REG - Signet Jewelers Ltd - Form 10Q <Origin Href="QuoteRef">SIG.N</Origin> - Part 2
29/10/2014 11:09
- Part 2: For the preceding part double click ID:nRSK4136Ra
was subsequently increased to $350 million. The 2011 Program was completed as of May
4, 2013.
n/a Not applicable.
Dividends
First quarter(1) $ 0.18 $ 14.4 (2) $ 0.15 $ 12.1
Second quarter $ 0.18 $ 14.4 (3) $ 0.15 $ 12.1
Cash dividend
per share
Total
dividends
(in millions)
(in millions)
First quarter(1)
$ 0.18
$ 14.4 (2)
$ 0.15
$ 12.1
Second quarter
$ 0.18
$ 14.4 (3)
$ 0.15
$ 12.1
(1) Signet's dividend policy results in the dividend payment date being a quarter in arrears from the declaration date. As
a result, the fourth quarter Fiscal 2014 $0.15 per share cash dividend was paid on February 27, 2014 in the aggregate
amount of $12.0 million.
(2) The first quarter Fiscal 2015 $0.18 per share cash dividend was paid on May 28, 2014 in the aggregate amount of $14.4
million.
(3) As of August 2, 2014, $14.4 million has been recorded in accrued expenses and other current liabilities in the
condensed consolidated balance sheets reflecting the cash dividend declared for the second quarter of Fiscal 2015, which
has a record date of August 1, 2014 and a payment date of August 27, 2014.
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 (loss) income
Balance at February 1, 2014 $ (137.0 ) $ - $ (14.3 ) $ (42.5 ) $ 15.3 $ (178.5 )
OCI before reclassifications 7.3 (0.2 ) 0.2 - - 7.3
Amounts reclassified from accumulated OCI - - 8.1 0.8 (0.7 ) 8.2
Net current-period OCI 7.3 (0.2 ) 8.3 0.8 (0.7 ) 15.5
Balance at August 2, 2014 $ (129.7 ) $ (0.2 ) $ (6.0 ) $ (41.7 ) $ 14.6 $ (163.0 )
Balance at August 2, 2014
$ (129.7 )
$ (0.2 )
$ (6.0 )
$ (41.7 )
$ 14.6
$ (163.0 )
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Gains) losses on cash flow hedges:
Foreign currency contracts $ 0.3 $ 0.3 Cost of sales (see Note 15)
Commodity contracts 4.8 12.2 Cost of sales (see Note 15)
Total before income tax 5.1 12.5
(1.7 ) (4.4 ) Income taxes
Net of tax 3.4 8.1
Defined benefit pension plan items:
Amortization of unrecognized net prior service credits (0.5 ) (0.9 ) Selling, general and administrative expenses(1)
Amortization of unrecognized actuarial loss 0.5 1.0 Selling, general and administrative expenses(1)
Total before income tax - 0.1
- - Income taxes
Net of tax - 0.1
Total reclassifications $ 3.4 $ 8.2
Net of tax
-
0.1
Total reclassifications
$ 3.4
$ 8.2
(1) These items are included in the computation of net periodic pension benefit (cost). See Note 16 for additional
information.
(Gains) losses on cash flow hedges:
Foreign currency contracts $ (0.2 ) $ (0.4 ) Cost of sales (see Note 15)
Commodity contracts 0.2 (0.6 ) Cost of sales (see Note 15)
Total before income tax - (1.0 )
(0.1 ) 0.3 Income taxes
Net of tax (0.1 ) (0.7 )
Defined benefit pension plan items:
Amortization of unrecognized net prior service credits (0.3 ) (0.7 ) Selling, general and administrative expenses(1)
Amortization of unrecognized actuarial loss 0.5 1.1 Selling, general and administrative expenses(1)
Total before income tax 0.2 0.4
- (0.1 ) Income taxes
Net of tax 0.2 0.3
Total reclassifications $ 0.1 $ (0.4 )
Net of tax
0.2
0.3
Total reclassifications
$ 0.1
$ (0.4 )
(1) These items are included in the computation of net periodic pension benefit (cost). See Note 16 for additional
information.
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
8. 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 is of similar characteristics and is evaluated collectively for
impairment. The allowance is an estimate of the 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.
Accounts receivable by portfolio segment, net:
Sterling Jewelers customer in-house finance receivables $ 1,305.1 $ 1,356.0 $ 1,142.0
Other accounts receivable 10.9 18.0 10.1
Total accounts receivable, net $ 1,316.0 $ 1,374.0 $ 1,152.1
Total accounts receivable, net
$ 1,316.0
$ 1,374.0
$ 1,152.1
Sterling Jewelers grants credit to customers based on a variety of credit quality indicators, including customer 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 $10.0 million (February 1, 2014 and August 3, 2013: $12.8 million and $9.1 million,
respectively) with a corresponding valuation allowance of $0.6 million (February 1, 2014 and August 3, 2013: $0.3 million
and $0.4 million, respectively).
