XLON:SIG Signet Jewelers Ltd Quarterly Report 10-Q Filing - 7/28/2012

Effective Date 7/28/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended July 28, 2012 or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from             to            

Commission File Number 1-32349

 

 

Signet Jewelers Limited

(Exact name of Registrant as specified in its charter)

 

 

 

Bermuda   Not Applicable

(State or other jurisdiction

of incorporation)

 

(I.R.S. Employer

Identification No.)

Clarendon House

2 Church Street

Hamilton HM11

Bermuda

(441) 296 5872

(Address and telephone number of principal executive offices)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

Common Stock, $0.18 par value, 80,893,691 shares as of August 15, 2012

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         PAGE
NUMBER
 

PART I

  FINANCIAL INFORMATION      1   

Item 1

  Financial Statements (Unaudited)      1   
  Condensed Consolidated Income Statements      1   
  Condensed Consolidated Statements of Comprehensive Income      2   
  Condensed Consolidated Balance Sheets      3   
  Condensed Consolidated Statements of Cash Flows      4   
  Condensed Consolidated Statement of Shareholders’ Equity      5   
  Notes to the Condensed Consolidated Financial Statements      6   

Item 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      17   

Item 3

  Quantitative and Qualitative Disclosures about Market Risk      27   

Item 4

  Controls and Procedures      27   

PART II

  OTHER INFORMATION      27   

Item 1

  Legal Proceedings      27   

Item 1A

  Risk Factors      27   

Item 2

  Unregistered Sales of Equity Securities and Use of Proceeds      27   

Item 6

  Exhibits      29   


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

SIGNET JEWELERS LIMITED

CONDENSED CONSOLIDATED INCOME STATEMENTS

(Unaudited)

($ millions, except per share amounts)

 

     13 weeks ended     26 weeks ended        
     July 28,
2012
    July 30,
2011
    July 28,
2012
    July 30,
2011
    Notes  

Sales

     853.9        797.6        1,753.9        1,684.9        2   

Cost of sales

     (542.7 )     (502.8 )     (1,089.0 )     (1,040.4 )  
  

 

 

   

 

 

   

 

 

   

 

 

   

Gross margin

     311.2        294.8        664.9        644.5     

Selling, general and administrative expenses

     (240.3 )     (224.5 )     (504.8 )     (488.3 )  

Other operating income, net

     40.0        32.0        80.2        64.8     
  

 

 

   

 

 

   

 

 

   

 

 

   

Operating income

     110.9        102.3        240.3        221.0        2   

Interest expense, net

     (0.7 )     (2.5 )     (1.6 )     (3.4 )  
  

 

 

   

 

 

   

 

 

   

 

 

   

Income before income taxes

     110.2        99.8        238.7        217.6     

Income taxes

     (39.5     (33.5     (85.5     (75.9     4   
  

 

 

   

 

 

   

 

 

   

 

 

   

Net income

     70.7        66.3        153.2        141.7     
  

 

 

   

 

 

   

 

 

   

 

 

   

Earnings per share: basic

   $ 0.86      $ 0.77      $ 1.82      $ 1.64        5   

                                 diluted

   $ 0.85      $ 0.76      $ 1.81      $ 1.63        5   

Weighted average common shares outstanding: basic

     82.6        86.3        84.1        86.1        5   

                                                                               diluted

     83.0        87.1        84.7        86.9        5   

Dividends declared per share

   $ 0.12      $ —        $ 0.24      $ —          5   

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

 

1


Table of Contents

SIGNET JEWELERS LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

($ millions)

 

     13 weeks ended     26 weeks ended  
     July 28,
2012
    July 30,
2011
    July 28,
2012
    July 30,
2011
 

Net income

     70.7        66.3        153.2        141.7   

Other comprehensive income:

        

Foreign currency translation adjustments

     (7.7 )     (4.3     1.9        7.7   

Changes in fair value of derivative instruments, net of tax of $2.5 million and $10.1 million, respectively (July 30, 2011: $4.4 million and $9.7 million, respectively)

     (4.6 )     7.8        (18.5 )     16.2   

Pension plan adjustments, net of tax of $0.1 million and $0.2 million, respectively (July 30, 2011: $0.1 million and $0.2 million, respectively)

     0.4        0.3        0.8        0.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     58.8        70.1        137.4        166.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

2


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SIGNET JEWELERS LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

($ millions)

 

     July 28,
2012
    January 28,
2012
    July 30,
2011
    Notes  

Assets

        

Current assets:

        

Cash and cash equivalents

     237.5        486.8        440.2     

Accounts receivable, net

     1,032.2        1,088.2        906.8        6   

Other receivables

     40.4        44.3        29.4     

Other current assets

     71.6        92.0        91.5        7   

Deferred tax assets

     1.8        0.9        1.6     

Inventories

     1,312.8        1,304.1        1,202.8     
  

 

 

   

 

 

   

 

 

   

Total current assets

     2,696.3        3,016.3        2,672.3     
  

 

 

   

 

 

   

 

 

   

Non-current assets:

        

Property and equipment, net of accumulated depreciation of $709.8 million, $681.0 million, and $684.3 million, respectively

     392.0        383.4        374.8     

Other assets

     72.6        71.7        62.5        7   

Deferred tax assets

     120.3        108.5        107.9     

Retirement benefit asset

     37.8        31.5        30.0     
  

 

 

   

 

 

   

 

 

   

Total assets

     3,319.0        3,611.4        3,247.5        2   
  

 

 

   

 

 

   

 

 

   

Liabilities and Shareholders’ equity

        

Current liabilities:

        

Loans and overdrafts

     —          —          13.1        12   

Accounts payable

     136.4        182.6        137.5     

Accrued expenses and other current liabilities

     257.5        308.4        236.5        7   

Deferred revenue

     145.3        154.1        135.9        7   

Deferred tax liabilities

     124.7        135.0        105.3     

Income taxes payable

     57.0        77.9        44.7     
  

 

 

   

 

 

   

 

 

   

Total current liabilities

     720.9        858.0        673.0     
  

 

 

   

 

 

   

 

 

   

Non-current liabilities:

        

Other liabilities

     105.2        100.3        95.8        7   

Deferred revenue

     381.9        374.0        359.5        7   
  

 

 

   

 

 

   

 

 

   

Total liabilities

     1,208.0        1,332.3        1,128.3     
  

 

 

   

 

 

   

 

 

   

Commitments and contingencies

           10   

Shareholders’ equity:

        

Common shares of $0.18 par value: authorized 500 million shares, 80.9 million shares issued and outstanding (January 28, 2012: 86.9 million shares issued and outstanding; July 30, 2011: 86.9 million shares issued and outstanding)

     15.7        15.6        15.5     

Additional paid-in capital

     231.2        230.9        210.8     

Other reserves

     235.2        235.2        235.2     

Treasury shares at cost: 6.3 million shares (January 28, 2012: 0.3 million shares; July 30, 2011: 0.0 million shares)

     (281.1     (12.7     —          5   

Retained earnings

     2,085.0        1,969.3        1,804.0     

Accumulated other comprehensive loss

     (175.0 )     (159.2 )     (146.3  
  

 

 

   

 

 

   

 

 

   

Total shareholders’ equity

     2,111.0        2,279.1        2,119.2     
  

 

 

   

 

 

   

 

 

   

Total liabilities and shareholders’ equity

     3,319.0        3,611.4        3,247.5     
  

 

 

   

 

 

   

 

 

   

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

 

3


Table of Contents

SIGNET JEWELERS LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ millions)

 

     13 weeks ended     26 weeks ended  
     July 28,
2012
    July 30,
2011
    July 28,
2012
    July 30,
2011
 

Cash flows from operating activities

        

Net income

     70.7        66.3        153.2        141.7   

Adjustments to reconcile net income to cash provided by operating activities:

        

Depreciation and amortization of property and equipment

     23.6        22.5        46.7        45.0   

Pension

     (2.8 )     (2.9 )     (5.4 )     (5.6 )

Share-based compensation

     3.0        4.3        7.1        7.0   

Deferred taxation

     (9.3 )     (1.9     (12.8 )     (2.4 )

Facility amendment fees amortization and charges

     0.1        1.4        0.2        1.6   

Other non-cash movements

     (1.4 )     (0.4 )     (1.4 )     (0.5 )

Changes in operating assets and liabilities:

        

