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Derivatives | 9 Months Ended
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Oct. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | 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 the International segment purchases and purchases made by the Canadian operations of the North America segment 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 condensed consolidated statement of operations 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 reduce 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 forward purchase contracts, options and net zero premium collar arrangements (a combination of forwards and option contracts). 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 primary external sources of funding are an asset-based credit facility and senior unsecured notes as described in Note 18. 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 matured in April 2019. Under this contract, the Company agreed 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. During the term of the interest rate swap, the Company effectively converted a portion of its variable-rate senior unsecured term loan into fixed-rate debt. 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. 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. As of October 31, 2020, 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. These contracts were de-designated during the 13 weeks ended May 2, 2020. This de-designation occurred due to uncertainly around the volume of purchases in the Company’s UK business. These contracts were unlikely to retain hedge effectiveness given the change in circumstances. Trading for these contracts resumed during the third quarter of Fiscal 2021. Gains, losses, and fair values for these contracts were not material for the third quarter of Fiscal 2021. The total notional amount of these foreign currency contracts outstanding as of October 31, 2020 was $13.5 million (February 1, 2020 and November 2, 2019: $23.0 million and $25.0 million, respectively). These contracts have been designated as cash flow hedges and will be settled over the next 12 months (February 1, 2020 and November 2, 2019: 12 months and 11 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 31, 2020 was $51.3 million (February 1, 2020 and November 2, 2019: $224.2 million and $134.3 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 materials. During the 13 weeks ended May 2, 2020, the contracts which were still outstanding (and unrealized) were de-designated and liquidated. The contracts which were already settled remain designated as the hedged inventory purchases from these contracts are still on hand. The unrealized contracts were de-designated as a result of uncertainty around the Company’s future purchasing volume due to COVID-19 and thus the contracts were unlikely to retain hedge effectiveness. Trading for these contracts resumed during the third quarter of Fiscal 2021. Gains, losses, and fair values for these contracts were not material for the third quarter of Fiscal 2021. The total notional amount of these commodity derivative contracts outstanding as of October 31, 2020 was 11,000 ounces of gold (February 1, 2020 and November 2, 2019: 63,000 ounces and 75,000 ounces, respectively). These contracts have been designated as cash flow hedges and will be settled over the next 6 months (February 1, 2020 and November 2, 2019: 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 31, 2020, 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 31, 2020 |  | February 1, 2020 |  | November 2, 2019
Derivatives designated as hedging instruments: |  |  |  |  |  |  |
Foreign currency contracts | Other current assets |  | $ | — |  |  | $ | — |  |  | $ | 0.1 |
Commodity contracts | Other current assets |  | — |  |  | 11.8 |  |  | 9.8 |
Commodity contracts | Other assets |  | — |  |  | — |  |  | 0.6 |
Total derivative assets |  |  | — |  |  | 11.8 |  |  | 10.5 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Foreign currency contracts | Other current assets |  | — |  |  | 0.6 |  |  | 0.3 |
Total derivative assets |  |  | $ | — |  |  | $ | 12.4 |  |  | $ | 10.8 |
| Fair value of derivative liabilities
(in millions) | Balance sheet location |  | October 31, 2020 |  | February 1, 2020 |  | November 2, 2019
Derivatives designated as hedging instruments: |  |  |  |  |  |  |
Foreign currency contracts | Other current liabilities |  | $ | — |  |  | $ | (0.8) |  |  | $ | (0.9) |
Commodity contracts | Other current liabilities |  | — |  |  | — |  |  | (0.2) |
|  |  | — |  |  | (0.8) |  |  | (1.1) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Foreign currency contracts | Other current liabilities |  | (0.5) |  |  | (0.1) |  |  | — |
Total derivative liabilities |  |  | $ | (0.5) |  |  | $ | (0.9) |  |  | $ | (1.1) |
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 31, 2020 |  | February 1, 2020 |  | November 2, 2019
Foreign currency contracts | $ | — |  |  | $ | (1.0) |  |  | $ | (0.3) |
Commodity contracts | 3.5 |  |  | 17.7 |  |  | 16.1 |
Gains (losses) recorded in AOCI | $ | 3.5 |  |  | $ | 16.7 |  |  | $ | 15.8 |
The following tables summarize the effect of derivative instruments designated as cash flow hedges in OCI and the condensed consolidated statement of operations: Foreign currency contracts
|  |  | 13 weeks ended |  | 39 weeks ended
(in millions) | Statement of operations caption |  | October 31, 2020 |  | November 2, 2019 |  | October 31, 2020 |  | November 2, 2019
Gains (losses) recorded in AOCI, beginning of period |  |  | $ | — |  |  | $ | 1.7 |  |  | $ | (1.0) |  |  | $ | 0.7 |
Current period gains (losses) recognized in OCI |  |  | — |  |  | (1.7) |  |  | 1.6 |  |  | (0.1) |
Losses (gains) reclassified from AOCI to net income | Cost of sales (1) |  | — |  |  | (0.3) |  |  | — |  |  | (0.9) |
Gains from ineffective hedges reclassified from AOCI to net income | Other operating income (loss) (1) |  | — |  |  | — |  |  | (0.6) |  |  | — |
Gains (losses) recorded in AOCI, end of period |  |  | $ | — |  |  | $ | (0.3) |  |  | $ | — |  |  | $ | (0.3) |
Commodity contracts
|  |  | 13 weeks ended |  | 39 weeks ended
(in millions) | Statement of operations caption |  | October 31, 2020 |  | November 2, 2019 |  | October 31, 2020 |  | November 2, 2019
Gains (losses) recorded in AOCI, beginning of period |  |  | $ | 5.3 |  |  | $ | 11.2 |  |  | $ | 17.7 |  |  | $ | 4.0 |
Current period gains (losses) recognized in OCI |  |  | — |  |  | 5.1 |  |  | (1.4) |  |  | 11.6 |
Losses (gains) reclassified from AOCI to net income | Cost of sales (1) |  | (1.8) |  |  | (0.2) |  |  | (3.5) |  |  | 0.5 |
Gains from ineffective hedges reclassified from AOCI to net income | Other operating income (loss) (1) |  | — |  |  | — |  |  | (9.3) |  |  | — |
Gains (losses) recorded in AOCI, end of period |  |  | $ | 3.5 |  |  | $ | 16.1 |  |  | $ | 3.5 |  |  | $ | 16.1 |
Interest rate swaps
|  |  | 13 weeks ended |  | 39 weeks ended
(in millions) | Statement of operations caption |  | October 31, 2020 |  | November 2, 2019 |  | October 31, 2020 |  | November 2, 2019
Gains recorded in AOCI, beginning of period |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 0.6 |
(Gains) losses reclassified from AOCI to net income | Interest expense, net (1) |  | — |  |  | — |  |  | — |  |  | (0.6) |
Gains recorded in AOCI, end of period |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
(1) Refer to table below for total amounts of financial statement captions impacted by cash flow hedges. There was no material ineffectiveness related to the Company’s derivative instruments designated in cash flow hedging relationships for the 13 weeks ended October 31, 2020 and November 2, 2019. As of October 31, 2020, the Company expects $3.5 million of net pre-tax derivative gains to be reclassified out of AOCI into earnings during the next twelve months. Total amounts presented in the condensed consolidated statements of operations
|  | 13 weeks ended |  | 39 weeks ended
(in millions) |  | October 31, 2020 |  | November 2, 2019 |  | October 31, 2020 |  | November 2, 2019
Cost of sales |  | $ | (863.8) |  |  | $ | (818.6) |  |  | $ | (2,176.0) |  |  | $ | (2,652.2) |
Other operating income (loss) |  | (0.4) |  |  | — |  |  | $ | 4.3 |  |  | 1.4 |
Interest expense, net |  | $ | (9.1) |  |  | $ | (8.6) |  |  | $ | (25.6) |  |  | $ | (27.9) |
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 statement of operations:
|  |  | 13 weeks ended |  | 39 weeks ended
(in millions) | Statement of operations caption |  | October 31, 2020 |  | November 2, 2019 |  | October 31, 2020 |  | November 2, 2019
Foreign currency contracts | Other operating income (loss) |  | $ | (1.1) |  |  | $ | 3.4 |  |  | $ | (2.1) |  |  | $ | (1.8) |

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- Definition The entire disclosure for financial instruments. This disclosure includes, but is not limited to, fair value measurements of short and long term marketable securities, international currencies forward contracts, and auction rate securities. Financial instruments may include hedging and non-hedging currency exchange instruments, derivatives, securitizations and securities available for sale at fair value. Also included are investment results, realized and unrealized gains and losses as well as impairments and risk management disclosures. + References No definition available. + Details
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