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EXCEL - IDEA: XBRL DOCUMENT - SIGNET JEWELERS LTDFinancial_Report.xls


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

 
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the quarterly period ended May 2, 2015 or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to
Commission file number 1-32349
 
SIGNET JEWELERS LIMITED
(Exact name of Registrant as specified in its charter)

 
Bermuda
 
Not Applicable
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
Clarendon House
2 Church Street
Hamilton HM11
Bermuda
(441) 296 5872
(Address and telephone number including area code of principal executive offices)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes   ¨     No   x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).
Large accelerated filer   x          Accelerated filer   ¨         Non-accelerated filer   ¨         Smaller reporting company   ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   ¨     No   x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date
Common Stock, $0.18 par value, 80,127,405 shares as of May 27, 2015


1


SIGNET JEWELERS LIMITED
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
PART I
 
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
Financial Statements (Unaudited)
 
 
 
 
 
 
Condensed Consolidated Income Statements
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
 
 
 
Condensed Consolidated Statement of Shareholders' Equity
 
 
 
 
 
Notes to the Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
ITEM 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
ITEM 4.
 
Controls and Procedures
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
 
OTHER INFORMATION
 
 
 
 
ITEM 1.
 
Legal Proceedings
 
 
 
ITEM 1A.
 
Risk Factors
 
 
 
ITEM 2.
 
Unregistered Sales of Equity and Securities and Use of Proceeds
 
 
 
ITEM 6.
 
Exhibits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

SIGNET JEWELERS LIMITED
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
 
13 weeks ended
 
 
(in millions, except per share amounts)
May 2, 2015
 
May 3, 2014
 
Notes
Sales
$
1,530.6

 
$
1,056.1

 
4
Cost of sales
(964.7
)
 
(648.9
)
 
 
Gross margin
565.9

 
407.2

 
 
Selling, general and administrative expenses
(453.2
)
 
(310.5
)
 
 
Other operating income, net
63.5

 
54.0

 
 
Operating income
176.2

 
150.7

 
4
Interest expense, net
(11.0
)
 
(1.8
)
 
 
Income before income taxes
165.2

 
148.9

 
 
Income taxes
(46.4
)
 
(52.3
)
 
8
Net income
$
118.8

 
$
96.6

 
 
Earnings per share: basic
$
1.49

 
$
1.21

 
5
                                diluted
$
1.48

 
$
1.20

 
5
Weighted average common shares outstanding: basic
80.0

 
79.9

 
5
                                                                            diluted
80.2

 
80.3

 
5
Dividends declared per share
$
0.22

 
$
0.18

 
6
The accompanying notes are an integral part of these condensed consolidated financial statements.

3


SIGNET JEWELERS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
13 weeks ended
 
May 2, 2015
 
May 3, 2014
(in millions)
Pre-tax
amount
 
Tax
(expense)
benefit
 
After-tax
amount
 
Pre-tax
amount
 
Tax
(expense)
benefit
 
After-tax
amount
Net income
 
 
 
 
$
118.8

 
 
 
 
 
$
96.6
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
7.5

 
$
 
 
7.5

 
$
9.6
 
 
$

 
9.6
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized loss on securities, net
(0.1
)
 
 
 
(0.1
)
 
 
 

 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Unrealized (loss) gain
(9.1
)
 
3.2
 
 
(5.9
)
 
0.7
 
 
(0.4
)
 
0.3
 
Reclassification adjustment for losses to net income
0.7

 
(0.2
)
 
0.5

 
7.4
 
 
(2.7
)
 
4.7
 
Pension plan:
 
 
 
 
 
 
 
 
 
 
 
Reclassification adjustment to net income for amortization of actuarial loss
0.8

 
(0.1
)
 
0.7

 
0.5
 
 
(0.1
)
 
0.4
 
Reclassification adjustment to net income for amortization of prior service (credits) costs
(0.5
)
 
0.1
 
 
(0.4
)
 
(0.4
)
 
0.1

 
(0.3
)
Total other comprehensive income (loss)
$
(0.7
)
 
$
3.0
 

$
2.3

 
$
17.8
 

$
(3.1
)
 
$
14.7
 
Total comprehensive income
 
 
 
 
$
121.1

 
 
 
 
 
$
111.3
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4


SIGNET JEWELERS LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except par value per share amount)
May 2, 2015
 
January 31, 2015
 
May 3, 2014
 
Notes
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
122.6

 
$
193.6

 
$
249.1

 
 
Accounts receivable, net
1,499.9

 
1,567.6

 
1,308.2

 
9
Other receivables
56.5

 
63.6

 
47.1

 
 
Other current assets
132.4

 
137.2

 
91.0

 
 
Deferred tax assets
5.7

 
4.5

 
2.7

 
8
Income taxes
5.3

 
1.8

 
10.7

 
 
Inventories
2,487.8

 
2,439.0

 
1,523.9

 
10
Total current assets
4,310.2

 
4,407.3

 
3,232.7

 
 
Non-current assets:
 
 
 
 
 
 
 
Property, plant and equipment, net of accumulated depreciation of $848.8, $852.1 and
$816.3, respectively
668.7

 
665.9

 
494.0

 
 
Goodwill
520.7

 
519.2

 
26.8

 
11
Intangible assets, net
445.9

 
447.1

 

 
11
Other assets
141.1

 
140.0

 
93.5

 
12
Deferred tax assets
119.9

 
111.1

 
114.8

 
8
Retirement benefit asset
38.1

 
37.0

 
59.8

 
16
Total assets
$
6,244.6

 
$
6,327.6

 
$
4,021.6

 
 
Liabilities and Shareholders’ equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Loans and overdrafts
$
44.8

 
$
97.5

 
$
8.8

 
17
Accounts payable
256.5

 
277.7

 
163.1

 
 
Accrued expenses and other current liabilities
420.5

 
482.4

 
293.8

 
 
Deferred revenue
244.0

 
248.0

 
174.4

 
18
Deferred tax liabilities
158.9

 
145.8

 
123.9

 
8
Income taxes
28.3

 
86.9

 
32.2

 
 
Total current liabilities
1,153.0

 
1,338.3

 
796.2

 
 
Non-current liabilities:
 
 
 
 
 
 
 
Long-term debt
1,356.2

 
1,363.8

 

 
17
Other liabilities
224.4

 
230.2

 
121.6

 
 
