DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Jan. 28, 2017

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

7.DERIVATIVE  FINANCIAL  INSTRUMENTS

GAAP requires that derivatives be carried at fair value on the balance sheet, and provides for hedge accounting when certain conditions are met.  The Company’s derivative financial instruments are recognized on the balance sheet at fair value.  Changes in the fair value of derivative instruments designated as “cash flow” hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of tax effects.  Ineffective portions of cash flow hedges, if any, are recognized in current period earnings.  Other comprehensive income or loss is reclassified into current period earnings when the hedged transaction affects earnings.  Changes in the fair value of derivative instruments designated as “fair value” hedges, along with corresponding changes in the fair values of the hedged assets or liabilities, are recorded in current period earnings.  Ineffective portions of fair value hedges, if any, are recognized in current period earnings.

The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of the hedged items.  If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company discontinues hedge accounting prospectively.

Interest Rate Risk Management

The Company is exposed to market risk from fluctuations in interest rates.  The Company manages its exposure to interest rate fluctuations through the use of a commercial paper program, interest rate swaps (fair value hedges) and forward-starting interest rate swaps (cash flow hedges).  The Company’s current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates.  To do this, the Company uses the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total of $2,500 or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.

The Company reviews compliance with these guidelines annually with the Financial Policy Committee of the Board of Directors.  These guidelines may change as the Company’s needs dictate.

Fair Value Interest Rate Swaps

The table below summarizes the outstanding interest rate swaps designated as fair value hedges as of January 28, 2017 and January 30, 2016.

	2016					2015
	Pay			Pay		Pay			Pay
	Floating			Fixed		Floating			Fixed
Notional amount	$	100		$	—	$	100		$	—
Number of contracts		2			—		2			—
Duration in years		1.92			—		2.92			—
Average variable rate		6.37	%		—		6.00	%		—
Average fixed rate		6.80	%		—		6.80	%		—
Maturity		December 2018					December 2018

The gain or loss on these derivative instruments as well as the offsetting gain or loss on the hedged items attributable to the hedged risk is recognized in current earnings as “Interest expense.”  These gains and losses for 2016 and 2015 were as follows:

	Year-To-Date
	January 28, 2017				January 30, 2016
	Gain/(Loss) on		Gain/(Loss) on		Gain/(Loss) on		Gain/(Loss) on
Consolidated Statements of Operations Classification	Swaps		Borrowings		Swaps		Borrowings
Interest Expense	$	(2)	$	2	$	1	$	(1)

The following table summarizes the location and fair value of derivative instruments designated as fair value hedges on the Company’s Consolidated Balance Sheets:

	Asset Derivatives
	Fair Value
	January 28,		January 30,
Derivatives Designated as Fair Value Hedging Instruments	2017		2016		Balance Sheet Location
Interest Rate Hedges	$	(1)	$	1	(Other long-term liabilities)/Other assets

Cash Flow Forward-Starting Interest Rate Swaps

As of January 28, 2017, the Company had eleven forward-starting interest rate swap agreements with maturity dates of August 2017 with an aggregate notional amount totaling $600, nine forward-starting interest rate swap agreements with maturity dates of January 2019 with an aggregate notional amount totaling $750 and five forward-starting interest rate swap agreements with maturity dates of January 2020 with an aggregate notional amount totaling $250.  A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt.  The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuance of debt in August 2017, January 2019 and January 2020.  Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP.  As of January 28, 2017, the fair value of the interest rate swaps was recorded in other assets and other long-term liabilities for $67 and $7, respectively, and accumulated other comprehensive income for $38 net of tax.

As of January 30, 2016, the Company had seven forward-starting interest rate swap agreements with maturity dates of August 2017 with an aggregate notional amount totaling $400. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuances of debt in August 2017.  Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP.  As of January 30, 2016, the fair value of the interest rate swaps was recorded in other long-term liabilities for $27 and accumulated other comprehensive loss for $17 net of tax.

During 2016, the Company terminated forward-starting interest rate swaps with maturity dates of October 2016, with an aggregate notional amount totaling $300.  These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the third quarter of 2016.  Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $13,  $8 net of tax, has been deferred in AOCI and will be amortized to earnings as the interest payments are made.

During 2015, the Company terminated eight forward-starting interest rate swap agreements with maturity dates of October 2015 and January 2016 with an aggregate notional amount totaling $600.  Four of these forward-starting interest rate swap agreements, with an aggregate notional amount totaling $300, were entered into and terminated in 2015.  These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued in 2015.  As discussed in Note 6, the Company issued $1,100 of senior notes in 2015.  Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $17,  $11 net of tax, has been deferred in AOCI and will be amortized to earnings as the interest payments are made.

The following table summarizes the effect of the Company’s derivative instruments designated as cash flow hedges for 2016 and 2015:

	Year-To-Date
	Amount of Gain/(Loss) in				Amount of Gain/(Loss)
	AOCI on Derivative				Reclassified from AOCI into				Location of Gain/(Loss)
Derivatives in Cash Flow Hedging	(Effective Portion)				Income (Effective Portion)				Reclassified into Income
Relationships	2016		2015		2016		2015		(Effective Portion)
Forward-Starting Interest Rate Swaps, net of tax*	$	(2)	$	(51)	$	(2)	$	(1)	Interest expense

*The amounts of Gain/(Loss) in AOCI on derivatives include unamortized proceeds and payments from forward-starting interest rate swaps once classified as cash flow hedges that were terminated prior to end of 2016 and 2015, respectively. 

For the above fair value and cash flow interest rate swaps, the Company has entered into International Swaps and Derivatives Association master netting agreements that permit the net settlement of amounts owed under their respective derivative contracts.  Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions.  These master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.

Collateral is generally not required of the counterparties or of the Company under these master netting agreements. As of January 28, 2017 and January 30, 2016, no cash collateral was received or pledged under the master netting agreements.

The effect of the net settlement provisions of these master netting agreements on the Company’s derivative balances upon an event of default or termination event is as follows as of January 28, 2017 and January 30, 2016:

							Gross Amounts Not Offset in the
					Net Amount		Balance Sheet
	Gross Amount		Gross Amounts Offset		Presented in the		Financial
January 28, 2017	Recognized		in the Balance Sheet		Balance Sheet		Instruments		Cash Collateral		Net Amount
Assets
Cash Flow Forward-Starting Interest Rate Swaps	$	67	$	—	$	67	$	—	$	—	$	67
Liabilities
Fair Value Interest Rate Swaps		1		—		1		—		—		1
Cash Flow Forward-Starting Interest Rate Swaps		7		—		7		—		—		7
Total	$	8	$	—	$	8	$	—	$	—	$	8

							Gross Amounts Not Offset in the
					Net Amount		Balance Sheet
	Gross Amount		Gross Amounts Offset		Presented in the		Financial
January 30, 2016	Recognized		in the Balance Sheet		Balance Sheet		Instruments		Cash Collateral		Net Amount
Assets
Fair Value Interest Rate Swaps	$	1	$	—	$	1	$	—	$	—	$	1
Liabilities
Cash Flow Forward-Starting Interest Rate Swaps	$	27	$	—	$	27	$	—	$	—	$	27