Derivatives and Hedging Activities

9 Months Ended

Nov. 02, 2013

Derivatives and Hedging Activities

5. Derivatives and Hedging Activities

The Company does not have any derivative and hedging activity since September 20, 2012 when the Company terminated its former interest rate swap. During the periods when the Company had the interest rate swap, it followed the accounting treatment described below.

The Company formally designated and documented 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 assessed both at inception and at least quarterly thereafter, whether the financial instruments that were used in hedging transactions were effective at offsetting changes in cash flows of the related underlying exposure. The Company measured 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 employed 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 did not enter into derivative financial instruments for trading or speculative purposes. The Company faced credit risk if the counterparties to the financial instruments were unable to perform their obligations. However, the Company sought to mitigate derivative credit risk by entering into transactions with counterparties that were significant and creditworthy financial institutions. The Company monitored the credit ratings of the counterparties.

For derivatives that qualified as cash flow hedges, the Company reported 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 reclassified it into earnings in the same periods in which the hedged item affected 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 was recognized in income immediately. No ineffective portion was recorded to earnings during the three and nine months ended October 27, 2012 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 Unaudited Condensed Consolidated Statements of Operations and Comprehensive 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), net of tax” 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), net of tax” at the time of termination of the debt would be recognized in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss at that time.

The following tables provide a summary of the financial statement effect of the Company’s derivative financial instrument designated as an interest rate cash flow hedge during the three and nine months ended October 27, 2012 (in thousands):

Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (1)
	Three months ended October 27, 2012				Three months ended October 27, 2012 (2)
Interest rate swap	$	(153	)	Interest expense, net	$	(1,896	)

(1) Represents reclassification of amounts from accumulated other comprehensive income (loss) into earnings as interest expense was recognized on the former term loan. No ineffectiveness was associated with the interest rate cash flow hedge.

(2) Includes a reclassification amount of $1,784 from accumulated other comprehensive loss into interest expense resulting from the termination of the swap.

Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (1)
	Nine months ended October 27, 2012			Nine months ended October 27, 2012 (2)
Interest rate swap	$	375	Interest expense, net	$	(2,620	)

(1) Represents reclassification of amounts from accumulated other comprehensive income (loss) into earnings as interest expense was recognized on the former term loan. No ineffectiveness was associated with the interest rate cash flow hedge.

(2) Includes a reclassification amount of $1,784 from accumulated other comprehensive loss into interest expense resulting from the termination of the swap.