Deferred revenue
597.3

 
563.9

 
457.3

 
18
Deferred tax liabilities
21.8

 
21.0

 
2.7

 
 
Total liabilities
3,352.7

 
3,517.2

 
1,377.8

 
 
Commitments and contingencies


 


 


 
21
Shareholders’ equity:
 
 
 
 
 
 
 
Common shares of $0.18 par value: authorized 500 shares, 80.2 shares outstanding (January 31, 2015: 80.3 outstanding; May 3, 2014: 80.2 outstanding)
15.7

 
15.7

 
15.7

 
 
Additional paid-in capital
265.2

 
265.2

 
258.8

 
 
Other reserves
0.4

 
0.4

 
0.4

 
6
Treasury shares at cost: 7.0 shares (January 31, 2015: 6.9 shares; May 3, 2014: 7.0 shares)
(393.2
)
 
(370.0
)
 
(362.3
)
 
6
Retained earnings
3,238.1

 
3,135.7

 
2,895.0

 
 
Accumulated other comprehensive loss
(234.3
)
 
(236.6
)
 
(163.8
)
 
7
Total shareholders’ equity
2,891.9

 
2,810.4

 
2,643.8

 
 
Total liabilities and shareholders’ equity
$
6,244.6

 
$
6,327.6

 
$
4,021.6

 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5


SIGNET JEWELERS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
13 weeks ended
(in millions)
May 2, 2015
 
May 3, 2014
Cash flows from operating activities:
 
 
 
Net income
$
118.8

 
$
96.6

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
41.8

 
28.0

Amortization of unfavorable leases and contracts
(8.8
)
 

Pension benefit

 
(0.6
)
Share-based compensation
3.3

 
3.2

Deferred taxation
6.9

 
9.4

Excess tax benefit from exercise of share awards
(5.1
)
 
(7.7
)
Amortization of debt discount and issuance costs
0.9

 
1.0

Other non-cash movements
2.2

 
(0.6
)
Changes in operating assets and liabilities:
 
 
 
Decrease in accounts receivable
67.7

 
66.2

Decrease (increase) in other receivables and other assets
5.8

 
(1.7
)
(Increase) decrease in other current assets
(1.7
)
 
0.7

Increase in inventories
(43.7
)
 
(19.9
)
Decrease in accounts payable
(19.0
)
 
(4.2
)
Decrease in accrued expenses and other liabilities
(71.1
)
 
(42.7
)
Increase in deferred revenue
27.7

 
14.9

Decrease in income taxes payable
(57.9
)
 
(68.0
)
Pension plan contributions
(0.8
)
 
(1.1
)
Net cash provided by operating activities
67.0

 
73.5

Investing activities
 
 
 
Purchase of property, plant and equipment
(42.9
)
 
(28.1
)
Purchase of available-for-sale securities
(1.4
)
 

Proceeds from sale of available-for-sale securities
3.5

 

Net cash used in investing activities
(40.8
)
 
(28.1
)
Financing activities
 
 
 
Dividends paid
(14.4
)
 
(12.0
)
Proceeds from issuance of common shares
0.1

 
1.0

Excess tax benefit from exercise of share awards
5.1

 
7.7

Repayments of term loan
(5.0
)
 

Proceeds from securitization facility
638.2

 

Repayments of securitization facility
(638.2
)
 

Payment of debt issuance costs

 
(3.0
)
Repurchase of common shares
(19.1
)
 
(11.4
)
Net settlement of equity based awards
(8.7
)
 
(15.3
)
Principal payments under capital lease obligations
(0.3
)
 

Repayment of short-term borrowings
(55.0
)
 
(10.5
)
Net cash used in financing activities
(97.3
)
 
(43.5
)
 
 
 
 
Cash and cash equivalents at beginning of period
193.6

 
247.6

(Decrease) increase in cash and cash equivalents
(71.1
)
 
1.9

Effect of exchange rate changes on cash and cash equivalents
0.1

 
(0.4
)
Cash and cash equivalents at end of period
$
122.6

 
$
249.1

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


SIGNET JEWELERS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(in millions)
Common
shares at
par value
 
Additional
paid-in
capital
 
Other
reserves
 
Treasury
shares
 
Retained
earnings
 
Accumulated
other
comprehensive
(loss) income
 
Total
shareholders’
equity
Balance at January 31, 2015
$
15.7

 
$
265.2

 
$
0.4

 
$
(370.0
)
 
$
3,135.7

 
$
(236.6
)
 
$
2,810.4

Net income

 

 

 

 
118.8

 

 
118.8

Other comprehensive income

 

 

 

 

 
2.3

 
2.3

Dividends

 

 

 

 
(17.6
)
 

 
(17.6
)
Repurchase of common shares

 

 

 
(21.9
)
 

 

 
(21.9
)
Net settlement of equity based awards

 
(3.3
)
 

 
(1.5
)
 
1.3

 

 
(3.5
)
Share options exercised

 

 

 
0.2

 
(0.1
)
 

 
0.1

Share-based compensation expense

 
3.3

 

 

 

 

 
3.3

Balance at May 2, 2015
$
15.7

 
$
265.2

 
$
0.4

 
$
(393.2
)
 
$
3,238.1

 
$
(234.3
)
 
