Pier 1 2009 Annual Report Download - page 44

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, from time to time, 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 these operations. The Company, on occasion, uses 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 SFAS No. 133, ‘‘Accounting for Derivative Instruments
and Hedging Activities.’’ 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. Contracts that hedge the repatriation of Canadian funds have maturities not exceeding
18 months and changes in the fair value and settlement of these contracts are included in selling,
general and administrative expenses. At February 28, 2009, 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
and fixed rate debt. The interest rate exposure on the Company’s secured credit facility and industrial
revenue bonds is based upon variable interest rates and therefore is affected by changes in market
interest rates. As of February 28, 2009, the Company had $19.0 million in borrowings outstanding on its
industrial revenue bonds and no cash borrowings outstanding on its secured credit facility. A
hypothetical 10% adverse change in the interest rates applicable to either or both of these variable rate
instruments would have a negligible impact on the Company’s earnings and cash flows.
Additionally, as of February 28, 2009, the Company had $165.0 million in convertible senior notes
outstanding, which mature in February 2036. The notes pay a fixed annual rate of 6.375% for the first
five years and a fixed rate of 6.125% thereafter. Changes in market interest rates generally affect the
fair value of fixed rate debt instruments, but would not affect the Company’s financial position, results
of operations or cash flows related to these notes. As of February 28, 2009, the fair value of these
notes was $42.9 million based on quoted market values.
On March 20, 2009 a foreign subsidiary of the Company purchased $78.9 million of the Company’s
outstanding Notes at a purchase price of $27.4 million, including accrued interest. The purchase price
of these convertible notes implies a fair value of the total outstanding notes prior to the purchase of
approximately $56.0 million. The foreign subsidiary intends to hold the notes until maturity. As a result
of this transaction, the Company has reduced its outstanding convertible debt to $86.1 million on a
consolidated basis. The Company expects to recognize a gain of approximately $49.0 million in
connection with this transaction during the first quarter of fiscal 2010. See Note 13 of the Notes to
Consolidated Financial Statements for further discussion.
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