Allowance for credit losses on Sterling Jewelers' customer in-house finance receivables:
Beginning balance $ (97.8 ) $ (87.7 ) $ (87.7 )
Charge-offs 63.0 128.2 56.4
Recoveries 15.0 26.0 13.6
Provision expense (79.1 ) (164.3 ) (71.4 )
Ending balance $ (98.9 ) $ (97.8 ) $ (89.1 )
Ending receivable balance evaluated for impairment 1,404.0 1,453.8 1,231.1
Sterling Jewelers' customer in-house finance receivables, net $ 1,305.1 $ 1,356.0 $ 1,142.0
Sterling Jewelers' customer in-house finance receivables, net
$ 1,305.1
$ 1,356.0
$ 1,142.0
Net bad debt expense is calculated as provision expense less recoveries.
Credit quality indicator and age analysis of past due Sterling Jewelers' customer in-house finance receivables:
Performing:
Current, aged 0-30 days $ 1,110.6 $ (34.0 ) $ 1,170.4 $ (36.3 ) $ 973.2 $ (29.9 )
Past due, aged 31-90 days 236.8 (8.3 ) 229.9 (8.0 ) 206.1 (7.4 )
Non Performing:
Past due, aged more than 90 days 56.6 (56.6 ) 53.5 (53.5 ) 51.8 (51.8 )
$ 1,404.0 $ (98.9 ) $ 1,453.8 $ (97.8 ) $ 1,231.1 $ (89.1 )
$ 1,404.0
$ (98.9 )
$ 1,453.8
$ (97.8 )
$ 1,231.1
$ (89.1 )
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Performing 96.0 % 3.1 % 96.3 % 3.2 % 95.8 % 3.0 %
Non Performing 4.0 % 100.0 % 3.7 % 100.0 % 4.2 % 100.0 %
100.0 % 7.0 % 100.0 % 6.7 % 100.0 % 7.2 %
4.0 %
100.0 %
3.7 %
100.0 %
4.2 %
100.0 %
100.0 %
7.0 %
100.0 %
6.7 %
100.0 %
7.2 %
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 19 for additional information on this asset-backed securitization
facility.
9. Inventories
Raw materials $ 55.5 $ 41.8 $ 50.7
Finished goods 2,289.8 1,446.2 1,367.0
Total inventories $ 2,345.3 $ 1,488.0 $ 1,417.7
Total inventories
$ 2,345.3
$ 1,488.0
$ 1,417.7
10. Goodwill and intangibles
The following table summarizes the Company's goodwill by reporting unit:
Balance at February 2, 2013 $ 24.6 $ - $ - $ - $ - $ 24.6
Acquisitions(1) (1.4 ) - - - 3.6 2.2
Balance at February 1, 2014 23.2 - - - 3.6 26.8
Acquisitions(1) - - 525.1 - - 525.1
Balance at August 2, 2014 $ 23.2 $ - $ 525.1 $ - $ 3.6 $ 551.9
Balance at August 2, 2014
$ 23.2
$ -
$ 525.1
$ -
$ 3.6
$ 551.9
(1) See Note 20 for additional discussion of the goodwill recorded by the Company during Fiscal 2014 and Fiscal 2015.
The Company's reporting units align with the operating segments disclosed in Note 2. There have been no goodwill impairment
losses recorded 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.
Intangible Assets
Intangible assets with indefinite and definite lives represent the Zale trade names and favorable leases, which are
included in intangible assets, net on the condensed consolidated balance sheets. The following table provides additional
detail regarding the composition of intangible assets as of August 2, 2014, February 1, 2014 and August 3, 2013.
Definite-lived intangible assets
Trade names $ 1.6 $ - $ 1.6 $ - $ - $ - $ - $ - $ -
Favorable leases 50.2 (2.4 ) 47.8 - - - - - -
Total definite-lived intangible assets 51.8 (2.4 ) 49.4 - - - - - -
Indefinite-lived trade names 418.2 - 418.2 - - - - - -
Total intangible assets, net $ 470.0 $ (2.4 ) $ 467.6 $ - $ - $ - $ - $ - $ -
-
Total intangible assets, net
$ 470.0
$ (2.4 )
$ 467.6
$ -
$ -
$ -
$ -
$ -
$ -
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
11. Other assets
The following table summarizes the Company's non-current other assets:
Deferred extended service plan costs $ 64.5 $ 61.9 $ 58.8
Investments(1) 22.3 - -
Other assets 46.2 25.3 25.4
Total other assets $ 133.0 $ 87.2 $ 84.2
Total other assets
$ 133.0
$ 87.2
$ 84.2
(1) See Note 14 for additional discussion of the investment balances.