$
2,891.9

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and principal accounting policies
Signet Jewelers Limited (“Signet” or the “Company”), a holding company incorporated in Bermuda, is the world's largest retailer of diamond jewelry. The Company operates through its 100% owned subsidiaries with sales primarily in the US, UK and Canada. Signet manages its business as five reportable segments, the Sterling Jewelers division, the Zale division, which consists of Zale Jewelry and Piercing Pagoda, the UK Jewelry division and the Other reportable segment. The Sterling Jewelers division operates retail stores under brands including Kay Jewelers, Kay Jewelers Outlet, Jared The Galleria Of Jewelry, Jared Vault and various regional brands. The Zale Jewelry retail stores operate under brands including Zales Jewelers, Zales Outlet, Peoples Jewellers and various regional brands, while Piercing Pagoda operates through mall-based kiosks. The UK Jewelry division's retail stores operate under brands including H.Samuel and Ernest Jones.The Other reportable segment consists of all non-reportable segments, including subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones and unallocated corporate administrative functions. See Note 4 for additional discussion of the Company’s segments.
Signet’s sales are seasonal, with the first quarter slightly exceeding 20% of annual sales, the second and third quarters each approximating 20% and the fourth quarter accounting for almost 40% of annual sales, with December being by far the most important month of the year. The “Holiday Season” consists of results for the months of November and December. As a result, approximately 45% to 55% of Signet’s annual operating income normally occurs in the fourth quarter, comprised of nearly all of the UK Jewelry and Zale divisions’ annual operating income and about 40% to 45% of the Sterling Jewelers division’s annual operating income.
Basis of preparation
These condensed consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in Signet’s Annual Report on Form 10-K for the year-ended January 31, 2015.
Use of estimates
The preparation of these condensed consolidated financial statements, in conformity with US GAAP and SEC regulations for interim reporting, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are primarily made in relation to the valuation of accounts receivables, inventories, deferred revenue, derivatives, employee benefits, income taxes, contingencies, and asset impairments, as well as estimates utilized for the depreciation and amortization of long-lived assets and the accounting for business combinations.
Fiscal year
The Company’s fiscal year ends on the Saturday nearest to January 31st. Fiscal 2016 is the 52 week year ending January 30, 2016 and Fiscal 2015 was the 52 week year ended January 31, 2015. Within these condensed consolidated financial statements, the first quarter of the relevant fiscal years 2016 and 2015 refer to the 13 weeks ended May 2, 2015 and May 3, 2014, respectively.
Foreign currency translation
The financial position and operating results of foreign operations are consolidated using the local currency as the functional currency. Assets and liabilities are translated at the rates of exchange on the balance sheet date, and revenues and expenses are translated at the monthly average rates of exchange during the period. Resulting translation gains or losses are included in the accompanying condensed consolidated statements of equity as a component of accumulated other comprehensive income (loss) (“AOCI”). Gains or losses resulting from foreign currency transactions are included within the condensed consolidated income statements, whereas translation adjustments and gains or losses related to intercompany loans of a long-term investment nature are recognized as a component of AOCI.
Revenue recognition
Extended service plans and lifetime warranty agreements
The Company recognizes revenue related to lifetime warranty sales in proportion to when the expected costs will be incurred. The deferral period for lifetime warranty sales in each division is determined from patterns of claims costs, including estimates of future claims costs expected to be incurred. Management reviews the trends in claims to assess whether changes are required to the revenue and cost recognition rates utilized. A significant change in estimates related to the time period or pattern in which warranty-related costs are expected to be incurred could materially

8


impact revenues. All direct costs associated with the sale of these plans are deferred and amortized in proportion to the revenue recognized and disclosed as either other current assets or other assets.
The Sterling Jewelers division sells extended service plans, subject to certain conditions, to perform repair work over the lifetime of the product. Revenue from the sale of these lifetime extended service plans is deferred and recognized over 14 years, with approximately 43% of revenue recognized within the first two years (January 31, 2015: 45%; May 3, 2014: 45%).
The Sterling Jewelers division also sells a Jewelry Replacement Plan (“JRP”). The JRP is designed to protect customers from damage or defects of purchased merchandise for a period of three years. If the purchased merchandise is defective or becomes damaged under normal use in that time period, the item will be replaced. JRP revenue is deferred and recognized on a straight-line basis over the period of expected claims costs.
The Zale division also sells extended service plans. Zale Jewelry customers are offered lifetime warranties on certain products that cover sizing and breakage with an option to purchase theft protection for a two-year period. Revenue from the sale of lifetime extended service plans is deferred and recognized over 10 years, with approximately 69% of revenue recognized within the first two years (January 31, 2015: 69%). Revenues related to the optional theft protection are deferred and recognized over the two-year contract period on a straight-line basis. Zale Jewelry customers are also offered a two-year watch warranty and a one-year warranty that covers breakage. Piercing Pagoda customers are also offered a one-year warranty that covers breakage. Revenue from the two-year watch warranty and one-year breakage warranty is recognized on a straight-line basis over the respective contract terms.
Signet also sells warranty agreements in the capacity of an agent on behalf of a third-party. The commission that Signet receives from the third-party is recognized at the time of sale less an estimate of cancellations based on historical experience.
Reclassification
The Company has reclassified the presentation of certain prior year amounts to conform to the current year presentation. See Note 6.
2. New accounting pronouncements
New accounting pronouncements to be adopted in future periods
Revenue recognition
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 provides alternative methods of retrospective adoption and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. Signet is currently assessing the impact, if any, as well as the available methods of implementation, that the adoption of this accounting pronouncement will have on the Company's financial position or results of operations.
Share-based compensation
In June 2014, the FASB issued ASU No. 2014-12, “Compensation — Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The new guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU No. 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. Signet does not expect the adoption of this guidance to have a material impact on the Company's financial position or results of operations.
Debt issuance costs
In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The new guidance requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. ASU No. 2015-03 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. Signet does not expect the adoption of this guidance to have a material impact on the Company's financial position or results of operations.
3. Acquisitions
Zale Corporation
On May 29, 2014, the Company acquired 100% of the outstanding shares of Zale Corporation, making the entity a wholly-owned consolidated subsidiary of Signet. Under the terms of the Agreement and Plan of Merger, Zale Corporation shareholders received $21 per share in cash for each outstanding share of common stock and the vesting, upon consummation of the Acquisition, of certain outstanding Zale Corporation restricted

9


stock units and stock options, which converted into the right to receive the merger consideration of $1,458.0 million, including $478.2 million to extinguish Zale Corporation’s existing debt. The Acquisition was funded by the Company through existing cash and the issuance of $1,400.0 million of long-term debt, including: (a) $400.0 million of senior unsecured notes due in 2024, (b) $600.0 million of two-year revolving asset-backed variable funding notes, and (c) a $400.0 million five-year senior unsecured term loan facility. See Note 17 for additional information related to the Company’s long-term debt instruments.
The transaction was accounted for as a business combination during the second quarter of Fiscal 2015. The Acquisition aligns with the Company’s strategy to diversify businesses and expand its footprint. The following table summarizes the consideration transferred in conjunction with the Acquisition as of May 29, 2014:
(in millions, except per share amounts)
Amount
Cash consideration paid to Zale Corporation shareholders ($21 per share)
$
910.2

Cash consideration paid for settlement of Zale Corporation stock options, restricted share awards and long term incentive plan awards
69.6

Cash paid to extinguish Zale Corporation outstanding debt as of May 29, 2014
478.2

