UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 12, 2014
SIGNET JEWELERS LIMITED
(Exact name of registrant as specified in its charter)
Commission File Number: 1-32349
Bermuda | Not Applicable | |
(State or other jurisdiction of incorporation) |
(IRS Employer Identification No.) |
Clarendon House
2 Church Street
Hamilton
HM11
Bermuda
(Address of principal executive offices, including zip code)
441 296 5872
(Registrants telephone number, including area code)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 8.01. Other Events.
On May 12, 2014, Signet Jewelers Limited (the Company) filed a Registration Statement on Form S-3 (No. 333-195865) with the Securities and Exchange Commission (the SEC) under which Signet UK Finance plc (the Issuer) may offer debt securities that may be guaranteed by the Company and the following direct and indirect wholly owned subsidiaries of the Company (the Guarantor Subsidiaries): Signet Group Limited, Signet US Holdings, Inc., Signet U.S. Services Inc., Signet Group Treasury Services Inc., Signet US Finance Limited, Sterling Jewelers Inc., Ultra Stores, Inc., Sterling Ecomm LLC, Sterling Jewelers LLC, Scamp & Scoundrel LLC, Sterling Inc., Signet Group Services US Inc., Signet Trading Limited, H. Samuel Limited, Ernest Jones Limited, Leslie Davis Limited and Checkbury Limited.
Rule 3-10 of Regulation S-X requires that the Companys audited financial statements incorporated by reference into the Registration Statement include, in a footnote, certain condensed consolidating financial information relating to the Company, the Issuer, the Guarantor Subsidiaries and the subsidiaries of the Company that are not Guarantor Subsidiaries.
Accordingly, the Company is filing this Current Report on Form 8-K in part to add Note 26 to the notes to the Companys audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended February 1, 2014 (the Form 10-K) filed with the SEC on March 27, 2014. To reflect the addition of Note 26 to the Companys audited consolidated financial statements included in the Form 10-K, the Company has amended such financial statements in their entirety. Such amended financial statements are attached as Exhibit 99.1 hereto and are incorporated by reference herein.
Other than adding Note 26 to the Companys audited consolidated financial statements, this Form 8-K does not modify or update the disclosures in the Companys Form 10-K. This report should be read together with the Companys Form 10-K and its other filings with the SEC.
In addition, the Company is filing this Current Report on Form 8-K to provide certain historical financial information of Zale Corporation (Zale) and certain pro forma financial information of the Company in connection with the Companys previously announced proposed acquisition of Zale (the Acquisition), in each case as described in Item 9.01 below. The Zale historical financial information and the Companys pro forma financial information are attached as Exhibits 99.2, 99.3 and 99.4 to this Form 8-K and are incorporated by reference herein.
The Acquisition is subject to approval by Zales stockholders and certain other customary closing conditions.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
Exhibit No. |
Description | |
23.1 | Consent of KPMG LLP, independent registered public accounting firm to Signet Jewelers Limited | |
23.2 | Consent of Ernst & Young LLP, independent registered public accounting firm to Zale Corporation | |
99.1 | Audited consolidated financial statements of Signet Jewelers Limited as of February 1, 2014 and February 2, 2013, and for the three years ended February 1, 2014, including the notes thereto and the report of KPMG LLP thereon | |
99.2 | Audited consolidated financial statements of Zale Corporation as of July 31, 2013 and 2012, and for the three years ended July 31, 2013, including the notes thereto and the report of Ernst & Young LLP thereon | |
99.3 | Unaudited consolidated financial statements of Zale Corporation as of January 31, 2014, and for the three and six month periods ended January 31, 2014 and 2013, including the notes thereto |
2
99.4 | Unaudited pro forma condensed combined financial information of Signet Jewelers Limited as of and for the year ended February 1, 2014, including the notes thereto | |
99.5 | Unaudited pro forma computation of ratio of earnings to fixed charges (also incorporated by reference as Exhibit 12.2 to the Registration Statement) | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkase Document | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |
|
* | Filed herewith. |
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
SIGNET JEWELERS LIMITED | ||||||
Date: May 12, 2014 |
||||||
By: | /s/ Mark A. Jenkins | |||||
Name: | Mark A. Jenkins | |||||
Title: | Signet Company Secretary & Chief Legal Officer |
4
EXHIBIT INDEX
Exhibit No. |
Description | |
23.1 | Consent of KPMG LLP, independent registered public accounting firm to Signet Jewelers Limited | |
23.2 | Consent of Ernst & Young LLP, independent registered public accounting firm to Zale Corporation | |
99.1 | Audited consolidated financial statements of Signet Jewelers Limited as of February 1, 2014 and February 2, 2013, and for the three years ended February 1, 2014, including the notes thereto and the report of KPMG LLP thereon | |
99.2 | Audited consolidated financial statements of Zale Corporation as of July 31, 2013 and 2012, and for the three years ended July 31, 2013, including the notes thereto and the report of Ernst & Young LLP thereon | |
99.3 | Unaudited consolidated financial statements of Zale Corporation as of January 31, 2014, and for the three and six month periods ended January 31, 2014 and 2013, including the notes thereto | |
99.4 | Unaudited pro forma condensed combined financial information of Signet Jewelers Limited as of and for the year ended February 1, 2014, including the notes thereto | |
99.5 | Unaudited pro forma computation of ratio of earnings to fixed charges (also incorporated by reference as Exhibit 12.2 to the Registration Statement) | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkase Document | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Filed herewith. |
5
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Signet Jewelers Limited:
We consent to the use of our report dated March 27, 2014, except as to Note 26, which is as of May 9, 2014, with respect to the consolidated balance sheets of Signet Jewelers Limited and subsidiaries as of February 1, 2014 and February 2, 2013, and the related consolidated income statements, statements of comprehensive income, statement of cash flows, and statements of shareholders equity for the 52 week period ended February 1, 2014, the 53 week period ended February 2, 2013, and the 52 week period ended January 28, 2012, and the effectiveness of internal control over financial reporting as of February 1, 2014, included on the Form 8-K of Signet Jewelers Limited dated May 12, 2014 and incorporated by reference into the registration statement on Form S-3 of Signet UK Finance plc (Nos. 333-195865) and registration statements on Form S-8 (Nos. 333-159987, 333-153435, 333-09634, 333-134192, 333-12304, 333-153422 and 333-08964) of Signet Jewelers Limited and to the reference to our firm under the heading Experts in the prospectus.
/s/ KPMG LLP
Cleveland, Ohio
May 12, 2014
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements of Signet Jewelers Limited:
(1) | Registration Statement (Form S-8 No. 333-09634) pertaining to the Signet Group PLC Employee Stock Savings Plan, |
(2) | Registration Statement (Form S-8 No. 333-159987) pertaining to the Signet Jewelers Limited Omnibus Incentive Plan, |
(3) | Registration Statement (Form S-8 No. 333-153435) pertaining to the Signet Jewelers Limited Plans and Signet Group plc Plans, |
(4) | Registration Statement (Form S-8 No. 333-134192) pertaining to the Signet Group 2005 Long-Term Incentive Plan and Signet Group PLC US Share Option Plan 2003, |
(5) | Registration Statement (Form S-8 No. 333-12304) pertaining to the Signet Group PLC 2000 Long-Term Incentive Plan, |
(6) | Registration Statement (Form S-8 No. 333-153422) pertaining to the Signet Group PLC 1993 Executive Share Option Scheme, |
(7) | Registration Statement (Form S-8 No. 333-08964) pertaining to the Signet Group PLC 1993 Executive Share Option Scheme, and |
(8) | Registration Statement (Form S-3 No. 333-195865) of Signet UK Finance plc; |
of our reports dated September 27, 2013, with respect to the consolidated financial statements of Zale Corporation, and the effectiveness of internal control over financial reporting of Zale Corporation, included in this Current Report on Form 8-K of Signet Jewelers Limited dated May 12, 2014.
/s/ Ernst & Young LLP |
Dallas, Texas |
May 12, 2014 |
Exhibit 99.1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Signet Jewelers Limited:
We have audited the accompanying consolidated balance sheets of Signet Jewelers Limited and subsidiaries (Signet) as of February 1, 2014 and February 2, 2013, and the related consolidated income statements, statements of comprehensive income, statements of cash flows, and statements of shareholders equity for the 52 week period ended February 1, 2014, the 53 week period ended February 2, 2013, and the 52 week period ended January 28, 2012. We also have audited Signets internal control over financial reporting as of February 1, 2014, based on criteria established in Internal Control Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Signets management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements annual report on internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on Signets internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Signet Jewelers Limited and subsidiaries as of February 1, 2014 and February 2, 2013, and the results of its operations and its cash flows for the 52 week period ended February 1, 2014, the 53 week period ended February 2, 2013, and the 52 week period ended January 28, 2012, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Signet Jewelers Limited and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of February 1, 2014, based on criteria established in Internal Control Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
Cleveland, Ohio
March 27, 2014 , except for Note 26,
as to which the date is May 9, 2014
1
CONSOLIDATED INCOME STATEMENTS
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
Notes | |||||||||||||
(in millions, except per share amounts) | ||||||||||||||||
Sales |
$ | 4,209.2 | $ | 3,983.4 | $ | 3,749.2 | 2 | |||||||||
Cost of sales |
(2,628.7 | ) | (2,446.0 | ) | (2,311.6 | ) | ||||||||||
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Gross margin |
1,580.5 | 1,537.4 | 1,437.6 | |||||||||||||
Selling, general and administrative expenses |
(1,196.7 | ) | (1,138.3 | ) | (1,056.7 | ) | ||||||||||
Other operating income, net |
186.7 | 161.4 | 126.5 | 3 | ||||||||||||
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Operating income |
570.5 | 560.5 | 507.4 | 2 | ||||||||||||
Interest expense, net |
(4.0 | ) | (3.6 | ) | (5.3 | ) | ||||||||||
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Income before income taxes |
566.5 | 556.9 | 502.1 | |||||||||||||
Income taxes |
(198.5 | ) | (197.0 | ) | (177.7 | ) | 5 | |||||||||
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Net income |
$ | 368.0 | $ | 359.9 | $ | 324.4 | ||||||||||
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Earnings per share: basic |
$ | 4.59 | $ | 4.37 | $ | 3.76 | 6 | |||||||||
diluted |
$ | 4.56 | $ | 4.35 | $ | 3.73 | 6 | |||||||||
Weighted average common shares outstanding: basic |
80.2 | 82.3 | 86.2 | 6 | ||||||||||||
diluted |
80.7 | 82.8 | 87.0 | 6 | ||||||||||||
Dividends declared per share |
$ | 0.60 | $ | 0.48 | $ | 0.20 | 7 |
The accompanying notes are an integral part of these consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||||||||||||||||||||||||||
Pre-tax amount |
Tax (expense) benefit |
After-tax amount |
Pre-tax amount |
Tax (expense) benefit |
After-tax amount |
Pre-tax amount |
Tax (expense) benefit |
After-tax amount |
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(in millions) | ||||||||||||||||||||||||||||||||||||
Net income |
$ | 368.0 | $ | 359.9 | $ | 324.4 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
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Foreign currency translation adjustments |
$ | 12.4 | $ | | 12.4 | $ | (0.5 | ) | $ | | (0.5 | ) | $ | (3.9 | ) | $ | | (3.9 | ) | |||||||||||||||||
Cash flow hedges: |
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Unrealized (loss) gain |
(33.0 | ) | 11.0 | (22.0 | ) | (10.4 | ) | 3.7 | (6.7 | ) | 49.7 | (17.5 | ) | 32.2 | ||||||||||||||||||||||
Reclassification adjustment for losses (gains) to net income |
11.1 | (4.4 | ) | 6.7 | (22.4 | ) | 8.0 | (14.4 | ) | (24.6 | ) | 8.6 | (16.0 | ) | ||||||||||||||||||||||
Pension plan: |
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Actuarial gain (loss) |
0.2 | | 0.2 | 6.2 | (1.5 | ) | 4.7 | (10.8 | ) | 3.5 | (7.3 | ) | ||||||||||||||||||||||||
Reclassification adjustment to net income for amortization of actuarial loss |
2.3 | (0.6 | ) | 1.7 | 3.2 | (0.8 | ) | 2.4 | 2.6 | (0.8 | ) | 1.8 | ||||||||||||||||||||||||
Prior service (benefit) costs |
(0.9 | ) | 0.2 | (0.7 | ) | (1.1 | ) | 0.3 | (0.8 | ) | 7.5 | (2.0 | ) | 5.5 | ||||||||||||||||||||||
Reclassification adjustment to net income for amortization of prior service credits |
(1.5 | ) | 0.4 | (1.1 | ) | (1.6 | ) | 0.4 | (1.2 | ) | (1.0 | ) | 0.3 | (0.7 | ) | |||||||||||||||||||||
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Total other comprehensive (loss) income |
$ | (9.4 | ) | $ | 6.6 | $ | (2.8 | ) | $ | (26.6 | ) | $ | 10.1 | $ | (16.5 | ) | $ | 19.5 | $ | (7.9 | ) | $ | 11.6 | |||||||||||||
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Total comprehensive income |
$ | 365.2 | $ | 343.4 | $ | 336.0 | ||||||||||||||||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
February 1, 2014 |
February 2, 2013 |
Notes | ||||||||||
(in millions, except par value per share amount) | ||||||||||||
Assets |
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Current assets: |
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Cash and cash equivalents |
$ | 247.6 | $ | 301.0 | 9 | |||||||
Accounts receivable, net |
1,374.0 | 1,205.3 | 10 | |||||||||
Other receivables |
51.5 | 42.1 | ||||||||||
Other current assets |
87.0 | 85.6 | ||||||||||
Deferred tax assets |
3.0 | 1.6 | 5 | |||||||||
Income taxes |
6.5 | 3.5 | ||||||||||
Inventories |
1,488.0 | 1,397.0 | 11 | |||||||||
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Total current assets |
3,257.6 | 3,036.1 | ||||||||||
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Non-current assets: |
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Property, plant and equipment, net |
487.6 | 430.4 | 13 | |||||||||
Other assets |
114.0 | 99.9 | 12 | |||||||||
Deferred tax assets |
113.7 | 104.1 | 5 | |||||||||
Retirement benefit asset |
56.3 | 48.5 | 20 | |||||||||
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Total assets |
$ | 4,029.2 | $ | 3,719.0 | ||||||||
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Liabilities and Shareholders equity |
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Current liabilities: |
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Loans and overdrafts |
$ | 19.3 | $ | | 18 | |||||||
Accounts payable |
162.9 | 155.9 | ||||||||||
Accrued expenses and other current liabilities |
328.5 | 326.4 | 15 | |||||||||
Deferred revenue |
173.0 | 159.7 | 16 | |||||||||
Deferred tax liabilities |
113.1 | 129.6 | 5 | |||||||||
Income taxes |
103.9 | 100.3 | ||||||||||
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Total current liabilities |
900.7 | 871.9 | ||||||||||
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Non-current liabilities: |
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Other liabilities |
121.7 | 111.3 | 17 | |||||||||
Deferred revenue |
443.7 | 405.9 | 16 | |||||||||
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Total liabilities |
1,466.1 | 1,389.1 | ||||||||||
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Commitments and contingencies |
22 | |||||||||||
Shareholders equity: |
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Common shares of $0.18 par value: authorized 500 shares, 80.2 shares outstanding (2013: 81.4 outstanding) |
15.7 | 15.7 | 21 | |||||||||
Additional paid-in capital |
258.8 | 246.3 | ||||||||||
Other reserves |
235.2 | 235.2 | 21 | |||||||||
Treasury shares at cost: 7.0 shares (2013: 5.8 shares) |
(346.2 | ) | (260.0 | ) | 21 | |||||||
Retained earnings |
2,578.1 | 2,268.4 | 21 | |||||||||
Accumulated other comprehensive loss |
(178.5 | ) | (175.7 | ) | ||||||||
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Total shareholders equity |
2,563.1 | 2,329.9 | ||||||||||
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Total liabilities and shareholders equity |
$ | 4,029.2 | $ | 3,719.0 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
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(in millions) | ||||||||||||
Cash flows from operating activities |
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Net income |
$ | 368.0 | $ | 359.9 | $ | 324.4 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization of property, plant and equipment |
110.2 | 99.4 | 92.4 | |||||||||
Pension (benefit) expense |
(0.5 | ) | 3.2 | 3.3 | ||||||||
Share-based compensation |
14.4 | 15.7 | 17.0 | |||||||||
Deferred taxation |
(20.4 | ) | 4.3 | 29.3 | ||||||||
Excess tax benefit from exercise of share awards |
(6.5 | ) | (7.4 | ) | (3.9 | ) | ||||||
Facility amendment fee amortization and charges |
0.4 | 0.4 | 1.9 | |||||||||
Other non-cash movements |
(3.3 | ) | (1.4 | ) | 0.3 | |||||||
Changes in operating assets and liabilities: |
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Increase in accounts receivable |
(168.3 | ) | (117.1 | ) | (152.5 | ) | ||||||
Increase in other receivables and other assets |
(21.6 | ) | (1.3 | ) | (17.8 | ) | ||||||
(Increase) decrease in other current assets |
(3.9 | ) | (5.2 | ) | 1.8 | |||||||
Increase in inventories |
(98.4 | ) | (65.7 | ) | (115.2 | ) | ||||||
Increase (decrease) in accounts payable |
3.2 | (39.6 | ) | 57.2 | ||||||||
Increase in accrued expenses and other liabilities |
8.6 | 13.4 | 26.5 | |||||||||
Increase in deferred revenue |
50.8 | 40.6 | 28.9 | |||||||||
Increase in income taxes payable |
7.9 | 27.2 | 43.3 | |||||||||
Pension plan contributions |
(4.9 | ) | (13.7 | ) | (14.2 | ) | ||||||
Effect of exchange rate changes on currency swaps |
(0.2 | ) | | 2.5 | ||||||||
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Net cash provided by operating activities |
235.5 | 312.7 | 325.2 | |||||||||
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Investing activities |
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Purchase of property, plant and equipment |
(152.7 | ) | (134.2 | ) | (97.8 | ) | ||||||
Acquisition of Ultra Stores, Inc., net of cash received |
1.4 | (56.7 | ) | | ||||||||
Acquisition of diamond polishing factory |
(9.1 | ) | | | ||||||||
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Net cash used in investing activities |
(160.4 | ) | (190.9 | ) | (97.8 | ) | ||||||
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Financing activities |
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Dividends paid |
(46.0 | ) | (38.4 | ) | (8.7 | ) | ||||||
Proceeds from issuance of common shares |
9.3 | 21.6 | 10.6 | |||||||||
Excess tax benefit from exercise of share awards |
6.5 | 7.4 | 3.9 | |||||||||
Repurchase of common shares |
(104.7 | ) | (287.2 | ) | (12.7 | ) | ||||||
Net settlement of equity based awards |
(9.2 | ) | (11.5 | ) | | |||||||
Credit facility fees paid |
| | (2.1 | ) | ||||||||
Proceeds from (repayment of) short-term borrowings |
19.3 | | (31.0 | ) | ||||||||
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Net cash used in financing activities |
(124.8 | ) | (308.1 | ) | (40.0 | ) | ||||||
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Cash and cash equivalents at beginning of period |
301.0 | 486.8 | 302.1 | |||||||||
(Decrease) increase in cash and cash equivalents |
(49.7 | ) | (186.3 | ) | 187.4 | |||||||
Effect of exchange rate changes on cash and cash equivalents |
(3.7 | ) | 0.5 | (2.7 | ) | |||||||
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Cash and cash equivalents at end of period |
$ | 247.6 | $ | 301.0 | $ | 486.8 | ||||||
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Supplemental cash flow information: |
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Interest paid |
$ | 3.5 | $ | 3.4 | $ | 5.1 | ||||||
Income taxes paid |
211.0 | 165.6 | 105.1 |
The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Common shares at par value |
Additional paid-in- capital |
Other reserves (Note 21) |
Treasury shares |
Retained earnings |
Accumulated other comprehensive (loss) income |
Total shareholders equity |
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(in millions) | ||||||||||||||||||||||||||||
Balance at January 29, 2011 |
$ | 15.5 | $ | 196.8 | $ | 235.2 | $ | | $ | 1,662.3 | $ | (170.8 | ) | $ | 1,939.0 | |||||||||||||
Net income |
| | | | 324.4 | | 324.4 | |||||||||||||||||||||
Other comprehensive income |
| | | | | 11.6 | 11.6 | |||||||||||||||||||||
Dividends |
| | | | (17.4 | ) | | (17.4 | ) | |||||||||||||||||||
Repurchase of common shares |
| | | (12.7 | ) | | | (12.7 | ) | |||||||||||||||||||
Share options exercised |
0.1 | 14.5 | | | | | 14.6 | |||||||||||||||||||||
Share-based compensation expense |
| 19.6 | | | | | 19.6 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at January 28, 2012 |
15.6 | 230.9 | 235.2 | (12.7 | ) | 1,969.3 | (159.2 | ) | 2,279.1 | |||||||||||||||||||
Net income |
| | | | 359.9 | | 359.9 | |||||||||||||||||||||
Other comprehensive income |
| | | | | (16.5 | ) | (16.5 | ) | |||||||||||||||||||
Dividends |
| | | | (39.5 | ) | | (39.5 | ) | |||||||||||||||||||
Repurchase of common shares |
| | | (287.2 | ) | | | (287.2 | ) | |||||||||||||||||||
Net settlement of equity based awards |
| (7.4 | ) | | 10.8 | (14.9 | ) | | (11.5 | ) | ||||||||||||||||||
Share options exercised |
0.1 | 7.1 | | 29.1 | (6.4 | ) | | 29.9 | ||||||||||||||||||||
Share-based compensation expense |
| 15.7 | | | | | 15.7 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at February 2, 2013 |
15.7 | 246.3 | 235.2 | (260.0 | ) | 2,268.4 | (175.7 | ) | 2,329.9 | |||||||||||||||||||
Net income |
| | | | 368.0 | | 368.0 | |||||||||||||||||||||
Other comprehensive income |
| | | | | (2.8 | ) | (2.8 | ) | |||||||||||||||||||
Dividends |
| | | | (48.2 | ) | | (48.2 | ) | |||||||||||||||||||
Repurchase of common shares |
| | | (104.7 | ) | | | (104.7 | ) | |||||||||||||||||||
Net settlement of equity based awards |
| (1.7 | ) | | 7.1 | (8.1 | ) | | (2.7 | ) | ||||||||||||||||||
Share options exercised |
| (0.2 | ) | | 11.4 | (2.0 | ) | | 9.2 | |||||||||||||||||||
Share-based compensation expense |
| 14.4 | | | | | 14.4 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at February 1, 2014 |
$ | 15.7 | $ | 258.8 | $ | 235.2 | $ | (346.2 | ) | $ | 2,578.1 | $ | (178.5 | ) | $ | 2,563.1 | ||||||||||||
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|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Principal accounting policies
Signet Jewelers Limited (Signet, or the Company) is a holding company, incorporated in Bermuda, that operates through its subsidiaries. Signet is a leading retailer whose results principally derive from one business segmentthe retailing of jewelry, watches and associated services. The Company manages its business as two geographical reportable segments, being the United States of America (the US) and the United Kingdom (the UK). The US division operates retail stores under brands including Kay Jewelers, Jared The Galleria Of Jewelry and various regional brands. In Fiscal 2013, Ultra Stores Inc. was acquired by Signet, of which the majority of these stores were converted to the Kay brand during Fiscal 2014, with the remaining being accounted for within the regional brands. See Note 14. The UK divisions retail stores operate under brands including H.Samuel and Ernest Jones.
In the fourth quarter of Fiscal 2014, subsequent to the November 4, 2013 acquisition of a diamond polishing factory in Gaborone, Botswana, management established a separate operating segment (Other), which consists of all non-reportable segments including subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones. See Note 14.
The following accounting policies have been applied consistently in the preparation of the Companys financial statements with respect to items which are considered material in all reporting periods presented herein.
(a) Basis of preparation
The consolidated financial statements of Signet are prepared in accordance with US generally accepted accounting principles (US GAAP) and include the results of Signet and its subsidiaries for the 52 week period ended February 1, 2014 (Fiscal 2014), as Signets fiscal year ends on the Saturday nearest January 31. The comparative periods are for the 53 week period ended February 2, 2013 (Fiscal 2013) and the 52 week period ended January 28, 2012 (Fiscal 2012). Intercompany balances have been eliminated on consolidation.
(b) Use of estimates
The preparation of consolidated financial statements, in conformity with US GAAP, 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 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 receivables, inventories and deferred revenue, fair value of derivatives, depreciation and asset impairment, the valuation of employee benefits, income taxes and contingencies.
(c) Foreign currency translation
Assets and liabilities denominated in the UK pound sterling are translated into the US dollar at the exchange rate prevailing at the balance sheet date. Equity accounts denominated in the UK pound sterling are translated into US dollars at historical exchange rates. Revenues and expenses denominated in the UK pound sterling are translated into the US dollar at the monthly average exchange rate for the period and calculated each month from the weekly exchange rates weighted by sales of the UK division. Gains and losses resulting from foreign currency transactions are included within the consolidated income statement, whereas translation adjustments and gains and losses related to intercompany loans of a long-term investment nature are recognized as a component of accumulated other comprehensive income (loss) (OCI). In addition, as the majority of the sales and expenses related to the factory in Gaborone, Botswana are transacted in US dollars, there is no related foreign currency translation as the US dollar is the functional currency.
7
(d) Revenue recognition
Revenue is recognized when:
| there is persuasive evidence of an agreement or arrangement; |
| delivery of products has occurred or services have been rendered; |
| the sellers price to the buyer is fixed and determinable; and |
| collectability is reasonably assured. |
Signets revenue streams and their respective accounting treatments are discussed below:
Merchandise sales
Store sales are recognized when the customer receives and pays for the merchandise at the store with cash, in-house customer finance or a third party credit card. For online sales, sales are recognized at the estimated time the customer has received the merchandise. Amounts related to shipping and handling that are billed to customers are reflected in sales and the related costs are reflected in cost of sales.
Revenue on the sale of merchandise is reported net of anticipated returns and sales tax collected. Returns are estimated based on previous return rates experienced.
Any deposits received from a customer for merchandise are deferred and recognized as revenue when the customer receives the merchandise.
Certain of Signets merchandise sales are derived from providing replacement merchandise on behalf of insurance organizations to their customers who have experienced a loss of their property. In these cases, the sales price is established by contract with the insurance organization and revenue on the sale is recognized upon receipt of the merchandise by the customer.
Merchandise repairs
Revenue on repair of merchandise is recognized when the service is complete and the customer collects the merchandise at the store.
Extended service plans and lifetime warranty agreements
The US division sells extended service plans where it is obliged, subject to certain conditions, to perform repair work over the lifetime of the product. Revenue from the sale of extended service plans is deferred over 14 years. Revenue is recognized in relation to the costs expected to be incurred in performing these services, with approximately 45% of revenue recognized within the first two years (February 2, 2013: 46%). The deferral period 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 used. 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.
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 the sale less an estimate of cancellations based on historical experience.
Sale vouchers
In connection with certain promotions, the Company gives customers making a purchase a voucher granting the customers a discount on a future purchase, redeemable within a stated time frame. The Company accounts for such vouchers by allocating the fair value of the voucher between the initial purchase and the future purchase.
8
The fair value of the voucher is determined based on the average sales transactions in which the vouchers were issued and the estimated average sales transactions when the vouchers are expected to be redeemed, combined with the estimated voucher redemption rate. The fair value allocated to the future purchase is recorded as deferred revenue.
Sale of consignment inventory
Sales of consignment inventory are accounted for on a gross sales basis. This reflects that the Company is the primary obligor providing independent advice, guidance and after sales service to customers. The products sold from consignment inventory are indistinguishable to the customer from other products that are sold from purchased inventory and are sold on the same terms. The Company selects the products and suppliers at its own discretion and is responsible for determining the selling price and the physical security of the products making it liable for any inventory loss. It also takes the credit risk of a sale to the customer.
(e) Cost of sales and selling, general and administrative expenses
Cost of sales includes merchandise costs net of discounts and allowances, freight, processing and distribution costs of moving merchandise from suppliers to distribution centers and to stores, inventory shrinkage, store operating and occupancy costs, net bad debts and charges for late payments under the US in-house customer finance programs. Store operating and occupancy costs include utilities, rent, real estate taxes, common area maintenance charges and depreciation. Selling, general and administrative expenses include store staff and store administrative costs, centralized administrative expenses, including information technology, credit and eCommerce, advertising and promotional costs, and other operating expenses not specifically categorized elsewhere in the consolidated income statements.
(f) Store opening costs
The opening costs of new locations are expensed as incurred.
(g) Advertising and promotional costs
Advertising and promotional costs are expensed within selling, general and administrative expenses. Production costs are expensed at the first communication of the advertisements, while communication expenses are recognized each time the advertisement is communicated. For catalogues and circulars, costs are all expensed at the first date they can be viewed by the customer. Point of sale promotional material is expensed when first displayed in the stores. Gross advertising costs totaled $253.8 million in Fiscal 2014 (Fiscal 2013: $245.8 million; Fiscal 2012: $208.6 million).
(h) Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation, amortization and impairment losses. Maintenance and repair costs are expensed as incurred. Depreciation and amortization are recognized on the straight-line method over the estimated useful lives of the related assets as follows:
Buildings |
30 40 years when land is owned or the remaining term of lease, not to exceed 40 years | |
Leasehold improvements |
Remaining term of lease, not to exceed 10 years | |
Furniture and fixtures |
Ranging from 3 10 years | |
Equipment, including software |
Ranging from 3 5 years |
Equipment, which includes computer software purchased or developed for internal use, is stated at cost less accumulated amortization. Signets policy provides for the capitalization of external direct costs of materials and
9
services associated with developing or obtaining internal use computer software. In addition, Signet also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer projects. Amortization is charged on a straight-line basis over periods from three to five years.
Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Potentially impaired assets or asset groups are identified by reviewing the cash flows of individual stores. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the undiscounted cash flow is less than the assets carrying amount, the impairment charge recognized is determined by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value. Property and equipment at stores planned for closure are depreciated over a revised estimate of their useful lives.
(i) Goodwill and other intangibles
Goodwill represents the excess of the purchase price of acquisitions over the Companys interest in the fair value of the identifiable assets and liabilities acquired. Goodwill is recorded by the Companys reporting units based on the acquisitions made by each. Goodwill is not amortized, but is reviewed for impairment and is required to be tested at least annually or whenever events or changes in circumstances indicate it is more likely than not that a reporting units fair value is less than its carrying value. The annual testing date for reporting units within the US and UK segments is the last day of the fourth quarter.
The Company may elect to perform a qualitative assessment for each reporting unit to determine whether it is more likely than not that the fair value of the reporting unit is greater than its carrying value. If a qualitative assessment is not performed, or if as a result of a qualitative assessment it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, then the reporting units fair value is compared to its carrying value. Fair value is determined through the income approach using discounted cash flow models or market-based methodologies. Significant estimates used in these discounted cash flow models include: the weighted average cost of capital; long-term growth rates; expected changes to selling prices, direct costs and profitability of the business; and working capital requirements. Management estimates discount rates using post-tax rates that reflect assessments of the time value of money and Company-specific risks. If the carrying value exceeds the estimated fair value, the Company determines the fair value of all assets and liabilities of the reporting unit, including the implied fair value of goodwill. If the carrying value of goodwill exceeds the implied fair value of goodwill, the Company recognizes an impairment charge equal to the difference.
Goodwill is recorded in other assets. See Note 12.
(j) Inventories
Inventories held in the US and UK division primarily represent goods held for resale and are valued at the lower of cost or market value. Cost is determined using average cost and includes costs directly related to bringing inventory to its present location and condition. These include relevant warehousing, distribution and certain buying, security and data processing costs. Market value is defined as estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Inventory write-downs are recorded for obsolete, slow moving or defective items and shrinkage. The write-down is equal to the difference between the cost of inventory and its estimated market value based upon assumptions of targeted inventory turn rates, future demand, management strategy and market conditions. Shrinkage is estimated and recorded based on historical physical inventory results, expectations of future inventory losses and current inventory levels. Physical inventories are taken at least once annually for all store locations and distribution centers.
Inventories held in the Companys diamond sourcing operations are valued at the lower of cost, as determined on specific identification process, or market.
10
(k) Vendor contributions
Contributions are received from vendors through various programs and arrangements including cooperative advertising. Where vendor contributions related to identifiable promotional events are received, these are matched against the costs of these promotions. Vendor contributions, which are received as general contributions and not related to specific promotional events, are recognized as a reduction of inventory costs.
(l) In-house customer finance programs
Signets US division operates customer in-house finance programs that allow customers to finance merchandise purchases from the US divisions stores. Signet recognizes finance charges in accordance with the contractual agreements. Gross interest earned is recorded as other operating income in the income statement. See Note 3. In addition to interest-bearing accounts, a significant proportion of credit sales are made using interest-free financing for one year or less, subject to certain conditions.
Accrual of interest is suspended when accounts become more than 90 days aged. Upon suspension of the accrual of interest, interest income is subsequently recognized to the extent cash payments are received. Accrual of interest is resumed when receivables are removed from non-accrual status.
(m) Accounts receivable
Accounts receivable are stated at their nominal amounts and primarily include account balances outstanding from Signets in-house customer finance programs. The finance receivables from the in-house customer finance programs are comprised of a large volume of transactions with no one customer representing a significant balance. The initial acceptance of customer finance arrangements is based on proprietary consumer credit scores. Subsequent to the initial finance purchase, Signet monitors the credit quality of its customer finance receivable portfolio based on payment activity that drives the aging of receivables. This credit quality indicator is assessed on a real-time basis by Signet.
Accounts receivable under the customer finance programs are shown net of an allowance for uncollectible amounts. See Note 10. This 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.
Allowances for uncollectible amounts are recorded as a charge to cost of sales in the income statement. Receivables are charged off to the allowance when amounts become more than 120 days aged on the recency method and more than 240 days aged on the contractual method. See Note 10.
(n) Leases
Assets held under capital leases relate to leases where substantially all the risks and rewards of the asset have passed to Signet. All other leases are defined as operating leases. Where operating leases include predetermined rent increases, those rents are charged to the income statement on a straight-line basis over the lease term, including any construction period or other rental holiday. Other amounts paid under operating leases are charged to the income statement as incurred. Premiums paid to acquire short-term leasehold properties and inducements to enter into a lease are recognized on a straight line basis over the lease term.
Certain leases provide for contingent rentals that are not measurable at inception. These contingent rentals are primarily based on a percentage of sales in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the determination of rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.
11
(o) Income taxes
Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are recognized by applying statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
At any point in time, various tax years are subject to, or are in the process of, audit by various taxing authorities. To the extent that managements estimates of settlements change, or the final tax outcome of these matters is different than the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made.
(p) Employee benefits
Signet operates a defined benefit pension plan in the UK (the UK Plan) which ceased to admit new employees effective April 2004. The UK Plan provides benefits to participating eligible employees. Beginning in Fiscal 2014, a change to the benefit structure was implemented and members benefits that accumulate after that date are now based upon career average salaries, whereas previously, all benefits were based on salaries at retirement. The UK Plans assets are held by the UK Plan.
The net periodic pension cost of the UK Plan is measured on an actuarial basis using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and the expected long-term rate of return on plan assets. Other material assumptions include rates of participant mortality, the expected long-term rate of compensation and pension increases and rates of employee attrition. Gains and losses occur when actual experience differs from actuarial assumptions. If such gains or losses exceed 10% of the greater of plan assets or plan liabilities, Signet amortizes those gains or losses over the average remaining service period of the employees.
The net periodic pension cost is charged to selling, general and administrative expenses in the income statement.
The funded status of the UK Plan is recognized on the balance sheet, and is the difference between the fair value of plan assets and the benefit obligation measured at the balance sheet date. Any gains or losses and prior service costs or credits that arise during the period but are not included as components of net periodic pension cost are recognized, net of tax, in the period within other comprehensive (loss) income.
Signet also operates a defined contribution pension plan in the UK and sponsors a defined contribution 401(k) retirement savings plan in the US. Contributions made by Signet to these pension arrangements are charged primarily to selling, general and administrative expenses in the income statement as incurred.
(q) Derivative financial instruments and hedge accounting
Signet enters into various types of derivative instruments to mitigate certain risk exposures related to changes in commodity costs and foreign exchange rates. Derivative instruments are recorded in the consolidated balance sheets at fair value, as either assets or liabilities, with an offset to current or comprehensive income, depending on whether the derivative qualifies as an effective hedge.
If a derivative instrument meets certain hedge accounting criteria, it may be designated as a cash flow hedge on the date it is entered into. A cash flow hedge is a hedge of the exposure to variability in the cash flows of a recognized asset, liability or a forecasted transaction. For cash flow hedge transactions, the effective portion of the changes in fair value of derivatives is recognized directly in equity as a component of accumulated OCI and is recognized in the consolidated income statements in the same period(s) and on the same financial statement
12
line in which the hedged item affects net income. Amounts excluded from the effectiveness calculation and any ineffective portions of the change in fair value of the derivatives are recognized immediately in other operating income, net in the consolidated income statements. In addition, gains and losses on derivatives that do not qualify for hedge accounting are recognized immediately in other operating income, net.
In the normal course of business, the Company may terminate cash flow hedges prior to the occurrence of the underlying forecasted transaction. For cash flow hedges terminated prior to the occurrence of the underlying forecasted transaction, management monitors the probability of the associated forecasted cash flow transactions to assess whether any gain or loss recorded in accumulated OCI should be immediately recognized in net income.