In addition, other current assets include deferred direct costs in relation to the sale of extended service plans ("ESP")
of $22.9 million as of August 2, 2014 (February 1, 2014 and August 3, 2013: $21.9 million and $20.8 million,
respectively).
12. Deferred revenue
Deferred revenue is comprised primarily of ESP and voucher promotions as follows:
Sterling Jewelers ESP deferred revenue $ 626.6 $ 601.2 $ 567.0
Zale ESP deferred revenue 99.1 - -
Voucher promotions and other 5.8 15.5 6.0
Total deferred revenue $ 731.5 $ 616.7 $ 573.0
Presented as:
Current liabilities $ 211.1 $ 173.0 $ 154.6
Non-current liabilities 520.4 443.7 418.4
Total deferred revenue $ 731.5 $ 616.7 $ 573.0
Total deferred revenue
$ 731.5
$ 616.7
$ 573.0
Sterling Jewelers ESP deferred revenue, beginning of period $ 619.6 $ 563.4 $ 601.2 $ 549.7
Plans sold 53.9 46.1 118.1 101.4
Revenues recognized (46.9 ) (42.5 ) (92.7 ) (84.1 )
Sterling Jewelers ESP deferred revenue, end of period $ 626.6 $ 567.0 $ 626.6 $ 567.0
Sterling Jewelers ESP deferred revenue, end of period
$ 626.6
$ 567.0
$ 626.6
$ 567.0
Zale ESP deferred revenue, beginning of period $ - n/a $ - n/a
Plans acquired 93.0 n/a 93.0 n/a
Plans sold 19.3 n/a 19.3 n/a
Revenues recognized (13.2 ) n/a (13.2 ) n/a
Zale ESP deferred revenue, end of period $ 99.1 n/a $ 99.1 n/a
Zale ESP deferred revenue, end of period
$ 99.1
n/a
$ 99.1
n/a
n/a Not applicable as the Acquisition occurred during Fiscal 2015.
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
13. Warranty reserve
Sterling Jewelers and Zale provide a product lifetime diamond guarantee as long as six-month inspections are performed and
certified by an authorized store representative. Provided the customer has complied with the six month inspection policy,
the Company will replace, at no cost to the customer, any stone that chips, breaks or is lost from its original setting
during normal wear. Management estimates the warranty accrual based on the lag of actual claims experience and the costs of
such claims, inclusive of labor and material. Sterling Jewelers also provides a similar product lifetime guarantee on color
gemstones. The warranty reserve for diamond and gemstone guarantee, included in accrued expenses and other current
liabilities, and other non-current liabilities, is as follows:
Warranty reserve, beginning of period $ 19.4 $ 18.6 $ 19.1 $ 18.5
Warranty obligations acquired 28.8 - 28.8 -
Warranty expense 2.3 1.9 4.0 3.5
Utilized (2.4 ) (1.9 ) (3.8 ) (3.4 )
Warranty reserve, end of period $ 48.1 $ 18.6 $ 48.1 $ 18.6
Warranty reserve, end of period
$ 48.1
$ 18.6
$ 48.1
$ 18.6
(in millions) August 2, February 1, August 3,
2014 2014 2013
Presented as:
Current liabilities $ 17.6 $ 6.7 $ 6.6
Non-current liabilities 30.5 12.4 12.0
Total warranty reserve $ 48.1 $ 19.1 $ 18.6
14. Investments
Investments in debt and equity securities held by certain insurance subsidiaries, acquired as part of the Acquisition, 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. All investments are classified as available-for-sale.
Investments consist of the following:
US Treasury securities $ 10.0 $ 9.9 $ n/a $ n/a
US government agency securities 1.3 1.3 n/a n/a
Corporate bonds and notes 8.7 8.6 n/a n/a
Corporate equity securities 2.5 2.5 n/a n/a
$ 22.5 $ 22.3 $ n/a $ n/a
$ 22.5
$ 22.3
$ n/a
$ n/a
n/a Not applicable as all investments were acquired as part of the Acquisition that occurred during Fiscal 2015.