Total consideration transferred
$
1,458.0

Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed are recorded at acquisition date fair values. During the fourth quarter of Fiscal 2015, the Company finalized the valuation of net assets acquired. The following table summarizes the fair values identified for the assets acquired and liabilities assumed in the Acquisition as of May 29, 2014:
(in millions)
 
Fair values
 
     Cash and cash equivalents
 
$
28.8

 
     Inventories
 
856.7

 
     Other current assets
 
22.4

 
     Property, plant and equipment
 
103.6

 
     Intangible assets:
 
 
 
          Trade names
 
417.0

 
          Favorable leases
 
50.2

 
Deferred tax assets
 
132.8

 
Other assets
 
25.4

 
Current liabilities(1)
 
(206.3
)
 
Deferred revenue
 
(93.3
)
 
Unfavorable leases
 
(50.5
)
 
Unfavorable contracts
 
(65.6
)
 
Deferred tax liabilities
 
(234.0
)
 
Other liabilities
 
(28.6
)
 
Fair value of net assets acquired
 
958.6

 
Goodwill
 
499.4

 
Total consideration transferred
 
$
1,458.0

 
(1) Includes loans and overdrafts, accounts payable, income taxes payable, accrued expenses and other current liabilities.
The excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed was recognized as goodwill. The goodwill attributable to the Acquisition is not deductible for tax purposes. See Note 11.

10


The following unaudited consolidated pro forma information summarizes the results of operations of the Company as if the Acquisition and related issuance of $1,400.0 million of long-term debt (see Note 17) had occurred as of February 2, 2013. The unaudited consolidated pro forma financial information was prepared in accordance with the acquisition method of accounting under existing standards and is not necessarily indicative of the results of operations that would have occurred if the Acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.
 
 
13 weeks ended
(in millions, except per share amounts)
 
May 3, 2014
Pro forma sales
 
$
1,479.4

Pro forma net income
 
$
115.0

Pro forma earnings per share – basic
 
$
1.44

Pro forma earnings per share – diluted
 
$
1.43

The unaudited pro forma information gives effect to actual operating results prior to the Acquisition and has been adjusted with respect to certain aspects of the Acquisition to reflect the following:
Acquisition accounting adjustments to reset deferred revenue associated with extended service plans sold by Zale Corporation prior to the Acquisition to fair value as of the acquisition date. The fair value of deferred revenue is determined based on the estimated costs remaining to be incurred for future obligations associated with the outstanding plans at the time of the Acquisition, plus a reasonable profit margin on the estimated costs. These adjustments also reflect the impact of deferring the revenue associated with the lifetime extended service plans over a 10-year period as disclosed in Note 1.
Additional depreciation and amortization expenses that would have been recognized assuming fair value adjustments to the existing Zale Corporation assets acquired and liabilities assumed, including intangible assets, favorable and unfavorable leases, and unfavorable contracts and expense associated with the fair value step-up of inventory acquired.
Tax impact of the Company’s amended capital structure as a result of the Acquisition and related issuance of $1,400 million of long-term debt.
Adjustment of valuation allowances associated with US and Canadian deferred tax assets, including net operating loss carryforwards.
Exclusion of acquisition-related costs of $9.2 million, which were included in the Company’s net income for the 13 weeks ended May 3, 2014. All amounts were reported within the Other segment.
The unaudited pro forma results do not reflect future events that either have occurred or may occur after the Acquisition, including, but not limited to, the anticipated realization of expected operating synergies in subsequent periods. They also do not give effect to acquisition-related costs that the Company expects to incur in connection with the Acquisition, including, but not limited to, additional professional fees, employee integration, retention, and severance costs.
4. Segment information
Financial information for each of Signet’s reportable segments is presented in the tables below. Signet's chief operating decision maker utilizes sales and operating income, after the elimination of any inter-segment transactions, to determine resource allocations and performance assessment measures. Signet’s sales are derived from the retailing of jewelry, watches, other products and services as generated through the management of its five reportable segments: Sterling Jewelers division, the Zale division, which consists of the Zale Jewelry and the Piercing Pagoda segments, UK Jewelry division and a separate reportable segment, "Other".
The Sterling Jewelers division operated in all 50 states. Its stores operate nationally in malls, outlets and off-mall locations as Kay Jewelers ("Kay") and regionally under a number of well-established mall-based brands. Destination superstores operate nationwide as Jared The Galleria Of Jewelry (“Jared”).
The Zale division operated jewelry stores (Zale Jewelry) and kiosks (Piercing Pagoda), located primarily in shopping malls throughout the US, Canada and Puerto Rico. Zale Jewelry includes national brands Zales Jewelers, Zales Outlet and Peoples Jewellers, along with regional brands Gordon’s Jewelers and Mappins Jewellers. Piercing Pagoda operates through mall-based kiosks.
The UK Jewelry division operated stores in the UK, Republic of Ireland and Channel Islands. Its stores operate in major regional shopping malls and prime ‘High Street’ locations (main shopping thoroughfares with high pedestrian traffic) under brands including H.Samuel and Ernest Jones.
Other consists of all non-reportable operating segments including subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones and unallocated corporate administrative functions that are below the quantifiable threshold for separate disclosure as a reportable segment.

11


 
13 weeks ended
(in millions)
May 2, 2015
 
May 3, 2014
Sales:
 
 
 
Sterling Jewelers
$
944.2

 
$
903.5

Zale Jewelry
372.9

 
n/a

Piercing Pagoda
64.2

 
n/a

UK Jewelry
146.5

 
151.7

Other
2.8

 
0.9

Total sales
$
1,530.6

 
$
1,056.1

 
 
 
 
Operating income (loss):
 
 
 
Sterling Jewelers
$
178.2

 
$
166.3

Zale Jewelry(1)
10.4

 
n/a

Piercing Pagoda(2)
5.1

 
n/a

UK Jewelry
0.5

 

Other(3)
(18.0
)
 
(15.6
)
Total operating income
$
176.2

 
$
150.7

(1) 
Includes net operating loss of $9.1 million related to the effects of purchase accounting associated with the acquisition of Zale Corporation for the 13 weeks ended May 2, 2015. See Note 3 for additional information.
(2) 
Includes net operating loss of $2.3 million related to the effects of purchase accounting associated with the acquisition of Zale Corporation for the 13 weeks ended May 2, 2015. See Note 3 for additional information.
(3) 
Includes $6.4 million and $8.4 million of transaction-related and integration expenses for the 13 weeks ended May 2, 2015 and May 3, 2014, respectively. Transaction costs include expenses associated with advisor fees for legal, tax, accounting and consulting expenses.
n/a
Not applicable as Zale division was acquired on May 29, 2014. See Note 3 for additional information.
(in millions)
May 2, 2015
 