(Increase)/decrease in accounts receivable

     (7.4 )     (2.7 )     56.1        29.3   

Decrease/(increase) in other receivables and other assets

     3.2        (5.8 )     3.1        6.1   

Decrease in other current assets

     2.9        0.3        7.2        8.4   

Decrease/(increase) in inventories

     8.4        17.8        (17.2 )     (6.5 )

(Decrease)/increase in accounts payable

     (18.8 )     (7.1 )     (46.5 )     10.8   

Increase/(decrease) in accrued expenses and other liabilities

     9.0        1.5        (53.0 )     (45.8 )

Decrease in deferred revenue

     (3.6 )     (7.5 )     (0.9 )     (4.0 )

Increase/(decrease) in income taxes payable

     4.7        1.4        (20.9 )     6.1   

Effect of exchange rate changes on currency swaps

     0.5        (0.4 )     1.3        0.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     82.8        86.8        116.8        192.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

        

Purchase of property and equipment

     (36.2 )     (25.4 )     (54.8 )     (38.3 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (36.2 )     (25.4 )     (54.8 )     (38.3 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

        

Dividends

     (10.3 )     —          (19.0 )     —     

Proceeds from exercise of share options

     0.3        0.4        5.4        4.4   

Repurchase of common shares

     (196.5 )     —          (287.2 )     —     

Net settlement of equity based awards

     (2.5 )     —          (10.8 )     —     

Credit facility fees paid

     —          (1.4 )     —          (1.6 )

Repayment of short-term borrowings

     —          (14.3 )     —          (18.3 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (209.0 )     (15.3 )     (311.6 )     (15.5 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     0.9        —          0.3        (0.2 )

Cash and cash equivalents at beginning of period

     399.0        394.1        486.8        302.1   

(Decrease)/increase in cash and cash equivalents

     (162.4 )     46.1        (249.6 )     138.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

     237.5        440.2        237.5        440.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

SIGNET JEWELERS LIMITED

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

($ millions)

 

     Common
shares at
par value
     Additional
paid-in
capital
    Other
reserves
     Treasury
shares
    Retained
earnings
    Accumulated
other
comprehensive
loss
    Total
shareholders’
equity
 

Balance at January 28, 2012

     15.6         230.9        235.2         (12.7     1,969.3        (159.2 )     2,279.1   

Net income

     —           —          —           —          153.2        —          153.2   

Foreign currency translation

     —           —          —           —          —          1.9        1.9   

Changes in fair value of derivative instruments, net

     —           —          —           —          —          (18.5     (18.5

Pension plan, net

     —           —          —           —          —          0.8        0.8   

Dividend

     —           —          —           —          (20.0     —          (20.0

Repurchase of common shares

     —           —          —           (287.2     —          —          (287.2

Net settlement of equity based awards

     —           (7.1     —           13.8        (17.5     —          (10.8

Share options exercised

     0.1         0.3        —           5.0        —          —          5.4   

Share-based compensation expense

     —           7.1        —           —          —          —          7.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 28, 2012

     15.7         231.2        235.2         (281.1     2,085.0        (175.0 )     2,111.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

SIGNET JEWELERS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Principal accounting policies and basis of preparation

Basis of preparation

Signet Jewelers Limited (“Signet” or the “Company”), including its subsidiaries, is a leading retailer of jewelry, watches and associated services. Signet manages its business as two geographical segments, 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, while the UK division’s retail stores operate under brands including H.Samuel and Ernest Jones.

These condensed consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in Signet’s Annual Report on Form 10-K for the year ended January 28, 2012.

Use of estimates

The preparation of these condensed consolidated financial statements, in conformity with US GAAP and SEC regulations for interim reporting, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are primarily made in relation to the valuation of receivables, inventory and deferred revenue, fair value of derivatives, depreciation and asset impairment, the valuation of employee benefits, income taxes and contingencies.

Fiscal year

The Company’s fiscal year ends on the Saturday nearest to January 31st. Fiscal 2013 is the year ending February 2, 2013 and Fiscal 2012 is the year ended January 28, 2012. Within these financial statements, the second quarter and the year to date of the relevant fiscal years 2013 and 2012 refers to the 13 and 26 weeks ended July 28, 2012 and July 30, 2011, respectively.

Seasonality

Signet’s sales are seasonal, with the first and second quarters each normally accounting for slightly more than 20% of annual sales, the third quarter a little under 20% and the fourth quarter for about 40% of sales, with December being by far the most important month of the year. Sales made in November and December are known as the “Holiday Season.” Due to sales leverage, Signet’s operating income is even more seasonal; about 45% to 50% of operating income normally occurs in the fourth quarter, comprised of nearly all of the UK division’s and about 40% to 50% of the US division’s operating income.

New accounting pronouncements adopted during the period

Presentation of comprehensive income

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 eliminates the option to present components of other comprehensive income (“OCI”) as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from OCI to net income, in either the other comprehensive income section of the comprehensive income statement or in the notes as US GAAP currently requires for annual reporting. The standard does not change the current option for presenting components of OCI gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is presented or disclosed in the notes to the financial statements. Additionally, the standard does not affect the calculation or reporting of earnings per share. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is to be applied retrospectively, with early adoption permitted. Signet adopted this guidance effective for the first quarter ended April 28, 2012 and the implementation of this accounting pronouncement did not have any impact on Signet’s financial position or results of operations.

 

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Table of Contents

SIGNET JEWELERS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Fair value measurements and disclosures

In May 2011, the FASB issued ASU 2011-04, “Fair Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards (“IFRS”).” FASB intends the new guidance to achieve common fair value measurement and disclosure requirements in US GAAP and IFRS. The amended guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 assets and liabilities for which Signet will be required to disclose quantitative information about the unobservable inputs used in fair value measurements. The amendments are to be applied prospectively and are effective for annual periods beginning after December 15, 2011. Signet adopted this guidance effective for the first quarter ended April 28, 2012 and the adoption of this amendment did not have did not have any impact on Signet’s financial position or results of operations.

Reclassification

Signet has reclassified the presentation of certain prior year information to conform to the current year presentation.

2. Segment information

Signet’s sales are derived from the retailing of jewelry, watches, other products and services. Signet is managed as two geographical operating 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 through a divisional Chief Executive to Signet’s Chief Executive Officer, who in turn 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. The operating segments do not include certain central costs. There are no material transactions between the operating segments.

 

     13 weeks ended     26 weeks ended  
     July 28,
2012
$million
    July 30,
2011
$million
    July 28,
2012
$million
    July 30,
2011
$million
 

Sales:

        

US

     701.9        643.0        1,453.4        1,381.0   

UK

     152.0        154.6        300.5        303.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total sales

     853.9        797.6        1,753.9        1,684.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income/(loss):

        

US

     117.3        104.4        255.0        230.6   

UK

     (0.3 )     2.8        (3.3 )     2.6   

Unallocated(1)

     (6.1 )     (4.9 )     (11.4 )     (12.2 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

     110.9        102.3        240.3        221.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     July 28,
2012
$million
     January 28,
2012
$million
     July 30,
2011
$million
 

Total assets:

        

US

     2,683.8         2,747.5         2,506.8   

UK

     437.3         427.3         410.6   

Unallocated(1)

     197.9         436.6         330.1   
  

 

 

    

 

 

    

 

 

 

Total assets

     3,319.0         3,611.4         3,247.5   
  

 

 

    

 

 

    

 

 

 

 

(1) Unallocated principally relates to central costs and assets, which include corporate and general administrative functions.

 

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SIGNET JEWELERS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

3. Foreign currency translation

The exchange rates used in these financial statements for the translation of UK pound sterling transactions and balances into US dollars are as follows:

 

     26 weeks
ended
July 28,
2012
     52 weeks
ended
January 28,
2012
     26 weeks
ended
July 30,
2011
 

Income statement (average rate)

     1.58         1.60         1.62   

Balance sheet (period end rate)

     1.58         1.57         1.64   

The year to date average exchange rate is used to prepare the income statement for the 26 weeks ended July 28, 2012 and is calculated from the weekly average exchange rates weighted by sales of the UK division. The income statement for the 13 weeks ended July 28, 2012 is calculated as the difference between the income statement for the 26 weeks ended July 28, 2012 and the previously reported income statement for the 13 weeks ended April 28, 2012. Therefore, the second quarter’s income statement includes the impact of the change in the year-to-date exchange rates between these quarter ends.