Cash flows from derivative contracts are included in net cash provided by operating activities.
(r) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, money market deposits and amounts placed with external fund managers with an original maturity of three months or less, and are carried at cost which approximates fair value. In addition, receivables from third-party credit card issuers typically converted to cash within 5 days of the original sales transaction are considered cash equivalents.
(s) Borrowing costs
Borrowings comprise interest bearing bank loans and bank overdrafts. Borrowing costs are capitalized and amortized into interest expense over the contractual term of the related loan.
(t) Share-based compensation
Signet measures share-based compensation cost for awards classified as equity at the grant date, based on the estimated fair value of the award, and recognizes the cost as an expense on a straight-line basis (net of estimated forfeitures) over the requisite service period of employees. Certain of Signets share plans include a condition whereby vesting is contingent on growth exceeding a given target, and therefore awards granted with this condition are considered to be performance-based awards.
Signet estimates fair value using a Black-Scholes model for awards granted under the Omnibus Plan (as defined in Note 23 below) and the binomial valuation model for awards granted under the Share Saving Plans (as defined in Note 23 below). Deferred tax assets for awards that result in deductions on the income tax returns of subsidiaries are recorded by Signet based on the amount of compensation cost recognized and the subsidiaries statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the subsidiaries income tax return are recorded in additional paid-in-capital (if the tax deduction exceeds the deferred tax asset) or in the income statement (if the deferred tax asset exceeds the tax deduction and no additional paid-in-capital exists from previous awards).
Share-based compensation is primarily recorded in selling, general and administrative expenses in the income statement, along with the relevant salary cost.
See Note 23 for a further description of Signets share-based compensation plans.
(u) Contingent liabilities
Provisions for contingent liabilities are recorded for probable losses when management is able to reasonably estimate the loss or range of loss.
When it is reasonably possible that a contingent liability may result in a loss or additional loss, the range of the loss is disclosed.
13
(v) Common shares
When new shares are issued, they are recorded in Common Shares at their par value. The excess of the issue price over the par value is recorded in additional paid-in capital.
(w) Dividends
Dividends are reflected as a reduction of retained earnings in the period in which they are formally approved by the Board of Directors (the Board).
(x) Recently issued accounting pronouncements
Adopted during the period
Reclassification out of Accumulated Other Comprehensive Income
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The new guidance does not change the current requirements for reporting net income or other comprehensive income, but it does require disclosure of amounts reclassified out of accumulated other comprehensive income by component, as well as require the presentation of these amounts on the face of the statements of comprehensive income or in the notes to the consolidated financial statements. ASU 2013-02 is effective for the reporting periods beginning after December 15, 2012. Signet adopted this guidance effective for the first quarter ended May 4, 2013 and the implementation of this accounting pronouncement did not have a material impact on Signets consolidated financial statements.
To be adopted in future periods
Presentation of Unrecognized Tax Benefit
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance requires, unless certain conditions exist, an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance in ASU 2013-11 will become effective for the Company prospectively for fiscal years beginning after December 15, 2013, and interim periods within those years, with early adoption permitted. Retrospective application is also permitted. Signet did not early adopt this guidance and it has determined that implementation will not have a material impact on Signets consolidated financial statements.
(y) Reclassification
Signet has reclassified the presentation of certain prior year information to conform to the current year presentation.
2. Segment information
Effective with the fourth quarter of Fiscal 2014, management changed the Companys segment reporting in order to align with a change in its organizational and management reporting structure. Signets sales are derived from the retailing of jewelry, watches, other products and services. Signet has identified two geographical reportable segments, being the US and UK divisions. These segments represent channels of distribution that offer similar merchandise and services and have similar marketing and distribution strategies. Both divisions are managed by executive committees, which report to Signets Chief Executive Officer, who reports to the Board. Each divisional executive committee is responsible for operating decisions within parameters set by the Board. The performance of each segment is regularly evaluated based on sales and operating income.
14
In the fourth quarter of Fiscal 2014, subsequent to the November 4, 2013 acquisition of a diamond polishing factory in Gaborone, Botswana, management established the Other operating segment which consists of all non-reportable segments including subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones. This segment was determined to be non-reportable and will be aggregated with corporate administrative functions for segment reporting. Prior year results have been revised to reflect this change. All inter-segment sales and transfers are eliminated.
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Sales: |
||||||||||||
US |
$ | 3,517.6 | $ | 3,273.9 | $ | 3,034.1 | ||||||
UK |
685.6 | 709.5 | 715.1 | |||||||||
Other |
6.0 | | | |||||||||
|
|
|
|
|
|
|||||||
Total sales |
$ | 4,209.2 | $ | 3,983.4 | $ | 3,749.2 | ||||||
|
|
|
|
|
|
|||||||
Operating income (loss): |
||||||||||||
US |
$ | 553.2 | $ | 547.8 | $ | 478.0 | ||||||
UK |
42.4 | 40.0 | 56.1 | |||||||||
Other |
(25.1 | ) | (27.3 | ) | (26.7 | ) | ||||||
|
|
|
|
|
|
|||||||
Total operating income |
$ | 570.5 | $ | 560.5 | $ | 507.4 | ||||||
|
|
|
|
|
|
|||||||
Depreciation and amortization: |
||||||||||||
US |
$ | 88.8 | $ | 75.9 | $ | 69.0 | ||||||
UK |
21.4 | 23.5 | 23.4 | |||||||||
Other |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total depreciation and amortization |
$ | 110.2 | $ | 99.4 | $ | 92.4 | ||||||
|
|
|
|
|
|
|||||||
Capital additions: |
||||||||||||
US |
$ | 134.2 | $ | 110.9 | $ | 75.6 | ||||||
UK |
18.4 | 23.1 | 22.2 | |||||||||
Other |
0.1 | 0.2 | | |||||||||
|
|
|
|
|
|
|||||||
Total capital additions |
$ | 152.7 | $ | 134.2 | $ | 97.8 | ||||||
|
|
|
|
|
|
|||||||
February 1, 2014 |
February 2, 2013 |
January 28, 2012 |
||||||||||
(in millions) | ||||||||||||
Total assets: |
||||||||||||
US |
$ | 3,311.0 | $ | 2,979.2 | $ | 2,747.5 | ||||||
UK |
484.6 | 449.9 | 427.3 | |||||||||
Other |
233.6 | 289.9 | 436.6 | |||||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 4,029.2 | $ | 3,719.0 | $ | 3,611.4 | ||||||
|
|
|
|
|
|
|||||||
Total long-lived assets: |
||||||||||||
US |
$ | 423.6 | $ | 377.5 | $ | 305.8 | ||||||
UK |
81.1 | 76.8 | 77.0 | |||||||||
Other |
9.7 | 0.7 | 0.6 | |||||||||
|
|
|
|
|
|
|||||||
Total long-lived assets |
$ | 514.4 | $ | 455.0 | $ | 383.4 | ||||||
|
|
|
|
|
|
|||||||
Total liabilities: |
||||||||||||
US |
$ | 1,299.3 | $ | 1,243.4 | $ | 1,166.3 | ||||||
UK |
139.3 | 116.9 | 146.2 | |||||||||
Other |
27.5 | 28.8 | 19.8 | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities |
$ | 1,466.1 | $ | 1,389.1 | $ | 1,332.3 | ||||||
|
|
|
|
|
|
15
Sales by product
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Diamonds and diamond jewelry |
$ | 2,552.1 | $ | 2,410.7 | $ | 2,183.3 | ||||||
Gold, silver jewelry, other products and services |
1,236.9 | 1,116.5 | 1,133.5 | |||||||||
Watches |
420.2 | 456.2 | 432.4 | |||||||||
|
|
|
|
|
|
|||||||
Total sales |
$ | 4,209.2 | $ | 3,983.4 | $ | 3,749.2 | ||||||
|
|
|
|
|
|
Sales to any individual customer were not significant to Signets consolidated sales.
3. Other operating income, net
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Interest income from in-house customer finance programs |
$ | 186.4 | $ | 159.7 | $ | 125.4 | ||||||
Other |
0.3 | 1.7 | 1.1 | |||||||||
|
|
|
|
|
|
|||||||
Other operating income, net |
$ | 186.7 | $ | 161.4 | $ | 126.5 | ||||||
|
|
|
|
|
|
4. Compensation and benefits
Compensation and benefits were as follows:
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Wages and salaries |
$ | 753.3 | $ | 713.4 | $ | 681.5 | ||||||
Payroll taxes |
65.8 | 62.6 | 59.3 | |||||||||
Employee benefit plans expense |
10.2 | 12.9 | 11.3 | |||||||||
Share-based compensation expense |
14.4 | 15.7 | 17.0 | |||||||||
|
|
|
|
|
|
|||||||
Total compensation and benefits |
$ | 843.7 | $ | 804.6 | $ | 769.1 | ||||||
|
|
|
|
|
|
5. Income taxes
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Income before income taxes: |
||||||||||||
US |
$ | 493.7 | $ | 494.3 | $ | 423.2 | ||||||
Foreign |
72.8 | 62.6 | 78.9 | |||||||||
|
|
|
|
|
|
|||||||
Total income before income taxes |
$ | 566.5 | $ | 556.9 | $ | 502.1 | ||||||
|
|
|
|
|
|
|||||||
Current taxation: |
||||||||||||
US |
$ | 211.8 | $ | 186.6 | $ | 136.9 | ||||||
Foreign |
7.1 | 6.1 | 11.5 | |||||||||
Deferred taxation: |
||||||||||||
US |
(22.8 | ) | 3.1 | 26.1 | ||||||||
Foreign |
2.4 | 1.2 | 3.2 | |||||||||
|
|
|
|
|
|
|||||||
Total income taxes |
$ | 198.5 | $ | 197.0 | $ | 177.7 | ||||||
|
|
|
|
|
|
16
As the statutory rate of corporation tax in Bermuda is 0%, the differences between the federal income tax rate in the US and the effective tax rates for Signet have been presented below:
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
% | % | % | ||||||||||
US federal income tax rates |
35.0 | 35.0 | 35.0 | |||||||||
US state income taxes |
2.5 | 2.7 | 2.7 | |||||||||
Differences between US federal and foreign statutory income tax rates |
(0.9 | ) | (0.6 | ) | (1.0 | ) | ||||||
Expenditures permanently disallowable for tax purposes, net of permanent tax benefits |
0.6 | 0.8 | 1.1 | |||||||||
Benefit of intra-group financing and services arrangements |
(2.1 | ) | (2.1 | ) | (2.0 | ) | ||||||
Other items |
(0.1 | ) | (0.4 | ) | (0.4 | ) | ||||||
|
|
|
|
|
|
|||||||
Effective tax rate |
35.0 | 35.4 | 35.4 | |||||||||
|
|
|
|
|
|
Signets effective tax rate is largely impacted by the relative proportion of US and foreign income tax expense. In Fiscal 2014, Signets effective tax rate was the same as the US federal income tax rate because the US state income tax expense was substantially offset by the benefit of intra-group financing and services arrangements. Signets future effective tax rate is dependent on changes in the geographic mix of income and the movement in foreign exchange translation rates.
Deferred tax assets (liabilities) consisted of the following:
February 1, 2014 | February 2, 2013 | |||||||||||||||||||||||
Assets | (Liabilities) | Total | Assets | (Liabilities) | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
US property, plant and equipment |
$ | | $ | (70.1 | ) | $ | (70.1 | ) | $ | | $ | (55.8 | ) | $ | (55.8 | ) | ||||||||
Foreign property, plant and equipment |
7.0 | | 7.0 | 6.7 | | 6.7 | ||||||||||||||||||
Inventory valuation |
| (169.2 | ) | (169.2 | ) | | (188.6 | ) | (188.6 | ) | ||||||||||||||
Allowances for doubtful accounts |
39.7 | | 39.7 | 36.6 | | 36.6 | ||||||||||||||||||
Revenue deferral |
134.3 | | 134.3 | 122.4 | | 122.4 | ||||||||||||||||||
Derivative instruments |
6.9 | | 6.9 | | | | ||||||||||||||||||
Straight-line lease payments |
27.5 | | 27.5 | 26.8 | | 26.8 | ||||||||||||||||||
Deferred compensation |
9.9 | | 9.9 | 7.7 | | 7.7 | ||||||||||||||||||
Retirement benefit obligations |
| (12.0 | ) | (12.0 | ) | | (11.2 | ) | (11.2 | ) | ||||||||||||||
Share-based compensation |
10.3 | | 10.3 | 10.7 | | 10.7 | ||||||||||||||||||
US state income tax accruals |
5.3 | | 5.3 | 5.6 | | 5.6 | ||||||||||||||||||
Other temporary differences |
15.0 | | 15.0 | 16.2 | | 16.2 | ||||||||||||||||||
Value of foreign capital losses |
15.8 | | 15.8 | 16.5 | | 16.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total gross deferred tax asset (liability) |
$ | 271.7 | $ | (251.3 | ) | $ | 20.4 | $ | 249.2 | $ | (255.6 | ) | $ | (6.4 | ) | |||||||||
Valuation allowance |
(16.8 | ) | | (16.8 | ) | (17.5 | ) | | (17.5 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Deferred tax asset (liability) |
$ | 254.9 | $ | (251.3 | ) | $ | 3.6 | $ | 231.7 | $ | (255.6 | ) | $ | (23.9 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Current assets |
$ | 3.0 | $ | 1.6 | ||||||||||||||||||||
Current liabilities |
(113.1 | ) | (129.6 | ) | ||||||||||||||||||||
Non-current assets |
113.7 | 104.1 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Deferred tax asset (liability) |
$ | 3.6 | $ | (23.9 | ) | |||||||||||||||||||
|
|
|
|
As of February 1, 2014 Signet had foreign gross capital loss carry forwards of $74.2 million (Fiscal 2013: $71.0 million) which are only available to offset future capital gains, if any, over an indefinite period.
17
The decrease in the total valuation allowance in Fiscal 2014 was $0.7 million due to changes in foreign exchange translation and tax rates (Fiscal 2013: $3.6 million net decrease; Fiscal 2012: $1.5 million net decrease). The valuation allowance primarily relates to foreign capital loss carry forwards that, in the judgment of management, are not more likely than not to be realized.
Signet believes that it is more likely than not that deferred tax assets not subject to a valuation allowance as of February 1, 2014 will be offset where permissible by deferred tax liabilities or realized on future tax returns, primarily from the generation of future taxable income.
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 and certain other foreign jurisdictions. Signet is subject to US federal and state examinations by tax authorities for tax years after November 1, 2008 and is subject to examination by the UK tax authority for tax years after January 31, 2012.
As of February 1, 2014 Signet had approximately $4.6 million (Fiscal 2013: $4.5 million; Fiscal 2012: $4.8 million) of unrecognized tax benefits in respect of uncertain tax positions, all of which would favorably affect the effective income tax rate if resolved in Signets favor. These unrecognized tax benefits relate to financing arrangements and intra-group charges which are subject to different and changing interpretations of tax law.
Signet recognizes accrued interest and, where appropriate, penalties related to unrecognized tax benefits within income tax expense. In Fiscal 2014, the total amount of interest recognized in income tax expense in the consolidated income statement was $0.1 million, net charge (Fiscal 2013: $0.2 million, net credit; Fiscal 2012: $0.1 million, net credit). As of February 1, 2014, Signet had accrued interest of $0.3 million (Fiscal 2013: $0.2 million; Fiscal 2012: $0.4 million).
The following table summarizes the activity related to unrecognized tax benefits:
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Balance at beginning of period |
$ | 4.5 | $ | 4.8 | $ | 9.0 | ||||||
Increases related to current year tax positions |
0.4 | 0.2 | 0.3 | |||||||||
Prior year tax positions: |
||||||||||||
Increases |
0.2 | | | |||||||||
Decreases |
| | (1.4 | ) | ||||||||
Cash settlements |
(0.5 | ) | | (2.6 | ) | |||||||
Lapse of statute of limitations |
| (0.5 | ) | (0.5 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at end of period |
$ | 4.6 | $ | 4.5 | $ | 4.8 | ||||||
|
|
|
|
|
|
Over the next twelve months management believes that it is reasonably possible that there could be a reduction of substantially all of the unrecognized tax benefits as of February 1, 2014, due to settlement of the uncertain tax positions with the tax authorities.
6. Earnings per share
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions, except per share amounts) | ||||||||||||
Net income |
$ | 368.0 | $ | 359.9 | $ | 324.4 | ||||||
|
|
|
|
|
|
|||||||
Basic weighted average number of shares outstanding |
80.2 | 82.3 | 86.2 | |||||||||
Dilutive effect of share awards |
0.5 | 0.5 | 0.8 | |||||||||
|
|
|
|
|
|
|||||||
Diluted weighted average number of shares outstanding |
80.7 | 82.8 | 87.0 | |||||||||
|
|
|
|
|
|
|||||||
Earnings per share basic |
$ | 4.59 | $ | 4.37 | $ | 3.76 | ||||||
Earnings per share diluted |
$ | 4.56 | $ | 4.35 | $ | 3.73 |
18
The basic weighted average number of shares 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 Fiscal 2014 by 6,961,632 (Fiscal 2013: 4,882,625; Fiscal 2012: 576,427). The calculation of fully diluted EPS for Fiscal 2014 excludes share awards to acquire 70,447 shares (Fiscal 2013: 192,374 share awards; Fiscal 2012: 375,071 share awards) on the basis that their effect on EPS was anti-dilutive.
7. Dividends
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||||||||||||||
Cash dividend per share |
Total dividends |
Cash dividend per share |
Total dividends |
Cash dividend per share |
Total dividends |
|||||||||||||||||||
(in millions) | (in millions) | (in millions) | ||||||||||||||||||||||
First quarter |
$ | 0.15 | $ | 12.1 | $ | 0.12 | $ | 10.3 | $ | | $ | | ||||||||||||
Second quarter |
0.15 | 12.1 | 0.12 | 9.6 | | | ||||||||||||||||||
Third quarter |
0.15 | 12.0 | 0.12 | 9.8 | 0.10 | 8.7 | ||||||||||||||||||
Fourth quarter(1) |
0.15 | 12.0 | (2) | 0.12 | 9.8 | (2) | 0.10 | 8.7 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 0.60 | $ | 48.2 | $ | 0.48 | $ | 39.5 | $ | 0.20 | $ | 17.4 |
(1) | Signets 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 each fiscal year is paid in the subsequent fiscal year. The dividends are reflected in the consolidated statement of cash flows upon payment. |
(2) | As of February 1, 2014 and February 2, 2013, $12.0 million and $9.8 million, respectively, has been recorded in accrued expenses and other current liabilities in the consolidated balance sheets reflecting the cash dividends declared for the fourth quarter of Fiscal 2014 and Fiscal 2013, respectively. |
In addition, on March 26, 2014, Signets Board of Directors declared a quarterly dividend of $0.18 per share on its Common Shares. This dividend will be payable on May 28, 2014 to shareholders of record on May 2, 2014, with an ex-dividend date of April 30, 2014.
8. Accumulated other comprehensive income (loss)
The following tables present the changes in accumulated OCI by component and the reclassifications out of accumulated OCI:
Pension plan | ||||||||||||||||||||
Foreign currency translation |
Gains (losses) on cash flow hedges |
Actuarial (losses) gains |
Prior service credit (cost) |
Accumulated other comprehensive (loss) income |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Balance at January 29, 2011 |
$ | (145.0 | ) | $ | 5.9 | $ | (46.0 | ) | $ | 14.3 | $ | (170.8 | ) | |||||||
OCI before reclassifications |
(3.9 | ) | 32.2 | (7.3 | ) | 5.5 | 26.5 | |||||||||||||
Amounts reclassified from accumulated OCI |
| (16.0 | ) | 1.8 | (0.7 | ) | (14.9 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net current-period OCI |
(3.9 | ) | 16.2 | (5.5 | ) | 4.8 | 11.6 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at January 28, 2012 |
(148.9 | ) | 22.1 | (51.5 | ) | 19.1 | (159.2 | ) | ||||||||||||
OCI before reclassifications |
(0.5 | ) | (6.7 | ) | 4.7 | (0.8 | ) | (3.3 | ) | |||||||||||
Amounts reclassified from accumulated OCI |
| (14.4 | ) | 2.4 | (1.2 | ) | (13.2 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net current-period OCI |
(0.5 | ) | (21.1 | ) | 7.1 | (2.0 | ) | (16.5 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at February 2, 2013 |
(149.4 | ) | 1.0 | (44.4 | ) | 17.1 | (175.7 | ) | ||||||||||||
OCI before reclassifications |
12.4 | (22.0 | ) | 0.2 | (0.7 | ) | (10.1 | ) | ||||||||||||
Amounts reclassified from accumulated OCI |
| 6.7 | 1.7 | (1.1 | ) | 7.3 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net current-period OCI |
12.4 | (15.3 | ) | 1.9 | (1.8 | ) | (2.8 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at February 1, 2014 |
$ | (137.0 | ) | $ | (14.3 | ) | $ | (42.5 | ) | $ | 15.3 | $ | (178.5 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
19
The amounts reclassified from accumulated OCI were as follows:
Reclassification activity by individual accumulated OCI |
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 |
Income statement caption | ||||||||||
Amounts reclassified from accumulated OCI |
Amounts reclassified from accumulated OCI |
Amounts reclassified from accumulated OCI |
||||||||||||
(in millions) | ||||||||||||||
(Gains) losses on cash flow hedges: |
||||||||||||||
Foreign currency contracts |
$ | (0.9 | ) | $ | (0.4 | ) | $ | (0.1 | ) | Cost of sales (see Note 19) | ||||
Commodity contracts |
12.0 | (22.0 | ) | (24.5 | ) | Cost of sales (see Note 19) | ||||||||
|
|
|
|
|
|
|||||||||
Total before income tax |
11.1 | (22.4 | ) | (24.6 | ) | |||||||||
(4.4 | ) | 8.0 | 8.6 | Income taxes | ||||||||||
|
|
|
|
|
|
|||||||||
Net of tax |
6.7 | (14.4 | ) | (16.0 | ) | |||||||||
|
|
|
|
|
|
|||||||||
Defined benefit pension plan items: |
||||||||||||||
Amortization of unrecognized net prior service credit |
(1.5 | ) | (1.6 | ) | (1.0 | ) | Selling, general and administrative expenses(1) | |||||||
Amortization of unrecognized actuarial loss |
2.3 | 3.2 | 2.6 | Selling, general and administrative expenses(1) | ||||||||||
|
|
|
|
|
|
|||||||||
Total before income tax |
0.8 | 1.6 | 1.6 | |||||||||||
(0.2 | ) | (0.4 | ) | (0.5 | ) | Income taxes | ||||||||
|
|
|
|
|
|
|||||||||
Net of tax |
0.6 | 1.2 | 1.1 | |||||||||||
|
|
|
|
|
|
|||||||||
Total reclassifications, net of tax |
$ | 7.3 | $ | (13.2 | ) | $ | (14.9 | ) | ||||||
|
|
|
|
|
|
(1) | These items are included in the computation of net periodic pension benefit (cost). See Note 20 for additional information. |
9. Cash and cash equivalents
February 1, 2014 |
February 2, 2013 |
|||||||
(in millions) | ||||||||
Cash and cash equivalents held in money markets and other accounts |
$ | 225.3 | $ | 276.6 | ||||
Cash equivalents from third-party credit card issuers |
21.1 | 23.2 | ||||||
Cash on hand |
1.2 | 1.2 | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
$ | 247.6 | $ | 301.0 | ||||
|
|
|
|
10. Accounts receivable, net
Signets accounts receivable primarily consist of US 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
20
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.
February 1, 2014 |
February 2, 2013 |
|||||||
(in millions) | ||||||||
Accounts receivable by portfolio segment, net: |
||||||||
US customer in-house finance receivables |
$ | 1,356.0 | $ | 1,192.9 | ||||
Other accounts receivable |
18.0 | 12.4 | ||||||
|
|
|
|
|||||
Total accounts receivable, net |
$ | 1,374.0 | $ | 1,205.3 | ||||
|
|
|
|
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 division of $12.8 million (Fiscal 2013: $13.0 million), with a corresponding valuation allowance of $0.3 million (Fiscal 2013: $0.6 million).
Allowance for credit losses on US customer in-house finance receivables:
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
(in millions) | ||||||||||||
Beginning balance: |
$ | (87.7 | ) | $ | (78.1 | ) | $ | (67.8 | ) | |||
Charge-offs |
128.2 | 112.8 | 92.8 | |||||||||
Recoveries |
26.0 | 21.8 | 19.3 | |||||||||
Provision |
(164.3 | ) | (144.2 | ) | (122.4 | ) | ||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | (97.8 | ) | $ | (87.7 | ) | $ | (78.1 | ) | |||
Ending receivable balance evaluated for impairment |
1,453.8 | 1,280.6 | 1,155.5 | |||||||||
|
|
|
|
|
|
|||||||
US customer in-house finance receivables, net |
$ | 1,356.0 | $ | 1,192.9 | $ | 1,077.4 | ||||||
|
|
|
|
|
|
Net bad debt expense is defined as the provision expense less recoveries.
Credit quality indicator and age analysis of past due US customer in-house finance receivables:
February 1, 2014 |
February 2, 2013 |
January 28, 2012 |
||||||||||||||||||||||
Gross | Valuation allowance |
Gross | Valuation allowance |
Gross | Valuation allowance |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Performing: |
||||||||||||||||||||||||
Current, aged 0 30 days |
$ | 1,170.4 | $ | (36.3 | ) | $ | 1,030.3 | $ | (33.8 | ) | $ | 932.6 | $ | (28.9 | ) | |||||||||
Past due, aged 31 90 days |
229.9 | (8.0 | ) | 203.9 | (7.5 | ) | 180.2 | (6.5 | ) | |||||||||||||||
Non Performing: |
||||||||||||||||||||||||
Past due, aged more than 90 days |
53.5 | (53.5 | ) | 46.4 | (46.4 | ) | 42.7 | (42.7 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 1,453.8 | $ | (97.8 | ) | $ | 1,280.6 | $ | (87.7 | ) | $ | 1,155.5 | $ | (78.1 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
21
February 1, 2014 |
February 2, 2013 |
January 28, 2012 |
||||||||||||||||||||||
Gross | Valuation allowance |
Gross | Valuation allowance |
Gross | Valuation allowance |
|||||||||||||||||||
(as a percentage of the ending receivable balance) | ||||||||||||||||||||||||
Performing |
96.3 | % | 3.2 | % | 96.4 | % | 3.3 | % | 96.3 | % | 3.2 | % | ||||||||||||
Non Performing |
3.7 | % | 100.0 | % | 3.6 | % | 100.0 | % | 3.7 | % | 100.0 | % | ||||||||||||
100.0 | % | 6.7 | % | 100.0 | % | 6.8 | % | 100.0 | % | 6.8 | % | |||||||||||||
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11. Inventories
Signet held $312.6 million of consignment inventory at February 1, 2014 (February 2, 2013: $227.7 million) which is not recorded on the balance sheet. The principal terms of the consignment agreements, which can generally be terminated by either party, are such that Signet can return any or all of the inventory to the relevant suppliers without financial or commercial penalties and the supplier can vary the inventory prices prior to sale.
Inventories
February
1, 2014 |
February
2, 2013 |
|||||||
(in millions) | ||||||||
Raw materials |
$ | 41.8 | $ | 41.2 | ||||
Finished goods |
1,446.2 | 1,355.8 | ||||||
|
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|
|
|||||
Total inventories |
$ | 1,488.0 | $ | 1,397.0 | ||||
|
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|
|
Inventory reserves
Balance at beginning of period |
Charged to profit |
Utilized(1) | Balance at end of period |
|||||||||||||
(in millions) | ||||||||||||||||
Fiscal 2012 |
$ | 27.8 | $ | 18.4 | $ | (16.9 | ) | $ | 29.3 | |||||||
Fiscal 2013 |
29.3 | 23.6 | (29.5 | ) | 23.4 | |||||||||||
Fiscal 2014 |
23.4 | 33.3 | (40.4 | ) | 16.3 |
(1) | Including the impact of foreign exchange translation between opening and closing balance sheet dates. |
12. Other assets
February 1, 2014 |
February 2, 2013 |
|||||||
(in millions) | ||||||||
Deferred extended service plan costs |
$ | 61.9 | $ | 56.9 | ||||
Goodwill |
26.8 | 24.6 | ||||||
Other assets |
25.3 | 18.4 | ||||||
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|
|
|||||
Total other assets |
$ | 114.0 | $ | 99.9 | ||||
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22
Goodwill
The following table summarizes the Companys goodwill by reporting unit:
US | UK | Other | Total | |||||||||||||
(in millions) | ||||||||||||||||
Balance at January 28, 2012 |
$ | | $ | | $ | | $ | | ||||||||
Acquisition(1) |
24.6 | | | 24.6 | ||||||||||||
|
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|
|
|
|
|
|
|||||||||
Balance at February 2, 2013 |
24.6 | | | 24.6 | ||||||||||||
Acquisitions(1) |
(1.4 | ) | | 3.6 | 2.2 | |||||||||||
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|
|
|
|
|
|||||||||
Balance at February 1, 2014 |
$ | 23.2 | $ | | $ | 3.6 | $ | 26.8 |
(1) | See Note 14 for additional discussion of the goodwill recorded by the Company during Fiscal 2014 and Fiscal 2013. |
The Companys 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 consolidated income statements. If future economic conditions are different than those projected by management, future impairment charges may be required.
13. Property, plant and equipment, net
February 1, 2014 |
February 2, 2013 |
|||||||
(in millions) | ||||||||
Land and buildings |
$ | 37.2 | $ | 32.5 | ||||
Leasehold improvements |
461.4 | 419.3 | ||||||
Furniture and fixtures |
537.3 | 503.4 | ||||||
Equipment, including software |
221.1 | 183.8 | ||||||
Construction in progress |
18.7 | 15.5 | ||||||
|
|
|
|
|||||
Total |
$ | 1,275.7 | $ | 1,154.5 | ||||
Accumulated depreciation and amortization |
(788.1 | ) | (724.1 | ) | ||||
|
|
|
|
|||||
Property, plant and equipment, net |
$ | 487.6 | $ | 430.4 | ||||
|
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|
Depreciation and amortization expense for Fiscal 2014 was $110.2 million (Fiscal 2013: $99.4 million; Fiscal 2012: $92.4 million). The expense for Fiscal 2014 includes $0.7 million (Fiscal 2013: $2.6 million; Fiscal 2012: $1.4 million) for impairment of assets.
14. Acquisitions
Botswana diamond polishing factory acquisition
On November 4, 2013, Signet acquired a diamond polishing factory in Gaborone, Botswana for $9.1 million. The acquisition expands the Companys long-term diamond sourcing capabilities and provides resources for the Company to cut and polish stones.
The transaction was accounted for as a business combination during the fourth quarter of Fiscal 2014. The Company is in the process of finalizing the valuation of the net assets acquired, most notably the valuation of property, plant and equipment. The total consideration paid by the Company was funded through existing cash and allocated to the net assets acquired based on the preliminary fair values as follows: property, plant and equipment acquired of $5.5 million and goodwill of $3.6 million. None of the goodwill will be deductible for income tax purposes. The goodwill balance is recorded within other assets in the consolidated balance sheet. See Note 12.
23
Acquisition-related costs incurred prior to closing the transaction were immaterial. The results of operations related to the acquired diamond polishing factory are reported within the Other operating segment of Signets consolidated results and included in Signets consolidated financial statements commencing on the date of acquisition in the Other operating segment. Pro forma results of operations have not been presented, as the impact on the Companys consolidated financial results was not material.
Ultra acquisition
On October 29, 2012, Signet acquired the outstanding shares of Ultra Stores, Inc. (the Ultra Acquisition). The Company paid $56.7 million, net of acquired cash of $1.5 million, for the Ultra Acquisition, including a $1.4 million working capital adjustment at closing. The total consideration paid was funded through existing cash.
On May 15, 2013, the post-closing procedures were finalized and a reduction to the initial purchase price was agreed to. As a result, total consideration paid for the Ultra Acquisition was reduced to $55.3 million. The refund of $1.4 million from the initial consideration paid was received during the second quarter of Fiscal 2014.
Signet incurred approximately $3.0 million of acquisition-related expenses, which were expenses as incurred during Fiscal 2013 and recorded as selling, general and administrative expenses in the consolidated income statement. The results of operations related to the Ultra Acquisition are reported as a component of the results of the US division and included in Signets consolidated financial statements commencing on the date of acquisition. Pro forma results of operations have not been presented, as the impact on the Companys consolidated financial results were not material.
The Ultra Acquisition was accounted for as a business combination during the fourth quarter of Fiscal 2013. During the first quarter of Fiscal 2014, the Company finalized the valuation of net assets acquired. There were no material changes to the valuation of net assets acquired from the initial allocation reported during the fourth quarter of Fiscal 2013. Accordingly, the total consideration paid has been allocated to the net assets acquired based on the final fair values at October 29, 2012 as follows:
Initial Allocation |
Final Allocation |
Change | ||||||||||
(in millions) | ||||||||||||
Recognized amounts of assets acquired and liabilities assumed: |
||||||||||||
Inventories |
$ | 43.3 | $ | 43.3 | $ | | ||||||
Other current assets, excluding cash acquired |
3.3 | 3.3 | | |||||||||
Property and equipment |
12.1 | 12.1 | | |||||||||
Other assets |
0.3 | 0.3 | | |||||||||
Current liabilities |
(19.5 | ) | (19.5 | ) | | |||||||
Other liabilities |
(7.4 | ) | (7.4 | ) | | |||||||
|
|
|
|
|
|
|||||||
Fair value of net assets acquired |
$ | 32.1 | $ | 32.1 | $ | | ||||||
Goodwill(1) |
24.6 | 23.2 | (1.4 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total consideration |
$ | 56.7 | $ | 55.3 | $ | (1.4 | ) | |||||
|
|
|
|
|
|
(1) | None of the goodwill will be deductible for income tax purposes. The goodwill balance is recorded within other assets in the consolidated balance sheet. See Note 12. |
During Fiscal 2014, the majority of the acquired stores were converted to the Kay brand, with the remaining stores being reflected under regional brands.
24
15. Accrued expenses and other current liabilities
February 1, 2014 |
February 2, 2013 |
|||||||
(in millions) | ||||||||
Accrued compensation |
$ | 81.3 | $ | 85.9 | ||||
Other liabilities |
50.1 | 48.7 | ||||||
Other taxes |
31.7 | 31.9 | ||||||
Payroll taxes |
8.0 | 7.4 | ||||||
Accrued expenses |
157.4 | 152.5 | ||||||
|
|
|
|
|||||
Total accrued expenses and other current liabilities |
$ | 328.5 | $ | 326.4 | ||||
|
|
|
|
Sales returns reserve included in accrued expenses above:
Balance at beginning of period |
Net adjustment(1) |
Balance at end of period |
||||||||||
(in millions) | ||||||||||||
Fiscal 2012 |
$ | 7.7 | $ | (0.4 | ) | $ | 7.3 | |||||
Fiscal 2013 |
7.3 | 0.3 | 7.6 | |||||||||
Fiscal 2014 |
7.6 | 0.8 | 8.4 |
(1) | Net adjustment relates to sales returns previously provided for and changes in estimate and the impact of foreign exchange translation between opening and closing balance sheet dates. |
The US division provides a product lifetime diamond and color gemstone 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, Signet 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. Warranty reserve for diamond and gemstone guarantee were as follows:
Balance at beginning of period |
Warranty expense |
Utilized | Balance at end of period |
|||||||||||||
(in millions) | ||||||||||||||||
Fiscal 2012 |
$ | 13.0 | $ | 7.9 | $ | (5.8 | ) | $ | 15.1 | |||||||
Fiscal 2013 |
15.1 | 8.6 | (5.2 | ) | 18.5 | |||||||||||
Fiscal 2014 |
18.5 | 7.4 | (6.8 | ) | 19.1 |
Disclosed as: |
February 1, 2014 |
February 2, 2013 |
||||||
(in millions) | ||||||||
Current liabilities(1) |
$ | 6.7 | $ | 6.9 | ||||
Non-current liabilities (see Note 17) |
12.4 | 11.6 | ||||||
|
|
|
|
|||||
Total warranty reserve |
$ | 19.1 | $ | 18.5 | ||||
|
|
|
|
(1) | Included within accrued expenses above. |
25
16. Deferred revenue
Deferred revenue is comprised primarily of extended service plans (ESP) and voucher promotions and other as follows:
February 1, 2014 |
February 2, 2013 |
|||||||
(in millions) | ||||||||
ESP deferred revenue |
$ | 601.2 | $ | 549.7 | ||||
Voucher promotions and other |
15.5 | 15.9 | ||||||
|
|
|
|
|||||
Total deferred revenue |
$ | 616.7 | $ | 565.6 | ||||
|
|
|
|
|||||
Disclosed as: |
||||||||
Current liabilities |
$ | 173.0 | $ | 159.7 | ||||
Non-current liabilities |
443.7 | 405.9 | ||||||
|
|
|
|
|||||
Total deferred revenue |
$ | 616.7 | $ | 565.6 | ||||
|
|
|
|
ESP deferred revenue
Balance at beginning of period |
Plans sold |
Revenue recognized |
Balance at end of period |
|||||||||||||
(in millions) | ||||||||||||||||
Fiscal 2012 |
$ | 481.1 | $ | 187.0 | $ | (156.4 | ) | $ | 511.7 | |||||||
Fiscal 2013 |
511.7 | 205.1 | (167.1 | ) | 549.7 | |||||||||||
Fiscal 2014 |
549.7 | 223.3 | (171.8 | ) | 601.2 |
17. Other liabilitiesnon-current
February 1, 2014 |
February 2, 2013 |
|||||||
(in millions) | ||||||||
Straight-line rent |
$ | 67.1 | $ | 65.6 | ||||
Deferred compensation |
25.0 | 18.5 | ||||||
Warranty reserve |
12.4 | 11.6 | ||||||
Lease loss reserve |
5.8 | 8.1 | ||||||
Other liabilities |
11.4 | 7.5 | ||||||
|
|
|
|
|||||
Total other liabilities |
$ | 121.7 | $ | 111.3 | ||||
|
|
|
|
A lease loss reserve is recorded for the net present value of the difference between the contractual rent obligations and the rate at which income is received or expected to be received from subleasing the properties.