At August 2, 2014, the carrying value of investments included a net unrealized loss of $0.2 million, which is included in
OCI. Realized gains and losses on investments are determined on the specific identification basis. There were no material
net realized gains or losses during the 13 or 26 weeks ended August 2, 2014. Investments with a carrying value of $7.4
million were on deposit with various state insurance departments at August 2, 2014, as required by law.
Debt securities outstanding as of August 2, 2014 mature as follows:
Less than one year $ 1.8 $ 1.8
Year two through year five 11.1 11.0
Year six through year ten 7.0 6.9
After ten years 0.1 0.1
$ 20.0 $ 19.8
$ 20.0
$ 19.8
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
15. Financial instruments and fair value
Signet's principal financial instruments are comprised of cash, cash deposits/investments and overdrafts, accounts
receivable and payable, derivatives, US Treasury and government agency securities, corporate bonds and equity securities, a
revolving credit facility and long-term debt. Signet does not enter into derivative transactions for trading purposes.
Derivative transactions are used by Signet for risk management purposes to address risks inherent in Signet's business
operations and sources of finance. The main risks arising from Signet's operations are market risk including foreign
currency risk and commodity risk, liquidity risk and interest rate risk. Signet uses these financial instruments to manage
and mitigate these risks under policies reviewed and approved by the Board of Directors.
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 cash 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 intercompany balances and US dollar to
British pound swaps. In order to manage the foreign exchange exposure and minimize the level of British pound cash held by
Signet, the British pound denominated subsidiaries pay dividends regularly 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 of Directors. In particular, Signet undertakes some hedging of its requirement 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 supplementing Signet's resources in meeting liquidity requirements.
The main external source of funding is an amended credit facility, senior unsecured notes and securitized credit card
receivables, described below in Note 19.
Interest rate risk
Signet may enter into various interest rate protection agreements in order to limit the impact of movements in interest
rates on its cash or borrowings. There were no interest rate protection agreements outstanding at August 2, 2014, February
1, 2014 or August 3, 2013.
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 8. 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.
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Derivatives
The following types of derivative instruments are utilized by Signet:
Forward foreign currency exchange contracts (designated) - These contracts, which are principally in US dollars, are
entered into in order 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 August 2, 2014 was $34.2 million (February
1, 2014 and August 3, 2013: $42.3 million and $50.3 million, respectively). These contracts have been designated as cash
flow hedges and will be settled over the next 12 months (February 1, 2014 and August 3, 2013: 12 months and 18 months,
respectively).
Forward foreign currency exchange contracts (undesignated) - Foreign currency contracts not designated as cash flow hedges
are used 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 August 2,
2014 was $27.7 million (February 1, 2014 and August 3, 2013: $22.1 million and $58.1 million, respectively).
Commodity forward purchase contracts and net zero-cost collar arrangements - These contracts are entered into in order 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 August 2, 2014 was $27.1 million (February 1,
2014 and August 3, 2013: $63.0 million and $0.0 million, respectively). These contracts have been designated as cash flow
hedges and will be settled over the next 7 months (February 1, 2014 and August 3, 2013: 12 months and 0 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 August 2, 2014, 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:
Derivatives designated as hedging instruments:
Foreign currency contracts Other current assets $ - $ - $ 1.5
Foreign currency contracts Other assets - - 0.1
Commodity contracts Other current assets 0.7 0.8 -
Commodity contracts Other assets - - -
$ 0.7 $ 0.8 $ 1.6
Derivatives not designated as hedging instruments:
Foreign currency contracts Other current assets 0.3 0.2 0.1
Total derivative assets $ 1.0 $ 1.0 $ 1.7
Derivative liabilities
Fair value
(in millions) Balance sheet location August 2, February 1, August 3,
2014 2014 2013
Derivatives designated as hedging instruments:
Foreign currency contracts Other current liabilities $ (1.9 ) $ (2.1 ) $ -
Foreign currency contracts Other liabilities - - -
Commodity contracts Other current liabilities (0.1 ) (0.8 ) -
Commodity contracts Other liabilities - - -
$ (2.0 ) $ (2.9 ) $ -
Derivatives not designated as hedging instruments:
Foreign currency contracts Other current liabilities - - -
Total derivative liabilities $ (2.0 ) $ (2.9 ) $ -
Foreign currency contracts
Other current liabilities
-
-
-
Total derivative liabilities
$ (2.0 )
$ (2.9 )
$ -
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Derivatives designated as cash flow hedges
The following table summarizes the pre-tax gains (losses) recorded in accumulated OCI for derivatives designated in cash
flow hedging relationships:
Foreign currency contracts $ (3.2 ) $ (2.3 ) $ 2.3
Commodity contracts (4.9 )(1) (18.8 )(1) (28.6 )(1)
Total $ (8.1 ) $ (21.1 ) $ (26.3 )
Total
$ (8.1 )
$ (21.1 )
$ (26.3 )
(1) As of August 2, 2014, losses recorded in accumulated OCI include $6.2 million related to commodity contracts terminated
prior to contract maturity in Fiscal 2014 (February 1, 2014 and August 3, 2013: $18.2 million and $27.7 million,
respectively).
