Neiman Marcus 2009 Annual Report Download - page 117

Table of Contents
gains on our outstanding interest rate swaps are recognized as assets while unrealized losses are recognized as liabilities. Our interest
rate swap agreements are highly, but not perfectly, correlated to the changes in interest rates to which we are exposed. As a result,
unrealized gains and losses on our interest rate swap agreements are designated as effective or ineffective. The effective portion of
such gains or losses is recorded as a component of accumulated other comprehensive loss while the ineffective portion of such gains
or losses is recorded as a component of interest expense.
In addition, we realize a gain or loss on our interest rate swap agreements in connection with each required interest payment
on our floating rate indebtedness. These realized gains or losses are reclassified from accumulated other comprehensive loss to
interest expense. The realized gains and losses effectively adjust the contractual interest requirements pursuant to the terms of our
floating rate indebtedness to the interest requirements at the fixed rates established in the interest rate swaps agreements. The cash
flows from our interest rate swaps are recorded in operating activities in the consolidated statements of cash flows.
Interest Rate Caps. Effective January 2010, NMG entered into interest rate cap agreements for an aggregate notional amount
of $500.0 million in order to hedge the variability of our cash flows related to a portion of our floating rate indebtedness once the
interest rate swap expires on December 2010. The interest rate cap agreements commence in December 2010 and expire in
December 2012. Pursuant to the interest rate cap agreements, NMG has capped LIBOR at 2.50% through December 2012 with
respect to the $500.0 million notional amount of such agreements. In the event LIBOR is less than 2.50%, NMG will pay interest at
the lower LIBOR rate. In the event LIBOR is higher than 2.50%, NMG will pay interest at the capped rate of 2.50%.
At each balance sheet date, the interest rate caps are recorded at estimated fair value. Changes in the fair value of the cap are
expected to be highly effective in offsetting the unpredictability in expected future cash flows on floating rate indebtedness
attributable to fluctuations in LIBOR interest rates above 2.50%. Unrealized gains and losses on the outstanding balances of the
interest rate caps are recorded as a component of accumulated other comprehensive loss. Gains and losses realized at the time of our
quarterly interest payments due to the expiration of applicable portions of the interest rate caps are reclassified to interest expense.
Fair Value. The fair values of the interest rate swaps and interest rate caps are estimated using industry standard valuation
models using market-based observable inputs, including interest rate curves (Level 2). A summary of the recorded assets (liabilities)
with respect to our derivative financial instruments included in our consolidated balance sheets is as follows:
(in thousands)
July 31,
2010
August 1,
2009
Interest rate caps (included in other long-term assets) $ 1,040 $ —
Interest rate swaps (included in other current liabilities) $ (22,661) $ —
Interest rate swaps (included in other long-term liabilities) $ — $ (57,750)
Accumulated other comprehensive loss, net of taxes $ 17,281 $ 35,508
A summary of the recorded amounts related to our interest rate swaps reflected in our consolidated statements of operations
are as follows:
Fiscal year ended
(in thousands)
July 31,
2010
August 1,
2009
August 2,
2008
Realized hedging losses – included in interest
expense, net $ 45,663 $ 29,212 $ 3,841
Ineffective hedging losses – included in interest
expense, net $ 854 $ 669 $ 479
The amount of losses recorded in other comprehensive loss at July 31, 2010 that is expected to be reclassified into interest
expense in the next twelve months, if interest rates remain unchanged, is approximately $22.7 million.
F-24