February 1, 2014 |
February 2, 2013 |
|||||||
(in millions) | ||||||||
At beginning of period: |
$ | 8.1 | $ | 9.6 | ||||
Adjustments, net |
(1.6 | ) | (1.1 | ) | ||||
Utilization(1) |
(0.7 | ) | (0.4 | ) | ||||
|
|
|
|
|||||
At end of period |
$ | 5.8 | $ | 8.1 | ||||
|
|
|
|
(1) | Including the impact of foreign exchange translation between opening and closing balance sheet dates. |
The cash expenditures on the remaining lease loss reserve are expected to be paid over the various remaining lease terms through 2023.
26
18. Loans, overdrafts and long-term debt
Loans and overdrafts
(in millions) | February 1, 2014 |
February
2, 2013 |
||||||
Current liabilities loans and overdrafts |
||||||||
Revolving credit facility |
$ | | $ | | ||||
Bank overdrafts |
19.3 | | ||||||
|
|
|
|
|||||
Total loans and overdrafts |
$ | 19.3 | $ | | ||||
|
|
|
|
Revolving credit facility
On May 24, 2011, Signet Jewelers Limited and certain of its subsidiaries as Borrowers entered into a $400 million senior unsecured multi-currency five year revolving credit agreement (the Credit Agreement) with various financial institutions as the lenders (the Lenders), JPMorgan Chase Bank, N.A., as Administrative Agent, Barclays Capital, as Syndication Agent, and JPMorgan Securities LLC and Barclays Capital as the joint lead arrangers. Borrowings under the Credit Agreement may be used for working capital and general corporate purposes. The Company has guaranteed the obligations of the Borrowers under the Credit Agreement and is also directly bound by certain of the covenants contained in the Credit Agreement.
Under the Credit Agreement, the Borrowers are able to borrow from time to time in an aggregate amount up to $400 million, including issuing letters of credit in an aggregate amount at any time outstanding not to exceed $100 million. The Credit Agreement contains an expansion option that, with the consent of the Lenders or the addition of new lenders, and subject to certain conditions, availability under the Credit Agreement may be increased by an additional $200 million at the request of the Borrowers. The Credit Agreement has a five year term and matures in May 2016, at which time all amounts outstanding under the Credit Agreement will be due and payable.
Borrowings under the Credit Agreement bear interest, at the Borrowers option, at either a base rate (as defined in the Credit Agreement), or an adjusted LIBOR (a Eurocurrency Borrowing), in each case plus an applicable margin rate based on the Companys Fixed Charge Coverage Ratio (as defined in the Credit Agreement). Interest is payable on the last day of each March, June, September and December, or at the end of each interest period for a Eurocurrency Borrowing, but not less often than every three months. Commitment fee rates range from 0.20% to 0.35% based on the Companys Fixed Charge Coverage Ratio and are payable quarterly in arrears and on the date of termination or expiration of commitments.
The Credit Agreement limits the ability of the Company and certain of its subsidiaries to, among other things and subject to certain baskets and exceptions contained therein, incur debt, create liens on assets, make investments outside of the ordinary course of business, sell assets outside of the ordinary course of business, enter into merger transactions and enter into unrelated businesses. The Credit Agreement permits the making of dividend payments and stock repurchases so long as the Company (i) is not in default under the Credit Agreement, or (ii) if in default at the time of making such dividend payment or stock repurchase, has no loans outstanding under the Credit Agreement or more than $10 million in letters of credit issued under the Credit Agreement. The Credit Agreement also contains various customary representations and warranties, financial reporting requirements and other affirmative and negative covenants. The Credit Agreement requires that the Company maintain at all times a Leverage Ratio (as defined in the Credit Agreement) to be no greater than 2.50 to 1.00 and a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) to be no less than 1.40 to 1.00, both determined as of the end of each fiscal quarter of the Company for the trailing four quarters. As of February 1, 2014 and February 2, 2013, Signet was in compliance with all debt covenants.
The commitments may be terminated and amounts outstanding under the Credit Agreement may be accelerated upon the occurrence of certain events of default as set forth in the Credit Agreement. These include failure to
27
make principal or interest payments when due, certain insolvency or bankruptcy events affecting the Company or certain of its subsidiaries and breaches of covenants and representations or warranties.
No borrowings were drawn on the facility as of February 1, 2014 and February 2, 2013. Stand-by letters of credit of $10.1 million were drawn on the facility at February 1, 2014 (February 2, 2013: $9.5 million), with no significant intra-period fluctuations.
As of February 1, 2014, there were $19.3 million in overdrafts, which represents issued and outstanding checks where there are no bank balances with the right to offset. There were no overdrafts as of February 2, 2013.
Capitalized fees
Capitalized amendment fees for the Credit Agreement were $2.1 million, with $1.2 million and $0.8 million of accumulated amortization as of February 1, 2014 and February 2, 2013, respectively. In Fiscal 2014, $0.4 million was charged to the income statement (Fiscal 2013: $0.4 million; Fiscal 2012: $1.9 million). In Fiscal 2012, $0.2 million of the capitalized balance was amortized as it related to the 2008 Facility. Following the effectiveness of the new Credit Agreement, the remaining $1.3 million of capitalized fees for the 2008 Facility were written off.
19. Financial instruments and fair value
Signets principal financial instruments are comprised of cash, cash deposits/investments and overdrafts, accounts receivable and payable, derivatives and a revolving credit facility. 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 Signets business operations and sources of finance. The main risks arising from Signets 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.
Market risk
Signet generates revenues and incurs expenses in US dollars and pounds sterling. As a portion of Signets UK division purchases 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 pounds sterling cash reflecting the cash generative characteristics of the UK division. Signets objective is to minimize net foreign exchange exposure to the income statement on pound sterling denominated items through managing this level of cash, pound sterling denominated intercompany balances and US dollar to pound sterling swaps. In order to manage the foreign exchange exposure and minimize the level of pound sterling cash held by Signet, the pound sterling denominated subsidiaries pay dividends regularly to their immediate holding companies and excess pounds sterling are sold in exchange for US dollars.
Signets 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 either purchase options or net zero-cost collar arrangements to purchase, precious metals within treasury guidelines approved by the Board. 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
Signets 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.
28
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 source of funding supplementing Signets resources in meeting liquidity requirements.
The main external source of funding is a $400 million senior unsecured multi-currency five year revolving credit facility, under which there were no borrowings as of February 1, 2014 or February 2, 2013.
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 as of February 1, 2014 or February 2, 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 10. Signet does not require collateral or other security to support cash investments or financial instruments with credit risk; however it is Signets 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.
Derivatives
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 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 February 1, 2014 was $42.3 million (February 2, 2013: $50.8 million). These contracts have been designated as cash flow hedges and will be settled over the next 12 months (February 2, 2013: 12 months).
Forward foreign currency exchange contracts (undesignated)Foreign currency contracts not designated as cash flow hedges are used to hedge currency flows through Signets bank accounts to mitigate Signets exposure to foreign currency exchange risk in its cash and borrowings. The total notional amount of these foreign currency contracts outstanding as of February 1, 2014 was $22.1 million (February 2, 2013: $36.1 million).
Commodity forward purchase contracts and net zero-cost collar arrangementsThese contracts are entered into in order to reduce Signets 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 February 1, 2014 was $63.0 million (February 2, 2013: $187.6 million). These contracts have been designated as cash flow hedges and will be settled over the next 12 months (February 2, 2013: 11 months).
The bank counterparties to the derivative contracts expose Signet to credit-related losses in the event of their nonperformance. However, to mitigate that risk, Signet only contracts with counterparties that meet certain minimum requirements under its counterparty risk assessment process. As of February 1, 2014, Signet believes that this credit risk did not materially change the fair value of the foreign currency or commodity contracts.
29
The following table summarizes the fair value and presentation of derivative instruments in the consolidated balance sheets:
Derivative assets | ||||||||||
Fair value | ||||||||||
Balance sheet location | February 1, 2014 |
February 2, 2013 |
||||||||
(in millions) | ||||||||||
Derivatives designated as hedging instruments: |
||||||||||
Foreign currency contracts |
Other current assets | $ | | $ | 1.0 | |||||
Foreign currency contracts |
Other assets | | | |||||||
Commodity contracts |
Other current assets | 0.8 | 2.8 | |||||||
Commodity contracts |
Other assets | | | |||||||
|
|
|
|
|||||||
0.8 | 3.8 | |||||||||
|
|
|
|
|||||||
Derivatives not designated as hedging instruments: |
||||||||||
Foreign currency contracts |
Other current assets | 0.2 | | |||||||
|
|
|
|
|||||||
Total derivative assets |
$ | 1.0 | $ | 3.8 | ||||||
|
|
|
|
Derivative liabilities | ||||||||||
Fair value | ||||||||||
Balance sheet location | February 1, 2014 |
February 2, 2013 |
||||||||
(in millions) | ||||||||||
Derivatives designated as hedging instruments: |
||||||||||
Foreign currency contracts |
Other current liabilities | $ | (2.1 | ) | $ | | ||||
Foreign currency contracts |
Other liabilities | | | |||||||
Commodity contracts |
Other current liabilities | (0.8 | ) | (4.6 | ) | |||||
Commodity contracts |
Other liabilities | | | |||||||
|
|
|
|
|||||||
(2.9 | ) | (4.6 | ) | |||||||
|
|
|
|
|||||||
Derivatives not designated as hedging instruments: |
||||||||||
Foreign currency contracts |
Other current liabilities | | | |||||||
|
|
|
|
|||||||
Total derivative liabilities |
$ | (2.9 | ) | $ | (4.6 | ) | ||||
|
|
|
|
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:
February 1, 2014 |
February 2, 2013 |
|||||||
(in millions) | ||||||||
Foreign currency contracts |
$ | (2.3 | ) | $ | 1.3 | |||
Commodity contracts |
(18.8 | )(1) | (0.5 | ) | ||||
|
|
|
|
|||||
Total |
$ | (21.1 | ) | $ | 0.8 | |||
|
|
|
|
(1) | Includes losses of $18.2 million related to commodity contracts terminated prior to contract maturity in Fiscal 2014. |
30
The following tables summarize the effect of derivative instruments designated as cash flow hedges in OCI and the consolidated income statements:
Foreign currency contracts
Income statement caption | Fiscal 2014 |
Fiscal 2013 |
||||||||||
(in millions) | ||||||||||||
Gains (losses) recorded in accumulated OCI, beginning of year |
$ | 1.3 | $ | 1.2 | ||||||||
Current period (losses) gains recognized in OCI |
(2.7 | ) | 0.5 | |||||||||
(Gains) losses reclassified from accumulated OCI to net income |
Cost of sales | (0.9 | ) | (0.4 | ) | |||||||
|
|
|
|
|||||||||
(Losses) gains recorded in accumulated OCI, end of year |
$ | (2.3 | ) | $ | 1.3 | |||||||
|
|
|
|
Commodity contracts
Income statement caption | Fiscal 2014 |
Fiscal 2013 |
||||||||||
(in millions) | ||||||||||||
(Losses) gains recorded in accumulated OCI, beginning of year |
$ | (0.5 | ) | $ | 32.4 | |||||||
Current period (losses) gains recognized in OCI |
(30.3 | )(1) | (10.9 | ) | ||||||||
Losses (gains) reclassified from accumulated OCI to net income |
Cost of sales | 12.0 | (22.0 | ) | ||||||||
|
|
|
|
|||||||||
(Losses) gains recorded in accumulated OCI, end of year |
$ | (18.8 | ) | $ | (0.5 | ) | ||||||
|
|
|
|
(1) | Includes losses of $27.8 million related to the change in fair value of commodity contracts the Company terminated prior to contract maturity in Fiscal 2014. |
There was no material ineffectiveness related to the Companys derivative instruments designated in cash flow hedging relationships for the years ended February 1, 2014 and February 2, 2013. Based on current valuations, the Company expects approximately $19.5 million of net pre-tax derivative losses to be reclassified out of accumulated OCI into earnings within the next 12 months.
Derivatives not designated as hedging instruments
The following table presents the effects of the Companys derivatives instruments not designated as cash flow hedges in the consolidated income statements:
Income statement caption | Amount of gain
(loss) recognized in income |
|||||||||||
Fiscal 2014 |
Fiscal 2013 |
|||||||||||
(in millions) | ||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||
Foreign currency contracts |
Other operating income, net | $ | (5.5 | ) | $ | | ||||||
|
|
|
|
|||||||||
Total |
$ | (5.5 | ) | $ | | |||||||
|
|
|
|
31
Fair value
The estimated fair value of Signets financial instruments held or issued to finance Signets 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 Signets 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 1quoted market prices in active markets for identical assets and liabilities
Level 2observable market based inputs or unobservable inputs that are corroborated by market data
Level 3unobservable 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.
February 1, 2014 | February 2, 2013 | |||||||||||||||
Carrying amount |
Significant other observable inputs (Level 2) |
Carrying amount |
Significant other observable inputs (Level 2) |
|||||||||||||
(in millions) | ||||||||||||||||
Assets: |
||||||||||||||||
Foreign currency contracts |
$ | 0.2 | $ | 0.2 | $ | 1.0 | $ | 1.0 | ||||||||
Commodity contracts |
0.8 | 0.8 | 2.8 | 2.8 | ||||||||||||
Liabilities: |
||||||||||||||||
Foreign currency contracts |
(2.1 | ) | (2.1 | ) | | | ||||||||||
Commodity contracts |
(0.8 | ) | (0.8 | ) | (4.6 | ) | (4.6 | ) |
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, current foreign currency forward rates or current commodity forward rates. These are held as assets and liabilities within other receivables and other payables, and all contracts have a maturity of less than twelve months. 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.
20. Pension plans
The UK Plan, which ceased to admit new employees from April 2004, is a funded plan with assets held in a separate trustee administered fund, which is independently managed. February 1, 2014 and February 2, 2013 measurement dates were used in determining the UK Plans benefit obligation and fair value of plan assets.
32
The following tables provide information concerning the UK Plan as of and for the fiscal years ended February 1, 2014 and February 2, 2013:
Fiscal 2014 |
Fiscal 2013 |
|||||||
(in millions) | ||||||||
Change in UK Plan assets: |
||||||||
Fair value at beginning of year |
$ | 261.1 | $ | 236.0 | ||||
Actual return on UK Plan assets |
13.1 | 22.1 | ||||||
Employer contributions |
4.9 | 13.7 | ||||||
Members contributions |
0.7 | 0.5 | ||||||
Benefits paid |
(9.3 | ) | (10.9 | ) | ||||
Foreign currency changes |
12.1 | (0.3 | ) | |||||
|
|
|
|
|||||
Fair value at end of year |
$ | 282.6 | $ | 261.1 | ||||
|
|
|
|
Fiscal 2014 |
Fiscal 2013 |
|||||||
(in millions) | ||||||||
Change in benefit obligation: |
||||||||
Benefit obligation at beginning of year |
$ | 212.6 | $ | 204.5 | ||||
Service cost |
2.4 | 3.6 | ||||||
Past service cost |
0.9 | 1.1 | ||||||
Interest cost |
9.3 | 9.5 | ||||||
Members contributions |
0.7 | 0.5 | ||||||
Actuarial loss (gain) |
(0.1 | ) | 4.3 | |||||
Benefits paid |
(9.3 | ) | (10.9 | ) | ||||
Foreign currency changes |
9.8 | | ||||||
|
|
|
|
|||||
Benefit obligation at end of year |
$ | 226.3 | $ | 212.6 | ||||
|
|
|
|
|||||
Funded status at end of year: UK Plan assets less benefit obligation |
$ | 56.3 | $ | 48.5 | ||||
|
|
|
|
February 1, 2014 |
February 2, 2013 |
|||||||
(in millions) | ||||||||
Amounts recognized in the balance sheet consist of: |
||||||||
Non-current assets |
$ | 56.3 | $ | 48.5 | ||||
Non-current liabilities |
| | ||||||
|
|
|
|
|||||
Net asset recognized |
$ | 56.3 | $ | 48.5 | ||||
|
|
|
|
Items in accumulated OCI not yet recognized as income (expense) in the income statement:
February 1, 2014 |
February 2, 2013 |
January 28, 2012 |
||||||||||
(in millions) | ||||||||||||
Net actuarial loss |
$ | (42.5 | ) | $ | (44.4 | ) | $ | (51.5 | ) | |||
Net prior service credit |
15.3 | 17.1 | 19.1 |
The estimated actuarial loss and prior service credit for the UK Plan that will be amortized from accumulated OCI into net periodic pension cost over the next fiscal year are $2.0 million and $(1.7) million, respectively.
The accumulated benefit obligation for the UK Plan was $210.3 million and $197.5 million at February 1, 2014 and February 2, 2013, respectively.
33
The components of net periodic pension cost and other amounts recognized in OCI for the UK Plan are as follows:
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Components of net periodic pension cost: |
||||||||||||
Service cost |
$ | (2.4 | ) | $ | (3.6 | ) | $ | (4.8 | ) | |||
Interest cost |
(9.3 | ) | (9.5 | ) | (10.7 | ) | ||||||
Expected return on UK Plan assets |
13.0 | 11.5 | 13.8 | |||||||||
Amortization of unrecognized net prior service credit |
1.5 | 1.6 | 1.0 | |||||||||
Amortization of unrecognized actuarial loss |
(2.3 | ) | (3.2 | ) | (2.6 | ) | ||||||
|
|
|
|
|
|
|||||||
Net periodic pension benefit (cost) |
$ | 0.5 | $ | (3.2 | ) | $ | (3.3 | ) | ||||
Other changes in assets and benefit obligations recognized in OCI |
0.1 | 6.7 | (1.7 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total recognized in net periodic pension benefit (cost) and OCI |
$ | 0.6 | $ | 3.5 | $ | (5.0 | ) | |||||
|
|
|
|
|
|
February 1, 2014 |
February 2, 2013 |
|||||||
Assumptions used to determine benefit obligations (at the end of the year): |
||||||||
Discount rate |
4.40 | % | 4.50 | % | ||||
Salary increases |
3.00 | % | 3.20 | % | ||||
Assumptions used to determine net periodic pension costs (at the start of the year): |
||||||||
Discount rate |
4.50 | % | 4.70 | % | ||||
Expected return on UK Plan assets |
5.00 | % | 4.75 | % | ||||
Salary increases |
3.20 | % | 3.20 | % |
The discount rate is based upon published rates for high-quality fixed-income investments that produce expected cash flows that approximate the timing and amount of expected future benefit payments.
The expected return on the UK Plan assets assumption is based upon the historical return and future expected returns for each asset class, as well as the target asset allocation of the portfolio of UK Plan assets.
The UK Plans investment strategy is guided by an objective of achieving a return on the investments, which is consistent with the long-term return assumptions and funding policy, to ensure the UK Plan obligations are met. The investment policy is to carry a balance of funds to achieve these aims. These funds carry investments in UK and overseas equities, diversified growth funds, UK corporate bonds, UK Gilts and commercial property. The property investment is through a Pooled Pensions Property Fund that provides a diversified portfolio of property assets.
The target allocation for the UK Plans assets at February 1, 2014 was bonds 45%, diversified growth funds 35%, equities 15% and property 5%. This allocation is consistent with the long-term target allocation of investments underlying the UK Plans funding strategy.
The fair value of the assets in the UK Plan at February 1, 2014 and February 2, 2013 are required to be classified and disclosed in one of the following three categories:
Level 1quoted market prices in active markets for identical assets and liabilities
Level 2observable market based inputs or unobservable inputs that are corroborated by market data
Level 3unobservable inputs that are not corroborated by market data
34
In Fiscal 2014, based upon further review of the underlying securities of the investments, management corrected the presentation for certain investments as of February 2, 2013 from Level 1 to Level 2 in the amount of $188.3 million. The value and classification of these assets was as follows:
Fair value measurements at February 1, 2014 |
Fair value measurements at February 2, 2013 |
|||||||||||||||||||||||||||||||
Total | Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
Significant Unobservable inputs (Level 3) |
Total | Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Asset category: |
||||||||||||||||||||||||||||||||
Diversified equity securities |
$ | 41.0 | $ | 19.1 | $ | 21.9 | $ | | $ | 73.2 | $ | 34.9 | $ | 38.3 | $ | | ||||||||||||||||
Diversified growth funds |
100.5 | 50.8 | 49.7 | | 51.2 | 26.3 | 24.9 | | ||||||||||||||||||||||||
Fixed income government bonds |
64.2 | | 64.2 | | 63.4 | | 63.4 | | ||||||||||||||||||||||||
Fixed income corporate bonds |
64.6 | | 64.6 | | 61.7 | | 61.7 | | ||||||||||||||||||||||||
Property |
11.6 | | | 11.6 | 10.4 | | | 10.4 | ||||||||||||||||||||||||
Cash |
0.7 | 0.7 | | | 1.2 | 1.2 | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 282.6 | $ | 70.6 | $ | 200.4 | $ | 11.6 | $ | 261.1 | $ | 62.4 | $ | 188.3 | $ | 10.4 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in diversified equity securities, diversified growth funds, and fixed income securities are in pooled funds. Investments are valued based on unadjusted quoted prices for each fund in active markets, where possible and, therefore, classified in Level 1 of the fair value hierarchy. If unadjusted quoted prices for identical assets are unavailable, investments are valued by the administrators of the funds. The valuation is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units outstanding. The unit price is based on underlying investments which are generally either traded in an active market or are valued based on observable inputs such as market interest rates and quoted prices for similar securities and, therefore, classified in Level 2 of the fair value hierarchy.
The investment in property is in pooled funds valued by the administrators of the fund. The valuation is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units outstanding. The unit price is based on underlying investments which are independently valued on a monthly basis. The investment in the property fund is subject to certain restrictions on withdrawals that could delay the receipt of funds by up to 16 months.
The table below sets forth changes in the fair value of the Level 3 investment assets in Fiscal 2014 and 2013:
(in millions) | ||||
Balance at January 28, 2012 |
$ | 10.3 | ||
Actual return on assets |
0.1 | |||
|
|
|||
Balance at February 2, 2013 |
$ | 10.4 | ||
Actual return on assets |
1.2 | |||
|
|
|||
Balance at February 1, 2014 |
$ | 11.6 | ||
|
|
The UK Plan does not hold any investment in Signet shares or in property occupied by or other assets used by Signet.
35
Signet contributed $4.9 million to the UK Plan in Fiscal 2014 and expects to contribute a minimum of $4.2 million to the UK Plan in Fiscal 2015. The level of contributions is in accordance with an agreed upon deficit recovery plan and based on the results of the actuarial valuation as of April 5, 2012.
The following benefit payments, which reflect expected future service, as appropriate, are estimated to be paid by the UK Plan:
(in millions) | ||||
Fiscal 2015 |
$ | 9.3 | ||
Fiscal 2016 |
10.3 | |||
Fiscal 2017 |
10.7 | |||
Fiscal 2018 |
10.3 | |||
Fiscal 2019 |
11.9 | |||
Fiscal 2020 to Fiscal 2024 |
62.2 |
In June 2004, Signet introduced a defined contribution plan which replaced the UK Plan for new UK employees. The contributions to this plan in Fiscal 2014 were $1.0 million (Fiscal 2013: $0.7 million; Fiscal 2012: $0.6 million).
In the US, Signet sponsors a defined contribution 401(k) retirement savings plan for all eligible employees who meet minimum age and service requirements. The assets of this plan are held in a separate trust and Signet matches 50% of up to 6% of employee elective salary deferrals, subject to statutory limitations. Effective April 1, 2011, Signet increased the matching element from 25% to 50% of up to 6% of employee elective salary deferrals. Signets contributions to this plan in Fiscal 2014 were $7.1 million (Fiscal 2013: $6.5 million; Fiscal 2012: $5.4 million). The US division has also established two unfunded, non-qualified deferred compensation plans, one of which permits certain management and highly compensated employees to elect annually to defer all or a portion of their compensation and earn interest on the deferred amounts (DCP) and the other of which is frozen as to new participants and new deferrals. Beginning in April 2011, the DCP provided for a matching contribution based on each participants annual compensation deferral. The plan also permits employer contributions on a discretionary basis. In connection with these plans, Signet has invested in trust-owned life insurance policies and money market funds. The cost recognized in connection with the DCP in Fiscal 2014 was $2.4 million (Fiscal 2013: $2.1 million; Fiscal 2012: $2.2 million).
The fair value of the assets in the two unfunded, non-qualified deferred compensation plans at February 1, 2014 and February 2, 2013 are required to be classified and disclosed. Although these plans are not required to be funded by the Company, the Company may elect to fund the plans. The value and classification of these assets are as follows:
Fair value measurements at February 1, 2014 |
Fair value measurements at February 2, 2013 |
|||||||||||||||||||||||
Total | Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
Total | Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Corporate-owned life insurance plans |
$ | 8.2 | $ | | $ | 8.2 | $ | 8.9 | $ | | $ | 8.9 | ||||||||||||
Money market funds |
16.3 | 16.3 | | 8.6 | 8.6 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 24.5 | $ | 16.3 | $ | 8.2 | $ | 17.5 | $ | 8.6 | $ | 8.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
36
21. Common shares, treasury shares and reserves
Common Shares
The par value of each Common Share is 18 cents. The consideration received for Common Shares issued during the year related to options was $9.3 million (Fiscal 2013: $21.6 million; Fiscal 2012: $10.6 million).
Treasury shares
Treasury shares represent the cost of shares that the Company purchased in the market under the applicable authorized repurchase program, shares forfeited under the Omnibus Incentive Plan, and those previously held by the Employee Stock Ownership Trust (ESOT) to satisfy options under Signets share option plans.
The total number of shares held in treasury by the Company at February 1, 2014 was 6,954,596. In Fiscal 2014, the Company repurchased 1,557,673 shares under authorized repurchase programs, while reissuing 437,913 shares, net of taxes and forfeitures, to satisfy awards outstanding under existing share based compensation plans. In Fiscal 2013, the Company repurchased 6,425,296 shares under authorized repurchase programs, while reissuing 865,598 shares, net of taxes and forfeitures, to satisfy awards outstanding under existing share based compensation plans. In Fiscal 2012, the Company repurchased 256,241 shares under authorized repurchase programs and 18,897 shares were forfeited under the Omnibus Incentive Plan.
Share repurchase
Signet may from time to time repurchase common shares under various share repurchase programs authorized by Signets Board. Repurchases may be made in the open market, through block trades or otherwise. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion, and will be subject to economic and market conditions, stock prices, applicable legal requirements and other factors. The repurchase programs are funded through Signets existing cash reserves and liquidity sources. Repurchased shares are being held as treasury shares and may be used by Signet for general corporate purposes. Share repurchase activity is as follows:
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||||||||||||||||||||||||||||||
Amount authorized |
Shares repurchased |
Amount repurchased |
Average repurchase price per share |
Shares repurchased |
Amount repurchased |
Average repurchase price per share |
Shares repurchased |
Amount repurchased |
Average repurchase price per share |
|||||||||||||||||||||||||||||||
(in millions) | (in millions) | (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||
2013 Program(1) |
$ | 350.0 | 808,428 | $ | 54.6 | $ | 67.54 | na | na | na | na | na | na | |||||||||||||||||||||||||||
2011 Program(2) |
350.0 | 749,245 | 50.1 | 66.92 | 6,425,296 | $ | 287.2 | $ | 44.70 | 256,241 | $ | 12.7 | $ | 49.57 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Total |
1,557,673 | $ | 104.7 | $ | 67.24 | 6,425,296 | $ | 287.2 | $ | 44.70 | 256,241 | $ | 12.7 | $ | 49.57 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | On June 14, 2013, the Board the repurchase of up to $350 million of Signets common shares (the 2013 Program). The 2013 Program may be suspended or discontinued at any time without notice. The 2013 Program had $295.4 million remaining as of February 1, 2014. |
(2) | In October 2011, the Board authorized the repurchase of up to $300 million of Signets common shares (the 2011 Program), which authorization was subsequently increased to $350 million. The 2011 Program was completed as of May 4, 2013. |
na | Not applicable. |
Other reserves
Other reserves consist of special reserves and a capital redemption reserve established in accordance with the laws of England and Wales.
The Predecessor Company established a special reserve prior to 1997 in connection with reductions in additional paid-in capital which can only be used to write off existing goodwill resulting from acquisitions and otherwise only for purposes permitted for share premium accounts under the laws of England and Wales.
The capital redemption reserve has arisen on the cancellation of previously issued Common Shares and represents the nominal value of those shares cancelled.
37
22. Commitments and contingencies
Operating leases
Signet occupies certain properties and holds machinery and vehicles under operating leases; it does not have any capital leases.
Rental expense for operating leases is as follows:
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Minimum rentals |
$ | 323.7 | $ | 316.0 | $ | 311.7 | ||||||
Contingent rent |
11.1 | 7.8 | 9.8 | |||||||||
Sublease income |
(0.9 | ) | (2.9 | ) | (5.1 | ) | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 333.9 | $ | 320.9 | $ | 316.4 | ||||||
|
|
|
|
|
|
The future minimum operating lease payments for operating leases having initial or non-cancelable terms in excess of one year are as follows:
(in millions) | ||||
Fiscal 2015 |
$ | 311.1 | ||
Fiscal 2016 |
275.4 | |||
Fiscal 2017 |
245.8 | |||
Fiscal 2018 |
212.6 | |||
Fiscal 2019 |
181.8 | |||
Thereafter |
937.7 | |||
|
|
|||
Total |
$ | 2,164.4 | ||
|
|
Signet has entered into certain sale and leaseback transactions of certain properties. Under these transactions it continues to occupy the space in the normal course of business. Gains on the transactions are deferred and recognized as a reduction of rent expense over the life of the operating lease.
Contingent property liabilities
Approximately 44 UK property leases had been assigned by Signet at February 1, 2014 (and remained unexpired and occupied by assignees at that date) and approximately 19 additional properties were sub-let at that date. Should the assignees or sub-tenants fail to fulfill any obligations in respect of those leases or any other leases which have at any other time been assigned or sub-let, Signet or one of its UK subsidiaries may be liable for those defaults. The number of such claims arising to date has been small, and the liability, which is charged to the income statement as it arises, has not been material.
Capital commitments
At February 1, 2014 Signet has committed to spend $42.3 million (February 2, 2013: $33.6 million) related to capital commitments. These commitments principally relate to the expansion and renovation of stores.
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 U.S. 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.
38
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.
Also as previously reported, on September 23, 2008, the U.S. Equal Employment Opportunity Commission (EEOC) filed a lawsuit against Sterling in the U.S. District Court for the Western District of New York. The EEOCs 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 Sterlings motion for partial summary judgment and dismiss the EEOCs claims in their entirety. The EEOC filed its objections to the Magistrate Judges ruling and Sterling filed its response thereto. The District Court Judge heard oral arguments on the EEOCs objections to the Magistrate Judges ruling on March 7, 2014 and on March 10, 2014 entered an order dismissing the action with prejudice. The EEOC has until May 12, 2014 to appeal the District Court Judges dismissal of the action to United States Court of Appeals for the Second Circuit.
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.
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 Signets consolidated financial position, results of operations or cash flows.
23. Share-based compensation
Signet operates several share-based compensation plans which can be categorized as the Omnibus Plan, Share Saving Plans, and the Executive Plans.
Impact on results
Share-based compensation expense and the associated tax benefits are as follows:
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Share-based compensation expense |
$ | 14.4 | $ | 15.7 | $ | 17.0 | ||||||
|
|
|
|
|
|
|||||||
Income tax benefit |
$ | (5.2 | ) | $ | (5.4 | ) | $ | (5.7 | ) | |||
|
|
|
|
|
|
The Fiscal 2014, Fiscal 2013 and Fiscal 2012 expense includes $0.4 million, $1.9 million and $4.4 million, respectively, of share-based compensation incurred in connection with the Chief Executive Officers (CEO) employment agreement dated September 29, 2010, for amounts foregone from his former employment. Under this agreement, 289,554 shares valued at $12.5 million were granted based upon the mid-market closing price of Signets stock on January 18, 2011. Of the shares granted, 116,392 shares vested on January 19, 2011, 92,083 shares vested in Fiscal 2013, 61,127 shares vested in Fiscal 2014 and 19,952 shares are expected to vest in Fiscal 2015, based on the vesting schedule of his foregone awards.
39
Unrecognized compensation cost related to awards granted under share-based compensation plans is as follows:
Unrecognized Compensation Cost | ||||||||||||
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
(in millions) | ||||||||||||
Omnibus Plan |
$ | 14.4 | $ | 14.6 | $ | 16.3 | ||||||
Share Saving Plans |
2.9 | 2.9 | 3.3 | |||||||||
CEO Shares |
| 0.4 | 2.3 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 17.3 | $ | 17.9 | $ | 21.9 | ||||||
Weighted average period of amortization |
1.8 years | 1.7 years | 1.6 years |
As of April 2012, the Company opted to satisfy share option exercises and the vesting of restricted stock and restricted stock units (RSUs) under its plans with the issuance of treasury shares. Prior to April 2012, all share option exercises and award vestings were satisfied through the issuance of new shares.
Omnibus Plan
In Fiscal 2010, Signet adopted the Signet Jewelers Limited Omnibus Incentive Plan (the Omnibus Plan). Awards that may be granted under the Omnibus Plan include restricted stock, RSUs, stock options and stock appreciation rights. The Fiscal 2014, Fiscal 2013 and Fiscal 2012 Awards granted under the Omnibus Plan have two elements, time-based restricted stock and performance-based restricted stock units. The time-based restricted stock has a three year cliff vesting period, subject to continued employment and has the same voting rights and dividend rights as Common Shares (which are payable once the shares have vested). Performance-based restricted stock units granted in Fiscal 2012 and Fiscal 2013 vest based upon actual cumulative operating income achieved for the relevant three year performance period compared to cumulative targeted operating income metrics established in the underlying grant agreement. In Fiscal 2014, an additional performance measure was included for the performance-based restricted stock units for senior executives, to include a return on capital employed (ROCE) metric during the relevant three year performance period compared to target levels established in the underlying grant agreements. The relevant performance is measured over a three year vesting period from the start of the fiscal year in which the award is granted. The Omnibus Plan permits the grant of awards to employees for up to 7,000,000 Common Shares.
The significant assumptions utilized to estimate the weighted-average fair value of awards granted under the Omnibus Plan are as follows:
Omnibus Plan | ||||||||||||
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
Share price(1) |
$ | 67.39 | $ | 47.15 | $ | 44.33 | ||||||
Risk free interest rate(1) |
0.3 | % | 0.4 | % | 1.4 | % | ||||||
Expected term(1) |
2.8 years | 2.9 years | 2.9 years | |||||||||
Expected volatility(1) |
41.7 | % | 44.2 | % | 45.1 | % | ||||||
Dividend yield(1) |
1.1 | % | 1.2 | % | 0.7 | % | ||||||
Fair value(1) |
$ | 66.10 | $ | 46.12 | $ | 43.52 |
(1) | Weighted average. |
The risk free interest rate is based on the US Treasury (for US-based award recipients) or UK Gilt (for UK-based award recipients) yield curve in effect at the grant date with remaining terms equal to the expected term of the awards. The expected term utilized is based on the contractual vesting period of the awards. The expected volatility is determined by calculating the historical volatility of Signets share price over the previous 10 years.
40
The Fiscal 2014 activity for awards granted under the Omnibus Plan is as follows:
Omnibus Plans(1) | ||||||||||||||||
No. of shares |
Weighted average grant date fair value |
Weighted average remaining contractual life |
Intrinsic value(2) |
|||||||||||||
millions | millions | |||||||||||||||
Outstanding at February 2, 2013 |
1.2 | $ | 40.86 | 1.1 years | $ | 73.1 | ||||||||||
Fiscal 2014 activity: |
||||||||||||||||
Granted |
0.3 | $ | 66.10 | |||||||||||||
Vested |
(0.4 | ) | $ | 33.62 | ||||||||||||
Lapsed |
(0.1 | ) | $ | 46.58 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Outstanding at February 1, 2014 |
1.0 | $ | 51.44 | 1.0 years | $ | 80.1 | ||||||||||
|
|
|
|
|
|
|
|
(1) | Includes shares issued to the CEO, whose contract includes share based compensation for amounts foregone from his prior employment. |
(2) | Intrinsic value for outstanding restricted stock and RSUs is based on the fair market value of Signets common stock on the last business day of the fiscal year. |
The following table summarizes additional information about awards granted under the Omnibus Plan:
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Total intrinsic value of awards vested |
$ | 25.3 | $ | 28.5 | $ | 0.5 | ||||||
|
|
|
|
|
|
Share Saving Plans
Signet has three share option savings plans (collectively the Share Saving Plans) available to employees as follows:
| Employee Share Savings Plan, for US employees |
| Sharesave Plan, for UK employees |
| Irish Sharesave Plan for Republic of Ireland employees |
The Share Saving Plans are compensatory and compensation expense is recognized over the requisite service period. In any 10 year period not more than 10% of the issued Common Shares of the Company from time to time may, in aggregate, be issued or be issuable pursuant to options granted under the Share Saving Plans or any other employees share plans adopted by Signet.