4. Income taxes

Signet has business activity in all states within the US and files income tax returns for the US federal jurisdiction and all applicable states. Signet also files income tax returns in the UK and certain other foreign jurisdictions. Signet is subject to US federal and state examinations by tax authorities for tax years ending after November 1, 2008 and is subject to examination by the UK tax authority for tax years ending after January 31, 2010.

As of January 28, 2012, Signet had approximately $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 Signet’s favor. These unrecognized tax benefits relate to financing arrangements and intra-group charges which are subject to different and changing interpretations of tax law.

There has been no material change in the amount of unrecognized tax benefits in respect of uncertain tax positions during the 26 weeks ended July 28, 2012.

Signet recognizes accrued interest and, where appropriate, penalties related to unrecognized tax benefits within income tax expense. As of January 28, 2012, Signet had accrued interest of $0.4 million and there has been no material change in the amount of accrued interest as of July 28, 2012.

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 January 28, 2012, due to settlement of the uncertain tax positions with the tax authorities.

5. Shareholders’ equity and earnings per share

Share repurchase

On October 26, 2011, the Board of Directors announced that it had authorized a program to repurchase up to $300 million of Signet’s common shares (the “Repurchase Program”). The Repurchase Program will be funded through Signet’s existing cash reserves and liquidity sources. Repurchased shares may be used by Signet for general corporate purposes. Repurchases may be made from time to time in the open market, through block trades or otherwise. The timing, manner, price and amount of any repurchases will be determined by Signet in its discretion, and will be subject to economic and market conditions, stock prices, applicable legal requirements and other factors. The Repurchase Program may be suspended or discontinued at any time, or from time to time, without notice. The Repurchase Program became effective on January 16, 2012, and lasts 24 months. On July 17, 2012, Signet announced that its Board of Directors had authorized a $50 million increase in the existing Repurchase Program, bringing the total authorization to $350 million, of which $50.1 million remained available as of July 28, 2012 and set to expire in January 2014.

The Company repurchased 6,425,296 shares at an average price of $44.70 in the 26 weeks ended July 28, 2012 under the Repurchase Program, which are being held as treasury shares. The Company did not repurchase any shares held as treasury in the 26 weeks ended July 30, 2011.

 

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SIGNET JEWELERS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Earnings per share

 

     13 weeks ended      26 weeks ended  
     July 28,
2012
     July 30,
2011
     July 28,
2012
     July 30,
2011
 

Net income ($million)

     70.7         66.3         153.2         141.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average number of shares in issue (million)

     82.6         86.3         84.1         86.1   

Dilutive effect of share options (million)

     0.4         0.8         0.6         0.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average number of shares in issue (million)

     83.0         87.1         84.7         86.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share – basic

   $ 0.86       $ 0.77       $ 1.82       $ 1.64   

Earnings per share – diluted

   $ 0.85       $ 0.76       $ 1.81       $ 1.63   

The basic weighted average number of shares excludes non-vested time-based restricted shares, shares held by the Employee Stock Ownership Trust and treasury shares. Such shares are not considered outstanding and do not qualify for dividends, except for time-based restricted shares for which dividends are earned and payable by the Company subject to full vesting. The effect of excluding these shares is to reduce the average number of shares in the 13 and 26 week periods ended July 28, 2012 by 4,579,232 and 3,108,956 shares, respectively (13 and 26 week periods ended July 30, 2011: 585,636 and 558,911 shares, respectively). The calculation of fully diluted earnings per share for the 13 and 26 week periods ended July 28, 2012 excludes options to purchase 287,487 and 223,811 shares, respectively (13 and 26 week periods ended July 30, 2011: 144,183 and 311,742 shares, respectively) on the basis that their effect on earnings per share was anti-dilutive.

Dividends

For the first quarter of Fiscal 2013, a cash dividend of $0.12 per share on Signet’s Common Shares was paid on May 29, 2012. Further, for the second quarter of Fiscal 2013, a cash dividend of $0.12 per share on Signet’s Common Shares was approved on June 19, 2012 for payment on August 28, 2012 to shareholders of record on July 27, 2012. As a result, $9.7 million has been recorded in accrued expenses and other current liabilities reflecting this dividend, which is not presented in the condensed consolidated statement of cash flows as it is a non-cash transaction as of July 28, 2012.

6. Accounts receivable, net

Signet’s 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, 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.

 

     July 28,
2012
$million
     January 28,
2012
$million
     July 30,
2011
$million
 

Accounts receivable by portfolio segment, net:

        

US customer in-house finance receivables

     1,024.2         1,077.4         901.2   

Other accounts receivable

     8.0         10.8         5.6   
  

 

 

    

 

 

    

 

 

 

Total accounts receivable, net

     1,032.2         1,088.2         906.8   
  

 

 

    

 

 

    

 

 

 

Signet grants credit to customers based on a variety of credit quality indicators, including customer financial information and prior payment experience. On an ongoing basis, management monitors the credit exposure based on past due status and collection experience, as it has found a meaningful correlation between the past due status of customers and the risk of loss.

Other accounts receivable is comprised of gross accounts receivable relating to the insurance loss replacement business in the UK division of $8.7 million (January 28, 2012 and July 30, 2011: $11.3 million and $6.2 million, respectively) with a corresponding valuation allowance of $0.7 million (January 28, 2012 and July 30, 2011: $0.5 million and $0.6 million, respectively).

 

9


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SIGNET JEWELERS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Allowance for Credit Losses on US Customer In-House Finance Receivables:

 

     26 weeks
ended
July 28,
2012
$million
    52 weeks
ended
January 28,
2012
$million
    26 weeks
ended
July 30,
2011
$million
 

Beginning balance

     (78.1 )     (67.8 )     (67.8 )

Charge-offs

     49.5        92.8        40.3   

Recoveries

     11.1        19.3        9.9   

Provision

     (61.1 )     (122.4 )     (50.2 )
  

 

 

   

 

 

   

 

 

 

Ending balance

     (78.6 )     (78.1 )     (67.8 )

Ending receivable balance evaluated for impairment

     1,102.8        1,155.5        969.0   
  

 

 

   

 

 

   

 

 

 

US customer in-house finance receivables, net

     1,024.2        1,077.4        901.2   
  

 

 

   

 

 

   

 

 

 

Credit Quality Indicator and Age Analysis of Past Due US Customer In-House Finance Receivables:

 

     July 28,
2012
    January 28,
2012
    July 30,
2011
 
     Gross
$million
     Valuation
allowance
$million
    Gross
$million
     Valuation
allowance
$million
    Gross
$million
     Valuation
allowance
$million
 

Performing:

               

Current, aged 0-30 days

     874.8         (27.0 )     932.6         (28.9 )     774.3         (23.2 )

Past due, aged 31-90 days

     183.1         (6.7 )     180.2         (6.5 )     154.7         (4.6 )

Non Performing:

               

Past due, aged more than 90 days

     44.9         (44.9 )     42.7         (42.7 )     40.0         (40.0 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     1,102.8         (78.6 )     1,155.5         (78.1 )     969.0         (67.8 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

7. Deferred revenue and warranty reserve

Deferred revenue

Deferred revenue is comprised primarily of extended service plans (“ESP”) and voucher promotions as follows:

 

     July 28,
2012
$million
     January 28,
2012
$million
     July 30,
2011
$million
 

ESP deferred revenue

     523.7         511.7         490.5   

Voucher promotions

     3.5         16.4         4.9   
  

 

 

    

 

 

    

 

 

 

Total deferred revenue

     527.2         528.1         495.4   
  

 

 

    

 

 

    

 

 

 

Disclosed as:

        

Current liabilities

     145.3         154.1         135.9   

Non-current liabilities

     381.9         374.0         359.5   
  

 

 

    

 

 

    

 

 

 

Total deferred revenue

     527.2         528.1         495.4   
  

 

 

    

 

 

    

 

 

 

In addition, other current assets include deferred direct costs in relation to the sale of ESP of $21.2 million as of July 28, 2012 (January 28, 2012 and July 30, 2011: $20.2 million and $19.3 million, respectively). Other assets include the long-term portion of these deferred direct costs of $53.7 million as of July 28, 2012 (January 28, 2012 and July 30, 2011: $52.8 million and $50.4 million, respectively).