January 31, 2015
 
May 3, 2014
Total assets:
 
 
 
 
 
Sterling Jewelers
$
3,639.5

 
$
3,647.3

 
$
3,263.8

Zale Jewelry
1,893.9

 
1,903.6

 
n/a

Piercing Pagoda
128.0

 
132.8

 
n/a

UK Jewelry
427.7

 
413.5

 
493.2

Other
155.5

 
230.4

 
264.6

Total assets
$
6,244.6

 
$
6,327.6

 
$
4,021.6

n/a Not applicable as Zale division was acquired on May 29, 2014. See Note 3 for additional information.
5. Earnings per share
 
13 weeks ended
(in millions, except per share amounts)
May 2, 2015
 
May 3, 2014
Net income
$
118.8

 
$
96.6

Basic weighted average number of shares outstanding
80.0

 
79.9

Dilutive effect of share awards
0.2

 
0.4

Diluted weighted average number of shares outstanding
80.2

 
80.3

Earnings per share – basic
$
1.49

 
$
1.21

Earnings per share – diluted
$
1.48

 
$
1.20

The basic weighted average number of shares outstanding excludes non-vested time-based restricted shares, shares held by the Employee Stock Ownership Trust (“ESOT”) and treasury shares. Such shares are not considered outstanding and do not qualify for dividends, except for time-based restricted shares for which dividends are earned and payable by the Company subject to full vesting. The effect of excluding these shares is to reduce the average number of shares in the 13 weeks ended May 2, 2015 by 7,207,154 shares (13 weeks ended May 3, 2014: 7,272,616

12


shares). The calculation of fully diluted EPS for the 13 weeks ended May 2, 2015 excludes share awards of 74,148 shares (13 weeks ended May 3, 2014: 0 share awards) on the basis that their effect would be anti-dilutive.
6. Shareholders' equity
Share repurchase
 
 
 
13 weeks ended May 2, 2015
 
13 weeks ended May 3, 2014
 
Amount
authorized
 
Shares
repurchased
 
Amount
repurchased
 
Average
repurchase
price per
share
 
Shares
repurchased
 
Amount
repurchased
 
Average
repurchase
price per
share
 
(in millions)
 
 
 
(in millions)
 
 
 
 
 
(in millions)
 
 
2013 Program(1)
$
350.0

 
160,298

 
$
21.9

(2) 
$
136.84

 
126,468

 
$
12.9

(2) 
$
102.10

(1) 
On June 14, 2013, the Board authorized the repurchase of up to $350 million of Signet’s common shares (the “2013 Program”). The 2013 Program may be suspended or discontinued at any time without notice. The 2013 Program had $243.7 million remaining as of May 2, 2015.
(2) 
As of May 2, 2015 and May 3, 2014, $2.8 million and $1.5 million, respectively, has been recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheets reflecting shares repurchased but not yet settled and paid for by the end of the quarter.
Dividends
 
May 2, 2015
 
May 3, 2014
 
(in millions, except per share amounts)
Cash dividend
per share
 
Total
dividends
 
Cash dividend
per share
 
Total
dividends
 
First quarter(1)
$
0.22

 
$
17.6

(2) 
$
0.18

 
$
14.4

(2) 
(1) 
Signet’s dividend policy results in the dividend payment date being a quarter in arrears from the declaration date. As a result, the dividend declared in the fourth quarter of Fiscal 2015 of $0.18 per share was paid on February 26, 2015 in the aggregate of $14.4 million.
(2) 
As of May 2, 2015 and May 3, 2014, $17.6 million and $14.4 million, respectively, has been recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheets reflecting the cash dividends declared for the first quarter of Fiscal 2016 and Fiscal 2015, respectively.
Reclassification
During the second quarter of Fiscal 2015, $234.8 million was reclassified from other reserves within shareholders’ equity to retained earnings as the restrictions related to this amount were released. The presentation in previous periods has been adjusted to conform to the current period presentation.
7. Accumulated other comprehensive income (loss)
The following tables present the changes in AOCI by component and the reclassifications out of AOCI, net of tax:
 
 
 
 
 
 
 
Pension plan
 
 
(in millions)
Foreign
currency
translation
 
Losses on available-for-sale securities, net
 
Gains (losses)
on cash flow
hedges
 
Actuarial
gains
(losses)
 
Prior
service
credit
(cost)
 
Accumulated
other
comprehensive
(loss) income
Balance at January 31, 2015
$
(197.6
)
 
$

 
$
4.4

 
$
(56.7
)
 
$
13.3

 
$
(236.6
)
Other comprehensive income ("OCI") before reclassifications
7.5

 
(0.1
)
 
(5.9
)
 

 

 
1.5

Amounts reclassified from accumulated OCI to earnings

 

 
0.5

 
0.7

 
(0.4
)
 
0.8

Net current-period OCI
7.5

 
(0.1
)
 
(5.4
)
 
0.7

 
(0.4
)
 
2.3

Balance at May 2, 2015
$
(190.1
)
 
$
(0.1
)
 
$
(1.0
)
 
$
(56.0
)
 
$
12.9

 
$
(234.3
)

13


 The amounts reclassified from AOCI, by individual component, were as follows:
 
 
Amounts reclassified from AOCI
 
 
 
 
13 weeks ended
 
 
(in millions)
 
May 2, 2015
 
May 3, 2014
 
Income statement caption
Losses on cash flow hedges:
 
 
 
 
 
 
Foreign currency contracts
 
$
0.1

 
$

 
Cost of sales (see Note 14)
Interest rate swaps
 
0.3

 

 
Interest expense, net (see Note 14)
Commodity contracts
 
0.3

 
7.4

 
Cost of sales (see Note 14)
Total before income tax
 
0.7

 
7.4

 
 
Income taxes
 
(0.2
)
 
(2.7
)
 
 
Net of tax
 
0.5

 
4.7

 
 
 
 
 
 
 
 
 
Defined benefit pension plan items:
 
 
 
 
 
 
Amortization of unrecognized net prior service credit
 
(0.5
)
 
(0.4
)
 
