Derivatives

Derivative transactions are used by Signet for risk management purposes to address risks inherent in Signet’s business operations and sources of financing. The main risks arising from Signet’s operations are market risk including foreign currency risk, commodity risk, liquidity risk and interest rate risk. Signet uses derivative financial instruments to manage and mitigate certain of these risks under policies reviewed and approved by the Board of Directors. Signet does not enter into derivative transactions for speculative purposes.

Market risk

Signet generates revenues and incurs expenses in US dollars, Canadian dollars and British pounds. As a portion of UK Jewelry purchases and purchases made by the Canadian operations of the Zale division are denominated in US dollars, Signet enters into forward foreign currency exchange contracts and foreign currency swaps to manage this exposure to the US dollar.

Signet holds a fluctuating amount of British pounds and Canadian dollars reflecting the cash generative characteristics of operations. Signet’s objective is to minimize net foreign exchange exposure to the income statement on non-US dollar denominated items through managing cash levels, non-US dollar denominated intra-entity balances and foreign currency swaps. In order to manage the foreign exchange exposure and minimize the level of funds denominated in British pounds and Canadian dollars, dividends are paid regularly by subsidiaries to their immediate holding companies and excess British pounds and Canadian dollars are sold in exchange for US dollars.

Signet’s policy is to minimize the impact of precious metal commodity price volatility on operating results through the use of outright forward purchases of, or by entering into options to purchase, precious metals within treasury guidelines approved by the Board of Directors. In particular, Signet undertakes some hedging of its requirements for gold through the use of options, net zero-cost collar arrangements (a combination of call and put option contracts), forward contracts and commodity purchasing, while fluctuations in the cost of diamonds are not hedged.

Liquidity risk

Signet’s objective is to ensure that it has access to, or the ability to generate, sufficient cash from either internal or external sources in a timely and cost-effective manner to meet its commitments as they become due and payable. Signet manages liquidity risks as part of its overall risk management policy. Management produces forecasting and budgeting information that is reviewed and monitored by the Board of Directors. Cash generated from operations and external financing are the main sources of funding, which supplement Signet’s resources in meeting liquidity requirements.

The main external sources of funding are a senior unsecured credit facility, senior unsecured notes and securitized credit card receivables, as described in Note 17.

Interest rate risk

Signet has exposure to movements in interest rates associated with cash and borrowings. Signet may enter into various interest rate protection agreements in order to limit the impact of movements in interest rates.

Interest rate swap (designated) — The Company entered into an interest rate swap in March 2015 with an aggregate notional amount of $300.0 million that is scheduled to mature through April 2019. Under this contract, the Company agrees to exchange, at specified intervals, the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional amounts. This contract was entered into to reduce the consolidated interest rate risk associated with variable rate, long-term debt. The Company designated this derivative as a cash flow hedge of the variability in expected cash outflows for interest payments. The Company has effectively converted a portion of its variable-rate senior unsecured term loan into fixed-rate debt.

The fair value of the swap is presented within the condensed consolidated balance sheets, and the Company recognizes any changes in the fair value as an adjustment of AOCI within equity to the extent the swap is effective. The ineffective portion, if any, is recognized in current period earnings. As interest expense is accrued on the debt obligation, amounts in AOCI related to the interest rate swap are reclassified into income resulting in a net interest expense on the hedged amount of the underlying debt obligation equal to the effective yield of the fixed rate of the swap. In the event that the interest rate swap is dedesignated prior to maturity, gains or losses in AOCI remain deferred and are reclassified into earnings in the periods in which the hedged forecasted transaction affects earnings.

Credit risk and concentrations of credit risk

Credit risk represents the loss that would be recognized at the reporting date if counterparties failed to perform as contracted. Signet does not anticipate non-performance by counterparties of its financial instruments, except for customer in-house financing receivables as disclosed in Note 9 of which no single customer represents a significant portion of the Company’s receivable balance. Signet does not require collateral or other security to support cash investments or financial instruments with credit risk; however, it is Signet’s policy to only hold cash and cash equivalent investments and to transact financial instruments with financial institutions with a certain minimum credit rating. Management does not believe Signet is exposed to any significant concentrations of credit risk that arise from cash and cash equivalent investments, derivatives or accounts receivable.

Commodity and foreign currency risks

The following types of derivative financial instruments are utilized by Signet to mitigate certain risk exposures related to changes in commodity prices and foreign exchange rates:

Forward foreign currency exchange contracts (designated) — These contracts, which are principally in US dollars, are entered into 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 October 29, 2016 was $27.8 million (January 30, 2016 and October 31, 2015: $10.7 million and $20.9 million, respectively). These contracts have been designated as cash flow hedges and will be settled over the next 15 months (January 30, 2016 and October 31, 2015: 6 months and 9 months, respectively).

Forward foreign currency exchange contracts (undesignated) — Foreign currency contracts not designated as cash flow hedges are used to limit the impact of movements in foreign exchange rates on recognized foreign currency payables and to hedge currency flows through Signet’s bank accounts to mitigate Signet’s exposure to foreign currency exchange risk in its cash and borrowings. The total notional amount of these foreign currency contracts outstanding as of October 29, 2016 was $53.2 million (January 30, 2016 and October 31, 2015: $32.0 million and $35.5 million, respectively).

