Financial Instruments and Fair Value | 9 Months Ended |
Nov. 02, 2013 |
Financial Instruments and Fair Value | ' |
11. Financial instruments and fair value |
Signet’s principal financial instruments are comprised of cash, cash deposits/investments and overdrafts, accounts receivable and payable, derivatives and a revolving credit facility. Signet does not enter into derivative transactions for trading purposes. Derivative transactions are used by Signet for risk management purposes to address risks inherent in Signet’s business operations and sources of finance. The main risks arising from Signet’s operations are market risk including foreign currency risk and commodity risk, liquidity risk and interest rate risk. Signet uses these financial instruments to manage and mitigate these risks under policies reviewed and approved by the Board. |
|
Derivatives |
Signet enters into various types of derivative instruments to mitigate certain risk exposures related to changes in commodity costs and foreign exchange rates. Derivative instruments are recorded in the consolidated balance sheets at their fair values, as either assets or liabilities, with an offset to current or comprehensive income, depending on whether the derivative qualifies as an effective hedge. |
If a derivative instrument meets certain hedge accounting criteria, it may be designated as a cash flow hedge on the date it is entered into. A cash flow hedge is a hedge of the exposure to variability in the cash flows of a recognized asset, liability or a forecasted transaction. For cash flow hedge transactions, the effective portion of the changes in fair value of derivatives is reported as other comprehensive income (“OCI”) and is recognized in the consolidated income statements in the same period(s) and on the same financial statement line in which the hedged transaction affects net income. Amounts excluded from the effectiveness calculation and any ineffective portions of the change in fair value of the derivative are recognized immediately in other operating income, net in the consolidated income statements. In addition, gains and losses on derivatives that do not qualify for hedge accounting are recognized immediately in other operating income, net. |
The following types of derivative instruments are utilized by Signet: |
Forward foreign currency exchange contracts (designated)—These contracts, which are principally in US dollars, are entered into in order to limit the impact of movements in foreign exchange rates on forecasted foreign currency purchases. The total notional amount of these foreign currency contracts outstanding as of November 2, 2013 was $60.4 million (February 2, 2013 and October 27, 2012: $50.8 million and $75.9 million, respectively). These contracts have been designated as cash flow hedges and will be settled over the next 15 months (February 2, 2013 and October 27, 2012: 12 months and 15 months, respectively). |
Forward foreign currency exchange contracts (undesignated)—Foreign currency contracts not designated as cash flow hedges are used to hedge currency flows through Signet’s bank accounts to mitigate Signet’s exposure to foreign currency exchange risk in its cash and borrowings. |
Commodity forward purchase contracts and net zero-cost collar arrangements—These contracts are entered into in order to reduce Signet’s exposure to significant movements in the price of the underlying precious metal raw material. The total notional amount of these commodity derivative contracts outstanding as of November 2, 2013 was $58.1 million (February 2, 2013 and October 27, 2012: $187.6 million and $219.6 million, respectively). These contracts have been designated as cash flow hedges and will be settled over the next 12 months (February 2, 2013 and October 27, 2012: 11 months and 14 months, respectively). |
The bank counterparties to the derivative instruments expose Signet to credit-related losses in the event of their non-performance. However, to mitigate that risk, Signet only contracts with counterparties that meet certain minimum requirements under its counterparty risk assessment process. As of November 2, 2013, Signet believes that this credit risk did not materially change the fair value of the foreign currency or commodity contracts. |
The following table summarizes the fair value and presentation of derivative instruments in the condensed consolidated balance sheets: |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative assets | | | | | | | | | | | |
| | | | Fair value | | | | | | | | | | | |
(in millions) | | Balance sheet location | | November 2, | | | February 2, | | | October 27, | | | | | | | | | | | |
2013 | 2013 | 2012 | | | | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency contracts | | Other current assets | | $ | 0.2 | | | $ | 1 | | | $ | 0.4 | | | | | | | | | | | |
Foreign currency contracts | | Other assets | | | — | | | | — | | | | 0.1 | | | | | | | | | | | |
Commodity contracts | | Other current assets | | | 1.2 | | | | 2.8 | | | | 5.2 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 1.4 | | | | 3.8 | | | | 5.7 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency contracts | | Other current assets | | | 1.1 | | | | — | | | | — | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 1.1 | | | | — | | | | — | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total derivative assets | | | | $ | 2.5 | | | $ | 3.8 | | | $ | 5.7 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative liabilities | | | | | | | | | | | |
| | | | Fair value | | | | | | | | | | | |
(in millions) | | Balance sheet location | | November 2, | | | February 2, | | | October 27, | | | | | | | | | | | |
2013 | 2013 | 2012 | | | | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency contracts | | Other current liabilities | | $ | (0.7 | ) | | $ | — | | | $ | (0.7 | ) | | | | | | | | | | |
Foreign currency contracts | | Other liabilities | | | (0.2 | ) | | | — | | | | (0.2 | ) | | | | | | | | | | |
Commodity contracts | | Other current liabilities | | | (0.6 | ) | | | (4.6 | ) | | | (2.3 | ) | | | | | | | | | | |
Commodity contracts | | Other liabilities | | | — | | | | — | | | | (0.3 | ) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | (1.5 | ) | | | (4.6 | ) | | | (3.5 | ) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency contracts | | Other current liabilities | | | — | | | | — | | | | (0.5 | ) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | — | | | | — | | | | (0.5 | ) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total derivative liabilities | | | | $ | (1.5 | ) | | $ | (4.6 | ) | | $ | (4.0 | ) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The following tables summarize the effect of derivative instruments on the condensed consolidated income statements: |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of gain (loss) | | | Location of | | | Amount of gain | | | | | |