The Employee Share Savings Plan is a savings plan intended to qualify under US Section 423 of the US Internal Revenue Code and allows employees to purchase Common Shares at a discount of approximately 15% to the closing price of the New York Stock Exchange on the date of grant. Options granted under the Employee Share Savings Plan vest after 24 months and are generally only exercisable between 24 and 27 months of the grant date.
The Sharesave and Irish Sharesave Plans allow eligible employees to purchase Common Shares at a discount of approximately 20% below a determined market price based on the London Stock Exchange. The market price is determined as the average middle market price for the three trading days prior to the invitation date, or the market price on the day immediately preceding the participation date, or other market price agreed in writing, whichever is the higher value. Options granted under the Sharesave Plan and the Irish Sharesave Plan vest after 36 months and are generally only exercisable between 36 and 42 months from commencement of the related savings contract.
41
The significant assumptions utilized to estimate the weighted-average fair value of awards granted under the Share Saving Plans are as follows:
Share Saving Plans | ||||||||||||
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
Share price(1) |
$ | 72.65 | $ | 49.89 | $ | 40.09 | ||||||
Exercise price(1) |
$ | 59.75 | $ | 41.17 | $ | 28.32 | ||||||
Risk free interest rate(1) |
0.7 | % | 0.4 | % | 0.7 | % | ||||||
Expected term(1) |
2.7 years | 2.7 years | 3.0 years | |||||||||
Expected volatility(1) |
40.2 | % | 41.0 | % | 43.0 | % | ||||||
Dividend yield(1) |
1.1 | % | 1.4 | % | 1.0 | % | ||||||
Fair value(1) |
$ | 22.89 | $ | 15.40 | $ | 11.55 |
(1) | Weighted average. |
The risk free interest rate is based on the US Treasury (for US-based award recipients) or UK Gilt (for UK-based award recipients) yield curve in effect at the grant date with remaining terms equal to the expected term of the awards. The expected term utilized is based on the contractual vesting period of the awards, inclusive of any exercise period available to award recipients after vesting. The expected volatility is determined by calculating the historical volatility of Signets share price over the previous 10 years.
The Fiscal 2014 activity for awards granted under the Share Saving Plans is as follows:
Share Saving Plans | ||||||||||||||||
No. of |
Weighted average exercise price |
Weighted average remaining contractual life |
Intrinsic value(1) |
|||||||||||||
millions | millions | |||||||||||||||
Outstanding at February 2, 2013 |
0.3 | $ | 32.48 | 1.9 years | $ | 9.8 | ||||||||||
Fiscal 2014 activity: |
||||||||||||||||
Granted |
0.1 | $ | 59.75 | |||||||||||||
Exercised |
(0.1 | ) | $ | 27.32 | ||||||||||||
Lapsed |
| $ | | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Outstanding at February 1, 2014 |
0.3 | $ | 44.06 | 1.7 years | $ | 9.4 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Exercisable at February 2, 2013 |
| $ | | | $ | | ||||||||||
Exercisable at February 1, 2014 |
| $ | | | $ | | ||||||||||
|
|
|
|
|
|
|
|
(1) | Intrinsic value for outstanding awards is based on the fair market value of Signets common stock on the last business day of the fiscal year. |
The following table summarizes additional information about awards granted under the Share Saving Plans:
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Weighted average grant date fair value per share of awards granted |
$ | 22.89 | $ | 15.40 | $ | 11.55 | ||||||
|
|
|
|
|
|
|||||||
Total intrinsic value of options exercised |
$ | 4.9 | $ | 3.3 | $ | 1.1 | ||||||
|
|
|
|
|
|
|||||||
Cash received from share options exercised |
$ | 2.9 | $ | 2.7 | $ | 3.2 | ||||||
|
|
|
|
|
|
Executive Plans
Signet operates three 2003 executive share plans (the 2003 Plans), together referred to as the Executive Plans. Option awards under the Executive Plans are generally granted with an exercise price equal to the market
42
price of the Companys shares at the date of grant. Options under the Executive Plans are subject to certain internal performance criteria and cannot be exercised unless Signet achieves an annual rate of compound growth in earnings per share above the retail price index. The performance criteria are measured over a three year period from the start of the fiscal year in which the award is granted. Effective from Fiscal 2008, grants awarded under the 2003 Plans, other than for employee directors, are no longer subject to the performance criteria. Signets Executive Plans, which are shareholder approved, permit the grant of share options to employees for up to 10% of the issued Common Shares over any 10 year period, including any other employees share plans adopted by Signet or a maximum of 5% over 10 years including discretionary option plans. A maximum of 8,568,841 shares may be issued pursuant to options granted to US and UK participants in the Executive Plans. During Fiscal 2014, the plan periods for the Executive Plans expired. As a result, no additional awards may be granted under the Executive Plans as of February 1, 2014.
The Fiscal 2014 activity for awards granted under the Executive Plans is as follows:
Executive Plans | ||||||||||||||||
No. of |
Weighted average exercise price |
Weighted average remaining contractual life |
Intrinsic value(1) |
|||||||||||||
millions | millions | |||||||||||||||
Outstanding at February 2, 2013 |
0.3 | $ | 39.07 | 3.4 years | $ | 6.5 | ||||||||||
Fiscal 2014 activity: |
||||||||||||||||
Granted |
| $ | | |||||||||||||
Exercised |
(0.2 | ) | $ | 39.28 | ||||||||||||
Lapsed |
| $ | | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Outstanding at February 1, 2014 |
0.1 | $ | 39.11 | 3.5 years | $ | 4.1 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Exercisable at February 2, 2013 |
0.3 | $ | 39.07 | $ | 6.5 | |||||||||||
Exercisable at February 1, 2014 |
0.1 | $ | 39.11 | $ | 4.1 | |||||||||||
|
|
|
|
|
|
|
|
(1) | Intrinsic value for outstanding awards is based on the fair market value of Signets common stock on the last business day of the fiscal year. |
The following table summarizes additional information about awards granted under the Executive Plans:
Fiscal 2014 |
Fiscal 2013 |
Fiscal 2012 |
||||||||||
(in millions) | ||||||||||||
Total intrinsic value of options exercised |
$ | 4.8 | $ | 9.0 | $ | 5.2 | ||||||
|
|
|
|
|
|
|||||||
Cash received from share options exercised |
$ | 6.3 | $ | 18.9 | $ | 7.4 | ||||||
|
|
|
|
|
|
24. Related party transactions
There are no material related party transactions.
25. Subsequent Event
On February 19, 2014, Signet entered into a definitive agreement with Zale Corporation (Zale) to acquire all of Zales issued and outstanding common stock for $21.00 per share in cash, or approximately $1.4 billion including net debt. The proposed acquisition reflects our strategy to diversify our businesses and extend our international footprint. The acquisition is expected to be financed through the securitization of a significant portion of Signets US accounts receivable portfolio, bank debt and other debt financing. Signet has secured a commitment for bridge financing and a new underwritten term loan facility in connection with the transaction. Completion of the transaction is subject to customary closing conditions, including approval by Zale stockholders and regulatory approval.
43
26. | Condensed Consolidating Financial Information |
The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. We and certain of our subsidiaries will guarantee the obligations under certain debt securities that may be issued by Signet UK Finance plc. The following presents the condensed consolidating financial information for: (i) the indirect Parent Company (Signet Jewelers Limited); (ii) the Issuer of the guaranteed obligations (Signet UK Finance plc); (iii) the Guarantor subsidiaries, on a combined basis; (iv) the Non-Guarantor subsidiaries, on a combined basis; (v) Consolidating eliminations; and (vi) Signet Jewelers Limited and Subsidiaries on a consolidated basis. Each Guarantor subsidiary is 100% owned by the Parent Company at the date of each balance sheet presented. The Guarantor subsidiaries, along with Signet Jewelers Limited, will fully and unconditionally guarantee the obligations of Signet UK Finance plc under any such debt securities. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements.
The accompanying consdensed consolidating finanical information has been presented on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the subsidiaries cumulative results of operations, capital contributions and distributions, and other changes in equity. Elimination entries include consolidating and eliminating entries for investments in subsidiaries, and intercompany activity and balances.
44
Supplemental Condensed Consolidated Income Statement
For the 52 week period ended February 1, 2014
Signet Jewelers Limited |
Signet UK Finance plc |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Sales |
$ | | $ | | $ | 4,162.9 | $ | 46.3 | $ | | $ | 4,209.2 | ||||||||||||
Cost of sales |
| | (2,621.2 | ) | (7.5 | ) | | (2,628.7 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross margin |
| | 1,541.7 | 38.8 | | 1,580.5 | ||||||||||||||||||
Selling, general and administrative expenses |
(2.9 | ) | | (1,193.1 | ) | (0.7 | ) | | (1,196.7 | ) | ||||||||||||||
Other operating income, net |
| | 183.8 | 2.9 | | 186.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating (loss) income |
(2.9 | ) | | 532.4 | 41.0 | | 570.5 | |||||||||||||||||
Intercompany interest (expense) income |
| | (34.5 | ) | 34.5 | | | |||||||||||||||||
Interest expense, net |
| | (3.9 | ) | (0.1 | ) | | (4.0 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
(Loss) income before income taxes |
(2.9 | ) | | 494.0 | 75.4 | | 566.5 | |||||||||||||||||
Income taxes |
| | (196.8 | ) | (1.7 | ) | | (198.5 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Equity in income of subsidiaries |
370.9 | | 344.2 | 301.3 | (1,016.4 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 368.0 | $ | | $ | 641.4 | $ | 375.0 | $ | (1,016.4 | ) | $ | 368.0 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
45
Supplemental Condensed Consolidated Income Statement
For the 53 week period ended February 2, 2013
Signet Jewelers Limited |
Signet UK Finance plc |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Sales |
$ | | $ | | $ | 3,948.5 | $ | 34.9 | $ | | $ | 3,983.4 | ||||||||||||
Cost of sales |
| | (2,443.4 | ) | (2.6 | ) | | (2,446.0 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross margin |
| | 1,505.1 | 32.3 | | 1,537.4 | ||||||||||||||||||
Selling, general and administrative expenses |
(3.5 | ) | | (1,135.6 | ) | 0.8 | | (1,138.3 | ) | |||||||||||||||
Other operating income, net |
| | 161.7 | (0.3 | ) | | 161.4 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating (loss) income |
(3.5 | ) | | 531.2 | 32.8 | | 560.5 | |||||||||||||||||
Intercompany interest (expense) income |
| | (41.1 | ) | 41.1 | | | |||||||||||||||||
Interest expense, net |
| | (3.7 | ) | 0.1 | | (3.6 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
(Loss) income before income taxes |
(3.5 | ) | | 486.4 | 74.0 | | 556.9 | |||||||||||||||||
Income taxes |
| | (195.8 | ) | (1.2 | ) | | (197.0 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Equity in income of subsidiaries |
363.4 | | 333.9 | 295.1 | (992.4 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 359.9 | $ | | $ | 624.5 | $ | 367.9 | $ | (992.4 | ) | $ | 359.9 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
46
Supplemental Condensed Consolidated Income Statement
For the 52 week period ended January 28, 2012
Signet Jewelers Limited |
Signet UK Finance plc |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Sales |
$ | | $ | | $ | 3,719.6 | $ | 29.6 | $ | | $ | 3,749.2 | ||||||||||||
Cost of sales |
| | (2,311.4 | ) | (0.2 | ) | | (2,311.6 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross margin |
| | 1,408.2 | 29.4 | | 1,437.6 | ||||||||||||||||||
Selling, general and administrative expenses |
(4.3 | ) | | (1,053.2 | ) | 0.8 | | (1,056.7 | ) | |||||||||||||||
Other operating income, net |
0.1 | | 126.8 | (0.4 | ) | | 126.5 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating (loss) income |
(4.2 | ) | | 481.8 | 29.8 | | 507.4 | |||||||||||||||||
Intercompany interest (expense) income |
| | (43.0 | ) | 43.0 | | | |||||||||||||||||
Interest expense, net |
| | (5.2 | ) | (0.1 | ) | | (5.3 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
(Loss) income before income taxes |
(4.2 | ) | | 433.6 | 72.7 | | 502.1 | |||||||||||||||||
Income taxes |
| | (173.8 | ) | (3.9 | ) | | (177.7 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Equity in income of subsidiaries |
328.6 | | 308.8 | 269.4 | (906.8 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 324.4 | $ | | $ | 568.6 | $ | 338.2 | $ | (906.8 | ) | $ | 324.4 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
47
Supplemental Condensed Consolidated Statement of Comprehensive Income
For the 52 week period ended February 1, 2014
Signet Jewelers Limited |
Signet UK Finance plc |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Net income |
$ | 368.0 | $ | | $ | 641.4 | $ | 375.0 | $ | (1016.4 | ) | $ | 368.0 | |||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||
Foreign currency translation adjustments |
| | 13.9 | (2.7 | ) | 1.2 | 12.4 | |||||||||||||||||
Cash flow hedges: |
||||||||||||||||||||||||
Unrealized loss |
| | (22.0 | ) | | | (22.0 | ) | ||||||||||||||||
Reclassification adjustment for losses to net income |
| | 6.7 | | | 6.7 | ||||||||||||||||||
Pension plan: |
||||||||||||||||||||||||
Actuarial gain |
| | 0.2 | | | 0.2 | ||||||||||||||||||
Reclassification adjustment to net income for amortization of actuarial loss |
| | 1.7 | | | 1.7 | ||||||||||||||||||
Prior service benefit |
| | (0.7 | ) | | | (0.7 | ) | ||||||||||||||||
Reclassification adjustment to net income for amortization of prior service credits |
| | (1.1 | ) | | | (1.1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other comprehensive (loss) income |
$ | | $ | | $ | (1.3 | ) | $ | (2.7 | ) | $ | 1.2 | $ | (2.8 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total comprehensive income |
$ | 368.0 | $ | | $ | 640.1 | $ | 372.3 | $ | (1,015.2 | ) | $ | 365.2 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
48
Supplemental Condensed Consolidated Statement of Comprehensive Income
For the 53 week period ended February 2, 2013
Signet Jewelers Limited |
Signet UK Finance plc |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Net income |
$ | 359.9 | $ | | $ | 624.5 | $ | 367.9 | $ | (992.4 | ) | $ | 359.9 | |||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||
Foreign currency translation adjustments |
| | (0.6 | ) | 0.1 | | (0.5 | ) | ||||||||||||||||
Cash flow hedges: |
||||||||||||||||||||||||
Unrealized loss |
| | (6.7 | ) | | | (6.7 | ) | ||||||||||||||||
Reclassification adjustment for gains to net income |
| | (14.4 | ) | | | (14.4 | ) | ||||||||||||||||
Pension plan: |
||||||||||||||||||||||||
Actuarial gain |
| | 4.7 | | | 4.7 | ||||||||||||||||||
Reclassification adjustment to net income for amortization of actuarial loss |
| | 2.4 | | | 2.4 | ||||||||||||||||||
Prior service benefit |
| | (0.8 | ) | | | (0.8 | ) | ||||||||||||||||
Reclassification adjustment to net income for amortization of prior service credits |
| | (1.2 | ) | | | (1.2 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other comprehensive (loss) income |
$ | | $ | | $ | (16.6 | ) | $ | 0.1 | $ | | $ | (16.5 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total comprehensive income |
$ | 359.9 | $ | | $ | 607.9 | $ | 368.0 | $ | (992.4 | ) | $ | 343.4 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
49
Supplemental Condensed Consolidated Statement of Comprehensive Income
For the 52 week period ended January 28, 2012
Signet Jewelers Limited |
Signet UK Finance plc |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Net income |
$ | 324.4 | $ | | $ | 568.6 | $ | 338.2 | $ | (906.8 | ) | $ | 324.4 | |||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Foreign currency translation adjustments |
| | (4.4 | ) | 0.6 | (0.1 | ) | (3.9 | ) | |||||||||||||||
Cash flow hedges: |
||||||||||||||||||||||||
Unrealized gain |
| | 32.2 | | | 32.2 | ||||||||||||||||||
Reclassification adjustment for gains to net income |
| | (16.0 | ) | | | (16.0 | ) | ||||||||||||||||
Pension plan: |
||||||||||||||||||||||||
Actuarial loss |
| | (7.3 | ) | | | (7.3 | ) | ||||||||||||||||
Reclassification adjustment to net income for amortization of actuarial loss |
| | 1.8 | | | 1.8 | ||||||||||||||||||
Prior service costs |
| | 5.5 | | | 5.5 | ||||||||||||||||||
Reclassification adjustment to net income for amortization of prior service credits |
| | (0.7 | ) | | | (0.7 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other comprehensive income |
$ | | $ | | $ | 11.1 | $ | 0.6 | $ | (0.1 | ) | $ | 11.6 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total comprehensive income |
$ | 324.4 | $ | | $ | 579.7 | $ | 338.8 | $ | (906.9 | ) | $ | 336.0 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
50
Supplemental Condensed Consolidated Balance Sheet
February 1, 2014
Signet Jewelers Limited |
Signet UK Finance plc |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 1.4 | $ | | $ | 237.0 | $ | 9.2 | $ | | $ | 247.6 | ||||||||||||
Accounts receivable, net |
| | 1,361.3 | 12.7 | | 1,374.0 | ||||||||||||||||||
Intercompany receivables, net |
47.7 | | | 238.0 | (285.7 | ) | | |||||||||||||||||
Other receivables |
| | 51.1 | 0.4 | | 51.5 | ||||||||||||||||||
Other current assets |
| | 86.5 | 0.5 | | 87.0 | ||||||||||||||||||
Deferred tax assets |
| | 2.8 | 0.2 | | 3.0 | ||||||||||||||||||
Income taxes |
| | 6.0 | 0.5 | | 6.5 | ||||||||||||||||||
Inventories |
| | 1,434.5 | 53.5 | | 1,488.0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
49.1 | | 3,179.2 | 315.0 | (285.7 | ) | 3,257.6 | |||||||||||||||||
Non-current assets: |
||||||||||||||||||||||||
Property, plant and equipment, net |
| | 481.5 | 6.1 | | 487.6 | ||||||||||||||||||
Investment in subsidiaries |
2,526.3 | | 1,452.8 | 1,143.2 | (5,122.3 | ) | | |||||||||||||||||
Intercompany receivables, net |
| | | 1,098.0 | (1,098.0 | ) | | |||||||||||||||||
Other assets |
| | 110.4 | 3.6 | | 114.0 | ||||||||||||||||||
Deferred tax assets |
| | 113.6 | 0.1 | | 113.7 | ||||||||||||||||||
Retirement benefit asset |
| | 56.3 | | | 56.3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 2,575.4 | $ | | $ | 5,393.8 | $ | 2,566.0 | $ | (6,506.0 | ) | $ | 4,029.2 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Liabilities and Shareholders equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Loans and overdrafts |
$ | | $ | | $ | 19.3 | $ | | $ | | $ | 19.3 | ||||||||||||
Accounts payable |
| | 160.5 | 2.4 | | 162.9 | ||||||||||||||||||
Intercompany payables, net |
| | 285.7 | | (285.7 | ) | | |||||||||||||||||
Accrued expenses and other current liabilities |
12.3 | | 313.1 | 3.1 | | 328.5 | ||||||||||||||||||
Deferred revenue |
| | 173.0 | | | 173.0 | ||||||||||||||||||
Deferred tax liabilities |
| | 113.1 | | | 113.1 | ||||||||||||||||||
Income taxes |
| | 101.3 | 2.6 | | 103.9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
12.3 | | 1,166.0 | 8.1 | (285.7 | ) | 900.7 | |||||||||||||||||
Non-current liabilities: |
||||||||||||||||||||||||
Intercompany payables, net |
| | 1,098.0 | | (1,098.0 | ) | | |||||||||||||||||
Other liabilities |
| | 118.5 | 3.2 | | 121.7 | ||||||||||||||||||
Deferred revenue |
| | 443.7 | | | 443.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
12.3 | | 2,826.2 | 11.3 | (1,383.7 | ) | 1,466.1 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total shareholders equity |
2,563.1 | | 2,567.6 | 2,554.7 | (5,122.3 | ) | 2,563.1 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and shareholders equity |
$ | 2,575.4 | $ | | $ | 5,393.8 | $ | 2,566.0 | $ | (6,506.0 | ) | $ | 4,029.2 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
51
Supplemental Condensed Consolidated Balance Sheet
February 2, 2013
Signet Jewelers Limited |
Signet UK Finance plc |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 13.4 | $ | | $ | 271.3 | $ | 16.3 | $ | | $ | 301.0 | ||||||||||||
Accounts receivable, net |
| | 1,198.8 | 6.5 | | 1,205.3 | ||||||||||||||||||
Intercompany receivables, net |
37.3 | | | 715.8 | (753.1 | ) | | |||||||||||||||||
Other receivables |
| | 41.8 | 0.3 | | 42.1 | ||||||||||||||||||
Other current assets |
0.2 | | 85.0 | 0.4 | | 85.6 | ||||||||||||||||||
Deferred tax assets |
| | 1.1 | 0.5 | | 1.6 | ||||||||||||||||||
Income taxes |
| | 3.5 | | | 3.5 | ||||||||||||||||||
Inventories |
| | 1,360.9 | 36.1 | | 1,397.0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
50.9 | | 2,962.4 | 775.9 | (753.1 | ) | 3,036.1 | |||||||||||||||||
Non-current assets: |
||||||||||||||||||||||||
Property, plant and equipment, net |
| | 429.7 | 0.7 | | 430.4 | ||||||||||||||||||
Investment in subsidiaries |
2,288.9 | | 1,335.3 | 1,039.3 | (4,663.5 | ) | | |||||||||||||||||
Intercompany receivables, net |
| | | 600.0 | (600.0 | ) | | |||||||||||||||||
Other assets |
| | 99.9 | | | 99.9 | ||||||||||||||||||
Deferred tax assets |
| | 104.1 | | | 104.1 | ||||||||||||||||||
Retirement benefit asset |
| | 48.5 | | | 48.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 2,339.8 | $ | | $ | 4,979.9 | $ | 2,415.9 | $ | (6,016.6 | ) | $ | 3,719.0 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Liabilities and Shareholders equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Loans and overdrafts |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Accounts payable |
| | 160.0 | (4.1 | ) | | 155.9 | |||||||||||||||||
Intercompany payables, net |
| | 753.1 | | (753.1 | ) | | |||||||||||||||||
Accrued expenses and other current liabilities |
9.9 | | 312.3 | 4.2 | | 326.4 | ||||||||||||||||||
Deferred revenue |
| | 159.7 | | | 159.7 | ||||||||||||||||||
Deferred tax liabilities |
| | 129.6 | | | 129.6 | ||||||||||||||||||
Income taxes |
| | 95.9 | 4.4 | | 100.3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
9.9 | | 1,610.6 | 4.5 | (753.1 | ) | 871.9 | |||||||||||||||||
Non-current liabilities: |
||||||||||||||||||||||||
Intercompany payables, net |
| | 600.0 | | (600.0 | ) | | |||||||||||||||||
Other liabilities |
| | 106.1 | 5.2 | | 111.3 | ||||||||||||||||||
Deferred revenue |
| | 405.9 | | | 405.9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
9.9 | | 2,722.6 | 9.7 | (1,353.1 | ) | 1,389.1 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total shareholders equity |
2,329.9 | | 2,257.3 | 2,406.2 | (4,663.5 | ) | 2,329.9 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and shareholders equity |
2,339.8 | $ | | $ | 4,979.9 | $ | 2,415.9 | $ | (6,016.6 | ) | $ | 3,719.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
52
Supplemental Condensed Consolidated Statement of Cash Flows
For the 52 week period ended February 1, 2014
Signet Jewelers Limited |
Signet UK Finance plc |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||||||
Other cash provided by operating activities |
$ | 137.3 | $ | | $ | 421.3 | $ | 286.9 | $ | (610.0 | ) | $ | 235.5 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by operating activities |
137.3 | | 421.3 | 286.9 | (610.0 | ) | 235.5 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Investing activities |
||||||||||||||||||||||||
Purchase of property, plant and equipment |
| | (152.6 | ) | (0.1 | ) | | (152.7 | ) | |||||||||||||||
Investment in subsidiaries |
(0.3 | ) | | (11.0 | ) | (11.0 | ) | 22.3 | | |||||||||||||||
Acquisition of Ultra Stores, Inc., net of cash received |
| | 1.4 | | | 1.4 | ||||||||||||||||||
Acquisition of diamond polishing factory |
| | | (9.1 | ) | | (9.1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash used in investing activities |
(0.3 | ) | | (162.2 | ) | (20.2 | ) | 22.3 | (160.4 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Financing activities |
||||||||||||||||||||||||
Dividends paid |
(46.0 | ) | | | | | (46.0 | ) | ||||||||||||||||
Intercompany dividends paid |
| | (104.4 | ) | (35.6 | ) | 140.0 | | ||||||||||||||||
Proceeds from issuance of common shares |
9.3 | | | 22.3 | (22.3 | ) | 9.3 | |||||||||||||||||
Excess tax benefit from exercise of share awards |
| | 6.5 | | | 6.5 | ||||||||||||||||||
Repurchase of common shares |
(104.7 | ) | | | | | (104.7 | ) | ||||||||||||||||
Net settlement of equity based awards |
(9.2 | ) | | | | | (9.2 | ) | ||||||||||||||||
Proceeds from short-term borrowings |
| | 19.3 | | | 19.3 | ||||||||||||||||||
Intercompany activity, net |
1.6 | | (214.6 | ) | (257.0 | ) | 470.0 | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash used in financing activities |
(149.0 | ) | | (293.2 | ) | (270.3 | ) | 587.7 | (124.8 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash and cash equivalents at beginning of period |
13.4 | | 271.3 | 16.3 | | 301.0 | ||||||||||||||||||
Decrease in cash and cash equivalents |
(12.0 | ) | | (34.1 | ) | (3.6 | ) | | (49.7 | ) | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | (0.2 | ) | (3.5 | ) | | (3.7 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash and cash equivalents at end of period |
$ | 1.4 | $ | | $ | 237.0 | $ | 9.2 | $ | | $ | 247.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
53
Supplemental Condensed Consolidated Statement of Cash Flows
For the 53 week period ended February 2, 2013
Signet Jewelers Limited |
Signet UK Finance plc |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||||||
Other cash provided by operating activities |
$ | 305.7 | $ | | $ | 512.5 | $ | 280.5 | $ | (786.0 | ) | $ | 359.9 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by operating activities |
305.7 | | 512.5 | 280.5 | (786.0 | ) | $ | 312.7 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Investing activities |
||||||||||||||||||||||||
Purchase of property, plant and equipment |
| | (134.0 | ) | (0.2 | ) | | (134.2 | ) | |||||||||||||||
Acquisition of Ultra Stores, Inc., net of cash received |
| | (56.7 | ) | | | (56.7 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash used in investing activities |
| | (190.7 | ) | (0.2 | ) | | (190.9 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Financing activities |
||||||||||||||||||||||||
Dividends paid |
(38.4 | ) | | | | | (38.4 | ) | ||||||||||||||||
Intercompany dividends paid |
| | (520.1 | ) | (265.9 | ) | 786.0 | | ||||||||||||||||
Proceeds from issuance of common shares |
21.6 | | | | | 21.6 | ||||||||||||||||||
Excess tax benefit from exercise of share awards |
| | 7.4 | | | 7.4 | ||||||||||||||||||
Repurchase of common shares |
(287.2 | ) | | | | | (287.2 | ) | ||||||||||||||||
Net settlement of equity based awards |
(11.5 | ) | | | | | (11.5 | ) | ||||||||||||||||
Intercompany activity, net |
17.1 | | (9.9 | ) | (7.2 | ) | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash used in financing activities |
(298.4 | ) | | (522.6 | ) | (273.1 | ) | 786.0 | (308.1 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash and cash equivalents at beginning of period |
6.1 | | 471.6 | 9.1 | | 486.8 | ||||||||||||||||||
Increase (decrease) in cash and cash equivalents |
7.3 | | (200.8 | ) | 7.2 | | (186.3 | ) | ||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | 0.5 | | | 0.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash and cash equivalents at end of period |
$ | 13.4 | $ | | $ | 271.3 | $ | 16.3 | $ | | $ | 301.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
54
Supplemental Condensed Consolidated Statement of Cash Flows
For the 52 week period ended January 28, 2012
Signet Jewelers Limited |
Signet UK Finance plc |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
(in millions) |
||||||||||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||||||
Other cash provided by operating activities |
$ | 45.7 | $ | | $ | 665.2 | $ | 306.5 | $ | (692.2 | ) | $ | 325.2 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by operating activities |
45.7 | | 665.2 | 306.5 | (692.2 | ) | 325.2 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Investing activities |
||||||||||||||||||||||||
Purchase of property, plant and equipment |
| | (97.8 | ) | | | (97.8 | ) | ||||||||||||||||
Investment in subsidiaries |
| | (4.2 | ) | (2.4 | ) | 6.6 | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash used in investing activities |
| | (102.0 | ) | (2.4 | ) | 6.6 | (97.8 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Financing activities |
||||||||||||||||||||||||
Dividends paid |
(8.7 | ) | | | | | (8.7 | ) | ||||||||||||||||
Intercompany dividends paid |
| | (253.3 | ) | (438.9 | ) | 692.2 | | ||||||||||||||||
Proceeds from issuance of common shares |
10.6 | | | 2.4 | (2.4 | ) | 10.6 | |||||||||||||||||
Excess tax benefit from exercise of share awards |
| | 3.9 | | | 3.9 | ||||||||||||||||||
Repurchase of common shares |
(12.7 | ) | | | | | (12.7 | ) | ||||||||||||||||
Credit facility fees paid |
| | (2.1 | ) | | | (2.1 | ) | ||||||||||||||||
Repayment of short-term borrowings |
| | (31.0 | ) | | | (31.0 | ) | ||||||||||||||||
Intercompany activity, net |
(38.6 | ) | | (80.6 | ) | 123.4 | (4.2 | ) | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash used in financing activities |
(49.4 | ) | | (363.1 | ) | (313.1 | ) | 685.6 | (40.0 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash and cash equivalents at beginning of period |
9.8 | | 275.0 | 17.3 | | 302.1 | ||||||||||||||||||
(Decrease) increase in cash and cash equivalents |
(3.7 | ) | | 200.1 | (9.0 | ) | | 187.4 | ||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | (3.5 | ) | 0.8 | | (2.7 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash and cash equivalents at end of period |
$ | 6.1 | $ | | $ | 471.6 | $ | 9.1 | $ | | $ | 486.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
55
QUARTERLY FINANCIAL INFORMATIONUNAUDITED
The sum of the quarterly earnings per share data may not equal the full year amount as the computations of the weighted average shares outstanding for each quarter and the full year are calculated independently.
The following information incorporates the change in accounting for extended service plans that is described in Item 6 and Item 8.
Fiscal 2014 Quarters ended |
||||||||||||||||
May 4, 2013 |
August 3, 2013 |
November 2, 2013 |
February 1, 2014 |
|||||||||||||
(in millions, except per share amounts) | ||||||||||||||||
Sales |
$ | 993.6 | $ | 880.2 | $ | 771.4 | $ | 1,564.0 | ||||||||
Gross margin |
382.8 | 309.7 | 239.2 | 648.8 | ||||||||||||
Net income |
91.8 | 67.4 | 33.6 | 175.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per share basic |
$ | 1.14 | $ | 0.84 | $ | 0.42 | $ | 2.20 | ||||||||
diluted |
$ | 1.13 | $ | 0.84 | $ | 0.42 | $ | 2.18 | ||||||||
|
|
|
|
|
|
|
|
Fiscal 2013 Quarters ended |
||||||||||||||||
April 28, 2012 |
July 28, 2012 |
October 27, 2012 |
February 2, 2013 |
|||||||||||||
(in millions, except per share amounts) | ||||||||||||||||
Sales |
$ | 900.0 | $ | 853.9 | $ | 716.2 | $ | 1,513.3 | ||||||||
Gross margin |
353.7 | 311.2 | 235.4 | 637.1 | ||||||||||||
Net income |
82.5 | 70.7 | 34.9 | 171.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per share basic |
$ | 0.96 | $ | 0.86 | $ | 0.43 | $ | 2.13 | ||||||||
diluted |
$ | 0.96 | $ | 0.85 | $ | 0.43 | $ | 2.12 | ||||||||
|
|
|
|
|
|
|
|
56
Exhibit 99.2
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of July 31, 2013. The effectiveness of our internal control over financial reporting was audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report on page F-3.
/s/ THEO KILLION |
/s/ THOMAS A. HAUBENSTRICKER | |||
Theo Killion | Thomas A. Haubenstricker | |||
Chief Executive Officer | Chief Financial Officer | |||
September 27, 2013 | September 27, 2013 |
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Zale Corporation:
We have audited the accompanying consolidated balance sheets of Zale Corporation and subsidiaries as of July 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders investment, and cash flows for each of the three years in the period ended July 31, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zale Corporation and subsidiaries at July 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Zale Corporations internal control over financial reporting as of July 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated September 27, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
September 27, 2013
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Zale Corporation:
We have audited Zale Corporations internal control over financial reporting as of July 31, 2013, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSO criteria). Zale Corporations management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Zale Corporation maintained, in all material respects, effective internal control over financial reporting as of July 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Zale Corporation and subsidiaries as of July 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders investment, and cash flows for each of the three years in the period ended July 31, 2013 of Zale Corporation and subsidiaries and our report dated September 27, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
September 27, 2013
3
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended July 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenues |
$ | 1,888,016 | $ | 1,866,878 | $ | 1,742,563 | ||||||
Cost of sales |
903,602 | 905,613 | 862,468 | |||||||||
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Gross margin |
984,414 | 961,265 | 880,095 | |||||||||
Selling, general and administrative |
916,274 | 902,287 | 859,588 | |||||||||
Depreciation and amortization |
33,770 | 37,887 | 41,326 | |||||||||
Other (gains) charges |
(748 | ) | 1,973 | 7,047 | ||||||||
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Operating earnings (loss) |
35,118 | 19,118 | (27,866 | ) | ||||||||
Interest expense |
23,182 | 44,649 | 82,619 | |||||||||
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Earnings (loss) before income taxes |
11,936 | (25,531 | ) | (110,485 | ) | |||||||
Income tax expense |
1,924 | 1,365 | 1,557 | |||||||||
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Earnings (loss) from continuing operations |
10,012 | (26,896 | ) | (112,042 | ) | |||||||
Loss from discontinued operations, net of taxes |
| (414 | ) | (264 | ) | |||||||
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Net earnings (loss) |
$ | 10,012 | $ | (27,310 | ) | $ | (112,306 | ) | ||||
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Basic net earnings (loss) per common share: |
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Earnings (loss) from continuing operations |
$ | 0.31 | $ | (0.84 | ) | $ | (3.49 | ) | ||||
Loss from discontinued operations |
| (0.01 | ) | (0.01 | ) | |||||||
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Net earnings (loss) per share |
$ | 0.31 | $ | (0.85 | ) | $ | (3.50 | ) | ||||
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Diluted net earnings (loss) per common share: |
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Earnings (loss) from continuing operations |
$ | 0.24 | $ | (0.84 | ) | $ | (3.49 | ) | ||||
Loss from discontinued operations |
| (0.01 | ) | (0.01 | ) | |||||||
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Net earnings (loss) per share |
$ | 0.24 | $ | (0.85 | ) | $ | (3.50 | ) | ||||
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Weighted-average number of common shares outstanding: |
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Basic |
32,429 | 32,196 | 32,129 | |||||||||
Diluted |
40,958 | 32,196 | 32,129 |
See notes to consolidated financial statements.
4
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended July 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Net earnings (loss) |
$ | 10,012 | $ | (27,310 | ) | $ | (112,306 | ) | ||||
Foreign currency translation adjustment |
(5,685 | ) | (9,668 | ) | 14,190 | |||||||
Reclassification of gain on sale of securities to earnings |
(703 | ) | (242 | ) | (169 | ) | ||||||
Unrealized gain on securities, net |
34 | 628 | 924 | |||||||||
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Comprehensive income (loss) |
$ | 3,658 | $ | (36,592 | ) | $ | (97,361 | ) | ||||
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See notes to consolidated financial statements.