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
(Losses) gains recorded in accumulated OCI, beginning of period $ (3.6 ) $ 1.6 $ (2.3 ) $ 1.3
Current period gains (losses) recognized in OCI 0.1 0.9 (1.2 ) 1.4
Losses (gains) reclassified from accumulated OCI to net income Cost of sales 0.3 (0.2 ) 0.3 (0.4 )
(Losses) gains recorded in accumulated OCI, end of period $ (3.2 ) $ 2.3 $ (3.2 ) $ 2.3
(Losses) gains recorded in accumulated OCI, end of period
$ (3.2 )
$ 2.3
$ (3.2 )
$ 2.3
Commodity contracts
(Losses) gains recorded in accumulated OCI, beginning of period $ (9.4 ) $ (19.3 ) $ (18.8 ) $ (0.5 )
Current period (losses) gains recognized in OCI (0.3 ) (9.5 ) 1.7 (27.5 )
Losses (gains) reclassified from accumulated OCI to net income Cost of sales 4.8 0.2 12.2 (0.6 )
(Losses) gains recorded in accumulated OCI, end of period $ (4.9 ) $ (28.6 ) $ (4.9 ) $ (28.6 )
(Losses) gains recorded in accumulated OCI, end of period
$ (4.9 )
$ (28.6 )
$ (4.9 )
$ (28.6 )
There was no material ineffectiveness related to the Company's derivative instruments designated in cash flow hedging
relationships during the 13 and 26 weeks ended August 2, 2014 and August 3, 2013, respectively. Based on current
valuations, the Company expects approximately $7.3 million of net pre-tax derivative losses to be reclassified out of
accumulated OCI into earnings within the next 12 months, of which $6.2 million will be recognized in the remaining six
months of Fiscal 2015.
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
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:
Derivatives not designated as hedging instruments:
Foreign currency contracts Other operating income, net $ - $ 3.0 $ (1.6 ) $ 2.8
Total $ - $ 3.0 $ (1.6 ) $ 2.8
Total
$ -
$ 3.0
$ (1.6 )
$ 2.8
Fair value
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:
Assets:
US Treasury securities $ 9.9 $ 9.9 $ - $ - $ - $ - $ - $ - $ -
Corporate equity securities 2.5 2.5 - - - - - - -
Foreign currency contracts 0.3 - 0.3 0.2 - 0.2 1.7 - 1.7
Commodity contracts 0.7 - 0.7 0.8 - 0.8 - - -
US government agency securities 1.3 - 1.3 - - - - - -
Corporate bonds and notes 8.6 - 8.6 - - - - - -
Liabilities:
Foreign currency contracts (1.9 ) - (1.9 ) (2.1 ) - (2.1 ) - - -
Commodity contracts (0.1 ) - (0.1 ) (0.8 ) - (0.8 ) - - -
Liabilities:
Foreign currency contracts
(1.9 )
-
(1.9 )
(2.1 )
-
(2.1 )
-
-
-
Commodity contracts
(0.1 )
-
(0.1 )
(0.8 )
-
(0.8 )
-
-
-
Investments in US Treasury securities and corporate equity securities are based on quoted market prices for identical
instruments in active markets, and therefore were classified as a Level 1 measurement in the fair value hierarchy.
Investments in US government agency securities and corporate bonds and notes are based on quoted prices for similar
instruments in active markets, and therefore were classified as a Level 2 measurement in the fair value hierarchy (see Note
14 for additional information related to our investments).
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
The fair value of derivative financial instruments has been determined based on market value equivalents at the balance
sheet date, taking into account the current interest rate environment, foreign currency forward rates or commodity forward
rates. The carrying amounts of cash and cash equivalents, accounts receivable, other receivables, accounts payable and
accrued liabilities approximate fair value because of the short-term maturity of these amounts.
The carrying amount and fair value of outstanding debt at August 2, 2014 were as follows:
Outstanding debt(1):
Senior notes (Level 1) $ 398.4 $ 400.0 $ - $ - $ - $ -
Securitization facility (Level 2) 600.0 600.0 - - - -
Term loan (Level 2) 400.0 400.0
Capital lease obligations (Level 2) 1.8 1.8 - - - -
Total outstanding debt $ 1,400.2 $ 1,401.8 $ - $ - $ - $ -
Total outstanding debt
$ 1,400.2
$ 1,401.8
$ -
$ -
$ -
$ -
(1) See Note 19 - Loans, overdrafts and long-term debt for classification between current and long-term debt.
The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current
borrowing rates. See Note 19 - Loans, overdrafts and long-term debt.
16. Pensions
Signet operates a defined benefit pension plan in the UK (the "UK Plan") for participating eligible employees of the UK
Jewelry division. The components of net periodic pension benefit were as follows:
Components of net periodic pension benefit (cost):
Service cost $ (0.6 ) $ (0.6 ) $ (1.2 ) $ (1.2 )
Interest cost (2.5 ) (2.3 ) (5.0 ) (4.6 )
Expected return on UK Plan assets 3.7 3.2 7.5 6.4
Amortization of unrecognized prior service credit 0.5 0.3 0.9 0.7
Amortization of unrecognized actuarial loss (0.5 ) (0.5 ) (1.0 ) (1.1 )
Net periodic pension benefit (cost) $ 0.6 $ 0.1 $ 1.2 $ 0.2
Net periodic pension benefit (cost)
$ 0.6
$ 0.1
$ 1.2
$ 0.2
In the 26 weeks ended August 2, 2014, Signet contributed $2.2 million to the UK Plan and expects to contribute a minimum
aggregate of $4.2 million at current exchange rates to the UK Plan in Fiscal 2015. These contributions are in accordance
with an agreed upon deficit recovery plan and based on the results of the actuarial valuation as of April 5, 2012.
17. Commitments and contingencies
Legal proceedings
As previously reported, in March 2008, a group of private plaintiffs (the "Claimants") filed a class action lawsuit for an
unspecified amount against Sterling Jewelers Inc. ("Sterling"), a subsidiary of Signet, in the US District Court for the
Southern District of New York alleging that US store-level employment practices are discriminatory as to compensation and
promotional activities with respect to gender. In June 2008, the District Court referred the matter to private arbitration
where the Claimants sought to proceed on a class-wide basis. Discovery has been completed. The Claimants filed a motion for
class certification and Sterling opposed the motion. A hearing on the class certification motion was held in late February
2014. The motion is now pending before the Arbitrator.
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Also, as previously reported, on September 23, 2008, the US Equal Employment Opportunity Commission ("EEOC") filed a
lawsuit against Sterling in the US District Court for the Western District of New York. The EEOC's lawsuit alleges that
Sterling engaged in intentional and disparate impact gender discrimination with respect to pay and promotions of female
retail store employees from January 1, 2003 to the present. The EEOC asserts claims for unspecified monetary relief and
non-monetary relief against the Company on behalf of a class of female employees subjected to these alleged practices.
Non-expert fact discovery closed in mid-May 2013. In September 2013, Sterling made a motion for partial summary judgment on
procedural grounds, which was referred to a Magistrate Judge. The Magistrate Judge heard oral arguments on the summary
judgment motion in December 2013. On January 2, 2014, the Magistrate Judge issued his Report, Recommendation and Order,
recommending that the Court grant Sterling's motion for partial summary judgment and dismiss the EEOC's claims in their
entirety. The EEOC filed its objections to the Magistrate Judge's ruling and Sterling filed its response thereto. The
District Court Judge heard oral arguments on the EEOC's objections to the Magistrate Judge's ruling on March 7, 2014 and on
March 11, 2014 entered an order dismissing the action with prejudice. On May 12, 2014 the EEOC filed its Notice of Appeal
of the District Court Judge's dismissal of the action to United States Court of Appeals for the Second Circuit. The appeal
is pending.
Sterling denies the allegations of both parties and has been defending these cases vigorously. At this point, no outcome or
amount of loss is able to be estimated.
Prior to the Acquisition, Zale Corporation was a defendant in three purported class action lawsuits, Tessa Hodge v. Zale
Delaware, Inc., d/b/a Piercing Pagoda which was filed on April 23, 2013 in the Superior Court of the State of California,
County of San Bernardino; Naomi Tapia v. Zale Corporation which was filed on July 3, 2013 in the US District Court,
Southern District of California; and Melissa Roberts v. Zale Delaware, Inc. which was filed on October 7, 2013 in the
Superior Court of the State of California, County of Los Angeles. All three cases include allegations that Zale Corporation
violated various wage and hour labor laws. Relief is sought on behalf of current and former Piercing Pagoda and Zale
Corporation's employees. The lawsuits seek to recover damages, penalties and attorneys' fees as a result of the alleged
violations. Without admitting or conceding any liability, the Company has reached a tentative agreement to settle the Hodge
and Roberts matters for an immaterial amount.
There is no assurance that the settlement will become final or that the Court will approve the settlement. The Company is
investigating the underlying allegations of the Naomi Tapia v. Zale Corporation matter and intends to vigorously defend its
position against them. The Company cannot reasonably estimate the potential loss or range of loss, if any, for this
matter.
Litigation Challenging the Company's Acquisition of Zale Corporation
Five putative stockholder class action lawsuits challenging the Company's acquisition of Zale Corporation have been filed
in the Court of Chancery of the State of Delaware: Breyer v. Zale Corp. et al., C.A. No. 9388-VCP, filed February 24, 2014;
Stein v. Zale Corp. et al., C.A. No. 9408-VCP, filed March 3, 2014; Singh v. Zale Corp. et al., C.A. No. 9409-VCP, filed
March 3, 2014; Smart v. Zale Corp. et al., C.A. No. 9420-VCP, filed March 6, 2014; and Pill v. Zale Corp. et al., C.A. No.
9440-VCP, filed March 12, 2014 (collectively, the "Actions"). Each of these Actions is brought by a purported former holder
of Zale Corporation common stock, both individually and on behalf of a putative class of former Zale Corporation
stockholders. The Court of Chancery consolidated the Actions on March 25, 2014 (the "Consolidated Action"), and the
plaintiffs filed a consolidated amended complaint on April 23, 2014. The Consolidated Action names as defendants Zale
Corporation, the members of the board of directors of Zale Corporation, the Company, and a merger-related subsidiary of the
Company. The Consolidated Action alleges that the Zale Corporation directors breached their fiduciary duties to Zale
Corporation stockholders in connection with their consideration and approval of the merger agreement by failing to maximize
stockholder value and agreeing to an inadequate merger price and to deal terms that deter higher bids. The Consolidated
Action also alleges that the Zale Corporation directors issued a materially misleading and incomplete proxy statement
regarding the merger. Further, the Consolidated Action alleges that Zale Corporation and the Company aided and abetted the
Zale Corporation directors' breaches of fiduciary duty. On May 23, 2014, the Chancery Court of Chancery denied plaintiffs'
motion for a preliminary injunction to prevent the consummation of the merger. The Consolidated Action seeks, among other
things, rescission of the merger or damages, as well as attorneys' and experts' fees.
At this point, plaintiffs have not filed an amended complaint or quantified their claim for damages or fees. As a result,
we are unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation.
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Appraisal Litigation
Following the consummation of the Company's acquisition of Zale Corporation, on June 4, 2014, two former Zale Corporation
stockholders, who, combined, allege ownership of approximately 3.904 million shares of Zale Corporation's common stock,
filed a petition for appraisal pursuant to 8 Del. C. § 262 in the Court of Chancery of the State of Delaware, captioned
Merion Capital L.P. et al. v. Zale Corp., C.A. No. 9731-VCP (the "Merion Action"). On August 26, 2014, another former Zale
Corporation stockholder, who alleges ownership of approximately 2.450 million shares of Zale Corporation's common stock,
filed a second petition for appraisal, captioned TIG Arbitrage Opportunity Fund I, L.P. v. Zale Corp., C.A. No. 10070-VCP
(the "TIG Action" and, together with the Merion Action, the "Appraisal Actions"). Petitioners in the Appraisal Actions seek
a judgment awarding them, among other things, the fair value of their Zale Corporation shares plus interest.
On June 30, 2014, Zale Corporation filed its answer to the Merion Action petition and a verified list pursuant to 8 Del. C.
§ 262(f) naming, as of that filing, the persons that purported to demand appraisal of shares of Zale Corporation common
stock. Since that filing, Zale Corporation has received a number of dissent withdrawals from stockholders who had
previously demanded appraisal. At this point, the total number of shares of Zale Corporation's common stock for which
appraisal has been demanded and not requested to be withdrawn is approximately 9.0 million, inclusive of the shares
allegedly held by petitioners in the Appraisal Actions. The parties in the Merion Action are currently engaged in
discovery. The court has not yet set a hearing date for either of the petitions in the Appraisal Actions.
At this point, discovery in the Merion Action has just commenced, and none of the petitioners in the Appraisal Actions has
claimed an amount of fair value. As a result, we are unable to reasonably estimate the possible loss or range of losses, if
any, arising from the litigation.
In the ordinary course of business, Signet may be subject, from time to time, to various other proceedings, lawsuits,
disputes or claims incidental to its business, which the Company believe are not significant to Signet's consolidated
financial position, results of operations or cash flows.
18. Share-based compensation expense
Signet recorded share-based compensation expense of $4.0 million and $7.2 million for the 13 and 26 weeks ended August 2,
2014, respectively, related to the Omnibus Plans and Saving Share Plans ($3.5 million and $6.5 million for the 13 and 26
weeks ended August 3, 2013, respectively).
19. Loans, overdrafts and long-term debt
Current liabilities - loans and overdrafts:
Revolving credit facility $ - $ - $ -
Current portion of term loan 20.0 - -
Current portion of capital lease obligations 1.1 - -
Bank overdrafts 10.1 19.3 1.7
Total loans and overdrafts 31.2 19.3 1.7
Long-term debt:
Senior notes, net of unamortized discount 398.4 - -
Securitization facility 600.0 - -
Term loan 380.0 - -
Capital lease obligations 0.7 - -
Total long-term debt 1,379.1 - -
Total loans, overdrafts and long-term debt $ 1,410.3 $ 19.3 $ 1.7
Total loans, overdrafts and long-term debt
$ 1,410.3
$ 19.3
$ 1.7
Credit facility
In May 2011, Signet entered into a $400 million senior unsecured multi-currency five year revolving credit facility
agreement (the "Credit Facility").
SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
There were no amounts outstanding under this Credit Facility as of February 1, 2014 and August 3, 2013. Signet had stand-by
letters of credit on this Credit Facility of $10.1 million and $9.5 million as of February 1, 2014 and August 3, 2013,
respectively. As of February 1, 2014 and August 3, 2013, the Company was in compliance with all debt covenants.
On May 27, 2014, the Credit Facility was amended in conjunction with the issuance of the new term loan. See "New term loan
and amended revolving credit agreement" below. Capitalized amendment fees of $0.7 million relating to the Credit Facility
agreement signed in May 2011 were written-off in the 13 week period ended August 2, 2014 upon executing the amended credit
agreement in May 2014 (26 weeks ended August 2, 2014: $0.9 million).
On February 19, 2014, Signet entered into a definitive agreement to acquire Zale Corporation and concurrently received
commitments for an $800 million 364-day unsecured bridge facility to finance the transaction. The bridge facility contained
customary fees and incurred interest on any borrowings drawn on the facility. In May 2014, Signet executed its Zale
acquisition financing as described below in Note 20, replacing the bridge facility commitments in addition to amending its
Credit Facility, issuing senior unsecured notes and securitizing credit card receivables. No amounts were drawn on the
bridge facility commitments prior to replacement and fees of $4.0 million were incurred and capitalized. This agreement was
subsequently replaced by the issuances of the long-term debt listed below, and therefore during the 13 weeks ended August
2, 2014, the remaining $3.2 million was recorded as interest expense in the condensed consolidated income statement (26
weeks ended August 2, 2014: $4.0 million).
Issuance of senior unsecured notes due 2024
On May 19, 2014, Signet UK Finance plc ("Signet UK Finance"), a wholly owned subsidiary of the Company, issued $400 million
aggregate principal amount of its 4.700% senior unsecured notes due in 2024 (the "Notes"). The Notes were issued under an
effective registration statement previously filed with the SEC. Interest on the notes is payable semi-annually on June 15
and December 15 of each year, commencing December 15, 2014. The Notes are jointly and severally guaranteed, on a full and
unconditional basis, by the Company and by certain of the Company's wholly owned subsidiaries (such subsidiaries, the
"Guarantors"). The Notes were issued pursuant to a base indenture among the Company, Signet UK Finance, the Guarantors and
Deutsche Bank Trust Company Americas as trustee, with the indenture containing customary covenants and events of default
provisions. The Company received proceeds from the offering of approximately $393.9 million, which were net of underwriting
discounts, commissions and offering expenses.
Capitalized fees relating to the senior unsecured notes of $6.9 million were incurred, of which $5.7 million was paid and
$1.2 million was accrued as of August 2, 2014. Amortization expense relating to these fees of $0.1 million was recorded as
interest expense in the condensed consolidated income statements for the 13 and 26 weeks ended August 2, 2014.
Asset-backed securitization facility
On May 15, 2014, the Company sold an undivided interest in certain credit card receivables to Sterling Jewelers Receivables
Master Note Trust (the "Issuer"), a wholly-owned Delaware statutory trust and a wholly-owned indirect subsidiary of the
Company and issued two-year revolving asset-backed variable funding notes to an unrelated third party conduit pursuant to a
master indenture dated as of November 2, 2001, as supplemented by the Series 2014-A indenture supplement dated as of May
15, 2014 among the Issuer, Sterling Jewelers Inc. ("SJI") and Deutsche Bank Trust
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