Commodity forward purchase contracts and net zero-cost collar arrangements (designated) — These contracts are entered into 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 October 29, 2016 was 57,000 ounces of gold (January 30, 2016 and October 31, 2015: 76,000 ounces and 73,000 ounces, respectively). These contracts have been designated as cash flow hedges and will be settled over the next 15 months (January 30, 2016 and October 31, 2015: 12 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 October 29, 2016, 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:



	Fair value of derivative assets
(in millions)	Balance sheet location	October 29, 2016		January 30, 2016		October 31, 2015
Derivatives designated as hedging instruments:
Foreign currency contracts	Other current assets	$	3.5	$	0.8	$	0.1
Commodity contracts	Other current assets	0.6		0.6		0.3
Commodity contracts	Other assets	—		—		0.1
Total derivative assets		$	4.1	$	1.4	$	0.5



	Fair value of derivative liabilities
(in millions)	Balance sheet location	October 29, 2016			January 30, 2016			October 31, 2015
Derivatives designated as hedging instruments:
Foreign currency contracts	Other current liabilities	$	—		$	—		$	(0.1	)
Commodity contracts	Other current liabilities	(0.7		)	(0.8		)	(1.1		)
Interest rate swaps	Other liabilities	(2.3		)	(3.4		)	(2.1		)
		(3.0		)	(4.2		)	(3.3		)
Derivatives not designated as hedging instruments:
Foreign currency contracts	Other current liabilities	(0.1		)	(0.2		)	—
Total derivative liabilities		$	(3.1	)	$	(4.4	)	$	(3.3	)

Derivatives designated as cash flow hedges

The following table summarizes the pre-tax gains (losses) recorded in AOCI for derivatives designated in cash flow hedging relationships:



(in millions)	October 29, 2016			January 30, 2016			October 31, 2015
Foreign currency contracts	$	6.4		$	1.4		$	0.5
Commodity contracts	3.8			(3.7		)	(3.9		)
Interest rate swaps	(2.3		)	(3.4		)	(2.1		)
Gains (losses) recorded in AOCI	$	7.9		$	(5.7	)	$	(5.5	)

The following tables summarize the effect of derivative instruments designated as cash flow hedges in OCI and the condensed consolidated income statements:

Foreign currency contracts



		13 weeks ended						39 weeks ended
(in millions)	Income statement caption	October 29, 2016			October 31, 2015			October 29, 2016			October 31, 2015
Gains recorded in AOCI, beginning of period		$	3.8		$	0.4		$	1.4		$	0.9
Current period gains (losses) recognized in OCI		3.0			0.2			6.0			(0.4		)
(Gains) losses reclassified from AOCI to net income	Cost of sales	(0.4		)	(0.1		)	(1.0		)	—
Gains recorded in AOCI, end of period		$	6.4		$	0.5		$	6.4		$	0.5

Commodity contracts



		13 weeks ended						39 weeks ended
(in millions)	Income statement caption	October 29, 2016			October 31, 2015			October 29, 2016			October 31, 2015
Gains (losses) recorded in AOCI, beginning of period		$	6.2		$	(8.3	)	$	(3.7	)	$	5.7
Current period gains (losses) recognized in OCI		(2.1		)	4.0			5.8			(10.6		)
(Gains) losses reclassified from AOCI to net income	Cost of sales	(0.3		)	0.4			1.7			1.0
Gains (losses) recorded in AOCI, end of period		$	3.8		$	(3.9	)	$	3.8		$	(3.9	)

Interest rate swaps



		13 weeks ended						39 weeks ended
(in millions)	Income statement caption	October 29, 2016			October 31, 2015			October 29, 2016			October 31, 2015
Losses recorded in AOCI, beginning of period		$	(3.8	)	$	(0.9	)	$	(3.4	)	$	—
Current period gains (losses) recognized in OCI		1.0			(2.0		)	(0.6		)	(4.0		)
Losses reclassified from AOCI to net income	Interest expense, net	0.5			0.8			1.7			1.9
Losses recorded in AOCI, end of period		$	(2.3	)	$	(2.1	)	$	(2.3	)	$	(2.1	)

There was no material ineffectiveness related to the Company’s derivative instruments designated in cash flow hedging relationships for the 13 and 39 weeks ended October 29, 2016 and October 31, 2015. Based on current valuations, the Company expects approximately $7.6 million of net pre-tax derivative gains to be reclassified out of AOCI into earnings within the next 12 months.

Derivatives not designated as hedging instruments

The following table presents the effects of the Company’s derivatives instruments not designated as cash flow hedges in the condensed consolidated income statements:



		13 weeks ended					39 weeks ended
(in millions)	Income statement caption	October 29, 2016		October 31, 2015			October 29, 2016		October 31, 2015
Derivatives not designated as hedging instruments:
Foreign currency contracts	Other operating income, net	$	1.6	$	(1.4	)	$	3.2	$	(1.0	)