Famous Footwear 2014 Annual Report Download - page 67

66 2014 BROWN SHOE COMPANY, INC. FORM 10-K
12. RISK MANAGEMENT AND DERIVATIVES
General Risk Management
The Company maintains cash and cash equivalents and certain other financial instruments with various financial
institutions. The financial institutions are located throughout the world and the Company’s policy is designed to
limit exposure to any one institution or geographic region. The Company’s periodic evaluations of the relative credit
standing of these financial institutions are considered in the Company’s investment strategy.
The Company’s Brand Portfolio segment sells to national chains, department stores, mass merchandisers, independent
retailers, online retailers and catalogs primarily in the United States, Canada and China. Receivables arising from these
sales are not collateralized; however, a portion is covered by documentary letters of credit. Credit risk is aected
by conditions or occurrences within the economy and the retail industry. The Company maintains an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific customers and historical trends.
Derivatives
In the normal course of business, the Company’s financial results are impacted by currency rate movements in foreign-currency-
denominated assets, liabilities and cash flows as it makes a portion of its purchases and sales in local currencies. The Company
has established policies and business practices that are intended to mitigate a portion of the eect of these exposures. The
Company uses derivative financial instruments, primarily forward contracts, to manage its currency exposures. These derivative
financial instruments are viewed as risk management tools and are not used for trading or speculative purposes. Derivatives
entered into by the Company are designated as cash flow hedges of forecasted foreign currency transactions.
Derivative financial instruments expose the Company to credit and market risk. The market risk associated with these
instruments resulting from currency exchange movements is expected to oset the market risk of the underlying
transactions being hedged. The Company does not believe there is a significant risk of loss in the event of non-performance
by the counterparties associated with these instruments because these transactions are executed with major international
financial institutions and have varying maturities through January 2016. Credit risk is managed through the continuous
monitoring of exposures to such counterparties.
The Company principally uses foreign currency forward contracts as cash flow hedges to oset a portion of the eects of
exchange rate fluctuations. The Company’s cash flow exposures include anticipated foreign currency transactions, such
as foreign currency denominated sales, costs, expenses and intercompany charges, as well as collections and payments.
The Company performs a quarterly assessment of the eectiveness of the hedge relationship and measures and
recognizes any hedge ineectiveness in the consolidated statement of earnings. Hedge ineectiveness is evaluated
using the hypothetical derivative method. The amount of hedge ineectiveness for 2014, 2013 and 2012 was not material.
The Company’s hedging strategy uses forward contracts as cash flow hedging instruments, which are recorded in the
Company’s consolidated balance sheets at fair value. The eective portion of gains and losses resulting from changes
in the fair value of these hedge instruments are deferred in accumulated other comprehensive income and reclassified
to earnings in the period that the hedged transaction is recognized in earnings.
As of January 31, 2015 and February 1, 2014, the Company had forward contracts maturing at various dates through
January 2016 and January 2015, respectively. The contract amount represents the net amount of all purchase and sale
contracts of a foreign currency.
(U.S. $ equivalent in thousands) January 31, 2015 February 1, 2014
Financial Instruments
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars) . . . . . . . . . . . . . . . $ 19,633 $ 20,197
Chinese yuan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,512 15,278
Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,152 11,270
Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,523 1,586
New Taiwanese dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599 553
Other currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 970 792
Total financial instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,389 $ 49,676
The classification and fair values of derivative instruments designated as hedging instruments included within the
consolidated balance sheet as of January 31, 2015 and February 1, 2014 are as follows:
Asset Derivatives Liability Derivatives
($ in thousands) Balance Sheet Location Fair Value Balance Sheet Location Fair Value
Foreign exchange forwards contracts:
January 31, 2015 . . . . . . . . . . . . . . Prepaid expenses and other current assets $ 1,863 Other accrued expenses $ 1,784
February 1, 2014 . . . . . . . . . . . . . . Prepaid expenses and other current assets $ 1,056 Other accrued expenses $ 222