Selling, general and administrative expenses(1)
Amortization of unrecognized actuarial loss
 
0.8

 
0.5

 
Selling, general and administrative expenses(1)
Total before income tax
 
0.3

 
0.1

 
 
Income taxes
 

 

 
 
Net of tax
 
0.3

 
0.1

 
 
 
 
 
 
 
 
 
Total reclassifications, net of tax
 
$
0.8

 
$
4.8

 
 
(1)
These items are included in the computation of net periodic pension benefit (cost). See Note 16 for additional information.
8. Income taxes
Signet has business activity in all states within the US and files income tax returns for the US federal jurisdiction and all applicable states. Signet also files income tax returns in the UK, Canada and certain other foreign jurisdictions. The provision for income taxes is based on the current estimate of the consolidated annual effective tax rate.  As of May 2, 2015, the Company expects its annual effective tax rate to be approximately 28.1% compared to 35.1% as of May 3, 2014.  The decrease in the effective tax rate is a result of the amended capital structure and financing arrangements utilized to fund the acquisition of Zale Corporation. The estimated effective tax rates exclude the effects of any discrete items that may be recognized in future periods.
During the first quarter of Fiscal 2016, there has been no material change in the amounts of unrecognized tax benefits, or the related accrued interest and penalties (where appropriate), in respect of uncertain tax positions identified as of January 31, 2015.
9. Accounts receivable, net
Signet’s accounts receivable primarily consist of Sterling Jewelers’ customer in-house financing receivables. The accounts receivable portfolio consists of a population that has similar characteristics and is evaluated collectively for impairment. The allowance is an estimate of the expected losses as of the balance sheet date, and is calculated using a proprietary model that analyzes factors such as delinquency rates and recovery rates. A 100% allowance is made for any amount that is more than 90 days aged on a recency basis and any amount associated with an account the owner of which has filed for bankruptcy, as well as an allowance for those amounts 90 days aged and under based on historical loss information and payment performance. The calculation is reviewed by management to assess whether, based on economic events, additional analyses are required to appropriately estimate losses inherent in the portfolio.
(in millions)
May 2, 2015
 
January 31, 2015
 
May 3, 2014
Accounts receivable by portfolio segment, net:
 
 
 
 
 
Sterling Jewelers customer in-house finance receivables
$
1,489.4

 
$
1,552.9

 
$
1,294.8

Other accounts receivable
10.5

 
14.7

 
13.4

Total accounts receivable, net
$
1,499.9

 
$
1,567.6

 
$
1,308.2


14


Signet grants credit to customers based on a variety of credit quality indicators, including consumer financial information and prior payment experience. On an ongoing basis, management monitors the credit exposure based on past due status and collection experience, as it has found a meaningful correlation between the past due status of customers and the risk of loss.
Other accounts receivable is comprised primarily of gross accounts receivable relating to the insurance loss replacement business in the UK Jewelry division of $9.4 million (January 31, 2015 and May 3, 2014: $13.7 million and $12.2 million, respectively), with a corresponding valuation allowance of $0.5 million (January 31, 2015 and May 3, 2014: $0.5 million and $0.3 million, respectively). The credit function for the Zale division is outsourced and, as such, no material accounts receivable exist as of May 2, 2015 or January 31, 2015.
The allowance for credit losses on Sterling Jewelers' customer in-house finance receivables is shown below:
 
13 weeks ended
(in millions)
May 2, 2015
 
May 3, 2014
Beginning balance:
$
(113.1
)
 
$
(97.8
)
Charge-offs
37.9

 
32.3

Recoveries
10.4

 
8.5

Provision
(38.5
)
 
(30.8
)
Ending balance
$
(103.3
)
 
$
(87.8
)
Ending receivable balance evaluated for impairment
1,592.7

 
1,382.6

Sterling Jewelers customer in-house finance receivables, net
$
1,489.4

 
$
1,294.8

Net bad debt expense is defined as the provision expense less recoveries.
The following tables summarize the credit quality indicator and age analysis of past due Sterling Jewelers' customer in-house finance receivables:
   
May 2, 2015
 
January 31, 2015
 
May 3, 2014
(in millions)
Gross
 
Valuation
allowance
 
Gross
 
Valuation
allowance
 
Gross
 
Valuation
allowance
Performing:
 
 
 
 
 
 
 
 
 
 
 
Current, aged 0 – 30 days
$
1,290.9

 
$
(39.3
)
 
$
1,332.2

 
$
(41.1
)
 
$
1,130.8

 
$
(34.4
)
Past due, aged 31 – 90 days
246.4

 
(8.6
)
 
271.1

 
(9.3
)
 
205.6

 
(7.2
)
Non Performing:
 
 
 
 
 
 
 
 
 
 
 
Past due, aged more than 90 days
55.4

 
(55.4
)
 
62.7

 
(62.7
)
 
46.2

 
(46.2
)
 
$
1,592.7

 
$
(103.3
)
 
$
1,666.0

 
$
(113.1
)
 
$
1,382.6

 
$
(87.8
)
 
May 2, 2015
 
January 31, 2015
 
May 3, 2014
(as a % of the ending receivable balance)
Gross
 
Valuation
allowance
 
Gross
 
Valuation
allowance
 
Gross
 
Valuation
allowance
Performing
96.5
%
 
3.1
%
 
96.2
%
 
3.1
%
 
96.7
%
 
3.1
%
Non Performing
3.5
%
 
100.0
%
 
3.8
%
 
100.0
%
 
3.3
%
 
100.0
%
 
100.0
%
 
6.5
%
 
100.0
%
 
6.8
%
 
100.0
%
 
6.4
%
Securitized credit card receivables
The Sterling Jewelers division securitizes its credit card receivables through its Sterling Jewelers Receivables Master Note Trust established on May 15, 2014. See Note 17 for additional information regarding this asset-backed securitization facility.
10. Inventories
The following table summarizes the details of the Company's inventory:
(in millions)
May 2, 2015
 
January 31, 2015
 
May 3, 2014
Raw materials
$
97.6

 
$
75.2

 
$
38.0

Finished goods
2,390.2

 
2,363.8

 
1,485.9

Total inventories
$
2,487.8

 
$
2,439.0

 
$
1,523.9


15


11. Goodwill and intangibles
Goodwill
The following table summarizes the Company’s goodwill by reportable segment:
(in millions)
Sterling
Jewelers
 