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ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
July 31, | ||||||||
2013 | 2012 | |||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 17,060 | $ | 24,603 | ||||
Merchandise inventories |
767,540 | 741,788 | ||||||
Other current assets |
52,620 | 46,690 | ||||||
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Total current assets |
837,220 | 813,081 | ||||||
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Property and equipment, net |
108,875 | 122,124 | ||||||
Goodwill |
98,372 | 100,544 | ||||||
Other assets |
35,678 | 47,790 | ||||||
Deferred tax asset |
107,110 | 96,929 | ||||||
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Total assets |
$ | 1,187,255 | $ | 1,180,468 | ||||
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LIABILITIES AND STOCKHOLDERS INVESTMENT |
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Current liabilities: |
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Accounts payable and accrued liabilities |
$ | 220,558 | $ | 205,082 | ||||
Deferred revenue |
82,110 | 85,714 | ||||||
Deferred tax liability |
107,016 | 96,662 | ||||||
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Total current liabilities |
409,684 | 387,458 | ||||||
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Long-term debt |
410,050 | 452,908 | ||||||
Deferred revenue long-term |
109,135 | 122,802 | ||||||
Other liabilities |
73,057 | 38,364 | ||||||
Commitments and contingencies |
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Stockholders investment: |
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Common stock, par value $0.01, 150,000 shares authorized; 54,732 shares issued; 32,639 and 32,220 shares outstanding at July 31, 2013 and 2012, respectively |
488 | 488 | ||||||
Additional paid-in capital |
155,625 | 162,711 | ||||||
Accumulated other comprehensive income |
47,015 | 53,369 | ||||||
Accumulated earnings |
435,140 | 425,128 | ||||||
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638,268 | 641,696 | |||||||
Treasury stock, at cost, 22,093 and 22,512 shares at July 31, 2013 and 2012, respectively |
(452,939 | ) | (462,760 | ) | ||||
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Total stockholders investment |
185,329 | 178,936 | ||||||
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Total liabilities and stockholders investment |
$ | 1,187,255 | $ | 1,180,468 | ||||
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See notes to consolidated financial statements.
6
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended July 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Cash Flows From Operating Activities: |
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Net earnings (loss) |
$ | 10,012 | $ | (27,310 | ) | $ | (112,306 | ) | ||||
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: |
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Non-cash interest |
2,870 | 3,603 | 34,580 | |||||||||
Depreciation and amortization |
33,770 | 37,887 | 41,326 | |||||||||
Deferred taxes |
1,165 | 1,544 | 5,280 | |||||||||
Loss on disposition of property and equipment |
1,308 | 1,793 | 1,431 | |||||||||
Impairment of property and equipment |
1,119 | 1,751 | 6,762 | |||||||||
Stock-based compensation |
3,285 | 2,728 | 2,150 | |||||||||
Loss from discontinued operations |
| 414 | 264 | |||||||||
Changes in assets and liabilities: |
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Merchandise inventories |
(29,575 | ) | (27,516 | ) | (8,071 | ) | ||||||
Other current assets |
(7,447 | ) | 5,877 | (5,772 | ) | |||||||
Other assets |
(140 | ) | 142 | (1,982 | ) | |||||||
Accounts payable and accrued liabilities |
15,944 | (11,037 | ) | (19,577 | ) | |||||||
Deferred revenue |
(16,433 | ) | (22,064 | ) | 10,418 | |||||||
Other liabilities |
34,526 | (4,673 | ) | (1,449 | ) | |||||||
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Net cash provided by (used in) operating activities |
50,404 | (36,861 | ) | (46,946 | ) | |||||||
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Cash Flows From Investing Activities: |
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Payments for property and equipment |
(23,029 | ) | (19,775 | ) | (15,315 | ) | ||||||
Purchase of available-for-sale investments |
(4,181 | ) | (6,833 | ) | (9,388 | ) | ||||||
Proceeds from sales of available-for-sale investments |
12,892 | 8,517 | 6,140 | |||||||||
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Net cash used in investing activities |
(14,318 | ) | (18,091 | ) | (18,563 | ) | ||||||
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Cash Flows From Financing Activities: |
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Borrowings under revolving credit agreement |
5,071,300 | 4,891,400 | 3,604,800 | |||||||||
Payments on revolving credit agreement |
(5,113,900 | ) | (4,776,600 | ) | (3,514,800 | ) | ||||||
Payments on senior secured term loan |
| (60,454 | ) | (11,250 | ) | |||||||
Debt issuance costs |
| (7,990 | ) | | ||||||||
Proceeds from exercise of stock options |
147 | 34 | 67 | |||||||||
Payments on capital lease obligations |
(1,016 | ) | (527 | ) | | |||||||
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Net cash (used in) provided by financing activities |
(43,469 | ) | 45,863 | 78,817 | ||||||||
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Cash Flows Used in Discontinued Operations: |
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Net cash used in operating activities of discontinued operations |
| (893 | ) | (5,391 | ) | |||||||
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Effect of exchange rate changes on cash |
(160 | ) | (540 | ) | 973 | |||||||
Net change in cash and cash equivalents |
(7,543 | ) | (10,522 | ) | 8,890 | |||||||
Cash and cash equivalents at beginning of period |
24,603 | 35,125 | 26,235 | |||||||||
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Cash and cash equivalents at end of period |
$ | 17,060 | $ | 24,603 | $ | 35,125 | ||||||
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See notes to consolidated financial statements.
7
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT
(In thousands)
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||
Common Stock | Paid-In | Comprehensive | Accumulated | Treasury | ||||||||||||||||||||||||
Shares | Amount | Capital | Income | Earnings | Stock | Total | ||||||||||||||||||||||
Balances at July 31, 2010 |
32,107 | $ | 488 | $ | 160,645 | $ | 47,706 | $ | 564,744 | $ | (465,563 | ) | $ | 308,020 | ||||||||||||||
Comprehensive loss |
| | | 14,945 | (112,306 | ) | | (97,361 | ) | |||||||||||||||||||
Net settlement of share-based awards |
52 | | (1,220 | ) | | | 1,238 | 18 | ||||||||||||||||||||
Stock-based compensation |
| | 2,150 | | | | 2,150 | |||||||||||||||||||||
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Balances at July 31, 2011 |
32,159 | 488 | 161,575 | 62,651 | 452,438 | (464,325 | ) | 212,827 | ||||||||||||||||||||
Comprehensive loss |
| | | (9,282 | ) | (27,310 | ) | | (36,592 | ) | ||||||||||||||||||
Net settlement of share-based awards |
61 | | (1,592 | ) | | | 1,565 | (27 | ) | |||||||||||||||||||
Stock-based compensation |
| | 2,728 | | | | 2,728 | |||||||||||||||||||||
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Balances at July 31, 2012 |
32,220 | 488 | 162,711 | 53,369 | 425,128 | (462,760 | ) | 178,936 | ||||||||||||||||||||
Comprehensive income |
| | | (6,354 | ) | 10,012 | | 3,658 | ||||||||||||||||||||
Net settlement of share-based awards |
419 | | (10,371 | ) | | | 9,821 | (550 | ) | |||||||||||||||||||
Stock-based compensation |
| | 3,285 | | | | 3,285 | |||||||||||||||||||||
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Balances at July 31, 2013 |
32,639 | $ | 488 | $ | 155,625 | $ | 47,015 | $ | 435,140 | $ | (452,939 | ) | $ | 185,329 | ||||||||||||||
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See notes to consolidated financial statements.
8
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation. References to the Company, we, us, and our in this Form 10-K are references to Zale Corporation and its subsidiaries. We are, through our wholly owned subsidiaries, a leading specialty retailer of fine jewelry in North America. At July 31, 2013, we operated 1,064 specialty retail jewelry stores and 630 kiosks located mainly in shopping malls throughout the United States, Canada and Puerto Rico.
We report our operations under three segments: Fine Jewelry, Kiosk Jewelry and All Other. Fine Jewelry is comprised of our three core national brands, Zales Jewelers®, Zales Outlet® and Peoples Jewellers and our two regional brands, Gordons Jewelers® and Mappins Jewellers®. Each brand specializes in fine jewelry and watches, with merchandise and marketing emphasis focused on diamond products. Zales Jewelers® is our national brand in the U.S. providing moderately priced jewelry to a broad range of guests. Zales Outlet® operates in outlet malls and neighborhood power centers and capitalizes on Zale Jewelers® national marketing and brand recognition. Gordons Jewelers® is a value-oriented regional jeweler. Peoples Jewellers®, Canadas largest fine jewelry retailer, provides guests with an affordable assortment and an accessible shopping experience. Mappins Jewellers® offers Canadian guests a broad selection of merchandise from engagement rings to fashionable and contemporary fine jewelry.
Kiosk Jewelry operates under the brand names Piercing Pagoda®, Plumb Gold, and Silver and Gold Connection® through mall-based kiosks and is focused on the opening price point guest. Kiosk Jewelry specializes in gold, silver and non-precious metal products that capitalize on the latest fashion trends.
All Other includes our insurance and reinsurance operations, which offer insurance coverage primarily to our private label credit card guests.
We also maintain a presence in the retail market through our ecommerce sites, www.zales.com, www.zalesoutlet.com, www.gordonsjewelers.com, www.peoplesjewellers.com and www.pagoda.com.
We consolidate all of our U.S. operations into Zale Delaware, Inc. (ZDel), a wholly owned subsidiary of Zale Corporation. ZDel is the parent company for several subsidiaries, including three that are engaged primarily in providing credit insurance to our credit customers. We consolidate our Canadian retail operations into Zale Canada Holding, L.P., which is a wholly owned subsidiary of Zale Corporation. All significant intercompany transactions have been eliminated.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand, deposits in banks and short-term marketable securities at varying interest rates with original maturities of three months or less. Also included in cash equivalents are proceeds due from credit card transactions with settlement terms of less than five days. Under our credit card processing agreements, a portion of these proceeds are held back to serve as collateral for disputed charges. The credit card proceeds held back as of July 31, 2013 and 2012 were not material. The carrying amount of our cash equivalents approximates fair value due to the short-term maturity of those instruments.
Merchandise Inventories. Merchandise inventories are stated at the lower of cost or market. Substantially all U.S. inventories represent finished goods which are valued using the last-in, first-out (LIFO) retail inventory method. Merchandise inventory of our Canadian brands, Peoples Jewellers and Mappins Jewellers, is valued using the retail inventory method. Under the retail method, inventory is segregated into categories of merchandise with similar characteristics at its current average retail selling value. The determination of inventory cost and the resulting gross margins are calculated by applying an average cost-to-retail ratio to the retail value of inventory. At the end of fiscal year 2013, approximately 16 percent of our total inventory represented raw materials and finished goods in our distribution centers. The inventory related to our manufacturing program and distribution center is valued at the weighted-average cost of those items. The LIFO charge was $4.6 million, $22.4 million and $17.0 million for the years ended July 31, 2013, 2012 and 2011, respectively. The cumulative LIFO provision reflected in the accompanying consolidated balance sheets was $63.0 million and $58.3 million at July 31, 2013 and 2012, respectively. Domestic inventories, excluding the cumulative LIFO provision, were $690.5 million and $664.1 million at July 31, 2013 and 2012, respectively. Our Canadian inventory totaled $140.0 million and
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$136.0 million at July 31, 2013 and 2012, respectively.
Consignment inventory and the related contingent obligations are not reflected in our consolidated financial statements. Consignment inventory has historically consisted of test programs, merchandise at higher price points, or merchandise that otherwise does not warrant the risk of outright ownership. Consignment inventory can be returned to the vendor at any time. At the time consigned inventory is sold, we record the purchase liability in accounts payable and the related cost of merchandise in cost of sales. We had $149.1 million and $118.4 million of consignment inventory on hand at July 31, 2013 and 2012, respectively.
We are required to determine the LIFO cost on an interim basis by estimating annual inflation trends, annual purchases and ending inventory levels for the fiscal year. Actual annual inflation rates and inventory balances as of the end of any fiscal year may differ from interim estimates. We apply internally developed indices that we believe accurately and consistently measure inflation or deflation in the components of our merchandise (i.e., the proper weighting of diamonds, gold and other metals and precious stones) and our overall merchandise mix. We believe our internally developed indices more accurately reflect inflation or deflation in our own prices than the U.S. Bureau of Labor Statistics producer price indices or other published indices.
We also write-down the carrying value of our inventory for discontinued, slow-moving and damaged inventory. This write-down is equal to the difference between the cost of inventory and its estimated market value based upon assumptions of targeted inventory turn rates, future demand, management strategy and market conditions. If actual market conditions are less favorable than those projected by management or management strategy changes, additional inventory write-downs may be required and, in the case of a major change in strategy or downturn in market conditions, such write-downs could be significant.
Shrinkage is estimated for the period from the last inventory date to the end of the fiscal year on a store-by-store basis. Such estimates are based on experience and the shrinkage results from the last physical inventory. Physical inventories are taken at least once annually for all store locations and the distribution centers. The shrinkage rate from the most recent physical inventory, in combination with historical experience, could impact our shrinkage reserve.
Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment by comparing the carrying value of the assets with their estimated undiscounted future cash flows. If the evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted cash flow method, using a discount rate that is commensurate with the risk inherent in our current business model. Assumptions are made with respect to cash flows expected to be generated by the related assets based upon the most recent projections. Any changes in key assumptions, particularly store performance or market conditions, could result in an unanticipated impairment charge. For instance, in the event of a major market downturn or adverse developments within a particular market or portion of our business, individual stores may become unprofitable, which could result in a write-down of the carrying value of the assets in those stores.
Goodwill. In accordance with Accounting Standards Codification (ASC) 350, Intangibles Goodwill and Other, we test goodwill for impairment annually, at the end of our second quarter, or more frequently if events occur which indicate a potential reduction in the fair value of a reporting units net assets below its carrying value. We calculate estimated fair value using the present value of future cash flows expected to be generated using a weighted-average cost of capital, terminal values and updated financial projections. If our actual results are not consistent with estimates and assumptions used to calculate fair value, we may be required to recognize a goodwill impairment. See Note 5 for additional disclosures related to goodwill.
Revenue Recognition. We recognize revenue in accordance with ASC 605, Revenue Recognition. Revenue related to merchandise sales, which is approximately 90 percent of total revenues, is recognized at the time of sale, reduced by a provision for sales returns. The provision for sales returns is based on historical rates of return. Repair revenues are recognized when the service is complete and the merchandise is delivered to the guests.
Premium revenues from our insurance businesses relate to credit insurance policies sold to guests who purchase our merchandise under the customer credit programs. Insurance premium revenues from credit insurance subsidiaries were $10.9 million, $10.5 million and $10.0 million for the fiscal years ended July 31, 2013, 2012 and 2011,
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respectively. These insurance premiums are recognized over the coverage period and included in revenues in the accompanying consolidated statements of operations.
We offer our Fine Jewelry guests lifetime warranties on certain products that cover sizing and breakage with an option to purchase theft protection for a two-year period. ASC 605-20, Revenue Recognition-Services (ASC 605-20), requires recognition of warranty revenue on a straight-line basis until sufficient cost history exists. Once sufficient cost history is obtained, revenue is required to be recognized in proportion to when costs are expected to be incurred. Prior to fiscal year 2012, the Company recognized revenue from lifetime warranties on a straight-line basis over a five-year period because sufficient evidence of the pattern of costs incurred was not available. During the first quarter of fiscal year 2012, we began recognizing revenue related to lifetime warranty sales in proportion to when the expected costs will be incurred, which we estimate will be over an eight-year period. A significant change in estimates related to the time period or pattern in which warranty-related costs are expected to be incurred could adversely impact our revenues. The deferred revenue balance as of July 31, 2011 related to lifetime warranties is being recognized prospectively, in proportion to the remaining estimated warranty costs. The change in estimate related to the pattern of revenue recognition and the life of the warranties was the result of accumulating additional historical evidence over the five-year period that we have been selling the lifetime warranties.
Revenues related to the optional theft protection are recognized over the two-year contract period on a straight-line basis. We also offer our Fine Jewelry guests a two-year watch warranty and our Fine Jewelry and Kiosk Jewelry guests a one-year warranty that covers breakage. The revenue from the two-year watch warranty and one-year breakage warranty is recognized on a straight-line basis over the respective contract terms.
Gross Margin. Gross margin represents net sales less cost of sales. Cost of sales includes cost related to merchandise sold, receiving and distribution, guest repairs and repairs associated with warranties.
Selling, General and Administrative. Included in selling, general and administrative (SG&A) are store operating, advertising, merchandising, costs of insurance operations and general corporate overhead expenses.
On July 9, 2013, we entered into a Private Label Credit Card Program Agreement (the ADS Agreement) with an affiliate of Alliance Data Systems Corporation (ADS) to provide financing to our U.S. guests to purchase merchandise through private label credit cards beginning no later than October 1, 2015. The ADS Agreement will replace our current agreement with Citibank which expires on October 1, 2015. In July 2013, we received a $38.0 million commencement payment upon signing the ADS Agreement. The commencement payment will be amortized over the initial term of the ADS Agreement as a reduction of merchant fees beginning on the commencement date of the agreement.
Operating Leases. Rent expense is recognized on a straight-line basis, including consideration of rent holidays, tenant improvement allowances received from the landlords and applicable rent escalations over the term of the lease. The commencement date of the rent expense is the earlier of the date when we become legally obligated for the rent payments or the date when we take possession of the building for construction purposes.
Capital Leases. We enter into capital leases related to vehicles for our field management. The vehicles are included in property and equipment in the accompanying consolidated balance sheets and are depreciated over a four-year life.
Depreciation and Amortization. Leasehold improvements are stated at cost and are amortized using the straight-line method over the estimated useful lives of the assets or remaining lease life, whichever is shorter, which generally range from 5 to 10 years. Fixtures and equipment are amortized using the straight-line method over the estimated useful lives of the assets, which range from 3 to 15 years. Original cost and related accumulated depreciation or amortization is removed from the accounts in the year assets are retired. Gains or losses on dispositions of property and equipment are recorded in the year of disposal and are included in SG&A in the accompanying consolidated statements of operations. Repairs and maintenance costs are expensed as incurred.
Stock-Based Compensation. Stock-based compensation is accounted for under ASC 718, Compensation Stock Compensation, which requires the use of the fair value method of accounting for all stock-based compensation,
11
including stock options. Share-based awards are recognized as compensation expense over the requisite service period.
Stock Repurchase Program. During fiscal year 2008, the Board of Directors authorized share repurchases of $350 million. As of July 31, 2013, $23.3 million was remaining under our stock repurchase program.
Preferred Stock. At July 31, 2013 and 2012, 5.0 million shares of preferred stock, par value of $0.01, were authorized. None were issued or outstanding.
Self-Insurance. We are self-insured for certain losses related to property insurance, general liability, workers compensation and medical claims. Our liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet dates. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates. While we believe these estimates are reasonable based on the information currently available, if actual trends, including the severity or frequency of claims, medical cost inflation, or fluctuations in premiums differ from our estimates, our results of operations could be impacted.
Advertising Expenses. Advertising is generally expensed when the advertisement is utilized and is a component of SG&A. Production costs are expensed upon the first occurrence of the advertisement. Advertising expenses were $83.6 million, $94.5 million and $76.5 million for the fiscal years ended July 31, 2013, 2012 and 2011, respectively, net of amounts contributed by vendors. Prepaid advertising at July 31, 2013 and 2012 totaled $4.9 million and $0.7 million, respectively, and is included in other current assets in the accompanying consolidated balance sheets.
Vendor Allowances. We receive cash or allowances from merchandise vendors primarily in connection with cooperative advertising programs and reimbursements for markdowns taken to sell the vendors products. We have agreements in place with each vendor setting forth the specific conditions for each allowance or payment. The majority of these agreements are entered into or renewed annually at the beginning of each fiscal year. Qualifying vendor reimbursements of costs incurred to specifically advertise vendors products are recorded as a reduction of advertising expense. All other allowances or cash payments received are recorded as a reduction to the cost of merchandise. Vendor allowances included in advertising expense totaled $1.9 million, $3.1 million and $1.0 million for the fiscal years ended July 31, 2013, 2012 and 2011, respectively. Vendor allowances included in cost of sales totaled $10.1 million, $5.2 million and $3.7 million for the years ended July 31, 2013, 2012 and 2011, respectively.
Income Taxes. Income taxes are accounted for under the asset and liability method prescribed by ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the tax rate changes are enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not such assets will be realized.
We file income tax returns in the U.S. federal jurisdiction, in various states and in certain foreign jurisdictions. We are subject to U.S. federal examinations by tax authorities for fiscal years ending on or after July 31, 2009. We are subject to audit by taxing authorities of most states and certain foreign jurisdictions and are subject to examination by these taxing jurisdictions for fiscal years ending on or after July 31, 2008.
Sales Tax. We present revenues net of taxes collected and record the taxes as a liability in the consolidated balance sheets until the taxes are remitted to the appropriate taxing authority.
Foreign Currency. Translation adjustments result from translating foreign subsidiaries financial statements into U.S. dollars. Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Income statement accounts are translated at average exchange rates during the period. Resulting translation adjustments are included in the accompanying consolidated statements of comprehensive income (loss).
During the fiscal year ended July 31, 2013 and 2011, the average Canadian currency rate appreciated by less than one percent and approximately six percent, respectively, relative to the U.S. dollar. During the fiscal year ended
12
July 31, 2012, the average Canadian currency rate depreciated by approximately one percent relative to the U.S. dollar. The changes in the Canadian currency rates did not have a material impact on the Companys net earnings (loss) during the fiscal years ended July 31, 2013, 2012 and 2011. As a result of fluctuations in the Canadian dollar, we recorded losses totaling $0.7 million and $1.7 million and a gain totaling $1.4 million during the fiscal years ended July 31, 2013, 2012 and 2011, respectively, primarily associated with the settlement of Canadian accounts payable.
Discontinued Operations. In connection with the sale of the Bailey, Banks & Biddle brand in November 2007 and subsequent bankruptcy filed by the buyer, Finlay Fine Jewelry Corporation, on August 5, 2009, we remain contingently liable for certain leases for the remainder of the respective lease terms. As of July 31, 2013, the lease reserve related to the one remaining lease totaled $0.6 million.
Concentrations of Business and Credit Risk. During both fiscal years 2013 and 2012, we purchased approximately 22 percent of our finished merchandise from five vendors (excluding finished merchandise produced by our internal manufacturing organization) with no single vendor exceeding ten percent. In fiscal years 2013 and 2012, approximately 13 percent and 16 percent, respectively, of our merchandise requirements were assembled by our internal manufacturing organization. If purchases from these top vendors were disrupted, particularly at certain critical times during the year, our sales could be adversely affected in the short term until alternative supply arrangements could be established. As of July 31, 2013 and 2012, we had no significant concentrations of credit risk.
Use of Estimates. Our accounting and financial reporting policies are in conformity with U.S. generally accepted accounting principles. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. For example, unexpected changes in market conditions or a downturn in the economy could adversely affect actual results. Estimates are used in accounting for, among other things, inventory valuation, goodwill and long-lived asset valuation, LIFO inventory retail method, legal liability, credit insurance liability, product warranty, depreciation, workers compensation, taxes and contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.
Reclassification. Certain prior year amounts have been reclassified in the accompanying consolidated balance sheets to conform to our fiscal year 2013 presentation.
2. | FAIR VALUE MEASUREMENTS |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, ASC 820, Fair Value Measurement, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair values. These tiers include:
Level 1 | Quoted prices for identical instruments in active markets; | |
Level 2 | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and | |
Level 3 | Instruments whose significant inputs are unobservable. |
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Assets that are Measured at Fair Value on a Recurring Basis
The following tables include our assets that are measured at fair value on a recurring basis (in thousands):
Fair Value as of | ||||||||||||
July 31, 2013 | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
U.S. Treasury securities |
$ | 14,436 | $ | | $ | | ||||||
U.S. government agency securities |
| 2,687 | | |||||||||
Corporate bonds and notes |
| 828 | | |||||||||
Corporate equity securities |
2,669 | | | |||||||||
|
|
|
|
|
|
|||||||
$ | 17,105 | $ | 3,515 | $ | | |||||||
|
|
|
|
|
|
|||||||
Fair Value as of | ||||||||||||
July 31, 2012 | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
U.S. Treasury securities |
$ | 21,109 | $ | | $ | | ||||||
U.S. government agency securities |
| 2,920 | | |||||||||
Corporate bonds and notes |
| 1,314 | | |||||||||
Corporate equity securities |
3,993 | | | |||||||||
|
|
|
|
|
|
|||||||
$ | 25,102 | $ | 4,234 | $ | | |||||||
|
|
|
|
|
|
Investments in U.S. 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 U.S. 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 7 for additional information related to our investments).
Assets that are Measured at Fair Value on a Nonrecurring Basis
Impairment losses related to store-level property and equipment are calculated using significant unobservable inputs including the present value of future cash flows expected to be generated using a risk-adjusted weighted-average cost of capital of 15.3 percent to 17.5 percent and positive comparable store sales growth assumptions, and therefore are classified as a Level 3 measurement in the fair value hierarchy. For the fiscal year ended July 31, 2013, store-level property and equipment of $1.2 million was written down to their fair value of $0.1 million, resulting in an impairment charge of $1.1 million. For the fiscal year ended July 31, 2012, store-level property and equipment of $2.2 million was written down to their fair value of $0.4 million, resulting in an impairment charge of $1.8 million.
Other Financial Instruments
As cash and short-term cash investments, trade payables and certain other short-term financial instruments are all short-term in nature, their carrying amount approximates fair value. The outstanding principal of our revolving credit agreement and senior secured term loan approximates fair value as of July 31, 2013. The fair value of the revolving credit agreement and the senior secured term loan were based on estimates of current interest rates for similar debt, a Level 3 input.
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3. | OTHER CURRENT ASSETS |
Other current assets consist of the following (in thousands):
Year Ended July 31, | ||||||||
2013 | 2012 | |||||||
Prepaid rent |
$ | 19,666 | $ | 19,738 | ||||
Prepaid advertising |
4,887 | 704 | ||||||
Tax receivables |
8,104 | 9,711 | ||||||
Deferred tax asset |
3,495 | 4,150 | ||||||
Other |
16,468 | 12,387 | ||||||
|
|
|
|
|||||
$ | 52,620 | $ | 46,690 | |||||
|
|
|
|
4. | PROPERTY AND EQUIPMENT, NET |
Property and equipment consists of the following (in thousands):
Year Ended July 31, | ||||||||
2013 | 2012 | |||||||
Leasehold improvements |
$ | 223,424 | $ | 229,524 | ||||
Furniture and fixtures |
452,923 | 463,911 | ||||||
Construction in progress |
5,555 | 3,050 | ||||||
|
|
|
|
|||||
681,902 | 696,485 | |||||||
Less accumulated depreciation and amortization |
(573,027 | ) | (574,361 | ) | ||||
|
|
|
|
|||||
$ | 108,875 | $ | 122,124 | |||||
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|
|
5. | GOODWILL |
In accordance with ASC 350, Intangibles Goodwill and Other, we test goodwill for impairment annually, at the end of our second quarter, or more frequently if events occur which indicate a potential reduction in the fair value of a reporting units net assets below its carrying value. We calculate estimated fair value using the present value of future cash flows expected to be generated using a weighted average cost of capital, terminal values and updated financial projections. At the end of the second quarter of fiscal year 2013, we completed our annual impairment testing of goodwill. Based on the test results, we concluded that no impairment was necessary for the $79.0 million of goodwill related to the Peoples Jewellers acquisition and the $19.4 million of goodwill related to the Piercing Pagoda acquisition. As of the date of the test, the fair value of the Peoples Jewellers and Piercing Pagoda reporting units would have to decline by more than 20 percent and 59 percent, respectively, to be considered for potential impairment. We calculated the estimated fair value of our reporting units using Level 3 inputs, including: (1) cash flow projections for five years assuming positive comparable store sales growth; (2) terminal year growth rates of two percent based on estimates of long-term inflation expectations; and (3) discount rates of 15.3 percent to 17.5 percent, respectively, based on a risk-adjusted weighted average cost of capital that reflects current market conditions. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units, it is possible a material change could occur. If our actual results are not consistent with estimates and assumptions used to calculate fair value, we may be required to recognize goodwill impairments.
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The changes in the carrying amount of goodwill are as follows (in thousands):
Year Ended July 31, | ||||||||
2013 | 2012 | |||||||
Goodwill, beginning of period |
$ | 100,544 | $ | 104,620 | ||||
Foreign currency adjustments |
(2,172 | ) | (4,076 | ) | ||||
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|
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|
|||||
Goodwill, end of period |
$ | 98,372 | $ | 100,544 | ||||
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|
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6. | OTHER ASSETS |
Other assets consist of the following (in thousands):
Year Ended July 31, | ||||||||
2013 | 2012 | |||||||
Debt issuance costs |
$ | 11,488 | $ | 14,468 | ||||
Investments in debt and equity securities |
20,620 | 29,336 | ||||||
Other |
3,570 | 3,986 | ||||||
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|
|
|
|||||
$ | 35,678 | $ | 47,790 | |||||
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7. | INVESTMENTS |
Investments in debt and equity securities held by our insurance subsidiaries are reported as other assets in the accompanying 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.
Our investments consist of the following (in thousands):
Year Ended July 31, 2013 | Year Ended July 31, 2012 | |||||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||
U.S. Treasury securities |
$ | 13,501 | $ | 14,436 | $ | 19,423 | $ | 21,109 | ||||||||
U.S. government agency securities |
2,543 | 2,687 | 2,673 | 2,920 | ||||||||||||
Corporate bonds and notes |
756 | 828 | 1,192 | 1,314 | ||||||||||||
Corporate equity securities |
1,942 | 2,669 | 3,501 | 3,993 | ||||||||||||
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|
|
|
|
|
|||||||||
$ | 18,742 | $ | 20,620 | $ | 26,789 | $ | 29,336 | |||||||||
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At July 31, 2013 and 2012, the carrying value of investments included a net unrealized gain of $1.9 million and $2.5 million, respectively, which is included in accumulated other comprehensive income. Realized gains and losses on investments are determined on the specific identification basis. The net realized gains totaled $0.7 million in fiscal year 2013 and $0.2 million in fiscal years 2012 and 2011. Investments with a carrying value of $7.4 million were on deposit with various state insurance departments at both July 31, 2013 and 2012, respectively, as required by law.
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Debt securities outstanding as of July 31, 2013 mature as follows (in thousands):
Cost | Fair Value | |||||||
Less than one year |
$ | 3,610 | $ | 3,682 | ||||
Year two through year five |
9,178 | 10,017 | ||||||
Year six through year ten |
3,944 | 4,174 | ||||||
After ten years |
68 | 78 | ||||||
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|
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$ | 16,800 | $ | 17,951 | |||||
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8. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
Accounts payable and accrued liabilities consist of the following (in thousands):
Year Ended July 31, | ||||||||
2013 | 2012 | |||||||
Accounts payable |
$ | 135,650 | $ | 133,071 | ||||
Accrued payroll |
20,379 | 12,734 | ||||||
Accrued taxes |
16,716 | 15,166 | ||||||
Accrued and straight-line rent |
11,955 | 11,904 | ||||||
Other |
35,858 | 32,207 | ||||||
|
|
|
|
|||||
$ | 220,558 | $ | 205,082 | |||||
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9. | LONGTERM DEBT |
Long-term debt consists of the following (in thousands):
Year Ended July 31, | ||||||||
2013 | 2012 | |||||||
Revolving credit agreement |
$ | 327,200 | $ | 369,800 | ||||
Senior secured term loan |
80,000 | 80,000 | ||||||
Capital lease obligations |
2,850 | 3,108 | ||||||
|
|
|
|
|||||
$ | 410,050 | $ | 452,908 | |||||
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|
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Amended and Restated Revolving Credit Agreement
On July 24, 2012, we amended and restated our revolving credit agreement (the Amended Credit Agreement) with Bank of America, N.A. and certain other lenders. The Amended Credit Agreement totals $665 million, including a $15 million first-in, last-out facility (the FILO Facility), and matures in July 2017. Borrowings under the Amended Credit Agreement (excluding the FILO Facility) are limited to a borrowing base equal to 90 percent of the appraised liquidation value of eligible inventory (less certain reserves that may be established under the agreement), plus 90 percent of eligible credit card receivables. Borrowings under the FILO Facility are limited to a borrowing base equal to the lesser of: (i) 2.5 percent of the appraised liquidation value of eligible inventory or (ii) $15 million. The Amended Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit card receivables and certain other assets and a second priority security interest and lien on all other assets.
Based on the most recent inventory appraisal, the monthly borrowing rates calculated from the cost of eligible inventory range from 69 to 72 percent for the period of August through September 2013, 81 to 83 percent for the period of October through December 2013 and 68 to 73 percent for the period of January through July 2014.
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Borrowings under the Amended Credit Agreement (excluding the FILO Facility) bear interest at either: (i) LIBOR plus the applicable margin (ranging from 175 to 225 basis points) or (ii) the base rate (as defined in the Amended Credit Agreement) plus the applicable margin (ranging from 75 to 125 basis points). Borrowings under the FILO Facility bear interest at either: (i) LIBOR plus the applicable margin (ranging from 350 to 400 basis points) or (ii) the base rate plus the applicable margin (ranging from 250 to 300 basis points). We are also required to pay a quarterly unused commitment fee of 37.5 basis points based on the preceding quarters unused commitment.
In September 2013, we executed interest rate swaps with Bank of America, N.A. to hedge the variability of cash flows resulting from fluctuations in the one-month LIBOR associated with our Amended Credit Agreement. The interest rate swaps will replace the one-month LIBOR with the fixed interest rates shown in the table below and will be settled monthly. The swaps qualify as cash flow hedges and, to the extent effective, changes in their fair values will be recorded in accumulated other comprehensive income in the consolidated balance sheet.
Interest rate swaps executed in September 2013 are as follows:
Fixed | ||||||||
Notional Amount | Interest | |||||||
Period |
(in thousands) | Rate | ||||||
October 2013 - July 2014 |
$ | 215,000 | 0.29 | % | ||||
August 2014 - July 2016 |
$ | 215,000 | 1.19 | % |
If excess availability (as defined in the Amended Credit Agreement) falls below certain levels we will be required to maintain a minimum fixed charge coverage ratio of 1.0. Borrowing availability was approximately $242 million as of July 31, 2013, which exceeded the excess availability requirement by $185 million. The fixed charge coverage ratio was 2.72 as of July 31, 2013. The Amended Credit Agreement contains various other covenants including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions and asset sales. As of July 31, 2013, we were in compliance with all covenants.
We incurred debt issuance costs associated with the revolving credit agreement totaling $12.1 million, which consisted of $5.6 million of costs related to the Amended Credit Agreement and $6.5 million of unamortized costs associated with the prior agreement. The debt issuance costs are included in other assets in the accompanying consolidated balance sheets and are amortized to interest expense on a straight-line basis over the five-year life of the agreement.
Interest paid under the revolving credit agreement during fiscal years 2013, 2012 and 2011 was $10.6 million, $14.3 million and $10.4 million, respectively.
Amended and Restated Senior Secured Term Loan
On July 24, 2012, we amended and restated our senior secured term loan (the Amended Term Loan) with Z Investment Holdings, LLC, an affiliate of Golden Gate Capital. The Amended Term Loan totals $80.0 million, matures in July 2017 and is subject to a borrowing base equal to: (i) 107.5 percent of the appraised liquidation value of eligible inventory plus (ii) 100 percent of credit card receivables and an amount equal to the lesser of $40 million or 100 percent of the appraised liquidation value of intellectual property minus (iii) the borrowing base under the Amended Credit Agreement. In the event the outstanding principal under the Amended Term Loan exceeds the Amended Term Loan borrowing base, availability under the Amended Credit Agreement would be reduced by the excess. As of July 31, 2013, the outstanding principal under the Amended Term Loan did not exceed the borrowing base. The Amended Term Loan is secured by a second priority security interest on merchandise inventory and credit card receivables and a first priority security interest on substantially all other assets.
Borrowings under the Amended Term Loan bear interest at 11 percent payable on a quarterly basis. We may repay all or any portion of the Amended Term Loan with the following penalty prior to maturity: (i) the present value of the required interest payments that would have been made if the prepayment had not occurred during the first year; (ii) 4 percent during the second year; (iii) 3 percent during the third year; (iv) 2 percent during the fourth year and
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(v) no penalty in the fifth year. The Amended Credit Agreement restricts our ability to prepay the Amended Term Loan if the fixed charge coverage ratio is not equal to or greater than 1.0 after giving effect to the prepayment.
The Amended Term Loan includes various covenants which are consistent with the covenants in the Amended Credit Agreement, including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions, asset sales and the requirement to maintain a minimum fixed charge coverage ratio of 1.0 if excess availability thresholds under the Amended Credit Agreement are not maintained. As of July 31, 2013, we were in compliance with all covenants.
We incurred costs associated with the Amended Term Loan totaling $4.4 million, of which approximately $2 million was recorded in interest expense during the fourth quarter of fiscal year 2012. The remaining $2.4 million consists of debt issuance costs included in other assets in the accompanying consolidated balance sheet and are amortized to interest expense on a straight-line basis over the five-year life of the agreement. We also incurred a $3.0 million prepayment premium related to the $60.5 million prepayment on the prior term loan. The $3.0 million prepayment premium was recorded in interest expense during the fourth quarter of fiscal year 2012.
In fiscal year 2011, we recorded a charge to interest expense totaling $45.8 million as a result of an amendment to the prior term loan on September 24, 2010. In accordance with ASC 470-50, DebtModifications and Extinguishments, the amendment was considered a significant modification which required us to account for the prior term loan and related unamortized costs as an extinguishment and record the loan at fair value. The charge consisted of $20.3 million related to the unamortized discount associated with the warrants (see below) issued in connection with the prior term loan, a $12.5 million amendment fee, $10.3 million related to unamortized debt issue costs and $2.7 million related to a prepayment premium and other costs.
Interest paid under the term loan during fiscal years 2013, 2012 and 2011 was $8.9 million, $20.8 million and $21.7 million, respectively.