recognized in OCI on | gain (loss) | (loss) reclassified | | | | |
derivatives | reclassified from | from accumulated OCI into | | | | |
(Effective portion) | accumulated OCI | income (Effective portion) | | | | |
| into income | | | | | |
| (Effective portion) | | | | | |
| | 13 weeks ended | | | | | | 13 weeks ended | | | | | |
(in millions) | | November 2, | | | October 27, | | | | | | November 2, | | | October 27, | | | | | |
2013 | 2012 | 2013 | 2012 | | | | |
Derivatives in cash flow hedging relationships: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency contracts | | $ | (2.1 | ) | | $ | (1.1 | ) | | | Cost of sales | | | $ | 0.2 | | | $ | 0.1 | | | | | |
Commodity contracts | | | 0.3 | (1) | | | 7.9 | | | | Cost of sales | | | | (2.3 | ) | | | 2.8 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | (1.8 | ) | | $ | 6.8 | | | | | | | $ | (2.1 | ) | | $ | 2.9 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | Amount of gain (loss) | | | Location of | | | Amount of gain | | | | | |
recognized in OCI on | gain (loss) | (loss) reclassified | | | | |
derivatives | reclassified from | from accumulated OCI into | | | | |
(Effective portion) | accumulated OCI | income (Effective portion) | | | | |
| into income | | | | | |
| (Effective portion) | | | | | |
| | 39 weeks ended | | | | | | 39 weeks ended | | | | | |
(in millions) | | November 2, | | | October 27, | | | | | | November 2, | | | October 27, | | | | | |
2013 | 2012 | 2013 | 2012 | | | | |
Derivatives in cash flow hedging relationships: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency contracts | | $ | (0.7 | ) | | $ | (1.0 | ) | | | Cost of sales | | | $ | 0.6 | | | $ | 0.3 | | | | | |
Commodity contracts | | | (27.2 | )(1) | | | (6.3 | ) | | | Cost of sales | | | | (1.7 | ) | | | 17.1 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | (27.9 | ) | | $ | (7.3 | ) | | | | | | $ | (1.1 | ) | | $ | 17.4 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
-1 | During the 13 and 39 weeks ended November 2, 2013, losses recognized in OCI on commodity derivative contracts designated in cash flow hedging relationships included $0.0 million and $25.8 million of losses related to the change in fair value of commodity derivative contracts the Company terminated prior to contract maturity in the respective periods. | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of gain (loss) | | | Location of gain (loss) | | Amount of gain (loss) | | | | | | | |
recognized in income | recognized in income on | recognized in income | | | | | | |
on derivatives | derivatives | on derivatives | | | | | | |
| | 13 weeks ended | | | | | 39 weeks ended | | | | | | | |
(in millions) | | November 2, | | | October 27, | | | | | November 2, | | | October 27, | | | | | | | |
2013 | 2012 | 2013 | 2012 | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency contracts | | $ | (2.8 | ) | | $ | (1.6 | ) | | Other operating income, net | | $ | — | | | $ | (0.5 | ) | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | (2.8 | ) | | $ | (1.6 | ) | | | | $ | — | | | $ | (0.5 | ) | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
As of November 2, 2013, the ending balance of accumulated OCI for commodity derivative contracts designated in cash flow hedging relationships was a loss of $26.0 million, including a loss of $25.9 million related to the commodity derivative contracts terminated prior to contract maturity in Fiscal 2014. The Company expects approximately $23.2 million of net pre-tax derivative losses to be reclassified out of accumulated OCI into earnings within the next 12 months of which $9.8 million will be recognized in the fourth quarter of Fiscal 2014. |
Fair value |
The estimated fair value of Signet’s financial instruments held or issued to finance Signet’s operations is summarized below. Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown below are not necessarily indicative of the amounts that Signet would realize upon disposition nor do they indicate Signet’s intent or ability to dispose of the financial instrument. Assets and liabilities that are carried at fair value are required to be classified and disclosed in one of the following three categories: |
Level 1—quoted market prices in active markets for identical assets and liabilities |
Level 2—observable market based inputs or unobservable inputs that are corroborated by market data |
Level 3—unobservable inputs that are not corroborated by market data |
Signet determines fair value based upon quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The methods Signet uses to determine fair value on an instrument-specific basis are detailed below: |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | November 2, 2013 | | | February 2, 2013 | | | October 27, 2012 | |
(in millions) | | Carrying | | | Fair Value | | | Carrying | | | Fair Value | | | Carrying | | | Fair Value | |
Value | (Level 2) | Value | (Level 2) | Value | (Level 2) |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Forward foreign currency contracts and swaps | | $ | 1.3 | | | $ | 1.3 | | | $ | 1 | | | $ | 1 | | | $ | 0.5 | | | $ | 0.5 | |
Forward commodity contracts | | | 1.2 | | | | 1.2 | | | | 2.8 | | | | 2.8 | | | | 5.2 | | | | 5.2 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Forward foreign currency contracts and swaps | | | (0.9 | ) | | | (0.9 | ) | | | — | | | | — | | | | (1.4 | ) | | | (1.4 | ) |
Forward commodity contracts | | | (0.6 | ) | | | (0.6 | ) | | | (4.6 | ) | | | (4.6 | ) | | | (2.6 | ) | | | (2.6 | ) |
The fair value of derivative financial instruments has been determined based on market value equivalents at the balance sheet date, taking into account the current interest rate environment, current foreign currency forward rates or current commodity forward rates. These are held as assets and liabilities within other receivables and other payables, and all contracts have a maturity of less than 15 months. The carrying amounts of cash and cash equivalents, accounts receivable, other receivables, accounts payable and accrued liabilities approximate fair value because of the short-term maturity of these amounts. |