Pier 1 2016 Annual Report Download - page 39

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.
Market risks relating to the Company’s operations result primarily from changes in foreign exchange rates and interest rates. The
Company has limited involvement with derivative financial instruments, does not use them for trading purposes and is not a party
to any leveraged derivatives. Collectively, the Company’s exposure to market risk factors is not significant and has not materially
changed from February 28, 2015.
Foreign Currency Risk
Though the majority of the Company’s inventory purchases are made in U.S. dollars in order to limit its exposure to foreign
currency fluctuations, the Company, periodically, enters into forward foreign currency exchange contracts. The Company uses
such contracts to hedge exposures to changes in foreign currency exchange rates associated with purchases denominated in
foreign currencies, primarily euros. The Company operates stores in Canada and is subject to fluctuations in currency conversion
rates related to those operations. On occasion, the Company may consider utilizing contracts to hedge its exposure associated
with repatriation of funds from its Canadian operations. Changes in the fair value of the derivatives are included in the Company’s
consolidated statements of operations as such contracts are not designated as hedges under the applicable accounting
guidance. Forward contracts that hedge merchandise purchases generally have maturities not exceeding six months. Changes in
the fair value and settlement of these forwards are included in cost of sales and the impact was immaterial. At February 27,
2016, there were no outstanding contracts to hedge exposure associated with the Company’s merchandise purchases
denominated in foreign currencies or the repatriation of Canadian funds.
Interest Rate Risk
The Company manages its exposure to changes in interest rates by optimizing the use of variable rate debt. The expected
interest rate exposure on the Company’s Revolving Credit Facility, Term Loan Facility and industrial revenue bonds is based upon
variable interest rates and therefore is affected by changes in market interest rates. As of February 27, 2016, the Company had
$202.3 million (net of unamortized discounts and debt issuance costs) in long-term debt outstanding related to its Term Loan
Facility and industrial revenue bonds and no cash borrowings outstanding on its Revolving Credit Facility. The Company expects
to pay interest totaling approximately $9.0 million per year on the Term Loan Facility based upon rates in effect at the end of fiscal
2016. A hypothetical 100 basis point increase in the interest rate would result in approximately $2.0 million of additional interest
expense under the Term Loan Facility.
PIER 1 IMPORTS, INC. 2016 Form 10-K 33