Warrant and Registration Rights Agreement
In connection with the execution of the senior secured term loan in May 2010, we entered into a Warrant and Registration Rights Agreement (the Warrant Agreement) with Z Investment Holdings, LLC. Under the terms of the Warrant Agreement, we issued 6.4 million A-Warrants and 4.7 million B-Warrants (collectively, the Warrants) to purchase shares of our common stock, on a one-for-one basis, for an exercise price of $2.00 per share. The Warrants, which are currently exercisable and expire in May 2017, represented 25 percent of our common stock on a fully diluted basis (including the shares issuable upon exercise of the Warrants and excluding certain out-of-the-money stock options) as of the date of the issuance. The A-Warrants were exercisable immediately; however, the B-Warrants were not exercisable until the shares of common stock to be issued upon exercise of the B-Warrants were approved by our stockholders, which occurred on July 23, 2010. The number of shares and exercise price are subject to customary antidilution protection. The Warrant Agreement also entitles the holder to designate two, and in certain circumstances three, directors to our board. The holders of the Warrants may, at their option, request that we register for resale all or part of the common stock issuable under the Warrant Agreement.
The fair value of the Warrants totaled $21.3 million as of the date of issuance and was recorded as a long-term liability, with a corresponding discount to the carrying value of the prior term loan. On July 23, 2010, the stockholders approved the shares of common stock to be issued upon exercise of the B-Warrants. The long-term liability associated with the Warrants was marked-to-market as of the date of the stockholder approval resulting in an $8.3 million gain during the fourth quarter of fiscal year 2010. The remaining amount of $13.0 million was reclassified to stockholders investment and is included in additional paid-in capital in the accompanying consolidated balance sheet. The remaining unamortized discount totaling $20.3 million associated with the Warrants was charged to interest expense as a result of an amendment to the prior term loan on September 24, 2010.
19
Capital Lease Obligations
We enter into capital leases related to vehicles for our field management. The vehicles are included in property and equipment in the accompanying consolidated balance sheets and are depreciated over a four-year life. Capital leases, net of accumulated depreciation, included in property and equipment as of July 31, 2013 and 2012 totaled $2.9 million and $3.1 million, respectively.
10. | OTHER LIABILITIES |
Other liabilities consist of the following (in thousands):
Year Ended July 31, | ||||||||
2013 | 2012 | |||||||
Deferred income (a) |
$ | 38,000 | $ | | ||||
Long-term straight-line rent |
23,467 | 27,110 | ||||||
Credit insurance reserves |
5,592 | 5,527 | ||||||
Deferred tax liability |
5,998 | 5,727 | ||||||
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|
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$ | 73,057 | $ | 38,364 | |||||
|
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|
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(a) | Represents commencement payment received in July 2013 associated with the signing of the ADS Agreement (see Note 1). |
11. | OTHER (GAINS) CHARGES |
Other (gains) charges consist of the following (in thousands):
Year Ended July 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Store impairments |
$ | 1,119 | $ | 1,751 | $ | 6,762 | ||||||
Store closure adjustments |
324 | 222 | 285 | |||||||||
De Beers settlement |
(2,191 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
$ | (748 | ) | $ | 1,973 | $ | 7,047 | ||||||
|
|
|
|
|
|
During fiscal years 2013, 2012 and 2011, we recorded charges related to the impairment of long-lived assets of underperforming stores totaling $1.1 million, $1.8 million and $6.8 million, respectively. The impairment of long-lived assets is based on the amount that the carrying value exceeds the estimated fair value of the assets. The fair value is based on future cash flow projections over the remaining lease term using a discount rate that we believe is commensurate with the risk inherent in our current business model. If actual results are not consistent with our cash flow projections, we may be required to record additional impairments. If operating earnings over the remaining lease term for each store included in our impairment test as of July 31, 2013 were to decline by 20 percent, we would be required to record additional impairments of $0.5 million.
We have recorded lease termination charges related to certain store closures, primarily in Fine Jewelry. The lease termination charges for leases where the Company has finalized settlement negotiations with the landlords are based on the amounts agreed upon in the termination agreement. If a settlement has not been reached for a lease, the charges are based on the present value of the remaining lease rentals, including common area maintenance and other charges, reduced by estimated sublease rentals that could reasonably be obtained. There was no material lease reserve balance associated with closed stores at July 31, 2013 and 2012.
20
Beginning in June 2004, various class-action lawsuits were filed alleging that the De Beers group violated U.S. state and federal antitrust, consumer protection and unjust enrichment laws. During fiscal year 2013, we received proceeds totaling $2.2 million as a result of a settlement reached in the lawsuit.
12. | LEASES |
We rent substantially all of our retail space under operating leases that generally range from 5 to 10 years and may contain minimum rent escalations, while kiosk leases generally range from 3 to 5 years. We also lease certain vehicles under capital leases for a term of four years. We recognize the minimum rent payments on a straight-line basis over the term of the lease, including the construction period. Contingent rentals paid to lessors of certain store facilities are determined principally on the basis of a percentage of sales in excess of levels contained in the respective leases. All existing real estate leases are operating leases. Rent expense from continuing operations is included in SG&A and is as follows (in thousands):
Year Ended July 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Retail space: |
||||||||||||
Minimum rentals |
$ | 183,266 | $ | 184,239 | $ | 188,766 | ||||||
Rentals based on sales |
6,629 | 5,721 | 2,796 | |||||||||
|
|
|
|
|
|
|||||||
189,895 | 189,960 | 191,562 | ||||||||||
Corporate headquarters |
4,072 | 3,931 | 3,837 | |||||||||
|
|
|
|
|
|
|||||||
$ | 193,967 | $ | 193,891 | $ | 195,399 | |||||||
|
|
|
|
|
|
Future minimum lease payments as of July 31, 2013, for all non-cancelable leases were as follows (in thousands):
Fiscal | Capital | Operating | ||||||
Year Ended |
Leases | Leases | ||||||
2014 |
$ | 1,184 | $ | 173,782 | ||||
2015 |
1,184 | 141,188 | ||||||
2016 |
590 | 112,318 | ||||||
2017 |
46 | 87,366 | ||||||
2018 |
| 60,340 | ||||||
Thereafter |
| 140,806 | ||||||
|
|
|
|
|||||
$ | 3,004 | $ | 715,800 | |||||
|
|
|||||||
Less imputed interest |
(154 | ) | ||||||
|
|
|||||||
Capital lease obligation |
$ | 2,850 | ||||||
|
|
21
13. | INCOME TAXES |
Currently, we file a consolidated U.S. federal income tax return. The effective income tax rate from continuing operations varies from the federal statutory rate of 35 percent as follows (in thousands):
Year Ended July 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Federal income tax expense (benefit) at statutory rate |
$ | 4,177 | $ | (8,936 | ) | $ | (38,750 | ) | ||||
State income taxes, net of federal benefit |
858 | (2,767 | ) | (4,250 | ) | |||||||
Tax on repatriation of foreign earnings |
3,954 | 5,950 | 14,099 | |||||||||
Foreign tax rate changes and differential (a) |
577 | 225 | (1,274 | ) | ||||||||
Change in valuation allowance |
(6,977 | ) | 2,285 | 44,406 | ||||||||
Depreciation and amortization adjustment (b) |
| | (8,512 | ) | ||||||||
Other |
(665 | ) | 4,608 | (4,162 | ) | |||||||
|
|
|
|
|
|
|||||||
Income tax expense |
$ | 1,924 | $ | 1,365 | $ | 1,557 | ||||||
|
|
|
|
|
|
|||||||
Effective income tax rate |
16.1 | % | (5.3 | )% | (1.4 | )% | ||||||
|
|
|
|
|
|
(a) | For the past three years, Canada has reduced both its federal statutory and provincial tax rates. In fiscal year 2012, Puerto Rico reduced its federal statutory tax rate. Foreign tax rate differential represents the difference between the statutory tax rate in the U.S. and the statutory tax rates in Canada and Puerto Rico. |
(b) | The $8.5 million adjustment in fiscal year 2011 was fully offset with a valuation allowance, resulting in no impact to the consolidated statement of operations. |
The provision for income taxes from continuing operations consists of the following (in thousands):
Year Ended July 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Current income tax expense (benefit): |
||||||||||||
Federal |
$ | 232 | $ | 349 | $ | (9,628 | ) | |||||
Foreign |
1,131 | 664 | 5,003 | |||||||||
State |
(604 | ) | (1,206 | ) | 910 | |||||||
|
|
|
|
|
|
|||||||
Total current income tax expense (benefit) |
759 | (193 | ) | (3,715 | ) | |||||||
|
|
|
|
|
|
|||||||
Deferred income tax expense: |
||||||||||||
Federal |
102 | (166 | ) | 5,114 | ||||||||
Foreign |
986 | 1,675 | 159 | |||||||||
State |
77 | 49 | (1 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total deferred income tax expense |
1,165 | 1,558 | 5,272 | |||||||||
|
|
|
|
|
|
|||||||
$ | 1,924 | $ | 1,365 | $ | 1,557 | |||||||
|
|
|
|
|
|
22
Deferred tax assets and liabilities are determined based on the estimated future tax effects of the difference between the financial statement and tax basis of asset and liability balances using statutory tax rates. Tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at July 31, 2013 and 2012, respectively, are as follows (in thousands):
Year Ended July 31, | ||||||||
2013 | 2012 | |||||||
Assets: |
||||||||
Accrued liabilities |
$ | 78,754 | $ | 84,515 | ||||
Inventory reserves |
7,220 | 7,083 | ||||||
Deferred income |
14,033 | | ||||||
Net operating loss carryforward |
100,407 | 120,277 | ||||||
Stock-based compensation |
7,067 | 7,160 | ||||||
Investments in subsidiaries |
3,177 | 1,752 | ||||||
Foreign tax credits |
13,978 | 12,609 | ||||||
Property and equipment |
9,355 | 9,326 | ||||||
Other |
2,854 | 5,986 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
236,845 | 248,708 | ||||||
Valuation allowances |
(92,149 | ) | (98,995 | ) | ||||
|
|
|
|
|||||
Total deferred tax assets, net |
$ | 144,696 | $ | 149,713 | ||||
|
|
|
|
|||||
Liabilities: |
||||||||
Merchandise inventories, principally due to LIFO reserve |
$ | (129,273 | ) | $ | (119,256 | ) | ||
Undistributed earnings |
| (13,973 | ) | |||||
Goodwill |
(13,869 | ) | (13,941 | ) | ||||
Other |
(3,963 | ) | (3,853 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(147,105 | ) | (151,023 | ) | ||||
|
|
|
|
|||||
Deferred tax liabilities, net |
$ | (2,409 | ) | $ | (1,310 | ) | ||
|
|
|
|
Deferred tax assets and liabilities in the accompanying consolidated balance sheets are as follows (in thousands):
Year Ended July 31, | ||||||||
2013 | 2012 | |||||||
Other current assets |
$ | 3,495 | $ | 4,150 | ||||
Deferred tax asset |
107,110 | 96,929 | ||||||
Deferred tax liability |
(107,016 | ) | (96,662 | ) | ||||
Other liabilities |
(5,998 | ) | (5,727 | ) | ||||
|
|
|
|
|||||
Deferred tax liabilities, net |
$ | (2,409 | ) | $ | (1,310 | ) | ||
|
|
|
|
We are required to assess the available positive and negative evidence to estimate if sufficient future income will be generated to utilize deferred tax assets. A significant piece of negative evidence that we consider is cumulative losses (generally defined as losses before income taxes) incurred over the most recent three-year period. Such evidence limits our ability to consider other subjective evidence such as our projections for future growth. As of July 31, 2013 and 2012, cumulative losses were incurred over the applicable three-year period.
Our valuation allowances totaled $92.1 million and $99.0 million as of July 31, 2013 and 2012, respectively. The valuation allowances were established due to the uncertainty of our ability to utilize certain federal, state and foreign net operating loss carryforwards in the future. The amount of the deferred tax asset considered realizable could be adjusted if negative evidence, such as three-year cumulative losses, no longer exists and additional consideration is given to our growth projections.
23
Deferred tax assets associated with foreign tax credits totaled $14.0 million and $12.6 million as of July 31, 2013 and 2012, respectively. The net operating loss carryforwards, including foreign tax credits, expire from fiscal year 2014 to fiscal year 2033. These carryforwards may be subject to limitations under Section 382 of the Internal Revenue Code if significant ownership changes occur in the future.
In fiscal year 2011, we recorded income tax benefits totaling $4.6 million related to tax refunds associated with net operating loss carrybacks pursuant to the Worker, Homeownership and Business Assistance Act of 2009 (the Business Assistance Act). The Business Assistance Act was enacted in November 2009 and includes provisions that extend the time period in which net operating loss carrybacks can be utilized from two to five years, with certain limitations.
Income tax refunds, net of taxes paid, during fiscal years 2013, 2012 and 2011 totaled $2.2 million, $0.8 million and $2.5 million, respectively.
Uncertain Tax Positions
We operate in a number of tax jurisdictions and are subject to examination of our income tax returns by tax authorities in those jurisdictions who may challenge any item on these returns. Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. In accordance with ASC 740, Income Taxes, we recognize the benefits of uncertain tax positions in our financial statements only after determining that it is more likely than not that the uncertain tax positions will be sustained.
The total amount of unrecognized tax benefits as of July 31, 2013 was $3.5 million, of which $2.5 million would favorably impact the effective tax rate if resolved in our favor. Over the next twelve months, management does not anticipate that the amount of unrecognized tax benefits will be materially reduced due to our tax position being sustained upon audit or as a result of the expiration of the statute of limitations for specific jurisdictions.
A reconciliation of the fiscal year 2013 beginning and ending balance of unrecognized tax benefits is as follows (in thousands):
Unrecognized | ||||
Tax Benefits | ||||
Balance at July 31, 2012 |
$ | 3,631 | ||
Additions based on tax positions related to prior years |
555 | |||
Settlements with tax authorities |
(341 | ) | ||
Expiration of statute of limitations |
(331 | ) | ||
|
|
|||
Balance at July 31, 2013 |
$ | 3,514 | ||
|
|
We recognize accrued interest and penalties related to unrecognized tax benefits in our income tax expense. We had $1.5 million, $1.9 million and $2.6 million of interest and penalties accrued at July 31, 2013, 2012 and 2011, respectively. There was no material interest expense in fiscal years 2013, 2012 and 2011.
14. | STOCK-BASED COMPENSATION |
We are authorized to provide grants of options to purchase our common stock, restricted stock, time-vested restricted stock units, performance-based restricted stock units and other awards under the 2011 Omnibus Incentive Plan, as amended (2011 Incentive Plan). The 2011 Incentive Plan replaced the Zale Corporation 2003 Stock Incentive Plan and the Non-Employee Director Equity Compensation Plan. We are authorized to issue up to 5.5 million shares of our common stock for stock options and restricted stock to employees and non-employee directors under the plans. As of July 31, 2013, we have 1.0 million shares available to be issued under the plans. Stock options and restricted share awards are issued from treasury stock. Stock-based compensation expense is included in SG&A in the consolidated statements of operations and totaled $3.3 million, $2.7 million and $2.2 million for the fiscal years ended July 31, 2013, 2012 and 2011, respectively. The income tax benefit recognized in the consolidated statements of operations related to stock-based compensation totaled $1.2 million, $1.0 million and $0.1 million during fiscal years 2013, 2012 and 2011, respectively.
24
Stock Options. Stock options are granted at an exercise price equal to or greater than the market value of the shares of our common stock at the date of grant, generally vest ratably over a four-year period and generally expire ten years from the date of grant. Expense related to stock options is recognized using a graded-vesting schedule over the vesting period. As of July 31, 2013, there was $1.6 million of unrecognized compensation cost related to stock option awards that is expected to be recognized over a weighted-average period of 1.9 years.
Stock option transactions during fiscal year 2013 are summarized as follows:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | |||||||||||||||
Number of | Exercise | Contractual | Aggregate | |||||||||||||
Options | Price | Life (Years) | Intrinsic Value | |||||||||||||
Outstanding, beginning of year |
3,624,907 | $ | 10.31 | |||||||||||||
Granted |
10,500 | 5.15 | ||||||||||||||
Exercised |
(65,325 | ) | 2.30 | |||||||||||||
Forfeited |
(106,850 | ) | 3.02 | |||||||||||||
Expired |
(255,949 | ) | 23.49 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Outstanding, end of year |
3,207,283 | $ | 9.65 | 6.07 | $ | 13,801,439 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options exercisable, end of year |
2,099,758 | $ | 13.09 | 5.21 | $ | 7,335,791 | ||||||||||
|
|
|
|
|
|
|
|
For the year ended July 31, 2013, the total intrinsic value of stock options exercised was $0.3 million. The total intrinsic value of stock options exercised during fiscal years 2012 and 2011 was not material. The weighted-average fair values of option grants were $3.70, $2.51 and $1.38 during fiscal years 2013, 2012 and 2011, respectively. The fair value of stock options that vested during both fiscal years 2013 and 2012 totaled $1.6 million. The fair value of stock options that vested during fiscal year 2011 totaled $2.0 million.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following table presents the weighted-average assumptions used in the option pricing model for stock option grants in fiscal years 2013, 2012 and 2011:
2013 | 2012 | 2011 | ||||||||||
Expected volatility |
107.0 | % | 101.4 | % | 93.5 | % | ||||||
Risk-free interest rate |
0.5 | % | 0.7 | % | 1.0 | % | ||||||
Expected lives in years |
4.0 | 4.0 | 4.0 | |||||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % |
Expected volatility and the expected life of the stock options are based on historical experience. The risk-free rate is based on a U.S. Treasury yield that has a life which approximates the expected life of the option.
Restricted Share Awards. Restricted share awards consist of restricted stock, restricted stock units and performance-based restricted stock units. Restricted stock and restricted stock units granted to employees through fiscal year 2007 generally vested on the third anniversary of the grant date and are subject to restrictions on sale or transfer. Restricted stock and restricted stock units granted to employees between fiscal year 2007 and fiscal year 2011 generally vest twenty-five percent on the second and third anniversary of the date of the grant and the remaining fifty percent vest on the fourth anniversary of the date of the grant, subject to restrictions on sale or transfer. Restricted stock and restricted stock units granted to employees after fiscal year 2011 vest ratably over a three-year vesting period. Restricted stock granted to non-employee directors vest on the first anniversary of the grant date or, if earlier, the date of the next annual stockholder meeting and are subject to restrictions on sale or transfer. The fair value of restricted stock and restricted stock units is based on our closing stock price on the date of grant. Performance-based restricted stock units entitle the holder to receive a specified number of shares of our common
25
stock based on our achievement of performance targets established by the Compensation Committee. There were 297,500 performance-based restricted stock units outstanding as of July 31, 2013 and 2012. At the sole discretion of the Compensation Committee, the holder of a restricted stock unit or performance-based restricted stock unit may receive a cash payment in lieu of a payout of shares of common stock equal to the fair market value of the number of shares of common stock the holder otherwise would have received. The total fair value of restricted share awards that vested during fiscal years 2013, 2012 and 2011, was $3.0 million, $0.2 million and $0.1 million, respectively. As of July 31, 2013, there was $3.3 million of unrecognized compensation cost related to restricted stock awards that is expected to be recognized over a weighted-average period of 1.7 years.
Restricted share award transactions during fiscal year 2013 are summarized as follows:
Number of | Weighted- | |||||||
Restricted | Average | |||||||
Share | Fair Value | |||||||
Awards | Per Award | |||||||
Restricted share awards, beginning of year |
1,473,497 | $ | 3.29 | |||||
Granted |
238,483 | 5.88 | ||||||
Vested |
(446,982 | ) | 3.49 | |||||
Forfeited |
(33,375 | ) | 3.19 | |||||
|
|
|
|
|||||
Restricted share awards, end of year |
1,231,623 | $ | 3.73 | |||||
|
|
|
|
15. | EARNINGS (LOSS) PER COMMON SHARE |
Basic earnings (loss) per common share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, restricted share awards and warrants issued in connection with the senior secured term loan using the treasury stock method.
The following table presents a reconciliation of the diluted weighted average shares (in thousands):
Year Ended July 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Basic weighted average shares |
32,429 | 32,196 | 32,129 | |||||||||
Effect of potential dilutive securities: |
||||||||||||
Warrants |
7,189 | | | |||||||||
Stock options and restricted share awards |
1,340 | | | |||||||||
|
|
|
|
|
|
|||||||
Diluted weighted average shares |
40,958 | 32,196 | 32,129 | |||||||||
|
|
|
|
|
|
The calculation of diluted weighted average shares excludes the impact of 1.2 million, 5.1 million and 3.0 million antidilutive stock options and restricted share awards for the years ended July 31, 2013, 2012 and 2011, respectively. The calculation of diluted weighted average shares also excludes the impact of 11.1 million antidilutive warrants for both the years ended July 31, 2012 and 2011.
We incurred a net loss of $27.3 million and $112.3 million for the years ended July 31, 2012 and 2011, respectively. A net loss causes all outstanding stock options, restricted share awards and warrants to be antidilutive. As a result, the basic and dilutive losses per common share are the same for those fiscal years.
26
16. | ACCUMULATED OTHER COMPREHENSIVE INCOME |
The following table includes detail regarding changes in the composition of accumulated other comprehensive income (in thousands):
Total | ||||||||||||
Accumulated | ||||||||||||
Cumulative | Other | |||||||||||
Translation | Unrealized Gain | Comprehensive | ||||||||||
Adjustment | on Securities | Income | ||||||||||
Balance at July 31, 2010 |
$ | 46,300 | $ | 1,406 | $ | 47,706 | ||||||
Cumulative translation adjustment |
14,190 | | 14,190 | |||||||||
Unrealized gain on securities |
| 924 | 924 | |||||||||
Reclassification to earnings |
| (169 | ) | (169 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at July 31, 2011 |
60,490 | 2,161 | 62,651 | |||||||||
Cumulative translation adjustment |
(9,668 | ) | | (9,668 | ) | |||||||
Unrealized gain on securities |
| 628 | 628 | |||||||||
Reclassification to earnings |
| (242 | ) | (242 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at July 31, 2012 |
50,822 | 2,547 | 53,369 | |||||||||
Cumulative translation adjustment |
(5,685 | ) | | (5,685 | ) | |||||||
Unrealized gain on securities |
| 34 | 34 | |||||||||
Reclassification to earnings |
| (703 | ) | (703 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at July 31, 2013 |
$ | 45,137 | $ | 1,878 | $ | 47,015 | ||||||
|
|
|
|
|
|
17. | SEGMENTS |
We report our operations under three business segments: Fine Jewelry, Kiosk Jewelry and All Other (see Note 1). All corresponding items of segment information in prior periods have been presented consistently. Managements expectation is that overall economics of each of our major brands within each reportable segment will be similar over time.
We use earnings before unallocated corporate overhead, interest and taxes but include an internal charge for inventory carrying cost to evaluate segment profitability. Unallocated costs before income taxes include corporate employee-related costs, administrative costs, information technology costs, corporate facilities costs and depreciation and amortization. Income tax information by segment is not included as taxes are calculated at a company-wide level and not allocated to each segment.
27
Year Ended July 31, | ||||||||||||
Selected Financial Data by Segment |
2013 | 2012 | 2011 | |||||||||
(amounts in thousands) | ||||||||||||
Revenues: |
||||||||||||
Fine Jewelry (a) |
$ | 1,637,359 | $ | 1,617,684 | $ | 1,493,294 | ||||||
Kiosk |
239,722 | 238,692 | 239,231 | |||||||||
All Other |
10,935 | 10,502 | 10,038 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
$ | 1,888,016 | $ | 1,866,878 | $ | 1,742,563 | ||||||
|
|
|
|
|
|
|||||||
Depreciation and amortization: |
||||||||||||
Fine Jewelry |
$ | 22,230 | $ | 23,924 | $ | 28,009 | ||||||
Kiosk |
2,694 | 3,153 | 3,361 | |||||||||
All Other |
| | | |||||||||
Unallocated |
8,846 | 10,810 | 9,956 | |||||||||
|
|
|
|
|
|
|||||||
Total depreciation and amortization |
$ | 33,770 | $ | 37,887 | $ | 41,326 | ||||||
|
|
|
|
|
|
|||||||
Operating earnings (loss): |
||||||||||||
Fine Jewelry (b) |
$ | 49,112 | $ | 31,464 | $ | (15,875 | ) | |||||
Kiosk |
15,915 | 14,850 | 15,270 | |||||||||
All Other |
5,226 | 5,091 | 5,184 | |||||||||
Unallocated (c) |
(35,135 | ) | (32,287 | ) | (32,445 | ) | ||||||
|
|
|
|
|
|
|||||||
Total operating earnings (loss) |
$ | 35,118 | $ | 19,118 | $ | (27,866 | ) | |||||
|
|
|
|
|
|
|||||||
Assets (d): |
||||||||||||
Fine Jewelry (e) |
$ | 852,308 | $ | 821,427 | $ | 807,771 | ||||||
Kiosk |
73,975 | 85,828 | 85,999 | |||||||||
All Other |
27,725 | 38,110 | 40,406 | |||||||||
Unallocated |
233,247 | 235,103 | 254,582 | |||||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 1,187,255 | $ | 1,180,468 | $ | 1,188,758 | ||||||
|
|
|
|
|
|
|||||||
Capital expenditures: |
||||||||||||
Fine Jewelry |
$ | 16,513 | $ | 13,843 | $ | 8,818 | ||||||
Kiosk |
546 | | | |||||||||
All Other |
| | | |||||||||
Unallocated |
5,970 | 5,932 | 6,497 | |||||||||
|
|
|
|
|
|
|||||||
Total capital expenditures |
$ | 23,029 | $ | 19,775 | $ | 15,315 | ||||||
|
|
|
|
|
|
(a) | Includes $316.9 million, $313.0 million and $298.1 million in fiscal years 2013, 2012 and 2011, respectively, related to foreign operations. In addition, fiscal year 2012 includes a $34.9 million adjustment as a result of a change in the revenue recognition related to lifetime warranties. |
(b) | Includes $1.4 million, $2.0 million and $7.0 million in fiscal years 2013, 2012 and 2011, respectively, related to charges associated with store closures and store impairments. In addition, fiscal year 2012 includes $34.9 million of additional earnings as a result of a change in the revenue recognition related to lifetime warranties. |
(c) | Includes credits of $63.4 million, $58.9 million and $50.8 million in fiscal years 2013, 2012 and 2011, respectively, to offset internal carrying costs charged to the segments. Fiscal year 2013 also includes a gain totaling $2.2 million related to the De Beers group settlement. |
(d) | Assets allocated to segments include fixed assets, inventories, goodwill and investments held by our insurance operations. Unallocated assets include cash, prepaid assets such as rent, corporate office improvements and technology infrastructure. |
(e) | Includes $31.2 million, $31.3 million and $33.4 million of fixed assets in fiscal years 2013, 2012 and 2011, respectively, related to foreign operations. |
28
18. | CONTINGENCIES |
In November 2009, the Company and four former officers, Neal L. Goldberg, Rodney Carter, Mary E. Burton and Cynthia T. Gordon, were named as defendants in two purported class-action lawsuits filed in the United States District Court for the Northern District of Texas. On August 9, 2010, the two lawsuits were consolidated into one lawsuit, which alleged various violations of securities laws arising from the financial statement errors that led to the restatement completed by the Company as part of its Annual Report on Form 10-K for the fiscal year ended July 31, 2009. The lawsuit requested unspecified damages and costs. On August 1, 2011, the Court dismissed the lawsuit with prejudice. The plaintiffs appealed the decision and on November 30, 2012 the United States Court of Appeals upheld the trial courts decision and affirmed dismissal of the plaintiffs case. The plaintiffs did not appeal this ruling and the matter was therefore dismissed with prejudice.
The Company is a defendant in two purported class action lawsuits, Tessa Hodge v. Zale Delaware, Inc., d/b/a Piercing Pagoda which was filed on April 23, 2013 in California Superior Court and Naomi Tapia v. Zale which was filed on July 3, 2013 in the U.S. District Court, Southern District of California. The cases include allegations that the Company violated various wage and hour labor laws. Relief is sought on behalf of current and former Piercing Pagoda and Zales employees. Both lawsuits seek to recover damages, penalties and attorneys fees as a result of the alleged violations. The Company is investigating the underlying allegations and intends to vigorously defend its position against them. The Company cannot reasonably estimate the potential loss or range of loss, if any, for either lawsuit.
We are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established based on managements best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.
19. | DEFERRED REVENUE |
We offer our Fine Jewelry guests lifetime warranties on certain products that cover sizing and breakage with an option to purchase theft protection for a two-year period. ASC 605-20 requires recognition of warranty revenue on a straight-line basis until sufficient cost history exists. Once sufficient cost history is obtained, revenue is required to be recognized in proportion to when costs are expected to be incurred. Prior to fiscal year 2012, the Company recognized revenue from lifetime warranties on a straight-line basis over a five-year period because sufficient evidence of the pattern of costs incurred was not available. During the first quarter of fiscal year 2012, we began recognizing revenue related to lifetime warranty sales in proportion to when the expected costs will be incurred, which we estimate will be over an eight-year period. A significant change in estimates related to the time period or pattern in which warranty-related costs are expected to be incurred could adversely impact our revenues. The deferred revenue balance as of July 31, 2011 related to lifetime warranties is being recognized prospectively, in proportion to the remaining estimated warranty costs. The change in estimate related to the pattern of revenue recognition and the life of the warranties was the result of accumulating additional historical evidence over the five-year period that we have been selling the lifetime warranties. The change in estimate increased revenues by $34.9 million and decreased our net loss by $32.4 million during fiscal year 2012. As a result, basic and diluted net loss per share improved by $1.00 per share during fiscal year 2012.
Revenues related to the optional theft protection are recognized over the two-year contract period on a straight-line basis. We also offer our Fine Jewelry guests a two-year watch warranty and our Fine Jewelry and Kiosk Jewelry guests a one-year warranty that covers breakage. The revenue from the two-year watch warranty and one-year breakage warranty is recognized on a straight-line basis over the respective contract terms.
29
The change in deferred revenue associated with the sale of warranties is as follows (in thousands):
Year Ended July 31, | ||||||||
2013 | 2012 | |||||||
Deferred revenue, beginning of period |
$ | 208,516 | $ | 232,180 | ||||
Warranties sold (a) |
130,169 | 123,121 | ||||||
Revenue recognized |
(147,440 | ) | (146,785 | ) | ||||
|
|
|
|
|||||
Deferred revenue, end of period |
$ | 191,245 | $ | 208,516 | ||||
|
|
|
|
(a) | Warranty sales for the years ended July 31, 2013 and 2012 include approximately $0.9 million and $1.9 million, respectively, related to the depreciation in the Canadian currency rate on the beginning of the period deferred revenue balance. |
Revenues associated with warranties in fiscal years 2013, 2012 and 2011 totaled $147.4 million, $146.8 million and $96.8 million, respectively. Gross margin associated with warranties in fiscal years 2013, 2012 and 2011 totaled $120.1 million, $120.8 million and $75.2 million, respectively.
20. | RETIREMENT PLANS |
We maintain the Zale Corporation Savings & Investment Plan (the U.S. Plan) and the Zale Corporation Puerto Rico Employees Savings and Investment Plan (the PR Plan, collectively the Plans). The Plans are defined contribution plans covering substantially all employees of the Company who have completed one year of service (at least 1,000 hours) and are age 21 or older. Participants in the Plans can contribute from one percent to 60 percent (30 percent for highly-compensated employees) of their annual salary subject to Internal Revenue Service and Puerto Rico Internal Revenue Code limitations. Upon satisfying all eligibility requirements, employees who have not otherwise elected will be automatically enrolled in their respective plan at a contribution rate of five percent for participants in the U.S. Plan or two percent for participants in the PR Plan as of July 31, 2013. Effective February 27, 2009, we suspended matching contributions until business conditions support the reinstatement of the matching contributions.
30
21. | QUARTERLY RESULTS FROM CONTINUING OPERATIONS (UNAUDITED) |
Unaudited quarterly results from continuing operations for the fiscal years ended July 31, 2013 and 2012 were as follows (in thousands, except per share data):
Fiscal Year 2013 | ||||||||||||||||
For the Three Months Ended | ||||||||||||||||
July 31, 2013 | April 30, 2013 | January 31, 2013 | October 31, 2012 | |||||||||||||
Revenues |
$ | 417,089 | $ | 442,708 | $ | 670,752 | $ | 357,468 | ||||||||
Gross margin |
221,582 | 232,847 | 339,651 | 190,335 | ||||||||||||
(Loss) earnings from continuing operations (a) |
(7,984 | ) | 5,052 | 41,208 | (28,265 | ) | ||||||||||
(Loss) earnings per basic share from continuing operations |
(0.25 | ) | 0.16 | 1.27 | (0.88 | ) | ||||||||||
(Loss) earnings per diluted share from continuing operations |
(0.25 | ) | 0.13 | 1.02 | (0.88 | ) | ||||||||||
Fiscal Year 2012 | ||||||||||||||||
For the Three Months Ended | ||||||||||||||||
July 31, 2012 | April 30, 2012 | January 31, 2012 | October 31, 2011 | |||||||||||||
Revenues |
$ | 406,963 | $ | 445,170 | $ | 663,762 | $ | 350,983 | ||||||||
Gross margin |
209,885 | 228,193 | 335,512 | 187,674 | ||||||||||||
(Loss) earnings from continuing operations (b) |
(19,665 | ) | (4,440 | ) | 28,930 | (31,720 | ) | |||||||||
(Loss) earnings per basic share from continuing operations |
(0.61 | ) | (0.14 | ) | 0.90 | (0.99 | ) | |||||||||
(Loss) earnings per diluted share from continuing operations |
(0.61 | ) | (0.14 | ) | 0.78 | (0.99 | ) |
(a) | The earnings (loss) from continuing operations for the first and third quarters include gains totaling $1.9 million and $0.3 million, respectively, related to the De Beers settlement. |
(b) | The loss from continuing operations for the fourth quarter includes costs incurred related to the debt refinancing transactions totaling $5.0 million. |
31
Exhibit 99.3
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenues |
$ | 656,449 | $ | 670,752 | $ | 1,019,063 | $ | 1,028,220 | ||||||||
Cost of sales |
308,830 | 331,101 | 477,656 | 498,234 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross margin |
347,619 | 339,651 | 541,407 | 529,986 | ||||||||||||
Selling, general and administrative |
280,148 | 279,064 | 488,306 | 485,529 | ||||||||||||
Depreciation and amortization |
7,461 | 8,388 | 15,122 | 17,034 | ||||||||||||
Other charges (gains) |
488 | 926 | 488 | (847 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating earnings |
59,522 | 51,273 | 37,491 | 28,270 | ||||||||||||
Interest expense |
6,096 | 6,088 | 11,706 | 11,930 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings before income taxes |
53,426 | 45,185 | 25,785 | 16,340 | ||||||||||||
Income tax expense |
2,640 | 3,977 | 2,305 | 3,396 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net earnings |
$ | 50,786 | $ | 41,208 | $ | 23,480 | $ | 12,944 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic net earnings per common share: |
$ | 1.54 | $ | 1.27 | $ | 0.72 | $ | 0.40 | ||||||||
Diluted net earnings per common share: |
$ | 1.13 | $ | 1.02 | $ | 0.52 | $ | 0.32 | ||||||||
Weighted average number of common shares outstanding: |
||||||||||||||||
Basic |
32,919 | 32,426 | 32,827 | 32,362 | ||||||||||||
Diluted |
45,022 | 40,305 | 44,837 | 40,470 |
See notes to consolidated financial statements.
- 1 -
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net earnings |
$ | 50,786 | $ | 41,208 | $ | 23,480 | $ | 12,944 | ||||||||
Foreign currency translation adjustment |
(12,763 | ) | (44 | ) | (15,996 | ) | 470 | |||||||||
Unrealized loss on interest rate swaps |
(140 | ) | | (2,676 | ) | | ||||||||||
Reclassification of loss on interest rate swaps to interest expense |
65 | | 85 | | ||||||||||||
Unrealized gain on securities, net |
(128 | ) | 76 | (54 | ) | 21 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive income |
$ | 37,820 | $ | 41,240 | $ | 4,839 | $ | 13,435 | ||||||||
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
- 2 -
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
January 31, | July 31, | January 31, | ||||||||||
2014 | 2013 | 2013 | ||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 23,251 | $ | 17,060 | $ | 18,516 | ||||||
Merchandise inventories |
864,275 | 767,540 | 836,624 | |||||||||
Other current assets |
48,260 | 53,335 | 51,311 | |||||||||
|
|
|
|
|
|
|||||||
Total current assets |
935,786 | 837,935 | 906,451 | |||||||||
|
|
|
|
|
|
|||||||
Property and equipment |
666,000 | 675,705 | 688,558 | |||||||||
Less accumulated depreciation and amortization |
(562,286 | ) | (570,427 | ) | (575,646 | ) | ||||||
|
|
|
|
|
|
|||||||
Net property and equipment |
103,714 | 105,278 | 112,912 | |||||||||
|
|
|
|
|
|
|||||||
Goodwill |
92,376 | 98,372 | 100,756 | |||||||||
Other assets |
41,718 | 38,560 | 50,471 | |||||||||
Deferred tax asset |
107,110 | 107,110 | 96,888 | |||||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 1,280,704 | $ | 1,187,255 | $ | 1,267,478 | ||||||
|
|
|
|
|
|
|||||||
LIABILITIES AND STOCKHOLDERS INVESTMENT |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable and accrued liabilities |
$ | 276,907 | $ | 220,558 | $ | 263,384 | ||||||
Deferred revenue |
81,667 | 82,110 | 86,813 | |||||||||
Deferred tax liability |
107,479 | 107,016 | 97,233 | |||||||||
|
|
|
|
|
|
|||||||
Total current liabilities |
466,053 | 409,684 | 447,430 | |||||||||
|
|
|
|
|
|
|||||||
Long-term debt |
445,267 | 410,050 | 473,975 | |||||||||
Deferred revenue long-term |
105,004 | 109,135 | 115,664 | |||||||||
Other liabilities |
72,307 | 73,057 | 36,504 | |||||||||
Commitments and contingencies |
||||||||||||
Stockholders investment: |
||||||||||||
Common stock |
488 | 488 | 488 | |||||||||
Additional paid-in capital |
150,459 | 155,625 | 158,422 | |||||||||
Accumulated other comprehensive income |
28,374 | 47,015 | 53,860 | |||||||||
Accumulated earnings |
458,621 | 435,140 | 438,072 | |||||||||
|
|
|
|
|
|
|||||||
637,942 | 638,268 | 650,842 | ||||||||||
Treasury stock |
(445,869 | ) | (452,939 | ) | (456,937 | ) | ||||||
|
|
|
|
|
|
|||||||
Total stockholders investment |
192,073 | 185,329 | 193,905 | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities and stockholders investment |
$ | 1,280,704 | $ | 1,187,255 | $ | 1,267,478 | ||||||
|
|
|
|
|
|
See notes to consolidated financial statements.