Zale
Jewelry
 
Piercing
Pagoda
 
UK Jewelry
 
Other
 
Total
Balance at February 1, 2014
$
23.2

 
$

 
$

 
$

 
$
3.6

 
$
26.8

Acquisitions

 
499.4

 

 

 

 
499.4

Impact of foreign exchange

 
(7.0
)
 

 

 

 
(7.0
)
Balance at January 31, 2015
23.2

 
492.4

 

 

 
3.6

 
519.2

Impact of foreign exchange

 
1.5

 

 

 

 
1.5

Balance at May 2, 2015
$
23.2

 
$
493.9

 
$

 
$

 
$
3.6

 
$
520.7

There have been no goodwill impairment losses recognized during the fiscal periods presented in the condensed consolidated income statements. If future economic conditions are different than those projected by management, future impairment charges may be required.
Intangibles
Intangible assets with indefinite and definite lives represent Zale trade names and favorable leases acquired, while intangible liabilities with definite lives represent unfavorable leases and contract rights acquired in the Zale acquisition. No other intangible assets or liabilities were recognized prior to the acquisition of Zale Corporation on May 29, 2014. The following table provides additional detail regarding the composition of intangible assets and liabilities as of May 2, 2015 and January 31, 2015:
 
 
 
May 2, 2015
 
January 31, 2015
(in millions)
Balance sheet location
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
Intangible assets, net
 
$
1.5

 
$
(0.3
)
 
$
1.2

 
$
1.5

 
$
(0.2
)
 
$
1.3

Favorable leases
Intangible assets, net
 
48.6

 
(12.6
)
 
36.0

 
48.1

 
(9.1
)
 
39.0

Total definite-lived intangible assets
 
 
50.1

 
(12.9
)
 
37.2

 
49.6

 
(9.3
)
 
40.3

Indefinite-lived trade names
Intangible assets, net
 
408.7

 

 
408.7

 
406.8

 

 
406.8

Total intangible assets, net
 
 
$
458.8

 
$
(12.9
)
 
$
445.9

 
$
456.4

 
$
(9.3
)
 
$
447.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Definite-lived intangible liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Unfavorable leases
Other liabilities
 
$
(49.1
)
 
$
13.3

 
$
(35.8
)
 
$
(48.7
)
 
$
9.7

 
$
(39.0
)
Unfavorable contracts
Other liabilities
 
$
(65.6
)
 
$
19.0

 
$
(46.6
)
 
$
(65.6
)
 
$
13.8

 
$
(51.8
)
Total intangible liabilities, net
 
 
$
(114.7
)
 
$
32.3

 
$
(82.4
)
 
$
(114.3
)
 
$
23.5

 
$
(90.8
)
12. Other assets
(in millions)
May 2, 2015
 
January 31, 2015
 
May 3, 2014
Deferred extended service plan costs
$
71.5

 
$
69.7

 
$
63.6

Investments
23.0

 
25.2

 

Other assets
46.6

 
45.1

 
29.9

Total other assets
$
141.1

 
$
140.0

 
$
93.5

In addition, other current assets include deferred direct costs in relation to the sale of extended service plans (“ESP”) of $26.8 million as of May 2, 2015 (January 31, 2015 and May 3, 2014: $24.9 million and $22.5 million, respectively).
13. Investments
Investments in debt and equity securities acquired as a result of the Acquisition, see Note 3, are held by certain insurance subsidiaries and are reported as other assets in the accompanying condensed consolidated balance sheets. Investments are recorded at fair value based on quoted market prices for identical or similar securities in active markets. All investments are classified as available-for-sale and include the following:

16


 
May 2, 2015
 
January 31, 2015
 
May 3, 2014
(in millions)
Cost
 
Unrealized Gain (Loss)
 
Fair Value
 
Cost
 
Unrealized Gain (Loss)
 
Fair Value
 
Cost
 
Unrealized Gain (Loss)
 
Fair Value
US Treasury securities
$
9.1

 
$
(0.1
)
 
$
9.0

 
$
9.7

 
$
(0.1
)
 
$
9.6

 
n/a
 
n/a
 
n/a
US government agency securities
0.6

 
(0.1
)
 
0.5

 
1.4

 

 
1.4

 
n/a
 
n/a
 
n/a
Corporate bonds and notes
10.0

 
0.1

 
10.1

 
10.6

 
0.2

 
10.8

 
n/a
 
n/a
 
n/a
Corporate equity securities
3.4

 

 
3.4

 
3.5

 
(0.1
)
 
3.4

 
n/a
 
n/a
 
n/a
Total investments
$
23.1

 
$
(0.1
)
 
$
23.0

 
$
25.2

 
$

 
$
25.2

 
n/a
 
n/a
 
n/a
n/a Not applicable as all investments were acquired as part of the Acquisition on May 29, 2014. See Note 3 for additional information.
At May 2, 2015, the carrying value of investments included a net unrealized loss of $0.1 million, which is included in AOCI. Realized gains and losses on investments are determined on the specific identification basis. There were no material net realized gains or losses for the 13 week period ended May 2, 2015. Investments with a carrying value of $7.2 million were on deposit with various state insurance departments at May 2, 2015 (January 31, 2015: $7.2 million), as required by law.
Investments in debt securities outstanding as of May 2, 2015 mature as follows:
(in millions)
Cost
 
Fair Value
Less than one year
$
0.7

 
$
0.7

Year two through year five
9.6

 
9.4

Year six through year ten
9.3

 
9.4

After ten years
0.1

 
0.1

Total investment in debt securities
$
19.7

 
$
19.6

14. 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 these risks under policies reviewed and approved by the Board. Signet does not enter into derivative transactions for trading purposes.
Market risk
Signet generates revenues and incurs expenses in US dollars, Canadian dollars and British pounds. As a portion of the UK Jewelry purchases and the purchases made by the Canadian operations of the Zale division are denominated in US dollars, Signet enters into forward foreign currency exchange contracts, foreign currency option contracts and foreign currency swaps to manage this exposure to the US dollar.
Signet holds a fluctuating amount of British pounds reflecting the cash generative characteristics of the UK Jewelry division. Signet’s objective is to minimize net foreign exchange exposure to the income statement on British pound denominated items through managing this level of cash, British pound denominated intra-entity balances and US dollar to British pound swaps. In order to manage the foreign exchange exposure and minimize the level of funds denominated in the British pound, dividends are paid regularly by British pound denominated subsidiaries to their immediate holding companies and excess British pounds 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. In particular, Signet undertakes some hedging of its requirements for gold through the use of 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. Cash generated from operations and external financing are the main sources of funding supplementing Signet’s resources in meeting liquidity requirements.
The main external sources of funding are an amended credit facility, senior unsecured notes and securitized credit card receivables, as described in Note 17.

