FAIR VALUE MEASUREMENTS AND DERIVATIVES | 9 Months Ended |
Nov. 02, 2013 |
FAIR VALUE MEASUREMENTS AND DERIVATIVES | ' |
FAIR VALUE MEASUREMENTS AND DERIVATIVES | ' |
NOTE 13—FAIR VALUE MEASUREMENTS AND DERIVATIVES |
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The Company’s fair value measurements consist of (a) financial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all non-financial assets and liabilities that are recognized or disclosed at fair value on a non-recurring basis. |
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Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. |
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Assets and Liabilities that are Measured at Fair Value on a Recurring Basis: |
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The Company’s long-term investments and interest rate swap agreements are measured at fair value on a recurring basis. The information in the following paragraphs and tables primarily addresses matters relative to these assets and liabilities. |
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Cash equivalents: |
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Cash equivalents, other than credit card receivables, include highly liquid investments with an original maturity of three months or less at acquisition. The Company carries these investments at fair value. As a result, the Company has determined that its cash equivalents in their entirety are classified as a Level 1 measure within the fair value hierarchy. |
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Collateral investments: |
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Collateral investments include monies on deposit that are restricted. The Company carries these investments at fair value. As a result, the Company has determined that its collateral investments are classified as a Level 1 measure within the fair value hierarchy. |
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Deferred compensation assets: |
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Deferred compensation assets include variable life insurance policies held in a Rabbi Trust. The Company values these policies using observable market data. The inputs used to value the variable life insurance policy fall within Level 2 of the fair value hierarchy. |
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Derivative liability: |
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The Company has two interest rate swaps designated as cash flow hedges on $100.0 million of the Company’s Senior Secured Term Loan facility that expires in October 2018. The Company values these swaps using observable market data to discount projected cash flows and for credit risk adjustments. The inputs used to value derivatives fall within Level 2 of the fair value hierarchy. |
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The following tables provide information by level for assets and liabilities that are measured at fair value, on a recurring basis: |
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(dollar amounts in thousands) | | Fair Value at | | Fair Value Measurements Using Inputs Considered as | |
Description | | November 2, 2013 | | Level 1 | | Level 2 | | Level 3 | |
Assets: | | | | | | | | | |
Cash and cash equivalents | | $ | 55,798 | | $ | 55,798 | | $ | — | | $ | — | |
Collateral investments (1) | | 19,929 | | 19,929 | | — | | — | |
Deferred compensation assets (1) | | 4,205 | | — | | 4,205 | | — | |
Derivative asset (1) | | 543 | | — | | 543 | | — | |
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(dollar amounts in thousands) | | Fair Value at | | Fair Value Measurements Using Inputs Considered as | |
Description | | February 2, 2013 | | Level 1 | | Level 2 | | Level 3 | |
Assets: | | | | | | | | | |
Cash and cash equivalents | | $ | 59,186 | | $ | 59,186 | | $ | — | | $ | — | |
Collateral investments (1) | | 20,929 | | 20,929 | | — | | — | |
Deferred compensation assets (1) | | 3,834 | | — | | 3,834 | | — | |
Liabilities: | | | | | | | | | |
Derivative liability (2) | | 1,567 | | — | | 1,567 | | — | |
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(1) Included in other long-term assets. |
(2) Included in other long-term liabilities. |
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On October 11, 2012, the Company settled its interest rate swap designated as a cash flow hedge on $145.0 million of the Company’s Term Loan prior to its amendment and restatement. The swap was used to minimize interest rate exposure and overall interest costs by converting the variable component of the total interest rate to a fixed rate of 5.036%. Since February 1, 2008, this swap was deemed to be fully effective and all adjustments in the interest rate swap’s fair value have been recorded to accumulated other comprehensive income (loss). The settlement of this swap resulted in an interest charge of $7.5 million, which was previously recorded within accumulated other comprehensive income (loss). |
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On October 11, 2012, the Company entered into two new interest rate swaps for a notional amount of $50.0 million each that together were designated as a cash flow hedge on the first $100.0 million of the amended and restated Term Loan. The interest rate swaps convert the variable LIBOR portion of the interest payments due on the first $100.0 million of the Term Loan to a fixed rate of 1.855%. |
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The following represents the impact of fair value accounting for the Company’s derivative liability on its consolidated financial statements: |
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(dollar amounts in thousands) | | Amount of Gain in | | Earnings Statement | | Amount of Loss | | | | | |
Other Comprehensive | Classification | Recognized in Earnings | | | | |
Income (Loss) | | (Effective Portion) (a) | | | | |
(Effective Portion) | | | | | | |
Thirteen weeks ended November 2, 2013 | | $ | (372 | ) | Interest expense | | $ | (158 | ) | | | | |
Thirteen weeks ended October 27, 2012 | | $ | (170 | ) | Interest expense | | $ | (1,201 | ) | | | | |
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Thirty-nine weeks ended November 2, 2013 | | $ | 1,319 | | Interest expense | | $ | (459 | ) | | | | |
Thirty-nine weeks ended October 27, 2012 | | $ | 1,734 | | Interest expense | | $ | (4,540 | ) | | | | |
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(a) Represents the effective portion of the loss reclassified from accumulated other comprehensive income (loss). |
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The fair value of the derivative was a $0.5 million asset and a $1.6 million liability as of November 2, 2013 and February 2, 2013, respectively. Of the $2.1 million increase in the fair value during the thirty-nine weeks ended November 2, 2013, $1.3 million, net of tax, was recorded to accumulated other comprehensive income (loss) on the consolidated balance sheet. |
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Non-financial assets measured at fair value on a non-recurring basis: |
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Certain assets are measured at fair value on a non-recurring basis, that is, the assets are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. These measures of fair value, and related inputs, are considered level 2 or 3 measures under the fair value hierarchy. Measurements of assets held and used are discussed in Note 14, “Impairments”. |