Pier 1 2014 Annual Report Download - page 35

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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 only 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 March 2, 2013.
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 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 March 1, 2014, there were no material 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
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 March 1, 2014, the
Company had $9.5 million in long-term debt outstanding related to its industrial revenue bonds and no cash borrowings
outstanding on its Revolving Credit Facility. Subsequent to year end, the Company expects to close a new $200 million Term
Loan Facility with a variable interest rate. The Company expects interest payments to be approximately $9.0 million per year
based on rates expected to be in effect at issuance. A hypothetical 100 basis point change in the interest rate would result in
approximately $2.0 million of additional interest expense.
PIER 1 IMPORTS, INC. 2014 Form 10-K 31