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 swaps (designated) — These contracts are entered into to reduce the consolidated interest rate risk associated with variable rate, long-term debt. The Company designates these derivatives as cash flow hedges of the variability in expected cash outflows of interest payments. 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. 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 consolidated balance sheets, and the Company recognizes any changes in the fair value as an adjustment of AOCI within equity to the extent of their effectiveness. The ineffective portion of all hedges, if any, is recognized in current period earnings. As interest expense is accrued on the debt obligation, amounts in accumulated OCI 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 each swap. In the event that an 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 May 2, 2015 was $16.8 million (January 31, 2015 and May 3, 2014: $23.5 million and $40.4 million, respectively). These contracts have been designated as cash flow hedges and will be settled over the next 9 months (January 31, 2015 and May 3, 2014: 12 months and 12 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 May 2, 2015 was $8.0 million (January 31, 2015 and May 3, 2014: $40.3 million and $39.7 million, respectively).
Commodity forward purchase contracts (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 May 2, 2015 was 77,000 ounces of gold (January 31, 2015 and May 3, 2014: 81,000 ounces and 39,000 ounces, respectively). These contracts have been designated as cash flow hedges and will be settled over the next 12 months (January 31, 2015 and May 3, 2014: 11 months and 10 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 May 2, 2015, 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:

18


 
Fair value of derivative assets
(in millions)
Balance sheet location
 
May 2, 2015
 
January 31, 2015
 
May 3, 2014
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency contracts
Other current assets
 
$
0.4

 
$
1.0

 
$

Commodity contracts
Other current assets
 
0.2

 
6.3

 
1.4

 
 
 
0.6

 
7.3

 
1.4

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency contracts
Other current assets
 

 
0.1

 

Total derivative assets
 
 
$
0.6

 
$
7.4

 
$
1.4

 
Fair value of derivative liabilities
(in millions)
Balance sheet location
 
May 2, 2015
 
January 31, 2015
 
May 3, 2014
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency contracts
Other current liabilities
 
$

 
$

 
$
(2.6
)
Commodity contracts
Other current liabilities
 
(1.7
)
 

 
(0.2
)
Interest rate swaps
Other liabilities
 
(0.6
)
 

 

 
 
 
(2.3
)
 

 
(2.8
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency contracts
Other current liabilities
 
(0.1
)
 

 
(0.2
)
Total derivative liabilities
 
 
$
(2.4
)
 
$

 
$
(3.0
)
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)
May 2, 2015
 
January 31, 2015
 
May 3, 2014
Foreign currency contracts
$
0.8

 
$
0.9

 
$
(3.6
)
Commodity contracts
(2.0
)
 
5.7

 
(9.4
)
Interest rate swaps
(0.6
)
 

 

Total
$
(1.8
)
 
$
6.6

 
$
(13.0
)
The following tables summarize the effect of derivative instruments designated as cash flow hedges in OCI and the condensed consolidated income statements:

19


Foreign currency contracts
 
 
 
13 weeks ended
(in millions)
Income statement caption
 
May 2, 2015
 
May 3, 2014
Gains (losses) recorded in AOCI, beginning of period
 
 
$
0.9

 
$
(2.3
)
Current period losses recognized in OCI
 
 
(0.2
)
 
(1.3
)
Losses reclassified from AOCI to net income
Cost of sales
 
0.1

 

Gains (losses) recorded in AOCI, end of period
 
 
$
0.8

 
$
(3.6
)

Commodity contracts
 
 
 
13 weeks ended
(in millions)
Income statement caption
 
May 2, 2015
 
May 3, 2014
Gains (losses) recorded in AOCI, beginning of period
 
 
$
5.7

 
$
(18.8
)
Current period (losses) gains recognized in OCI
 
 
(8.0
)
 
2.0

Losses reclassified from AOCI to net income
Cost of sales
 
0.3

 
7.4

Losses recorded in AOCI, end of period
 
 
$
(2.0
)
 
$
(9.4
)

Interest rate swaps
 
 
 
13 weeks ended
(in millions)
Income statement caption
 
May 2, 2015
 
May 3, 2014
(Losses) gains recorded in AOCI, beginning of period
 
 
$

 
$

Current period losses recognized in OCI
 
 
(0.9
)
 

Losses reclassified from AOCI to net income
Interest expense, net
 
0.3

 

Losses recorded in AOCI, end of period
 
 
$
(0.6
)
 
$

There was no material ineffectiveness related to the Company’s derivative instruments designated in cash flow hedging relationships for the 13 weeks ended May 2, 2015 and May 3, 2014. Based on current valuations, the Company expects approximately $3.8 million of net pre-tax derivative losses 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:
 
 
 
Amount of gain (loss) recognized in income
(in millions)
Income statement caption
 
13 weeks ended
Derivatives not designated as hedging instruments:
 
 
May 2, 2015
 
May 3, 2014
Foreign currency contracts
Other operating income, net
 
$
(0.3
)
 
$
(1.6
)
Total
 
 
$
(0.3
)
 
$
(1.6
)
15. Fair value measurement
The estimated fair value of Signet’s financial instruments held or issued to finance Signet’s operations is summarized below. Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown below are not necessarily indicative of the amounts that Signet would realize upon disposition nor do they indicate Signet’s intent or ability to dispose of the financial instrument. Assets and liabilities that are carried at fair value are required to be classified and disclosed in one of the following three categories:
Level 1—quoted market prices in active markets for identical assets and liabilities
Level 2—observable market based inputs or unobservable inputs that are corroborated by market data
Level 3—unobservable inputs that are not corroborated by market data
Signet determines fair value based upon quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The methods Signet uses to determine fair value on an instrument-specific basis are detailed below:

20


 
May 2, 2015
 
January 31, 2015
 
May 3, 2014
(in millions)
Carrying Value
 
Quoted prices in
active
markets for
identical assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Carrying Value
 
Quoted prices in
active
markets for
identical assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Carrying Value
 
Quoted prices in
active
markets for
identical assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
Assets: