the debt obligation; and (iv) the likelihood of the counterparty not defaulting is assessed as being probable.

The Company primarily employs derivative financial instruments to manage its exposure to interest rate changes and to limit the volatility and impact of interest rate changes on earnings and cash flows. The Company does not enter into derivative financial instruments for trading or speculative purposes. The Company faces credit risk if the counterparties to the financial instruments are unable to perform their obligations. However, the Company seeks to mitigate derivative credit risk by entering into transactions with counterparties that are significant and creditworthy financial institutions. The Company monitors the credit ratings of the counterparties.

For derivatives that qualify as cash flow hedges, the Company reports the effective portion of the change in fair value as a component of “Accumulated other comprehensive income (loss), net of tax” in the Unaudited Condensed Consolidated Balance Sheets and reclassifies it into earnings in the same periods in which the hedged item affects earnings, and within the same income statement line item as the impact of the hedged item. The ineffective portion of the change in fair value of a cash flow hedge is recognized in income immediately. No ineffective portion was recorded to earnings during the three and six months ended July 30, 2011 and July 31, 2010, respectively, and all components of the derivative gain or loss were included in the assessment of hedge effectiveness. For derivative financial instruments which do not qualify as cash flow hedges, any changes in fair value would be recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss).

The Company may at its discretion change the designation of any such hedging instrument agreements prior to maturity. At that time, any gains or losses previously reported in accumulated other comprehensive income (loss) on termination would amortize into interest expense or interest income to correspond to the recognition of interest expense or interest income on the hedged debt. If such debt instrument was also terminated, the gain or loss associated with the terminated derivative included in accumulated other comprehensive income (loss) at the time of termination of the debt would be recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) at that time.

On July 28, 2010, the Company entered into an interest rate swap agreement (the “Swap”) to manage exposure to fluctuations in interest rate changes related to the senior secured term loan facility. The Swap has been designated and accounted for as a cash flow hedge and expires on July 30, 2013. The Swap represents a contract to exchange floating rate for fixed interest payments periodically over the life of the Swap without exchange of the underlying notional amount. The Swap covers an aggregate notional amount of $200.0 million of the outstanding principal balance of the senior secured term loan facility and has a fixed rate of 1.2235%. The interest rate Swap results in the Company paying a fixed rate plus the applicable margin then in effect for LIBOR borrowings resulting in an interest rate of 3.97% at July 30, 2011, on a notional amount of $200.0 million of the senior secured term loan.

The Company entered into three interest rate swap agreements in July 2007 (the “2007 Swaps”) to manage exposure to interest rate changes related to the senior secured term loan facility. The 2007 Swaps were designated and accounted for as cash flow hedges. Those 2007 Swaps expired on June 30, 2010. The 2007 Swaps covered an aggregate notional amount of $435.0 million of the outstanding principal balance of the senior secured term loan facility. The fixed rates of the 2007 Swaps ranged from 4.96% to 5.25%.

The Company does not make any credit-related valuation adjustments to the Swap entered into on July 28, 2010 because it is collateralized by cash, the balance of which is $5.0 million at July 30, 2011. The collateral requirement increases for declines in the three year LIBOR rate below 1.2235%. As of July 30, 2011, the three year LIBOR rate was 0.58% and each further 10 basis point decline in rate would result in an additional collateral requirement of $0.6 million. Any subsequent increases in the three year LIBOR rate will result in a release of the collateral. The Company included credit-related valuation adjustments in the calculation of fair value for the 2007 Swaps.

At July 30, 2011 and January 29, 2011, the estimated fair values of the Company’s derivative financial instruments designated as interest rate cash flow hedges were liabilities of approximately $2.5 million and $1.2 million, respectively, which were recorded in “Accrued expenses and other current liabilities” in the Unaudited Condensed Consolidated Balance Sheets. These amounts were also recorded, net of tax of approximately $5.7 million and $5.7 million, respectively, as a component in “Accumulated other comprehensive income (loss), net of tax” in the Unaudited Condensed Consolidated Balance Sheets. See Note 3 — Fair Value Measurements for fair value measurement of interest rate swaps.

The following tables provide a summary of the financial statement effect of the Company’s derivative financial instruments designated as interest rate cash flow hedges during the three and six months ended July 30, 2011 and July 31, 2010 (in thousands):

Location of Gain or

(Loss) Reclassified

Amount of Gain or (Loss)

Derivatives in

Amount of Gain or (Loss)

from Accumulated

Reclassified from Accumulated

Cash Flow Hedging

Recognized in OCI on Derivative

OCI into Income

OCI into Income

Relationships

(Effective Portion)

(Effective Portion)

(Effective Portion) (1)

Three months ended

Three months ended

July 30, 2011

July 31, 2010

July 30, 2011

July 31, 2010

Interest rate swaps

$

(1,079

)

$

2,590

Interest expense, net

$

(481

)

$

(3,447

)

(1) Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings as interest expense is recognized on the senior secured term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges.

Location of Gain or

(Loss) Reclassified

Amount of Gain or (Loss)

Derivatives in Cash

Amount of Gain or (Loss)

from Accumulated

Reclassified from Accumulated

Flow Hedging

Recognized in OCI on Derivative

OCI into Income

OCI into Income

Relationships

(Effective Portion)

(Effective Portion)

(Effective Portion) (1)

Six months ended

Six months ended

July 30, 2011

July 31, 2010

July 30, 2011

July 31, 2010

Interest rate swaps

$

(1,376

)

$

7,749

Interest expense, net

$

(946

)

$

(8,779

)

(1) Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings as interest expense is recognized on the senior secured term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges.

Over the next twelve months, the Company expects to reclassify net losses on the Company’s interest rate swaps recognized within “Accumulated other comprehensive income (loss), net of tax” of $1.9 million to interest expense.