- 3 -
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended | ||||||||
January 31, | ||||||||
2014 | 2013 | |||||||
Cash Flows From Operating Activities: |
||||||||
Net earnings |
$ | 23,480 | $ | 12,944 | ||||
Adjustments to reconcile net earnings to net cash used in operating activities: |
||||||||
Non-cash interest |
1,454 | 1,452 | ||||||
Depreciation and amortization |
15,122 | 17,034 | ||||||
Deferred taxes |
352 | 614 | ||||||
Loss on disposition of property and equipment |
690 | 632 | ||||||
Impairment of property and equipment |
488 | 851 | ||||||
Stock-based compensation |
2,261 | 1,742 | ||||||
Changes in operating assets and liabilities: |
||||||||
Merchandise inventories |
(108,272 | ) | (94,676 | ) | ||||
Other current assets |
3,696 | (4,898 | ) | |||||
Other assets |
536 | 1,192 | ||||||
Accounts payable and accrued liabilities |
57,515 | 56,593 | ||||||
Deferred revenue |
(2,258 | ) | (6,144 | ) | ||||
Other liabilities |
(1,446 | ) | (110 | ) | ||||
|
|
|
|
|||||
Net cash used in operating activities |
(6,382 | ) | (12,774 | ) | ||||
|
|
|
|
|||||
Cash Flows From Investing Activities: |
||||||||
Payments for property and equipment |
(18,007 | ) | (12,667 | ) | ||||
Purchase of available-for-sale investments |
(5,157 | ) | (1,674 | ) | ||||
Proceeds from sales of available-for-sale investments |
959 | 465 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(22,205 | ) | (13,876 | ) | ||||
|
|
|
|
|||||
Cash Flows From Financing Activities: |
||||||||
Borrowings under revolving credit agreement |
2,676,300 | 2,738,400 | ||||||
Payments on revolving credit agreement |
(2,640,500 | ) | (2,717,500 | ) | ||||
Proceeds from exercise of stock options |
311 | 56 | ||||||
Payments on capital lease obligations |
(551 | ) | (489 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
35,560 | 20,467 | ||||||
|
|
|
|
|||||
Effect of exchange rate changes on cash |
(782 | ) | 96 | |||||
Net change in cash and cash equivalents |
6,191 | (6,087 | ) | |||||
Cash and cash equivalents at beginning of period |
17,060 | 24,603 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 23,251 | $ | 18,516 | ||||
|
|
|
|
See notes to consolidated financial statements.
- 4 -
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | BASIS OF PRESENTATION |
References to the Company, we, us, and our in this Form 10-Q are references to Zale Corporation and its subsidiaries. We are, through our wholly owned subsidiaries, a leading specialty retailer of fine jewelry in North America. At January 31, 2014, we operated 1,037 specialty retail jewelry stores and 623 kiosks located primarily in shopping malls throughout the United States, Canada and Puerto Rico.
We report our operations under three segments: Fine Jewelry, Kiosk Jewelry and All Other. Fine Jewelry is comprised of our three core national brands, Zales Jewelers®, Zales Outlet® and Peoples Jewellers and our two regional brands, Gordons Jewelers® and Mappins Jewellers®. Each brand specializes in fine jewelry and watches, with merchandise and marketing emphasis focused on diamond products. Zales Jewelers® is our national brand in the U.S. providing moderately priced jewelry to a broad range of guests. Zales Outlet® operates in outlet malls and neighborhood power centers and capitalizes on Zale Jewelers® national marketing and brand recognition. Gordons Jewelers® is a value-oriented regional jeweler. Peoples Jewellers®, Canadas largest fine jewelry retailer, provides guests with an affordable assortment and an accessible shopping experience. Mappins Jewellers® offers Canadian guests a broad selection of merchandise from engagement rings to fashionable and contemporary fine jewelry.
Kiosk Jewelry operates under the brand names Piercing Pagoda®, Plumb Gold, and Silver and Gold Connection® through mall-based kiosks and is focused on the opening price point guest. Kiosk Jewelry specializes in gold, silver and non-precious metal products that capitalize on the latest fashion trends.
All Other includes our insurance and reinsurance operations, which offer insurance coverage primarily to our private label credit card guests.
We also maintain a presence in the retail market through our ecommerce sites www.zales.com, www.zalesoutlet.com, www.gordonsjewelers.com, www.peoplesjewellers.com and www.pagoda.com.
We consolidate all of our U.S. operations into Zale Delaware, Inc. (ZDel), a wholly owned subsidiary of Zale Corporation. ZDel is the parent company for several subsidiaries, including three that are engaged primarily in providing credit insurance to our credit customers. We consolidate our Canadian retail operations into Zale Canada Holding, L.P., which is a wholly owned subsidiary of Zale Corporation. All significant intercompany transactions have been eliminated. The consolidated financial statements are unaudited and have been prepared by the Company in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In managements opinion, all material adjustments (consisting of normal recurring accruals and adjustments) and disclosures necessary for a fair presentation have been made. Because of the seasonal nature of the retail business, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended July 31, 2013 filed with the Securities and Exchange Commission (SEC) on September 27, 2013.
Reclassification. Certain prior year amounts have been reclassified in the accompanying consolidated financial statements to conform to our fiscal year 2014 presentation.
- 5 -
2. | FAIR VALUE MEASUREMENTS |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, Accounting Standards Codification (ASC) 820, Fair Value Measurement, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair values. These tiers include:
Level 1 | Quoted prices for identical instruments in active markets; | |
Level 2 | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and | |
Level 3 | Instruments whose significant inputs are unobservable. |
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The following tables include our assets and liabilities that are measured at fair value on a recurring basis (in thousands):
Fair Value as of January 31, 2014 | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
Assets |
||||||||||||
U.S. Treasury securities |
$ | 14,306 | $ | | $ | | ||||||
U.S. government agency securities |
| 2,074 | | |||||||||
Corporate bonds and notes |
| 5,718 | | |||||||||
Corporate equity securities |
2,706 | | | |||||||||
|
|
|
|
|
|
|||||||
$ | 17,012 | $ | 7,792 | $ | | |||||||
|
|
|
|
|
|
|||||||
Liabilities |
||||||||||||
Interest rate swaps |
$ | | $ | 2,591 | $ | | ||||||
|
|
|
|
|
|
|||||||
Fair Value as of January 31, 2013 | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
Assets |
||||||||||||
U.S. Treasury securities |
$ | 22,445 | $ | | $ | | ||||||
U.S. government agency securities |
| 2,833 | | |||||||||
Corporate bonds and notes |
| 868 | | |||||||||
Corporate equity securities |
4,423 | | | |||||||||
|
|
|
|
|
|
|||||||
$ | 26,868 | $ | 3,701 | $ | | |||||||
|
|
|
|
|
|
Investments in U.S. 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 U.S. 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 3 for additional information related to our investments).
The fair value of our interest rate swaps is calculated using significant observable inputs including the present value of estimated future cash flows using interest rate curves, and therefore were classified as a Level 2 measurement in the fair value hierarchy (see Note 4 for additional information related to our interest rate swaps).
- 6 -
Assets that are Measured at Fair Value on a Nonrecurring Basis
Impairment losses related to store-level property and equipment are calculated using significant unobservable inputs including the present value of future cash flows expected to be generated using a risk-adjusted weighted average cost of capital of 14.0 percent to 15.5 percent, and therefore are classified as a Level 3 measurement in the fair value hierarchy. For the six months ended January 31, 2014, store-level property and equipment of $0.7 million was written down to their fair value of $0.2 million, resulting in an impairment charge of $0.5 million. For the six months ended January 31, 2013, store-level property and equipment of $1.0 million was written down to their fair value of $0.1 million, resulting in an impairment charge of $0.9 million.
At the end of the second quarter of fiscal year 2014, we completed our annual impairment testing of goodwill pursuant to ASC 350, Intangible-Goodwill and Other. Based on the test results, we concluded that no impairment was necessary for the $73.0 million of goodwill related to the Peoples Jewellers acquisition and the $19.4 million of goodwill related to the Piercing Pagoda acquisition. As of the date of the test, the fair value of the Peoples Jewellers and Piercing Pagoda reporting units would have to decline by more than 30 percent and 41 percent, respectively, to be considered for potential impairment. We calculated the estimated fair value of our reporting units using Level 3 inputs, including: (1) cash flow projections for five years; (2) terminal year growth rates of two percent based on estimates of long-term inflation expectations; and (3) discount rates of 14.0 percent to 15.5 percent based on a risk-adjusted weighted average cost of capital that reflects current market conditions. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units, it is possible a material change could occur. If our actual results are not consistent with estimates and assumptions used to calculate fair value, we may be required to recognize goodwill impairments.
Other Financial Instruments
As cash and short-term cash investments, trade payables and certain other short-term financial instruments are all short-term in nature, their carrying amount approximates fair value. The outstanding principal of our revolving credit agreement and senior secured term loan approximates fair value as of January 31, 2014. The fair value of the revolving credit agreement and the senior secured term loan were based on estimates of current interest rates for similar debt, a Level 3 input.
3. | INVESTMENTS |
Investments in debt and equity securities held by our insurance subsidiaries are reported as other assets in the accompanying 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.
Our investments consist of the following (in thousands):
January 31, 2014 | January 31, 2013 | |||||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||
U.S. Treasury securities |
$ | 13,492 | $ | 14,306 | $ | 21,086 | $ | 22,445 | ||||||||
U.S. government agency securities |
1,984 | 2,074 | 2,641 | 2,833 | ||||||||||||
Corporate bonds and notes |
5,616 | 5,718 | 773 | 868 | ||||||||||||
Corporate equity securities |
1,888 | 2,706 | 3,501 | 4,423 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 22,980 | $ | 24,804 | $ | 28,001 | $ | 30,569 | |||||||||
|
|
|
|
|
|
|
|
At January 31, 2014 and 2013, the carrying value of investments included a net unrealized gain of $1.8 million and $2.6 million, respectively, which is included in accumulated other comprehensive income. Realized gains and losses on investments are determined on the specific identification basis. There were no material net realized gains or losses during the three and six months ended January 31, 2014 and 2013. Investments with a carrying value of $7.4 million were on deposit with various state insurance departments at both January 31, 2014 and 2013, respectively, as required by law.
- 7 -
Debt securities outstanding as of January 31, 2014 mature as follows (in thousands):
Cost | Fair Value | |||||||
Less than one year |
$ | 3,272 | $ | 3,299 | ||||
Year two through year five |
11,081 | 11,853 | ||||||
Year six through year ten |
6,680 | 6,879 | ||||||
After ten years |
59 | 67 | ||||||
|
|
|
|
|||||
$ | 21,092 | $ | 22,098 | |||||
|
|
|
|
4. | LONGTERM DEBT |
Long-term debt consists of the following (in thousands):
January 31, | ||||||||
2014 | 2013 | |||||||
Revolving credit agreement |
$ | 363,000 | $ | 390,700 | ||||
Senior secured term loan |
80,000 | 80,000 | ||||||
Capital lease obligations |
2,267 | 3,275 | ||||||
|
|
|
|
|||||
$ | 445,267 | $ | 473,975 | |||||
|
|
|
|
Amended and Restated Revolving Credit Agreement
On July 24, 2012, we amended and restated our revolving credit agreement (the Amended Credit Agreement) with Bank of America, N.A. and certain other lenders. The Amended Credit Agreement totals $665 million, including a $15 million first-in, last-out facility (the FILO Facility), and matures in July 2017. Borrowings under the Amended Credit Agreement (excluding the FILO Facility) are limited to a borrowing base equal to 90 percent of the appraised liquidation value of eligible inventory (less certain reserves that may be established under the agreement), plus 90 percent of eligible credit card receivables. Borrowings under the FILO Facility are limited to a borrowing base equal to the lesser of: (i) 2.5 percent of the appraised liquidation value of eligible inventory or (ii) $15 million. The Amended Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit card receivables and certain other assets and a second priority security interest and lien on all other assets.
Based on the most recent inventory appraisal, the monthly borrowing rates calculated from the cost of eligible inventory range from 68 to 73 percent for the period of February through September 2014, 82 to 84 percent for the period of October through December 2014 and 71 percent for January 2015.
Borrowings under the Amended Credit Agreement (excluding the FILO Facility) bear interest at either: (i) LIBOR plus the applicable margin (ranging from 175 to 225 basis points) or (ii) the base rate (as defined in the Amended Credit Agreement) plus the applicable margin (ranging from 75 to 125 basis points). Borrowings under the FILO Facility bear interest at either: (i) LIBOR plus the applicable margin (ranging from 350 to 400 basis points) or (ii) the base rate plus the applicable margin (ranging from 250 to 300 basis points). We are also required to pay a quarterly unused commitment fee of 37.5 basis points based on the preceding quarters unused commitment.
If excess availability (as defined in the Amended Credit Agreement) falls below certain levels we will be required to maintain a minimum fixed charge coverage ratio of 1.0. Borrowing availability was approximately $259 million as of January 31, 2014, which exceeded the excess availability requirement by $197 million. The fixed charge coverage ratio was 2.47 as of January 31, 2014. The Amended Credit Agreement contains various other covenants including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions and asset sales. As of January 31, 2014, we were in compliance with all covenants.
We incurred debt issuance costs associated with the revolving credit agreement totaling $12.1 million, which consisted of $5.6 million of costs related to the Amended Credit Agreement and $6.5 million of unamortized costs associated with the prior agreement. The debt issuance costs are included in other assets in the accompanying
- 8 -
consolidated balance sheets and are amortized to interest expense on a straight-line basis over the five-year life of the agreement.
Interest Rate Swap Agreements
In September 2013, we executed interest rate swaps with Bank of America, N.A. to hedge the variability of cash flows resulting from fluctuations in the one-month LIBOR associated with our Amended Credit Agreement. The interest rate swaps replaced the one-month LIBOR with the fixed interest rates shown in the table below and are settled monthly. The swaps qualify as cash flow hedges and, to the extent effective, changes in their fair values are recorded in accumulated other comprehensive income in the consolidated balance sheet. The changes in fair values are reclassified from accumulated other comprehensive income to interest expense in the same period that the hedged items affect interest expense.
Interest rate swaps as of January 31, 2014 are as follows:
Notional Amount | Fixed | Fair Value | ||||||||||
Period |
(in thousands) | Interest Rate | (in thousands) | |||||||||
October 2013 - July 2014 |
$ | 215,000 | 0.29 | % | $ | 117 | ||||||
August 2014 - July 2016 |
$ | 215,000 | 1.19 | % | 2,474 | |||||||
|
|
|||||||||||
$ | 2,591 | |||||||||||
|
|
The change in the fair value of the interest rate swaps for the three and six months ended January 31, 2014 totaled $0.1 million and $2.7 million, respectively, and is included as an unrealized loss in other comprehensive income. There were no material amounts reclassified from accumulated other comprehensive income to interest expense during the three and six months ended January 31, 2014. The current portion of the fair value of the interest rate swaps totaled $1.0 million and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheet. The current portion represents the amount that is expected to be reclassified from other comprehensive income to interest expense over the next 12 months. The non-current portion of the fair value of the interest rate swaps totaled $1.6 million and is included in other liabilities in the accompanying consolidated balance sheet.
Amended and Restated Senior Secured Term Loan
On July 24, 2012, we amended and restated our senior secured term loan (the Amended Term Loan) with Z Investment Holdings, LLC, an affiliate of Golden Gate Capital. The Amended Term Loan totals $80.0 million, matures in July 2017 and is subject to a borrowing base equal to: (i) 107.5 percent of the appraised liquidation value of eligible inventory plus (ii) 100 percent of credit card receivables and an amount equal to the lesser of $40 million or 100 percent of the appraised liquidation value of intellectual property minus (iii) the borrowing base under the Amended Credit Agreement. In the event the outstanding principal under the Amended Term Loan exceeds the Amended Term Loan borrowing base, availability under the Amended Credit Agreement would be reduced by the excess. As of January 31, 2014, the outstanding principal under the Amended Term Loan did not exceed the borrowing base. The Amended Term Loan is secured by a second priority security interest on merchandise inventory and credit card receivables and a first priority security interest on substantially all other assets.
Borrowings under the Amended Term Loan bear interest at 11 percent payable on a quarterly basis. We may repay all or any portion of the Amended Term Loan with the following penalty prior to maturity: (i) the present value of the required interest payments that would have been made if the prepayment had not occurred during the first year; (ii) 4 percent during the second year; (iii) 3 percent during the third year; (iv) 2 percent during the fourth year and (v) no penalty in the fifth year. The Amended Credit Agreement restricts our ability to prepay the Amended Term Loan if the fixed charge coverage ratio is not equal to or greater than 1.0 after giving effect to the prepayment.
The Amended Term Loan includes various covenants which are consistent with the covenants in the Amended Credit Agreement, including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions, asset sales and the requirement to maintain a minimum fixed charge coverage ratio of 1.0
- 9 -
if excess availability thresholds under the Amended Credit Agreement are not maintained. As of January 31, 2014, we were in compliance with all covenants.
We incurred costs associated with the Amended Term Loan totaling $4.4 million, of which approximately $2 million was recorded in interest expense during the fourth quarter of fiscal year 2012. The remaining $2.4 million consists of debt issuance costs included in other assets in the accompanying consolidated balance sheet and are amortized to interest expense on a straight-line basis over the five-year life of the agreement.
Warrant and Registration Rights Agreement
In connection with the execution of the senior secured term loan in May 2010, we entered into a Warrant and Registration Rights Agreement (the Warrant Agreement) with Z Investment Holdings, LLC (Z Investment). Under the terms of the Warrant Agreement, Z Investment holds 11.1 million warrants (the Warrants) to purchase shares of our common stock, on a one-for-one basis, for an exercise price of $2.00 per share. The Warrants, which are currently exercisable and expire in May 2017, represented approximately 25 percent of our common stock on a fully diluted basis (including the shares issuable upon exercise of the Warrants and excluding certain out-of-the-money stock options) as of the date of the issuance. The number of shares and exercise price are subject to customary antidilution protection. The Warrant Agreement also entitles the holder to designate two, and in certain circumstances three, directors to our board.
The holders of the Warrants may, at their option, request that we register all or part of the common stock issuable under the Warrant Agreement for resale. In September 2013, Z Investment exercised their right to request that we register the common stock and on October 2, 2013 we filed a shelf registration statement on Form S-3 which has been declared effective by the SEC.
Capital Lease Obligations
We enter into capital leases related to vehicles for our field management. The vehicles are included in property and equipment in the accompanying consolidated balance sheets and are depreciated over a four-year life. Capital leases, net of accumulated depreciation, included in property and equipment as of January 31, 2014 and 2013 totaled $2.2 million and $3.2 million, respectively.
5. | OTHER CHARGES (GAINS) |
During the second quarter of fiscal years 2014 and 2013, we recorded charges related to the impairment of long-lived assets for underperforming stores, primarily in Fine Jewelry, totaling $0.5 million and $0.9 million, respectively. The impairment of long-lived assets is based on the amount that the carrying value exceeds the estimated fair value of the assets. The fair value is based on future cash flow projections over the remaining lease term using a discount rate that we believe is commensurate with the risk inherent in our current business model. If actual results are not consistent with our cash flow projections, we may be required to record additional impairments.
Beginning in June 2004, various class-action lawsuits were filed alleging that the De Beers group violated U.S. state and federal antitrust, consumer protection and unjust enrichment laws. During the six months ended January 31, 2013, we received proceeds totaling $1.9 million as a result of a settlement reached in the lawsuit.
6. | EARNINGS PER COMMON SHARE |
Basic earnings per common share is computed by dividing net earnings by the weighted-average number of common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted-average number of shares is increased by the dilutive effect of stock options, restricted share awards and warrants issued in connection with the senior secured term loan determined using the Treasury Stock method.
- 10 -
The following table presents a reconciliation of the diluted weighted average shares (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Basic weighted average shares |
32,919 | 32,426 | 32,827 | 32,362 | ||||||||||||
Effect of potential dilutive securities: |
||||||||||||||||
Warrants |
9,597 | 6,759 | 9,495 | 6,921 | ||||||||||||
Stock options and restricted share awards |
2,506 | 1,120 | 2,515 | 1,187 | ||||||||||||
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|
|||||||||
Diluted weighted average shares |
45,022 | 40,305 | 44,837 | 40,470 | ||||||||||||
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|
|
|
|
|
The calculation of diluted weighted average shares excludes the impact of 0.9 million and 1.8 million antidilutive stock options for the three and six months ended January 31, 2014 and 2013.
7. | ACCUMULATED OTHER COMPREHENSIVE INCOME |
The following table includes detail regarding changes in the composition of accumulated other comprehensive income (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Beginning of period |
$ | 41,340 | $ | 53,828 | $ | 47,015 | $ | 53,369 | ||||||||
Foreign currency translation adjustment |
(12,763 | ) | (44 | ) | (15,996 | ) | 470 | |||||||||
Unrealized loss on interest rate swaps |
(140 | ) | | (2,676 | ) | | ||||||||||
Reclassification of loss on interest rate swaps to interest expense |
65 | | 85 | | ||||||||||||
Unrealized gain (loss) on securities, net |
(128 | ) | 76 | (54 | ) | 21 | ||||||||||
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|||||||||
End of period |
$ | 28,374 | $ | 53,860 | $ | 28,374 | $ | 53,860 | ||||||||
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8. | INCOME TAXES |
We are required to assess the available positive and negative evidence to estimate if sufficient future income will be generated to utilize deferred tax assets. A significant piece of negative evidence that we consider is cumulative losses (generally defined as losses before income taxes) incurred over the most recent three-year period. Such evidence limits our ability to consider other subjective evidence such as our projections for future growth. As of January 31, 2014 and 2013, cumulative losses were incurred over the applicable three-year period.
Our valuation allowances totaled $82.7 million and $92.7 million as of January 31, 2014 and 2013, respectively. The valuation allowances were established due to the uncertainty of our ability to utilize certain federal, state and foreign net operating loss carryforwards in the future. The amount of the deferred tax asset considered realizable could be adjusted if negative evidence, such as three-year cumulative losses, no longer exists and additional consideration is given to our growth projections.
- 11 -
9. | SEGMENTS |
We report our operations under three business segments: Fine Jewelry, Kiosk Jewelry, and All Other (See Note 1). All corresponding items of segment information in prior periods have been presented consistently. Managements expectation is that overall economics of each of our major brands within each reportable segment will be similar over time.
We use earnings before unallocated corporate overhead, interest and taxes but include an internal charge for inventory carrying cost to evaluate segment profitability. Unallocated costs before income taxes include corporate employee-related costs, administrative costs, information technology costs, corporate facilities costs and depreciation and amortization. Income tax information by segment is not included as taxes are calculated at a company-wide level and not allocated to each segment.
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
Selected Financial Data by Segment |
2014 | 2013 | 2014 | 2013 | ||||||||||||
(amounts in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Fine Jewelry (a) |
$ | 580,821 | $ | 590,131 | $ | 894,519 | $ | 897,091 | ||||||||
Kiosk |
72,801 | 77,905 | 119,000 | 125,723 | ||||||||||||
All Other |
2,827 | 2,716 | 5,544 | 5,406 | ||||||||||||
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|
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Total revenues |
$ | 656,449 | $ | 670,752 | $ | 1,019,063 | $ | 1,028,220 | ||||||||
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Depreciation and amortization: |
||||||||||||||||
Fine Jewelry |
$ | 4,954 | $ | 5,393 | $ | 10,013 | $ | 10,914 | ||||||||
Kiosk |
516 | 689 | 1,093 | 1,428 | ||||||||||||
All Other |
| | | | ||||||||||||
Unallocated |
1,991 | 2,306 | 4,016 | 4,692 | ||||||||||||
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Total depreciation and amortization |
$ | 7,461 | $ | 8,388 | $ | 15,122 | $ | 17,034 | ||||||||
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Operating earnings: |
||||||||||||||||
Fine Jewelry |
$ | 58,273 | $ | 47,712 | $ | 46,272 | $ | 31,010 | ||||||||
Kiosk |
10,622 | 10,513 | 8,067 | 8,764 | ||||||||||||
All Other |
1,309 | 1,094 | 2,501 | 1,906 | ||||||||||||
Unallocated (b) |
(10,682 | ) | (8,046 | ) | (19,349 | ) | (13,410 | ) | ||||||||
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Total operating earnings |
$ | 59,522 | $ | 51,273 | $ | 37,491 | $ | 28,270 | ||||||||
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(a) | Includes $111.2 million and $120.4 million for the three months ended January 31, 2014 and 2013, respectively, and $174.1 million and $183.4 million for the six months ended January 31, 2014 and 2013, respectively, related to foreign operations. |
(b) | Includes credits of $17.1 million and $16.9 million for the three months ended January 31, 2014 and 2013, respectively, and $32.9 million and $32.0 million for the six months ended January 31, 2014 and 2013, respectively, to offset internal carrying costs charged to the segments. The six months ended January 31, 2013 also includes a gain totaling $1.9 million related to the De Beers settlement. |
- 12 -
10. | CONTINGENCIES |
The Company is 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 which was filed on July 3, 2013 in the U.S. 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 the Company violated various wage and hour labor laws. Relief is sought on behalf of current and former Piercing Pagoda and Zales employees. The lawsuits seek to recover damages, penalties and attorneys fees as a result of the alleged violations. The Company is investigating the underlying allegations and intends to vigorously defend its position against them. The Company cannot reasonably estimate the potential loss or range of loss, if any, for the lawsuits.
The Company and its directors have been named as defendants in four purported shareholder class action lawsuits filed in the Court of Chancery of the State of Delaware: Andrew Breyer v. Zale Corporation, et al. filed on February 24, 2014, Marc Stein v. Zale Corporation, et al. and Ravinder Singh v. Zale Corporation, et al. each filed on March 3, 2014 and Mary Smart v. Zale Corporation, et al. filed on March 6, 2014. Each lawsuit alleges that, in connection with the proposed transaction between the Company and Signet Jewelers Limited, entered into on February 19, 2014, the Companys directors breached their fiduciary duties to the Companys shareholders and that the Company, Signet Jewelers Limited and Carat Merger Sub, Inc. aided and abetted such breaches. Each lawsuit seeks injunctive relief, rescission in the event the merger is consummated, monetary damages and attorneys and other fees and costs. The Company and its directors believe that the claims in the lawsuits are without merit, and intend to vigorously defend each pending lawsuit. The Company cannot reasonably estimate the potential loss or range of loss, if any, for the lawsuits.
We are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established based on managements best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.
11. | DEFERRED REVENUE |
We offer our Fine Jewelry guests lifetime warranties on certain products that cover sizing and breakage with an option to purchase theft protection for a two-year period. Revenues related to lifetime warranty sales are recognized in proportion to when the expected costs will be incurred, which we estimate to be over an eight-year period. A significant change in estimates related to the time period or pattern in which warranty-related costs are expected to be incurred could adversely impact our revenues and earnings. Revenues related to the optional theft protection are recognized over the two-year contract period on a straight-line basis. We also offer our Fine Jewelry guests a two-year watch warranty and our Fine Jewelry and Kiosk Jewelry guests a one-year warranty that covers breakage. The revenue from the two-year watch warranty and one-year breakage warranty is recognized on a straight-line basis over the respective contract terms.
- 13 -
The change in deferred revenue associated with the sale of warranties is as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Deferred revenue, beginning of period |
$ | 183,224 | $ | 199,239 | $ | 191,245 | $ | 208,516 | ||||||||
Warranties sold (a) |
43,907 | 44,569 | 69,841 | 69,549 | ||||||||||||
Revenue recognized |
(40,460 | ) | (41,331 | ) | (74,415 | ) | (75,588 | ) | ||||||||
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Deferred revenue, end of period |
$ | 186,671 | $ | 202,477 | $ | 186,671 | $ | 202,477 | ||||||||
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(a) | Warranty sales for the three and six months ended January 31, 2014 include approximately $1.8 million and $2.3 million, respectively, related to the depreciation in the Canadian currency rate on the beginning of the period deferred revenue balance. The change in the Canadian currency rate did not have a significant impact on the beginning of the period deferred revenue balance for the three and six months ended January 31, 2013. |
Gross margin associated with warranties totaled $32.7 million and $34.2 million, respectively, during the three months ended January 31, 2014 and 2013 and $60.1 million and $62.3 million, respectively, during the six months ended January 31, 2014 and 2013.
12. | SUBSEQUENT EVENTS |
Merger Agreement
On February 19, 2014, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Signet Jewelers Limited, a Bermuda corporation (Signet), and Carat Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Signet (Merger Sub). The Merger Agreement provides for, subject to the satisfaction or waiver of specified conditions, the acquisition of the Company by Signet at a price of $21 per share in cash. Subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Signet. Consummation of the Merger is subject to various customary conditions set forth in the Merger Agreement, including, among other things, the adoption of the Merger Agreement by the Companys stockholders, the absence of laws or orders prohibiting or restraining the Merger and the receipt of certain required antitrust approvals. We cannot predict with certainty whether and when any of these conditions will be satisfied. For additional information regarding the Merger and the Merger Agreement, please refer to our Current Report on Form 8-K filed with the SEC on February 19, 2014 (the February 19th 8-K). The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached as Exhibit 2.1 to the February 19th 8-K.
Voting and Support Agreement
On February 19, 2014, and in connection with the execution of the Merger Agreement, Z Investment entered into a Voting and Support Agreement with Signet and the Company (the Voting Agreement). Pursuant to the Voting Agreement, Z Investment has agreed, among other things, to exercise its Warrants (see Note 4) and to vote, or cause to be voted, the shares of the Companys common stock issued upon such exercise in favor of the adoption of the Merger Agreement. The foregoing description of the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to the Voting Agreement, a copy of which is attached as Exhibit 10.1 to the February 19th 8-K.
- 14 -
Exhibit 99.4
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On February 19, 2014, Signet Jewelers Limited (Signet) entered into a definitive agreement to acquire Zale Corporation (Zale) (the Acquisition). Under the terms of the agreement, Zale shareholders will receive $21 per share in cash for each outstanding share of common stock, including shares issued for the assumed cashless exercise of outstanding warrants and the vesting, upon consummation of the Acquisition, of outstanding Zale restricted share awards subject to certain conditions. In addition, each outstanding stock option will be converted to an amount in cash equal to the excess (if any) of the merger consideration of $21 per share multiplied by the number of shares of common stock underlying such stock option over the aggregate exercise price payable upon exercise of such stock option immediately prior to the effective time of the Acquisition. Signet intends to finance the Acquisition, including payment of related fees and expenses, as well as repayment of Zales outstanding borrowings ($443.0 million as of January 31, 2014), with $600.0 million in an asset-backed securitization facility, $400.0 million in senior unsecured notes and $400.0 million in a senior unsecured term loan facility (the Financings).
The following unaudited pro forma condensed combined financial information is based on and derived from the separate historical financial statements of Signet and Zale after giving effect to the Acquisition and the Financings and gives effect to the assumptions and preliminary pro forma adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. The Acquisition and the Financings are together referred to as the Transactions. The unaudited pro forma condensed combined balance sheet gives effect to the Transactions as if they had occurred on February 1, 2014. The unaudited pro forma condensed combined income statement gives effect to the Transactions as if they had occurred on February 3, 2013. The historical consolidated financial information has been adjusted to give effect to pro forma events that are directly attributable to the Transactions and that are factually supportable. The unaudited pro forma condensed combined income statement has also been adjusted to only give effect to pro forma events that are expected to have a continuing impact on the combined results.
The unaudited pro forma condensed combined financial information giving effect to the Transaction was prepared using the acquisition method of accounting. Accordingly, consideration given by Signet to complete the Acquisition will be allocated to the assets and liabilities of Zale based upon their estimated fair values as of the date of completion of the Acquisition. Any excess of the consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. The unaudited pro forma condensed combined financial statements also reflect (i) reclassifications to conform the historical financial statement presentation of Zale to that of Signet; and (ii) adjustments to conform Zales accounting policies to those of Signet. Signet will continue to assess Zales accounting policies for any additional adjustments that may be required to conform Zales accounting policies to those of Signet, other than those noted in the pro forma adjustments described below.
Signet has not completed the detailed valuation studies necessary to arrive at the required estimates of the fair value of the Zale assets to be acquired and the liabilities to be assumed and the related allocations of consideration transferred, nor has it identified all adjustments necessary to conform Zales accounting policies to Signets accounting policies. A final determination of the fair value of Zales assets and liabilities will be based on the actual net tangible and intangible assets and liabilities of Zale that exist as of the date of completion of the Acquisition and, therefore, cannot be made prior to the completion of the Acquisition. Accordingly, the unaudited pro forma adjustments are preliminary and are subject to further adjustments as additional information becomes available and as additional analyses are performed, and such further adjustments may be material. The preliminary unaudited pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma condensed combined financial information presented below. Signet estimated the fair value of Zales assets and liabilities based on discussions with Zales management, preliminary valuation studies, due diligence and information presented in public filings. There can be no assurance that such finalization will not result in material changes.
The unaudited pro forma condensed combined financial information is provided for informational purposes only. The unaudited pro forma condensed combined financial information is not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the Transactions been completed as of the dates indicated or that may be achieved in the future and should not be taken as representative of future consolidated results of operations or financial condition of Signet. The unaudited pro forma condensed combined income statement does not reflect any non-recurring charges directly related to the Transactions that have already been incurred or will be incurred upon closing of the Transactions. Furthermore, no effect has been given in the unaudited pro forma condensed combined income statement for synergies and potential cost savings that may be realized through the combination of the two companies or the costs that may be incurred in integrating their operations.
The unaudited pro forma condensed combined financial information should be read in conjunction with Signets historical financial statements as of and for the year ended February 1, 2014, including the notes thereto, and Zales historical financial statements as of and for the year ended July 31, 2013 and as of and for the six-month period ended January 31, 2014, in each case including the notes thereto, attached as Exhibits 99.1, 99.2 and 99.3, respectively to the 8-K into which this Exhibit is incorporated by reference.
1
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET AS OF FEBRUARY 1, 2014
(In millions)
Historical Signet Jewelers Limited |
Historical Zale Corporation Reclassified (See Note 2) |
Adjustments for the Acquisition |
Note | Adjustments for the Financings |
Note | Pro Forma Combined |
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Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 247.6 | $ | 23.3 | $ | (1,453.2 | ) | (3a)(3b) (3c)(3d)(3e) |
$ | 1,382.0 | (3o)(3p) | $ | 199.7 | |||||||||||
Accounts receivable, net |
1,374.0 | | | | 1,374.0 | |||||||||||||||||||
Other receivables |
51.5 | 6.2 | | | 57.7 | |||||||||||||||||||
Other current assets |
87.0 | 29.5 | | 3.2 | (3p) | 119.7 | ||||||||||||||||||
Deferred tax assets |
3.0 | 3.2 | (6.2 | ) | (3l) | | | |||||||||||||||||
Income taxes |
6.5 | 6.3 | | | 12.8 | |||||||||||||||||||
Inventories |
1,488.0 | 867.3 | 89.5 | (3g) | | 2,444.8 | ||||||||||||||||||
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Total current assets |
3,257.6 | 935.8 | (1,369.9 | ) | 1,385.2 | 4,208.7 | ||||||||||||||||||
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Non-current assets: |
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Property, plant and equipment, net |
487.6 | 103.7 | | | 591.3 | |||||||||||||||||||
Goodwill |
26.8 | 92.4 | 373.2 | (3f) | | 492.4 | ||||||||||||||||||
Intangible assets, net |
| | 450.0 | (3h) | | 450.0 | ||||||||||||||||||
Other assets |
87.2 | 41.7 | (13.2 | ) | (3k) | 10.6 | (3p) | 126.3 | ||||||||||||||||
Deferred tax assets |
113.7 | 107.1 | 34.2 | (3l)(3m) | | 255.0 | ||||||||||||||||||
Retirement benefit asset |
56.3 | | | | 56.3 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 4,029.2 | $ | 1,280.7 | $ | (525.7 | ) | $ | 1,395.8 | $ | 6,180.0 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Liabilities and Shareholders equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Loans and overdrafts |
$ | 19.3 | $ | 57.0 | $ | | $ | 20.0 | (3o) | $ | 96.3 | |||||||||||||
Accounts payable |
162.9 | 129.0 | | | 291.9 | |||||||||||||||||||
Accrued expenses and other current liabilities |
328.5 | 90.9 | 19.0 | (3j) | | 438.4 | ||||||||||||||||||
Deferred revenue |
173.0 | 81.7 | (39.5 | ) | (3i) | | 215.2 | |||||||||||||||||
Deferred tax liabilities |
113.1 | 107.5 | 36.2 | (3l) | | 256.8 | ||||||||||||||||||
Income taxes |
103.9 | | (5.1 | ) | (1.6 | ) | 97.2 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current liabilities |
900.7 | 466.1 | 10.6 | 18.4 | 1,395.8 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Non-current liabilities: |
||||||||||||||||||||||||
Long-term debt |
| 445.2 | (443.0 | ) | (3d) | 1,380.0 | (3o) | 1,382.2 | ||||||||||||||||
Other liabilities |
121.7 | 66.9 | 0.7 | (3j) | | 189.3 | ||||||||||||||||||
Deferred revenue |
443.7 | 105.0 | (45.2 | ) | (3i) | | 503.5 | |||||||||||||||||
Deferred tax liabilities |
| 5.4 | 168.2 | (3l) | | 173.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total liabilities |
1,466.1 | 1,088.6 | (308.7 | ) | 1,398.4 | 3,644.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Commitments and contingencies |
||||||||||||||||||||||||
Shareholders equity: |
||||||||||||||||||||||||
Common shares at par value |
15.7 | 0.5 | (0.5 | ) | (3n) | | 15.7 | |||||||||||||||||
Additional paid-in capital |
258.8 | 150.5 | (150.5 | ) | (3n) | | 258.8 | |||||||||||||||||
Other reserves |
235.2 | | | | 235.2 | |||||||||||||||||||
Treasury shares at cost |
(346.2 | ) | (445.9 | ) | 445.9 | (3n) | | (346.2 | ) | |||||||||||||||
Retained earnings |
2,578.1 | 458.6 | (483.5 | ) | (3e)(3n) | (2.6 | ) | (3p) | 2,550.6 | |||||||||||||||
Accumulated other comprehensive income (loss) |
(178.5 | ) | 28.4 | (28.4 | ) | (3n) | | (178.5 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total shareholders equity |
2,563.1 | 192.1 | (217.0 | ) | (2.6 | ) | 2,535.6 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total liabilities and shareholders equity |
$ | 4,029.2 | $ | 1,280.7 | $ | (525.7 | ) | $ | 1,395.8 | $ | 6,180.0 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to the unaudited pro forma condensed combined financial information.
2
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE 52 WEEK PERIOD ENDED FEBRUARY 1, 2014
(In millions, except per share amounts)
Historical Signet Jewelers Limited |
Historical Zale Corporation Reclassified (See Note 2) |
Adjustments for the Acquisition |
Note | Adjustments for the Financings |
Note | Pro Forma | ||||||||||||||||||
Sales |
$ | 4,209.2 | $ | 1,878.9 | $ | (35.1 | ) | (4a) | $ | | $ | 6,053.0 | ||||||||||||
Cost of sales |
(2,628.7 | ) | (1,256.5 | ) | (6.7 | ) | (4b) | | (3,891.9 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Gross margin |
1,580.5 | 622.4 | (41.8 | ) | | 2,161.1 | ||||||||||||||||||
Selling, general and administrative expenses |
(1,196.7 | ) | (576.3 | ) | 25.5 | (4c) | | (1,747.5 | ) | |||||||||||||||
Other operating income, net |
186.7 | 0.2 | | | 186.9 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating income |
570.5 | 46.3 | (16.3 | ) | | 600.5 | ||||||||||||||||||
Interest expense, net |
(4.0 | ) | (24.9 | ) | 23.2 | (4d) | (39.6 | ) | (4d) | (45.3 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income before income taxes |
566.5 | 21.4 | 6.9 | (39.6 | ) | 555.2 | ||||||||||||||||||
Income taxes |
(198.5 | ) | (0.8 | ) | (2.7 | ) | (4e) | 15.2 | (4e) | (186.8 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net Income |
$ | 368.0 | $ | 20.6 | $ | 4.2 | $ | (24.4 | ) | $ | 368.4 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Earnings per share: basic |
$ | 4.59 | $ | 4.59 | ||||||||||||||||||||
diluted |
$ | 4.56 | $ | 4.57 | ||||||||||||||||||||
Weighted average common shares outstanding: basic |
80.2 | 80.2 | ||||||||||||||||||||||
diluted |
80.7 | 80.7 |
See the accompanying notes to the unaudited pro forma condensed combined financial information.
3
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. | Description of Transactions |
The Acquisition
On February 19, 2014, Signet, Carat Merger Sub and Zale entered into the merger agreement pursuant to which, through a series of transactions, Zale will become a wholly owned subsidiary of Signet. Upon consummation of the Acquisition, Carat Merger Sub, will merge with and into Zale, the separate corporate existence of Carat Merger Sub will cease and Zale will continue as the surviving corporation as a wholly-owned indirect subsidiary of Signet. Pursuant to the merger agreement, Zale shareholders will receive $21 per share in cash for each outstanding share of common stock, including shares issued for the assumed cashless exercise of outstanding warrants and the vesting upon consummation of the Acquisition of outstanding Zale restricted share awards subject to certain conditions. In addition, each outstanding stock option will be converted to an amount in cash equal to the excess (if any) of the merger consideration of $21 per share multiplied by the number of shares of common stock underlying such stock option over the aggregate exercise price payable upon exercise of such stock option immediately prior to the effective time of the Acquisition.
Completion of the Acquisition is subject to various customary conditions.
The Financings
Signet expects to enter into a senior unsecured term loan facility of $400.0 million, an asset-backed securitization facility of $600.0 million, and senior unsecured notes of $400.0 million. The expected proceeds from these proposed borrowings, together with cash on hand, will be used to pay down Zales existing debt, finance the Acquisition and to pay fees, costs and expenses related thereto. In conjunction with the senior unsecured term loan facility, Signet also expects to amend and restate its existing $400.0 million revolving credit facility to, among other things, extend the maturity thereof. If the timing of the financing transactions differs from our expectations, Signet has also obtained a commitment for an $800.0 million bridge loan facility to utilize as necessary. The commitment on this bridge loan facility will be terminated upon the successful raising of the asset-backed securitization facility and senior unsecured notes.
The senior unsecured term loan facility is expected to have a term of five years and to require minimum principal and interest payments to be made on a quarterly basis with the balance due at maturity. Interest on the senior unsecured term loan facility will accrue, at Signets option, at either a base rate or an adjusted LIBOR, in each case plus an applicable margin rate based on Signets Fixed Charge Coverage Ratio as defined in the underlying agreement. The corresponding revolving credit facility also has a term of five years with interest accruing, at Signets option, at either a base rate or an adjusted LIBOR, in each case plus an applicable margin rate based on Signets Fixed Charge Coverage Ratio as defined in the underlying agreement.
Interest on the senior unsecured notes is expected to be payable on a semiannual basis with the outstanding principal balance and any unpaid interest due at maturity.
The asset-backed securitization facility is expected to have a term of two years. Interest is expected to be payable on a monthly basis with the outstanding principal balance and any unpaid interest due at maturity.
Based on current levels of base interest rates for each of the financing transactions and an assumed credit-adjusted margin for Signet, interest on the Financings is assumed to accrue at a weighted average rate per annum of 2.60%.
2. | Reconciliation of Zales Historical Financial Information |
Balance sheet:
The following table reflects adjustments to conform the presentation of Zales historical balance sheet as of January 31, 2014 to align to Signets historical balance sheet presentation:
4
(in millions) | Historical Zale Corporation As Reported |
Reclassifications to conform with Signet presentation |
Note | Historical Zale Corporation Reclassified |
||||||||||
Assets |
||||||||||||||
Current assets: |
||||||||||||||
Cash and cash equivalents |
$ | 23.3 | $ | | $ | 23.3 | ||||||||
Other receivables |
| 6.2 | (i) | 6.2 | ||||||||||
Other current assets |
48.2 | (18.7 | ) | (i)(ii) | 29.5 | |||||||||
Deferred tax assets |
| 3.2 | (i) | 3.2 | ||||||||||
Income taxes |
| 6.3 | (i) | 6.3 | ||||||||||
Inventories |
864.3 | 3.0 | (ii) | 867.3 | ||||||||||
|
|
|
|
|
|
|||||||||
Total current assets |
935.8 | | 935.8 | |||||||||||
|
|
|
|
|
|
|||||||||
Non-current assets: |
||||||||||||||
Property, plant and equipment, net |
103.7 | | 103.7 | |||||||||||
Goodwill |
92.4 | | 92.4 | |||||||||||
Other assets |
41.7 | | 41.7 | |||||||||||
Deferred tax assets |
107.1 | | 107.1 | |||||||||||
|
|
|
|
|
|
|||||||||
Total assets |
$ | 1,280.7 | $ | | $ | 1,280.7 | ||||||||
|
|
|
|
|
|
|||||||||
Liabilities and shareholders equity |
||||||||||||||
Current liabilities: |
||||||||||||||
Loans and overdrafts |
$ | | $ | 57.0 | (iii) | $ | 57.0 | |||||||
Accounts payable |
| 129.0 | (iii) | 129.0 | ||||||||||
Accounts payable and accrued liabilities |
276.9 | (276.9 | ) | (iii) | | |||||||||
Accrued expenses and other current liabilities |
| 90.9 | (iii) | 90.9 | ||||||||||
Deferred revenue |
81.7 | | 81.7 | |||||||||||
Deferred tax liabilities |
107.5 | | 107.5 | |||||||||||
|
|
|
|
|
|
|||||||||
Total current liabilities |
466.1 | | 466.1 | |||||||||||
|
|
|
|
|
|
|||||||||
Non-current liabilities: |
||||||||||||||
Long-term debt |
445.2 | | 445.2 | |||||||||||
Other liabilities |
72.3 | (5.4 | ) | (iv) | 66.9 | |||||||||
Deferred revenue |
105.0 | | 105.0 | |||||||||||
Deferred tax liabilities |
| 5.4 | (iv) | 5.4 | ||||||||||
|
|
|
|
|
|
|||||||||
Total liabilities |
1,088.6 | | 1,088.6 | |||||||||||
|
|
|
|
|
|
|||||||||
Total shareholders equity |
192.1 | | 192.1 | |||||||||||
|
|
|
|
|
|
|||||||||
Total liabilities and shareholders equity |
$ | 1,280.7 | $ | | $ | 1,280.7 | ||||||||
|
|
|
|
|
|
The reclassification adjustments reflected above are as follows:
(i) | to separately classify other receivables of $6.2 million, deferred tax assets of $3.2 million and income tax assets of $6.3 million that were historically reported within other current assets; |
(ii) | to reclassify supply inventories of $3.0 million from other current assets to inventories; |
(iii) | to separately classify accounts payable of $129.0 million, loans and overdrafts of $57.0 million, and accrued expenses and other current liabilities of $90.9 that were historically reported within accounts payable and accrued liabilities; |
(iv) | to separately classify deferred tax liabilities of $5.4 million that were historically reported within other liabilities. |
5
Income Statement:
A reconciliation of Zales historical statement of operations for the twelve months ended January 31, 2014 is presented below. As Zales year-end date was July 31, 2013, which differs from Signets February 1, 2014 year-end date by more than 93 days, Zales statement of operations was brought up to within 93 days of Signets most recently completed year end by deducting the unaudited consolidated interim statement of operations of Zale for the six months ended January 31, 2013 and adding the unaudited consolidated interim statement of operations of Zale for the six months ended January 31, 2014 to the audited consolidated statement of operations of Zale for the fiscal year ended July 31, 2013. Any differences between Zales year-end date of January 31, 2014 and Signets year-end date of February 1, 2014 are considered insignificant. The following table also reflects reclassification to conform the presentation of Zales historical statement of operations to align to Signets historical income statement presentation.
Zales Historical As Reported | ||||||||||||||||||||||||||
(in millions) | Year ended July 31, 2013 |
Less: Six month period ended January 31, 2013 |
Add: Six month period ended January 31, 2014 |
Twelve months ended January 31, 2014 |
Reclassifications to conform with Signet presentation |
Note | Twelve months ended January 31, 2014 Reclassified |
|||||||||||||||||||
Sales |
$ | 1,888.0 | $ | 1,028.2 | $ | 1,019.1 | $ | 1,878.9 | $ | | $ | 1,878.9 | ||||||||||||||
Cost of sales |
(903.6 | ) | (498.2 | ) | (477.7 | ) | (883.1 | ) | (373.4 | ) | (i)(iii) | (1,256.5 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Gross margin |
984.4 | 530.0 | 541.4 | 995.8 | (373.4 | ) | 622.4 | |||||||||||||||||||
Selling, general and administrative expenses |
(950.0 | ) | (502.5 | ) | (503.4 | ) | (950.9 | ) | 374.6 | (i)(ii) | (576.3 | ) | ||||||||||||||
Other operating income (expense), net |
0.7 | 0.8 | (0.5 | ) | (0.6 | ) | 0.8 | (iii) | 0.2 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating income |
35.1 | 28.3 | 37.5 | 44.3 | 2.0 | 46.3 | ||||||||||||||||||||
Interest expense, net |
(23.2 | ) | (12.0 | ) | (11.7 | ) | (22.9 | ) | (2.0 | ) | (ii) | (24.9 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income before income taxes |
11.9 | 16.3 | 25.8 | 21.4 | | 21.4 | ||||||||||||||||||||
Income taxes |
(1.9 | ) | (3.4 | ) | (2.3 | ) | (0.8 | ) | | (0.8 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income |
$ | 10.0 | $ | 12.9 | $ | 23.5 | $ | 20.6 | $ | | $ | 20.6 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(i) | reclassification of $372.6 million related to certain costs incurred in the processing and distribution of merchandise, store operating and store occupancy costs (including utilities, rent, real estate taxes, common area maintenance charges and depreciation) to cost of sales from selling, general and administrative expenses to conform Zales presentation of these costs in accordance with Signets presentation. |
(ii) | reclassification of $2.0 million related to costs associated with outstanding financing arrangements from selling, general and administrative expenses to interest expense, net to conform Zales presentation of these costs in accordance with Signets presentation policy. |
(iii) | reclassification of $0.8 million related to store impairment charges from other operating income (expense), net to cost of sales to conform Zales presentation of these costs in accordance with Signets presentation policy. |
3. | Unaudited Pro Forma Condensed Combined Balance Sheet Adjustments |
Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed of Zale are recorded at acquisition date fair values. The pro forma adjustments are preliminary and based on estimates of fair values and useful lives and have been prepared to illustrate the estimated effects of the Transactions. The acquisition date fair values are dependent upon certain valuation and other studies conducted to date; however, not all such analysis has been completed. Accordingly, the pro forma acquisition date fair values are subject to further adjustment as additional information becomes available and analyses completed. There can be no assurance that these additional analyses and final valuations will not result in significant changes to the estimates and fair values presented below.
The following is a preliminary estimate of the fair value of assets acquired and the liabilities assumed by Signet as a result of the Transactions as if the acquisition date was February 1, 2014:
6
Calculation of consideration
Note | Amount | |||||||
Cash consideration paid to Zale shareholders ($21 per share) |
(3a | ) | $ | 694.2 | ||||
Cash consideration paid for Zale warrants |
(3b | ) | 210.2 | |||||
Cash consideration paid for Zale stock options, restricted share awards and long term incentive plan awards |
(3c | ) | 75.8 | |||||
|
|
|||||||
980.2 | ||||||||
Cash paid to extinguish Zale revolving credit agreement as of January 31, 2014 |
(3d | ) | 363.0 | |||||
Cash paid to extinguish Zale senior secured term loan as of January 31, 2014 |
(3d | ) | 80.0 | |||||
|
|
|||||||
443.0 | ||||||||
|
|
|||||||
Total consideration transferred |
$ | 1,423.2 | ||||||
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed
Amount | ||||
Net book value of net assets acquired as of January 31, 2014 |
$ | 192.1 | ||
Elimination of Zales revolving credit agreement and senior secured term loan |
443.0 | |||
Elimination of historical Zale goodwill |
(92.4 | ) | ||
|
|
|||
Adjusted net book value of assets to be acquired as of January 31, 2014 |
542.7 | |||
Fair value adjustments: |
||||
Intangible assets |
450.0 | |||
Inventory (including fair value step-up and LIFO to FIFO adjustment) |
89.5 | |||
Deferred revenue |
84.7 | |||
Deferred rent |
27.9 | |||
Unfavorable contracts |
(44.0 | ) | ||
Other fair value adjustments |
(16.8 | ) | ||
Deferred tax impact of preliminary acquisition adjustments |
(176.4 | ) | ||
|
|
|||
Fair value of assets acquired and liabilities assumed |
957.6 | |||
Goodwill |
465.6 | |||
|
|
|||
Total consideration transferred |
$ | 1,423.2 | ||
|
|
(a) | Reflects cash payments to Zale shareholders in the amount of $21.00 per outstanding Zale share based on 33,057,134 Zale shares outstanding as of January 31, 2014. |
(b) | Reflects net settlement of 11.1 million warrants with a $2.00 exercise price held by Z Investment Holdings, LLC. |
(c) | Zale has historically issued share-based compensation in the form of restricted share awards and options. At January 31, 2014, a total of 1,508,671 restricted share awards and 3,084,483 options (net 1,861,762 options assuming cashless exercise) were vested or expected to immediately vest upon consummation of the Acquisition. Zale also maintained a cash performance based long-term incentive plan for certain members of management which will immediately vest upon consummation of the Acquisition resulting in a $5.0 million payment. |
(d) | Represents the extinguishment of Zales existing revolving credit agreement and senior secured term loans of $443.0 million as of January 31, 2014. |
(e) | To record a preliminary estimate of Acquisition-related transaction costs of $30.0 million ($24.9 million net of tax). As Acquisition-related transaction costs are not expected to have a continuing impact on the combined companys results, an adjustment is not reflected in the pro forma condensed combined income statement. However, the amount was recorded as a reduction of cash with a corresponding decrease in retained earnings. Additionally, acquisition-related costs, including legal, accounting, valuation, employee retention and other costs, will continue to be incurred up to and subsequent to the date of consummation of the Acquisition and will be recognized in the income statement. |
(f) | Prior to the Transactions, Zales historical balance sheet included $92.4 million of goodwill. As a result of the Acquisition, goodwill is calculated as the difference between the fair value of consideration expected to be transferred and the fair values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed. As noted above, for the purposes of the unaudited pro forma condensed combined balance sheet, goodwill arising as a result of the Acquisition is $465.6 million which results in a pro forma adjustment of $373.2 million to goodwill. |
7
The accounting for the Acquisition is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for definitive measurements. Areas in which adjustments have not yet been reflected include, but are not limited to, the valuation of property, plant and equipment as Signet does not have sufficient information as to the specific types, nature, age or condition of Zales fixed assets, and favorable and/or unfavorable contractual arrangements (including leases) and certain other intangible assets. Accordingly, Signet will continue to refine its identification and initial measurement of assets to be acquired and the liabilities to be assumed as further information becomes available, and such adjustments could be material to the amounts presented in these unaudited pro forma condensed combined financial statements.
(g) | Reflects the acquisition accounting adjustment to recognize the additional value in merchandise inventories recorded at fair value of $30.3 million and an adjustment of $59.2 million to conform the presentation of Zales merchandise inventory amounts to the first-in, first-out (FIFO) valuation method used by Signet. To estimate the fair value of inventory, Signet considered the aging of inventory, estimates of selling prices and selling and distribution costs and a reasonable profit margin for remaining selling efforts that were based on Zales historical experience. The fair value inventory adjustment will be fully recognized in cost of sales in the first year following consummation of the Acquisition. The fair value adjustment is not reflected in the pro forma condensed combined income statement as the costs are not expected to have a continuing impact on the combined companys results. |
(h) | Reflects identifiable intangible assets representing trademarks and trade names with indefinite lives. The fair value was determined through an evaluation of expected future cash flows under the relief-from-royalty method. This estimate is preliminary and is subject to change upon completion of the final valuation of intangible assets. Changes in fair value of the acquired intangible assets may be material. |
As significant information and analysis will be required to determine the fair value of certain acquired intangible assets, no fair value has been assigned to customer relationship assets, favorable and/or unfavorable lease arrangements, distribution rights or other potential off-market contracts unless specifically stated herein. The final acquisition date fair value will be based on an appraisal subsequent to completion of the Acquisition and may result in a materially different valuation for intangible assets, and related useful life, than that presented in this section. Any change in the amount of the final acquisition date fair value of amortizable, definite-lived intangible assets or any change in the current designation of non-amortizable indefinite-lived intangible assets could materially affect the amount of amortization expense recorded by the combined company subsequent to the date of completion of the transactions.
(i) | Zales deferred revenue is comprised of amounts related to extended service plans. Historically, Zale deferred the revenue generated by the sale of these lifetime warranties and recognized revenue in relation to the pattern of costs expected to be incurred, which included a profit margin on activities related to the initial selling effort. In acquisition accounting, deferred revenue is only recognized when a legal performance obligation is assumed by the acquirer. The fair value of deferred revenue is determined based on the future obligations associated with the outstanding plans at the time of the Acquisition. The acquisition accounting adjustment results in a reduction to the Zale deferred revenue balance from $186.7 million as of January 31, 2014 to $102.0 million as the fair value was determined through the estimation of costs remaining to be incurred, plus a reasonable profit margin on the estimated costs. The current portion of deferred revenue was adjusted from $81.7 million to $42.2 million. The non-current portion of deferred revenue was adjusted from $105.0 million to $59.8 million. Revenues generated from the sales of extended services plans subsequent to the Acquisition are expected to be recognized in revenue in a similar manner to the accounting treatment utilized by Zale prior to the Acquisition. |
(j) | The following table summarizes pro forma adjustments impacting accrued expenses and other current liabilities and other liabilities, respectively: |
Amount | Note | |||||||
Accrued expenses and other current liabilities: |
||||||||
Deferred rent |
$ | (6.1 | ) | (j1 | ) | |||
Interest rate swap |
(1.0 | ) | (j2 | ) | ||||
Diamond warranty |
(0.3 | ) | (j3 | ) | ||||
Private label credit card contract |
26.4 | (j4 | ) | |||||
|
|
|||||||
$ | 19.0 | |||||||
|
|
|||||||
Other liabililities: |
||||||||
Deferred rent |
$ | (21.8 | ) | (j1 | ) | |||
Interest rate swap |
(1.6 | ) | (j2 | ) | ||||
Diamond warranty |
6.5 | (j3 | ) | |||||
Private label credit card contract |
17.6 | (j4 | ) | |||||
|
|
|||||||
$ | 0.7 | |||||||
|
|
8
(j1) | Reflects the acquisition accounting adjustment to eliminate the historical deferred rent balance of $27.9 million in aggregate. The current portion of deferred rent eliminated was $6.1 million and the non-current portion eliminated was $21.8 million, as deferred rent does not meet the definition of an asset or liability in acquisition accounting. |
(j2) | Zale has historically used interest rate swaps to hedge a portion of the interest rate risk arising associated with Zales LIBOR-based variable rate revolving credit agreement. In connection with the extinguishment of Zales revolving credit agreement, Zale will settle these interest rate swaps historically classified as cash flow hedges. This adjustment eliminates $1.0 million of accrued expenses and other current liabilities and $1.6 million of other liabilities. |
(j3) | Reflects the acquisition accounting adjustment to recognize Zales diamond warranty obligation at fair value. Historically, Zale recognized a warranty obligation for the expected cost under this warranty. The fair value of this warranty obligation has been determined by developing an estimate of the remaining performance obligation with an added profit margin on those remaining activities. |
In the aggregate, the book value of this warranty obligation was increased from $3.8 million to a fair value of $10.0 million. The current liability for this obligation was adjusted to $3.5 million. The non-current liability for this obligation was adjusted to $6.5 million. This adjustment will be recognized as a component of cost of sales over approximately 3 years following the consummation of the Acquisition in a systematic and rationale method.
(j4) | Reflects the acquisition accounting adjustment to record the fair value of the Citibank private label credit card arrangement deemed to be an off-market contract at the time of the Acquisition. Specifically, the current component is recognized in the amount of $26.4 million and the non-current component is recognized in the amount of $17.6 million. In addition, Zale management entered into a private label credit card agreement with Alliance Data Systems Corporation (ADS) in July 2013 and received a $38.0 million commencement payment for which Zale established a deferred service fee liability. The remaining terms of the ADS contract, which requires services to begin no later than October 2015 upon expiration of the Citibank arrangement, were evaluated and were identified as including off-market terms. The fair value of the ADS agreement was determined to be $38.0 million and is reflected as a non-current liability. |
These adjustments will be amortized to selling, general and administrative expenses over the respective terms of each agreement following the consummation of the Acquisition.
(k) | Reflects the acquisition accounting adjustment to eliminate both the historical debt issuance costs of $10.0 million as of January 31, 2014 upon settlement of Zales historical debt obligations and the historical lease issuance costs as of January 31, 2014 of $3.2 million as they do not meet the definition of an asset in acquisition accounting. |
(l) | Reflects the estimated tax effect of the acquisition accounting adjustments described within the notes to the unaudited pro forma condensed combined balance sheet based on an estimated statutory tax rate of 38.5%. |
(m) | Reflects the removal of a portion of the historical Zale valuation allowance on net operating loss carryforwards of $51.3 million. |
(n) | Reflects the elimination of Zales historical stockholders equity upon completion of the Transactions. |
(o) | Cash and cash equivalents represents borrowings of $1.4 billion, net of financing fees totaling $18.0 million. See note 3(p) for further detail. |
Loans and overdrafts and long-term debt represent borrowings of $1.4 billion, comprised of $400.0 million under the senior unsecured term loan, $400.0 million for the issuance of senior unsecured notes and $600.0 million related to the asset-backed securitization. The $20.0 million balance reflected in loans and overdrafts represents the minimum required principal repayment under the senior unsecured term loan during the first 12 months following issuance.
(p) | Reflects the capitalization of debt issuance costs totaling $13.8 million, comprised of $5.1 million related to the senior unsecured term loan, $5.3 million related to the senior unsecured notes, $2.5 million related to the asset-backed securitization and $0.9 million related to the revolving credit facility. |
Additionally, as $4.2 million of debt issuance costs ($2.6 million net of tax) associated with Signets bridge facility were not expected to have a continuing impact on the combined companys results, an adjustment was not reflected in the pro forma condensed combined income statement. However, the amount was recorded as a reduction of cash with a corresponding decrease in retained earnings.
4. | Unaudited Pro Forma Condensed Combined Income Statement |
(a) | Reflects $41.9 million reduction of revenue for the impact of the fair value adjustment to deferred revenue for Zales extended service plans, offset by $6.8 million related to a reclassification of direct costs associated with the sale of these plans to selling, general and administrative expenses. |
9
(b) | The following table summarizes pro forma adjustments impacting cost of sales: |
Year Ended February 1, 2014 |
Note | |||
$ | (6.5 | ) | (b1) | |
2.4 | (b2) | |||
(0.9 | ) | (b3) | ||
(1.7 | ) | (b4) | ||
|
|
|||
$ | (6.7 | ) | ||
|
|
(b1) | Reflects the adjustment to recognize additional rent expense based on a recalculated straight-line rent amount. |
(b2) | Reflects the adjustment to recognize the fair value of diamond warranty costs incurred during the period as established in acquisition accounting. See note 3(j3) for further detail. |
(b3) | Reflects the elimination of $0.8 million of Zales deferred lease issuance costs as part of acquisition accounting, offset by an increase of $1.7 million to recognize expense for lease costs capitalized by Zale during the period to conform to Signets accounting policy. |
(b4) | Reflects the adjustment for the LIFO benefit to conform to Signets policy for accounting for inventories on the FIFO method. |
(c) | The following table summarizes pro forma adjustments impacting selling, general and administrative expenses: |
Year Ended February 1, 2014 |
Note | |||
$ | (2.9 | ) | (c1) | |
$ | 2.0 | (c2) | ||
$ | 26.4 | (c3) | ||
|
|
|||
$ | 25.5 | |||
|
|
(c1) | Reflects the elimination of $3.9 million of deferred direct selling costs related to Zales extended service plans that were sold prior to February 3, 2013, offset by a reclassification of $6.8 million of direct selling costs associated with the sale of the plans during the pro forma period. |
(c2) | Reflects the elimination of historical expenses recognized of $2.0 million in connection with the Transactions, principally legal and financial advisory fees, due to the non-recurring nature of this expense. |
(c3) | Reflects an adjustment for the amortization expense of the unfavorable off-market contract based upon the fair value adjustment to the Citibank private label credit card agreement noted above. See note 3(j4) for further detail. |
(d) | Reflects the elimination of Zales historical interest expense, Signets historical interest expense and the addition of the new interest expense related to Signets new debt structure after the Transactions, comprised of the unsecured term loan, senior unsecured notes and asset-backed securitization. |
Zale historical financing adjustments: |
||||
Historical interest expense related to senior term loan |
$ | 9.0 | ||
Historical interest expense related to revolving credit agreement |
9.4 | |||
Amortization of historical debt issue costs |
4.8 | |||
|
|
|||
$ | 23.2 | |||
Signet historical financing adjustments: |
||||
Commitment fee on undrawn revolving credit facility |
$ | 0.8 | ||
Amortization of historical debt issue costs |
0.2 | |||
|
|
|||
$ | 1.0 | |||
Adjustments related to the Financings: |
||||
Interest expense related to the Financings |
$ | (36.4 | ) | |
Commitment fee on undrawn revolving credit facility |
(1.0 | ) | ||
Amortization of debt issue costs |
(3.2 | ) | ||
|
|
|||
$ | (40.6 | ) | ||
|
|
If the interest rate on the Financings were to change by 0.125%, Signets pro forma cash interest expense would change by $1.8 million.
10
(e) | This adjustment is to reflect the income tax effect of the pro forma adjustments related to the Acquisition based on an estimated statutory tax rate of 38.5%. Because the tax rate used for these pro forma financial statements is an estimate, it will likely vary from the actual effective tax rate in periods subsequent to completion of the Transactions. The combined companys ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitations. Furthermore, adjustments to established deferred tax assets and liabilities as well as the recognition of additional deferred tax assets and liabilities may occur in conjunction with the finalization of acquisition accounting and these items could be material. Although not reflected in the pro forma statements, the effective tax rate of the combined company could be significantly different depending on post-Acquisition activities, such as reviews of the corporate entity or capital structures and changes in business strategy impacting the geographical mix of federal, state and foreign taxes, among other factors. |
5. | Earnings per share |
The unaudited pro forma combined basic and diluted earnings per share calculations are based on the consolidated basic and diluted weighted average shares of Signet.
Fiscal 2014 | Pro Forma | |||||||
Net income |
$ | 368.0 | $ | 368.4 | ||||
|
|
|
|
|||||
Basic weighted average number of shares outstanding |
80.2 | 80.2 | ||||||
Dilutive effect of share awards |
0.5 | 0.5 | ||||||
|
|
|
|
|||||
Diluted weighted average number of shares outstanding |
80.7 | 80.7 | ||||||
|
|
|
|
|||||
Earnings per share - basic |
$ | 4.59 | $ | 4.59 | ||||
Earnings per share - diluted |
$ | 4.56 | $ | 4.57 | ||||
|
|
|
|
6. | Unaudited Pro Forma Computation of Ratio of Earnings to Fixed Charges |
Fiscal Year Ended February 1, 2014 |
||||
(in millions, except ratio) |
||||
Earnings: |
||||
Income before income taxes |
$ | 555.2 | ||
Capitalized interest (1) |
$ | 0.2 | ||
Fixed charges (2) |
214.8 | |||
|
|
|||
Total Earnings |
$ | 770.2 | ||
|
|
|||
Fixed Charges: |
||||
Interest expense, net |
$ | 41.9 | ||
Amortization of debt issuance costs (3) |
3.4 | |||
Capitalized interest |
0.3 | |||
Estimate of interest within rental expense (4) |
169.2 | |||
|
|
|||
Total Fixed Charges |
$ | 214.8 | ||
|
|
|||
Pro Forma Ratio of Earnings to Fixed Charges |
3.59x |
(1) | Includes the net of deductions for interest capitalized and additions for amortization of previously capitalized interest. |
(2) | Fixed charges comprise interest expense, net, amortization of debt issuance costs, capitalized interest and an estimate of the interest within rental expense. |
(3) | Primarily includes amortization costs associated with the issuance of new debt and amortization associated with our current credit facility amendment fees. |
(4) | Interest within rental expense is estimated to be one-third of rental expense. |
11
Exhibit 99.5
Unaudited Pro Forma Computation of Ratio of Earnings to Fixed Charges
Fiscal Year Ended February 1, 2014 |
||||
(in millions, except ratio) |
||||
Earnings: |
||||
Income before income taxes |
$ | 555.2 | ||
Capitalized interest (1) |
$ | 0.2 | ||
Fixed charges (2) |
214.8 | |||
|
|
|||
Total Earnings |
$ | 770.2 | ||
|
|
|||
Fixed Charges: |
||||
Interest expense, net |
$ | 41.9 | ||
Amortization of debt issuance costs (3) |
3.4 | |||
Capitalized interest |
0.3 | |||
Estimate of interest within rental expense (4) |
169.2 | |||
|
|
|||
Total Fixed Charges |
$ | 214.8 | ||
|
|
|||
Pro Forma Ratio of Earnings to Fixed Charges |
3.59x |
(1) | Includes the net of deductions for interest capitalized and additions for amortization of previously capitalized interest. |
(2) | Fixed charges comprise interest expense, net, amortization of debt issuance costs, capitalized interest and an estimate of the interest within rental expense. |
(3) | Primarily includes amortization costs associated with the issuance of new debt and amortization associated with our current credit facility amendment fees. |
(4) | Interest within rental expense is estimated to be one-third of rental expense. |
1
Income taxes (Tables)
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12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Feb. 01, 2014
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Tax Expense By Jurisdiction |
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Reconciliation Of Effective Tax Rate | As the statutory rate of corporation tax in Bermuda is 0%, the differences between the federal income tax rate in the US and the effective tax rates for Signet have been presented below:
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Deferred Tax Assets And Liabilities | Deferred tax assets (liabilities) consisted of the following:
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Activity Related To Unrecognized Tax Benefits | The following table summarizes the activity related to unrecognized tax benefits:
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Summary of Amounts Recognized in Balance Sheet (Detail) (USD $)
In Millions, unless otherwise specified |
Feb. 01, 2014
|
Feb. 02, 2013
|
---|---|---|
Amounts recognized in the balance sheet consist of: | ||
Non-current assets | $ 56.3 | $ 48.5 |
UK Plan
|
||
Amounts recognized in the balance sheet consist of: | ||
Non-current assets | 56.3 | 48.5 |
Non-current liabilities | ||
Net asset recognized | $ 56.3 | $ 48.5 |
Pension plans (Tables)
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12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Feb. 01, 2014
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Summary Of Changes In Fair Value Of Plan Assets | The following tables provide information concerning the UK Plan as of and for the fiscal years ended February 1, 2014 and February 2, 2013:
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Schedule of Changes in Projected Benefit Obligations |
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Schedule of Net Funded Status |
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Summary Of Amounts Recognized In Balance Sheet |
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Summary Of Net Periodic Benefit Cost Not Yet Recognized | Items in accumulated OCI not yet recognized as income (expense) in the income statement:
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Components Of Net Periodic Pension Cost And Other Assets Recognized In Period | The components of net periodic pension cost and other amounts recognized in OCI for the UK Plan are as follows:
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Summary Of Assumptions Used To Determine Benefit Obligations |
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Summary Of Changes In Fair Value Of Level 3 Investment Assets | The table below sets forth changes in the fair value of the Level 3 investment assets in Fiscal 2014 and 2013:
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Summary Of Expected Benefit Payments | The following benefit payments, which reflect expected future service, as appropriate, are estimated to be paid by the UK Plan:
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Nonqualified Deferred Compensation Plan Assets
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Fair Value Measurements Of Plan Assets | The value and classification of these assets are as follows:
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U K Pension Plan
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Fair Value Measurements Of Plan Assets | The value and classification of these assets was as follows:
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Acquisitions (Tables)
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12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Feb. 01, 2014
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Total Consideration Allocated to Net Assets Acquired Based on Estimated Fair Values | The Ultra Acquisition was accounted for as a business combination during the fourth quarter of Fiscal 2013. During the first quarter of Fiscal 2014, the Company finalized the valuation of net assets acquired. There were no material changes to the valuation of net assets acquired from the initial allocation reported during the fourth quarter of Fiscal 2013. Accordingly, the total consideration paid has been allocated to the net assets acquired based on the final fair values at October 29, 2012 as follows:
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Common Shares, Treasury Shares and Reserves - Additional Information (Detail) (USD $)
In Millions, except Share data, unless otherwise specified |
12 Months Ended | ||
---|---|---|---|
Feb. 01, 2014
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Feb. 02, 2013
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Jan. 28, 2012
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Common Stock Equity [Line Items] | |||
Common stock, par value | $ 0.18 | $ 0.18 | |
Proceeds from issuance of stock options | $ 9.3 | $ 21.6 | $ 10.6 |
Number of treasury shares held | 7,000,000 | 5,800,000 | |
Shares repurchased | 1,557,673 | 6,425,296 | 256,241 |
Treasury stock reissued during period, Net of taxes and forfeitures | 437,913 | 865,598 | 18,897 |
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