 

10


Table of Contents

SIGNET JEWELERS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

     13 weeks ended     26 weeks ended  
     July 28,
2012
$million
    July 30,
2011
$million
    July 28,
2012
$million
    July 30,
2011
$million
 

ESP deferred revenue, beginning of period

     520.7        491.0        511.7        481.1   

Plans sold

     44.4        38.4        94.2        86.6   

Revenues recognized

     (41.4 )     (38.9 )     (82.2 )     (77.2 )
  

 

 

   

 

 

   

 

 

   

 

 

 

ESP deferred revenue, end of period

     523.7        490.5        523.7        490.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Warranty reserve

The warranty reserve for diamond and gemstone guarantees provided by the US division, included in accrued expenses and other current liabilities, is as follows:

 

     13 weeks ended     26 weeks ended  
     July 28,
2012
$million
    July 30,
2011
$million
    July 28,
2012
$million
    July 30,
2011
$million
 

Warranty reserve, beginning of period

     15.1        13.1        15.1        13.0   

Warranty expense

     4.6        0.8        6.1        2.4   

Utilized

     (2.1 )     (1.2 )     (3.6 )     (2.7 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Warranty reserve, end of period

     17.6        12.7        17.6        12.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     July 28,
2012
$million
     January 28,
2012
$million
     July 30,
2011
$million
 

Disclosed as:

        

Current liabilities

     6.7         5.9         5.0   

Non-current liabilities

     10.9         9.2         7.7   
  

 

 

    

 

 

    

 

 

 

Total warranty reserve

     17.6         15.1         12.7   
  

 

 

    

 

 

    

 

 

 

8. Financial instruments and fair value

Signet’s 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 Signet’s business operations and sources of finance. The main risks arising from Signet’s operations are market risk including foreign currency risk and commodity risk, liquidity risk and interest rate risk. Signet uses these financial instruments to manage and mitigate these risks under policies reviewed and approved by the Board.

Market risk

Signet generates revenues and incurs expenses in US dollars and pounds sterling. As a portion of Signet’s UK division purchases are denominated in US dollars, Signet enters into foreign currency forward exchange contracts, foreign currency option contracts and foreign currency swaps to manage this exposure to the US dollar. The fair value of these contracts is recorded in other assets and other liabilities.

Signet holds a fluctuating amount of pounds sterling cash reflecting the cash generative characteristics of the UK division. Signet’s 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.

Signet’s policy is to minimize the impact of precious metal commodity price volatility on operating results through the use of outright forward purchases of, or by entering into options to purchase, precious metals within treasury guidelines approved by the Board. In particular, Signet undertakes some hedging of its requirement for gold through the use of options, forward contracts and commodity purchasing, while fluctuations in the cost of diamonds are not hedged.

 

11


Table of Contents

SIGNET JEWELERS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Liquidity risk

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

The main external source of funding is a $400 million senior unsecured multi-currency five year revolving credit facility, under which there were no borrowings as of July 28, 2012, January 28, 2012, or July 30, 2011.

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 July 28, 2012, January 28, 2012 or July 30, 2011.

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 6. Signet does not require collateral or other security to support cash investments or financial instruments with credit risk; however it is Signet’s policy to only hold cash and cash equivalent investments and to transact financial instruments with financial institutions with a certain minimum credit rating. Management does not believe Signet is exposed to any significant concentrations of credit risk that arise from cash and cash equivalent investments, derivatives or accounts receivable.

Derivatives

Signet enters into forward foreign currency exchange contracts and foreign currency option contracts, principally in US dollars, in order to limit the impact of movements in foreign exchange rates on its forecast foreign currency purchases. The total notional amount of these foreign currency contracts outstanding as of July 28, 2012 was $52.3 million (January 28, 2012 and July 30, 2011: $48.9 million and $51.0 million, respectively). These contracts have been designated as cash flow hedges and will be settled over the next 17 months (January 28, 2012 and July 30, 2011: 13 months and 20 months, respectively).

Signet enters into forward purchase contracts and option purchase contracts for commodities in order to reduce its exposure to significant movements in the price of the underlying precious metal raw material. The total notional amount of commodity contracts outstanding as of July 28, 2012 was $197.5 million (January 28, 2012 and July 30, 2011: $211.2 million and $195.5 million, respectively). These contracts have been designated as cash flow hedges and will be settled over the next 16 months (January 28, 2012 and July 30, 2011: 12 months and 18 months, respectively).

For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period in which the hedged item affects net income or loss. Gains and losses on derivatives that do not qualify for hedge accounting, together with any hedge ineffectiveness, are recognized immediately in other operating income, net.

Foreign currency contracts not designated as cash flow hedges are used to hedge currency flows through Signet’s bank accounts to mitigate Signet’s exposure to foreign currency exchange risk in its cash and borrowings.

The bank counterparties to the derivative contracts expose Signet to credit-related losses in the event of their non-performance. However, to mitigate that risk, Signet only contracts with counterparties that meet certain minimum requirements under its counterparty risk assessment process. As of July 28, 2012, Signet believes that this credit risk did not materially change the fair value of the foreign currency or commodity contracts.

The following table summarizes the fair value and presentation of derivative instruments in the condensed consolidated balance sheets:

 

12


Table of Contents

SIGNET JEWELERS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

     Derivative assets  
            Fair value  
     Balance sheet
location
     July 28,
2012
$million
    January 28,
2012
$million
    July 30,
2011
$million
 

Derivatives designated as hedging instruments:

         

Foreign currency contracts

     Other current assets         1.0        1.1        —     

Foreign currency contracts

     Other assets         0.2        0.1        —     

Commodity contracts

     Other current assets         3.1        16.1        20.8   

Commodity contracts

     Other assets         0.1        —          1.9   
     

 

 

   

 

 

   

 

 

 

Total derivative assets

        4.4        17.3        22.7   
     

 

 

   

 

 

   

 

 

 
     Derivative liabilities  
            Fair value  
     Balance sheet
location
     July 28,
2012
$million
    January 28,
2012
$million
    July 30,
2011
$million
 

Derivatives designated as hedging instruments:

         

Foreign currency contracts

     Other current liabilities         (0.2 )     (0.2 )     (1.4 )

Foreign currency contracts

     Other liabilities         —          —          (0.1 )

Commodity contracts

     Other current liabilities         (6.3 )     (1.0 )     —     

Commodity contracts

     Other liabilities         —          —          —     
     

 

 

   

 

 

   

 

 

 
        (6.5 )     (1.2 )     (1.5 )
     

 

 

   

 

 

   

 

 

 

Derivatives not designated as hedging instruments:

         

Foreign currency contracts

     Other current liabilities         (1.3 )     —          (0.3
     

 

 

   

 

 

   

 

 

 
        (1.3 )     —          (0.3 )
     

 

 

   

 

 

   

 

 

 

Total derivative liabilities

        (7.8 )     (1.2 )     (1.8 )
     

 

 

   

 

 

   

 

 

 

The following tables summarize the effect of derivative instruments on the condensed consolidated income statements:

 

     Amount of  gain/(loss)
recognized in OCI on
derivatives
(Effective portion)
     Location of
gain/(loss)
reclassified from
accumulated OCI
into income
(Effective portion)
     Amount of gain/(loss) reclassified
from accumulated OCI into
income
(Effective portion)
 
      13 weeks ended         13 weeks ended  
      July 28,
2012
$million
    July 30,
2011
$million
        July 28,
2012
$million
     July 30,
2011
$million
 

Derivatives in cash flow hedging relationships:

             

Foreign currency contracts

     0.9        1.1         Cost of sales         0.1         —     

Commodity contracts

     (2.1     14.3         Cost of sales         5.8         3.4   
  

 

 

   

 

 

       

 

 

    

 

 

 

Total

     (1.2     15.4            5.9         3.4   
  

 

 

   

 

 

       

 

 

    

 

 

 

 

13


Table of Contents

SIGNET JEWELERS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

     Amount of gain/(loss)
recognized in OCI  on
derivatives
(Effective portion)
    Location of
gain/(loss)
reclassified from
accumulated OCI
into income
(Effective portion)
     Amount of gain/(loss) reclassified
from accumulated OCI  into
income
(Effective portion)
 
      26 weeks ended        26 weeks ended  
     July 28,
2012
$million
    July 30,
2011
$million
       July 28,
2012
$million
     July 30,
2011
$million
 

Derivatives in cash flow hedging relationships:

            

Foreign currency contracts

     0.1        (0.7     Cost of sales         0.2         (0.1

Commodity contracts

     (14.2     33.1        Cost of sales         14.3         6.4   
  

 

 

   

 

 

      

 

 

    

 

 

 

Total

     (14.1     32.4           14.5         6.3   
  

 

 

   

 

 

      

 

 

    

 

 

 

The ineffective portion of hedging instruments taken into other operating income, net in the 13 and 26 weeks ended July 28, 2012 was $0.0 million (13 and 26 weeks ended July 30, 2011: $0.4 million gain).

 

     Amount of gain/(loss)
recognized in income
on derivatives
     Location of gain/(loss)
recognized in income
on derivatives
     Amount of gain/(loss)
recognized in income
on derivatives
 
      13 weeks ended         26 weeks ended  
      July 28,
2012
$million
     July 30,
2011
$million
        July 28,
2012
$million
     July 30,
2011
$million
 

Derivatives not designated as hedging instruments:

              

Foreign currency contracts

     1.1         0.3         Other operating income, net         1.1         0.7   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total

     1.1         0.3            1.1         0.7   
  

 

 

    

 

 

       

 

 

    

 

 

 

Fair value

The estimated fair value of Signet’s financial instruments held or issued to finance Signet’s operations is summarized below. Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown below are not necessarily indicative of the amounts that Signet would realize upon disposition nor do they indicate Signet’s intent or ability to dispose of the financial instrument. Assets and liabilities that are carried at fair value are required to be classified and disclosed in one of the following three categories:

Level 1—quoted market prices in active markets for identical assets and liabilities

Level 2—observable market based inputs or unobservable inputs that are corroborated by market data

Level 3—unobservable inputs that are not corroborated by market data

 

14


Table of Contents

SIGNET JEWELERS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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:

 

     July 28, 2012
$million
    January 28, 2012
$million
    July 30, 2011
$million
 
     Carrying
Value
    Fair Value
(Level 2)
    Carrying
Value
    Fair Value
(Level 2)
    Carrying
Value
    Fair Value
(Level 2)
 

Assets:

            

Forward foreign currency contracts and swaps

     1.2        1.2        1.2        1.2        0.1        0.1   

Forward commodity contracts

     3.2        3.2        16.1        16.1        22.7        22.7   

Liabilities:

            

Forward foreign currency contracts and swaps

     (1.5 )     (1.5 )     (0.2 )     (0.2 )     (1.8 )     (1.8 )

Forward commodity contracts

     (6.3     (6.3     (1.0 )     (1.0 )     —          —     

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. 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.

9. Pensions

Signet operates a defined benefit pension plan in the UK (the “UK Plan”). The components of net periodic pension cost were as follows:

 

     13 weeks ended     26 weeks ended  
     July 28,
2012
$million
    July 30,
2011
$million
    July 28,
2012
$million
    July 30,
2011
$million
 

Components of net periodic pension cost:

        

Service cost

     0.9        1.1        1.8        2.5   

Interest cost

     2.3        2.7        4.7        5.4   

Expected return on UK Plan assets

     (2.8 )     (3.5 )     (5.7 )     (7.0 )

Amortization of unrecognized prior service credit

     (0.4 )     (0.3 )     (0.8 )     (0.5 )

Amortization of unrecognized actuarial loss

     0.8        0.7        1.6        1.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

     0.8        0.7        1.6        1.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

In the 26 weeks ended July 28, 2012, Signet contributed $7.0 million to the UK Plan and expects to contribute a minimum aggregate of $13.7 million at current exchange rates to the UK Plan in Fiscal 2013. These contributions are in accordance with a deficit recovery plan that was in response to the funding deficit indicated by the April 5, 2009 actuarial valuation.

 

15


Table of Contents

SIGNET JEWELERS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

10. Commitments and contingencies

Legal proceedings

In March 2008, a group of private plaintiffs 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. In June 2008, the District Court referred the matter to private arbitration where the plaintiffs sought to proceed on a class-wide basis. In June 2009, the arbitrator ruled that the arbitration agreements allowed the plaintiff to proceed on a class-wide basis and attempt to seek class certification. Sterling challenged the ruling and the District Court vacated the arbitrator’s decision in July 2010. The plaintiffs appealed that order to the U.S. Court of Appeals for the Second Circuit. In July 2011, the Second Circuit reversed the District Court’s decision and instructed the District Court to confirm the Arbitrator’s Award (i.e., to allow the private plaintiff to move forward with a proposed class claim in arbitration). Sterling filed a petition for rehearing en banc of the Second Circuit panel’s decision, which was denied on September 6, 2011. Sterling appealed the Second Circuit’s decision to the U.S. Supreme Court on December 15, 2011, which was denied on March 19, 2012. The arbitration proceeding is in the early stages, and discovery is ongoing.

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 EEOC’s lawsuit alleges that Sterling engaged in a pattern or practice of 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. Discovery is now ongoing in the case.

Sterling denies the allegations of both parties and intends to defend 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 or not significant to Signet’s consolidated financial position.

11. Share-based compensation expense

Signet recorded share-based compensation expense of $3.0 million and $7.1 million for the 13 and 26 weeks ended July 28, 2012, respectively, related to the Omnibus Plans and Saving Share Plans ($4.3 million and $7.0 million for the 13 and 26 weeks ended July 30, 2011, respectively).

12. Loans, overdrafts and long-term debt

In May 2011, Signet entered into a $400 million senior unsecured multi-currency five year revolving credit facility agreement (the “Credit Facility”). The Credit Facility replaced Signet’s previous revolving credit facility (the “2008 Facility”), which was due to expire in June 2013. The Credit Facility 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 Facility may be increased by an additional $200 million at the request of Signet. The Credit Facility has a five year term and matures in May 2016, at which time all amounts outstanding under the Credit Facility will be due and payable. The Credit Facility also contains various customary representations and warranties, financial reporting requirements and other affirmative and negative covenants. The Credit Facility requires that Signet maintain at all times a “Leverage Ratio” (as defined in the Credit Facility) to be no greater than 2.50 to 1.00 and a “Fixed Charge Coverage Ratio” (as defined in the Credit Facility) to be no less than 1.40 to 1.00, both determined as of the end of each fiscal quarter of Signet for the trailing twelve months.

At July 28, 2012, January 28, 2012, and July 30, 2011, there were no amounts outstanding under the Credit Facility, with no intra-period borrowings. Signet had stand-by letters of credit of $8.2 million, $8.2 million and $5.5 million as of July 28, 2012, January 28, 2012 and July 30, 2011, respectively.

 

16


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, based upon management’s beliefs and expectations as well as on assumptions made by and data currently available to management, appear in a number of places throughout this document and include statements regarding, among other things, Signet’s results of operation, financial condition, liquidity, prospects, growth, strategies and the industry in which Signet operates. The use of the words “expects,” “intends,” “anticipates,” “estimates,” “predicts,” “believes,” “should,” “potential,” “may,” “forecast,” “objective,” “plan,” or “target,” and other similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, the merchandising, pricing and inventory policies followed by Signet, the reputation of Signet and its brands, the level of competition in the jewelry sector, the cost and availability of diamonds, gold and other precious metals, regulations relating to consumer credit, seasonality of Signet’s business, financial market risks, deterioration in consumers’ financial condition, exchange rate fluctuations, changes in consumer attitudes regarding jewelry, management of social, ethical and environmental risks, security breaches and other disruptions to Signet’s information technology infrastructure and databases, inadequacy in and disruptions to internal controls and systems, changes in assumptions used in making accounting estimates relating to items such as extended service plans and pensions, and risks relating to Signet being a Bermuda corporation.

For a discussion of these and other risks and uncertainties which could cause actual results to differ materially from those expressed in any forward-looking statement, see the “Risk Factors” section of Signet’s Fiscal 2012 Annual Report on Form 10-K filed with the SEC on March 22, 2012. Signet undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.

OVERVIEW

Signet is the largest specialty retail jeweler in the US and UK. Signet manages its business as two geographical segments, the US and the UK divisions.

In the US, Signet operated 1,323 stores in 50 states at July 28, 2012. Its store brands are located nationally in malls and off-mall locations as Kay Jewelers (“Kay”), and regionally under a number of well-established mall-based brands. Destination superstores are operated nationwide as Jared The Galleria Of Jewelry (“Jared”).

In the UK, Signet’s store brands are “H.Samuel,” “Ernest Jones,” and “Leslie Davis,” which are situated in prime “High Street” locations (main shopping thoroughfares with high pedestrian traffic) or major shopping malls. The UK division operated 522 stores at July 28, 2012, including 14 stores in the Republic of Ireland and 3 in the Channel Islands.

Non-GAAP measures

Signet provides certain non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. Management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitute for, financial information prepared in accordance with US GAAP.

Exchange translation impact

Signet has historically used constant exchange rates to compare period-to-period changes in certain financial data. Management considers this a useful measure for analyzing and explaining changes and trends in Signet’s results. The impact of the re-calculation, including a reconciliation to Signet’s US GAAP results, is analyzed below.

 

17


Table of Contents
     13 weeks ended     Change     Impact of
exchange
rate
movement
$million
    13 weeks
ended
July 30, 2011
at constant
exchange rates
(non-GAAP)
$million
    Change  at
constant
exchange
rates
(non-
GAAP)
 
     July 28,
2012
$million
    July 30,
2011
$million
         

Sales:

            

US

     701.9        643.0        9.2 %     —          643.0        9.2 %

UK

     152.0        154.6        (1.7 )%     (4.7     149.9        1.4 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     853.9        797.6        7.1 %     (4.7     792.9        7.7 %

Cost of sales

     (542.7 )     (502.8 )     (7.9 )%     3.4        (499.4 )     (8.7 )%
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     311.2        294.8        5.6 %     (1.3     293.5        6.0 %

Selling, general and administrative expenses

     (240.3 )     (224.5 )     (7.0 )%     1.5        (223.0 )     (7.8 )%

Other operating income, net

     40.0        32.0        25.0 %     —          32.0        25.0 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income/(loss):

            

US

     117.3        104.4        12.4     —          104.4        12.4

UK

     (0.3 )     2.8        nm        —          2.8        nm   

Unallocated

     (6.1 )     (4.9 )     (24.5 )%     0.2        (4.7 )     (29.8 )%
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     110.9        102.3        8.4     0.2        102.5        8.2

Interest expense, net

     (0.7 )     (2.5 )     72.0 %     —          (2.5 )     72.0 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     110.2        99.8        10.4     0.2        100.0        10.2

Income taxes

     (39.5 )     (33.5 )     (17.9 )%      (0.1 )     (33.6 )     (17.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     70.7        66.3        6.6     0.1        66.4        6.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share – basic

   $ 0.86      $ 0.77        11.7   $ —        $ 0.77        11.7

Earnings per share – diluted

   $ 0.85      $ 0.76        11.8   $ —        $ 0.76        11.8

 

nm – not meaningful

 

18


Table of Contents
     26 weeks ended     Change     Impact  of
exchange
rate
movement
$million
    26 weeks
ended
July 30, 2011
at constant
exchange  rates
(non-GAAP)
$million
    Change  at
constant
exchange
rates
(non-
GAAP)
 
     July  28,
2012

$million
    July 30,
2011
$million
         

Sales:

            

US

     1,453.4        1,381.0        5.2 %     —          1,381.0        5.2 %

UK

     300.5        303.9        (1.1 )%     (7.5     296.4        1.4 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,753.9        1,684.9        4.1 %     (7.5     1,677.4        4.6 %

Cost of sales

     (1,089.0 )     (1,040.4 )     (4.7 )%     5.4        (1,035.0 )     (5.2 )%
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     664.9        644.5        3.2 %     (2.1     642.4        3.5 %

Selling, general and administrative expenses

     (504.8 )     (488.3 )     (3.4 )%     2.4        (485.9 )     (3.9 )%

Other operating income, net

     80.2        64.8        23.8 %     —          64.8        23.8 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income/(loss):

            

US

     255.0        230.6        10.6     —          230.6        10.6

UK

     (3.3 )     2.6        nm        —          2.6        nm   

Unallocated

     (11.4 )     (12.2 )     6.6 %     0.3        (11.9 )     4.2 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     240.3        221.0        8.7     0.3        221.3        8.6

Interest expense, net

     (1.6 )     (3.4 )     52.9 %     —          (3.4 )     52.9 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     238.7        217.6        9.7     0.3        217.9        9.5

Income taxes

     (85.5 )     (75.9 )     (12.6 )%      (0.1 )     (76.0 )     (12.5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     153.2        141.7        8.1     0.2        141.9        8.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share – basic

   $ 1.82      $ 1.64        11.0   $ —        $ 1.64        11.0

Earnings per share – diluted

   $ 1.81      $ 1.63        11.0   $ —        $ 1.63        11.0

 

nm – not meaningful

Net cash

Net cash is a non-GAAP measure defined as the total of cash and cash equivalents less loans and overdrafts, and is helpful in providing a measure of the total indebtedness of the business.

 

     July  28,
2012

$million
     January 28,
2012
$million
     July 30,
2011
$million
 

Cash and cash equivalents

     237.5         486.8         440.2   

Loans and overdrafts

     —           —           (13.1 )
  

 

 

    

 

 

    

 

 

 

Net cash

     237.5         486.8         427.1   
  

 

 

    

 

 

    

 

 

 

Free cash flow

Free cash flow is a non-GAAP measure defined as the net cash provided by operating activities less net cash flows used in investing activities. Management considers that it is helpful in understanding how the business is generating cash from its operating and investing activities that can be used to meet the financing needs of the business. Free cash flow does not represent the residual cash flow available for discretionary expenditure.

 

     13 weeks ended     26 weeks ended  
     July 28,
2012
$million
    July 30,
2011
$million
    July 28,
2012
$million
    July 30,
2011
$million
 

Net cash provided by operating activities

     82.8        86.8        116.8        192.1   

Net cash used in investing activities

     (36.2 )     (25.4 )     (54.8 )     (38.3 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

     46.6        61.4        62.0        153.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Financial Statements and the related notes in Part I of this Quarterly Report on Form 10-Q, as well as the financial and other information included in Signet’s Fiscal 2012(1) Annual Report on Form 10-K.

Second Quarter Highlights (“second quarter” is the 13 weeks ended July 28, 2012)

 

   

Same store sales: up 7.1%

 

   

Operating income: $110.9 million, up $8.6 million, an increase of 8.4%

 

   

Diluted earnings per share: up by 11.8% to $0.85

Year to Date Highlights

 

   

Same store sales: up 4.0%

 

   

Operating income: $240.3 million, up $19.3 million, an increase of 8.7%

 

   

Diluted earnings per share: up by 11.0% to $1.81

 

(1) Fiscal 2013 is the year ending February 2, 2013 and Fiscal 2012 is the year ended January 28, 2012.

Certain operating data as a percentage of sales were as follows:

Operating Data

 

     Second Quarter     Year To Date  
     Fiscal
2013
%
    Fiscal
2012
%
    Fiscal
2013
%
    Fiscal
2012
%
 

Sales

     100.0        100.0        100.0        100.0   

Cost of sales

     (63.6 )     (63.0 )     (62.1 )     (61.7 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     36.4        37.0        37.9        38.3   

Selling, general and administrative expenses

     (28.1 )     (28.2 )     (28.8 )     (29.0 )

Other operating income, net

     4.7        4.0        4.6        3.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     13.0        12.8        13.7        13.1   

Interest expense, net

     (0.1 )     (0.3 )     (0.1 )     (0.2 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     12.9        12.5        13.6        12.9   

Income taxes

     (4.6 )     (4.2 )     (4.9 )     (4.5 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     8.3        8.3        8.7        8.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Second quarter sales

In the second quarter of Fiscal 2013, Signet’s same store sales were up 7.1%, compared to an increase of 9.9% in the 13 weeks ended July 30, 2011 (“second quarter of Fiscal 2012”). Total sales were $853.9 million as compared to $797.6 million in the second quarter of Fiscal 2012, up $56.3 million or 7.1%, compared to an increase of 10.8% in the second quarter of Fiscal 2012. eCommerce sales were $24.2 million as compared to $17.3 million in the second quarter of Fiscal 2012, up $6.9 million or 39.9%. The breakdown of the sales performance is set out in the table below.

 

     Change from previous year        

Second quarter of Fiscal 2013

   Same
store
sales
    Store space
impact, net
    Total sales at
constant
exchange

rates(1)
    Exchange
translation
impact(1)
    Total
sales
as  reported
    Total
sales
(millions)
 

US division

     8.2     1.0     9.2     —          9.2   $ 701.9   

UK division

     2.1     (0.7 )%      1.4     (3.1 )%      (1.7 )%    $ 152.0   
            

 

 

 

Signet

     7.1     0.6     7.7     (0.6 )%      7.1   $ 853.9   
            

 

 

 

 

(1) Non-GAAP measure, discussed herein.

 

20


Table of Contents

US sales

In the second quarter of Fiscal 2013, the US division’s sales were $701.9 million as compared to $643.0 million in the second quarter of Fiscal 2012, up $58.9 million or 9.2%. Same store sales increased 8.2% compared to an increase of 12.2% in the second quarter of Fiscal 2012, with the Fiscal 2013 second quarter sales driven by strong results for Mother’s Day, which included a promotional timing change and continued favorable customer response to our merchandise offerings, including branded differentiated and exclusive merchandise and bridal. See the table below for further analysis of sales.

 

     Change from previous year        

Second quarter of Fiscal 2013

   Same
store
sales
    Store space
impact, net
    Total sales at
constant
exchange

rate
    Exchange
translation
impact
     Total
sales
as reported
    Total
sales
(millions)
 

Kay

     12.5     1.4     13.9     —           13.9   $ 418.6   

Jared

     2.4     1.6     4.0     —           4.0   $ 222.4   

Regional brands

     3.1     (4.4 )%      (1.3 )%      —           (1.3 )%    $ 60.9   
             

 

 

 

US division

     8.2     1.0     9.2     —           9.2   $ 701.9   
             

 

 

 

UK sales

In the second quarter of Fiscal 2013, the UK division’s sales were $152.0 million as compared to $154.6 million in the second quarter of Fiscal 2012, down $2.6 million or 1.7%. Same store sales increased 2.1% compared to an increase of 1.4% in the second quarter of Fiscal 2012. Branded jewelry, watches and the bridal category, were key drivers of the sales increase. See the table below for further analysis of sales.

 

      Change from previous year        

Second quarter of Fiscal 2013

   Same
store
sales
    Store space
impact, net
    Total sales at
constant
exchange

rates(1)
    Exchange
translation
impact( 1)
    Total
sales
as reported
    Total
sales
(millions)
 

H.Samuel

     0.1     (0.4 )%      (0.3 )%      (3.0 )%      (3.3 )%    $ 78.7   

Ernest Jones(2)

     4.4     (1.2 )%      3.2     (3.1 )%      0.1   $ 73.3   
            

 

 

 

UK division

     2.1     (0.7 )%      1.4     (3.1 )%      (1.7 )%    $ 152.0   
            

 

 

 

 

(1) Non-GAAP measure, discussed herein.
(2) Includes stores selling under the Leslie Davis nameplate.

Year to date sales

In the year to date, Signet’s same store sales increased 4.0%, compared to an increase of 10.1% in the comparable period last year. In the year to date, total sales were $1,753.9 million as compared to $1,684.9 million in the 26 weeks ended July 30, 2011, up $69.0 million or 4.1%. eCommerce sales were $46.3 million as compared to $34.6 million in the 26 weeks ended July 30, 2011, up $11.7 million or 33.8%. The breakdown of the sales performance is set out in the table below.

 

      Change from previous year        

Year to Date Fiscal 2013

   Same
store
sales
    Store space
impact, net
    Total sales at
constant
exchange

rate(1) (2)
    Exchange
translation
impact( 1)
    Total
sales
as reported
    Total
sales
(millions)
 

US division

     4.4     0.8     5.2     —          5.2   $ 1,453.4   

UK division

     1.7     (0.3 )%      1.4     (2.5 )%      (1.1 )%    $ 300.5   
            

 

 

 

Signet

     4.0     0.6     4.6     (0.5 )%      4.1   $ 1,753.9   
            

 

 

 

 

(1) Non-GAAP measure, discussed herein.
(2) The average US dollar to pound sterling exchange rate for the 26 weeks ended July 28, 2012 was $1.58 as compared to $1.62 for the 26 weeks ended July 30, 2011.

 

21


Table of Contents

US sales

In year to date, the US division’s sales were $1,453.4 million as compared to $1,381.0 million in the 26 weeks ended July 30, 2011, up $72.4 million or 5.2%. Same store sales increased 4.4% compared to an increase of 12.4% in the prior year period. Branded differentiated and exclusive merchandise and bridal continue to be key drivers of US sales. See the table below for further analysis of sales.

 

     Change from previous year        

Year to Date Fiscal 2013

   Same
store
sales
    Store space
impact, net
    Total sales at
constant
exchange

rate
    Exchange
translation
impact
     Total
sales
as reported
    Total
sales
(millions)
 

Kay

     7.3     1.2     8.5     —           8.5   $ 871.2   

Jared

     1.3     1.5     2.8     —           2.8   $ 454.0   

Regional brands

     (1.9 )%      (4.2 )%      (6.1 )%      —           (6.1 )%    $ 128.2   
             

 

 

 

US division

     4.4     0.8     5.2     —           5.2   $ 1,453.4   
             

 

 

 

UK sales

In the year to date, the UK division’s sales were $300.5 million as compared to $303.9 million in the 26 weeks ended July 30, 2011, down $3.4 million or 1.1%. Same store sales increased 1.7% compared to an increase of 0.8% in the prior year period. Branded jewelry, watches and the bridal category, were key drivers of the sales increase. See the table below for further analysis of sales.

 

     Change from previous year        

Year to Date Fiscal 2013

   Same
store
sales
    Store space
impact, net
    Total sales at
constant
exchange

rate(1)(2)
    Exchange
translation
impact(1)
    Total
sales
as reported
    Total
sales
(millions)
 

H.Samuel

     0.9     0.3     1.2     (2.5 )%      (1.3 )%    $ 158.8   

Ernest Jones(3)

     2.6     (1.0 )%      1.6     (2.5 )%      (0.9 )%    $ 141.7   
            

 

 

 

UK division

     1.7     (0.3 )%      1.4     (2.5 )%      (1.1 )%    $ 300.5   
            

 

 

 

 

(1) Non-GAAP measure, discussed herein.
(2) The average US dollar to pound sterling exchange rate for the 26 weeks ended July 28, 2012 was $1.58 as compared to $1.62 for the 26 weeks ended July 30, 2011.
(3) Includes stores selling under the Leslie Davis nameplate.

Cost of sales and gross margin

In the second quarter of Fiscal 2013, the gross margin was $311.2 million or 36.4% of sales as compared to $294.8 million or 37.0% of sales in the second quarter of Fiscal 2012. Gross margin dollars in the US increased $21.3 million compared to the second quarter of Fiscal 2012, as the impact of increased sales was partially offset by a decrease in gross merchandise margin of 20 basis points primarily due to changes in the sales mix. The US net bad debt to US sales ratio was relatively consistent at 4.5% as compared to 4.4% in the second quarter of Fiscal 2012. In the UK, gross margin dollars decreased $4.9 million as compared to the second quarter of Fiscal 2012, primarily as a result of a decrease in gross merchandise margin of 210 basis points caused by customers’ preference for promotional merchandise and merchandise mix, which were partially offset by lower store occupancy expenses.

For the year to date, the gross margin was $664.9 million or 37.9% of sales as compared to $644.5 million or 38.3% of sales in the 26 weeks ended July 30, 2011. Gross margin in the US increased $27.1 million compared to the 26 weeks ended July 30, 2011, primarily as a result of increased sales and an increased gross merchandise margin movement of 10 basis points primarily due to changes in the sales mix. Store occupancy expenses were relatively unchanged, benefiting the gross margin rate. The US net bad debt to US sales ratio was 3.1% excluding the impact of a change in credit cycle processing in the first quarter as compared to 2.9% in the 26 weeks ended July 30, 2011, and 3.4% including the impact. In the UK, gross margin dollars decreased $6.7 million as compared to the 26 weeks ended July 30, 2011, primarily as a result of a decrease in gross merchandise margin of 190 basis points caused by customers’ preference for promotional merchandise and merchandise mix, which were partially offset by lower store occupancy expenses.

Selling, general and administrative expenses

In the second quarter of Fiscal 2013, selling, general and administrative expenses were $240.3 million or 28.1% of sales as compared to $224.5 million or 28.2% of sales in the second quarter Fiscal 2012. The decrease of 10 basis points primarily reflected control of store expenses partially offset by increased advertising expenses.

For the year to date, selling, general and administrative expenses were $504.8 million or 28.8% of sales as compared to $488.3 million or 29.0% of sales in the 26 weeks ended July 30, 2011. The decrease of 20 basis points primarily reflected control of store expenses partially offset by increased advertising expenses.

 

22


Table of Contents

Other operating income, net

In the second quarter of Fiscal 2013, other operating income, net was $40.0 million or 4.7% of sales as compared to $32.0 million or 4.0% of sales in the second quarter of Fiscal 2012. This increase primarily reflected interest income earned from higher outstanding receivable balances and a change in the mix of finance programs selected by customers. Year to date, other operating income, net was $80.2 million or 4.6% of sales as compared to $64.8 million or 3.8% of sales in the 26 weeks ended July 30, 2011.

Operating income

In the second quarter of Fiscal 2013, operating income increased to $110.9 million or 13.0% of sales as compared to $102.3 million or 12.8% of sales in the second quarter of Fiscal 2012. The US division’s operating income was $117.3 million or 16.7% of sales as compared to $104.4 million or 16.2% of sales in the second quarter of Fiscal 2012. The operating loss for the UK division was $0.3 million or (0.2)% of sales as compared to operating income of $2.8 million or 1.8% of sales in the second quarter of Fiscal 2012.

For the year to date, operating income increased to $240.3 million or 13.7% of sales as compared to $221.0 million or 13.1% of sales in the 26 weeks ended July 30, 2011. The US division’s operating income was $255.0 million or 17.5% of sales as compared to $230.6 million or 16.7% of sales in the 26 weeks ended July 30, 2011. The operating loss for the UK division was $3.3 million and (1.1)% of sales as compared to operating income of $2.6 million or 0.9% of sales in the 26 weeks ended July 30, 2011.

Interest expense, net

In the second quarter of Fiscal 2013, net interest expense was $0.7 million as compared to $2.5 million in the second quarter of Fiscal 2012, in which the prior year included a $1.3 million write off of unamortized deferred financing fees related to the termination of the prior revolving credit facility. Year to date, net interest expense was $1.6 million as compared to $3.4 million in the 26 weeks ended July 30, 2011.

Income before income taxes

In the second quarter of Fiscal 2013, income before income taxes was $110.2 million or 12.9% of sales as compared to $99.8 million or 12.5% in the second quarter of Fiscal 2012. Year to date, income before income taxes was $238.7 million or 13.6% as compared to $217.6 million or 12.9% of sales in the 26 weeks ended July 30, 2011.

Income taxes

In the second quarter of Fiscal 2013, income tax expenses were $39.5 million as compared to $33.5 million in the second quarter of Fiscal 2012. The effective tax rate was 35.8% as compared to 33.6% in the second quarter of Fiscal 2012, which included the recognition of $1.9 million of previously unrecognized tax benefits. Year to date, income tax expenses were $85.5 million as compared to $75.9 million in the 26 weeks ended July 30, 2011. The effective tax rate was 35.8% as compared to 34.9% in the 26 weeks ended July 30, 2011.

Net income

In the second quarter of Fiscal 2013, net income was $70.7 million or 8.3% of sales as compared to $66.3 million or 8.3% of sales in the second quarter of Fiscal 2012. Year to date, net income was $153.2 million or 8.7% of sales as compared to $141.7 million or 8.4% of sales in the 26 weeks ended July 30, 2011.

Earnings per share

In the second quarter of Fiscal 2013, diluted earnings per share increased $0.09 to $0.85 as compared to $0.76 in the second quarter of Fiscal 2012, up 11.8%. The weighted average diluted number of common shares outstanding was 83.0 million as compared to 87.1 million in the second quarter of Fiscal 2012. Signet repurchased 4,469,149 shares in the second quarter of Fiscal 2013 as compared to 0 shares in the second quarter of Fiscal 2012. Year to date, diluted earnings per share increased $0.18 to $1.81 as compared to $1.63 in the 26 weeks ended July 30, 2011, up 11.0%. The weighted average diluted common shares outstanding were 84.7 million as compared to 86.9 million in the 26 weeks ended July 30, 2011. Signet repurchased 6,425,296 shares through the 26 weeks ended July 28, 2012 as compared to 0 shares in the 26 weeks ended July 30, 2011.

Dividends per share

In the second quarter of Fiscal 2013, dividends of $0.12 were approved by the Board of Directors as compared to $0.00 in the second quarter of Fiscal 2012.

For the year to date, dividends of $0.24 have been approved by the Board of Directors as compared to $0.00 in the 26 weeks ended July 30, 2011.

 

23


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Highlights

 

   

Free cash flow(1) of $62.0 million at July 28, 2012;

 

   

Net cash(1) of $237.5 million at July 28, 2012 compared to net cash(1) of $427.1 million at July 30, 2011 and $486.8 million at January 28, 2012.

 

(1) Non-GAAP measures, discussed herein.

Set out in the table below is a summary of Signet’s cash flow activity for the year to date for Fiscal 2013 and Fiscal 2012.

 

     26 weeks ended  
     July 28,
2012
    July 30,
2011
 
     $million     $million  

Summary cash flow

    

Net cash provided by operating activities

     116.8        192.1   

Net cash used in investing activities

     (54.8 )     (38.3 )

Net cash used in financing activities

     (311.6     (15.5
  

 

 

   

 

 

 

(Decrease)/increase in cash and cash equivalents

     (249.6     138.3   

Cash and cash equivalents at beginning of period

     486.8        302.1   

Effect of exchange rate changes on cash and cash equivalents

     0.3        (0.2 )
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

     237.5        440.2   
  

 

 

   

 

 

 

Operating activities

During the 26 weeks ended July 28, 2012, net cash provided by operating activities was $116.8 million as compared to $192.1 million in the 26 weeks ended July 30, 2011, a decrease of $75.3 million. The main reasons for the decrease were a build in inventory levels primarily due to higher commodity costs, payments made for inventory purchases at year-end and higher tax expense due to increased US division profits. These were partially offset by increased net income and collections on accounts receivable.

 

   

In the 26 weeks ended July 28, 2012, accounts receivable decreased $56.1 million as compared to a decrease of $29.3 million in the 26 weeks ended July 30, 2011, reflecting seasonal collection patterns and a higher accounts receivable balance. In the US division, credit participation was 57.5% and the average monthly collection rate was 12.9% as of the 26 weeks ended July 28, 2012 as compared to 55.6% and 13.2%, respectively, in the 26 weeks ended July 30, 2011.

 

   

Inventory levels increased $17.2 million as compared to an increase of $6.5 million in the 26 weeks ended July 30, 2011, primarily reflecting the impact of higher diamond and gold costs and inventory purchases partially offset by management actions to improve inventory turn.

 

   

Other movements in operating assets and liabilities include a decrease in accrued expenses and other liabilities of $53.0 million as compared to a decrease of $45.8 million in the 26 weeks ended July 30, 2011, driven primarily by timing differences associated with payroll taxes, sales tax and rent.

 

   

Accounts payable decreased by $46.5 million as compared to an increase of $10.8 million in the 26 weeks ended July 30, 2011, driven by payments for inventory purchases at year-end and a decrease in income taxes payable of $20.9 million as compared to an increase of $6.1 million in the 26 weeks ended July 30, 2011, due to payment of a higher level of year-end tax expense driven primarily by operating performance.

Investing activities

In the 26 weeks ended July 28, 2012, net cash used in investing activities was $54.8 million as compared to $38.3 million in the 26 weeks ended July 30, 2011, as of result of increased capital investment in the existing businesses. In the US division, capital additions were $45.2 million as compared to $31.1 million in the 26 weeks ended July 30, 2011 and in the UK division were $9.6 million as compared to $7.2 million in the 26 weeks ended July 30, 2011, reflecting planned increases in IT and store investment.

Stores opened and closed in the 26 weeks ended July 28, 2012, together with planned changes for the balance of Fiscal 2013 are set out in the tables below.

 

24


Table of Contents

US Division

 

     Kay
mall
    Kay
off-mall
    Jared      Regional
brands
    Total     Annual net
space change
 

January 28, 2012

     766        154        183         215        1,318        1 %

Opened

     4        10        1         —          15     

Closed

     (2 )     (3     —           (5 )     (10 )  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

July 28, 2012

     768        161        184         210        1,323     

Openings, planned

     4        25        7         —          36     

Closures, planned

     (4 )     (1     —           (13 )     (18 )  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

February 2, 2013

     768        185        191         197        1,341        3 %
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

UK Division

 

     H.Samuel     Ernest
Jones  (1)
    Total     Annual net
space change
 

January 28, 2012

     337        198        535        0 %

Opened

     —          1 (2)     1     

Closed

     (9 )(2)      (5 )     (14 )  
  

 

 

   

 

 

   

 

 

   

July 28, 2012

     328        194        522     

Openings, planned

     —          2        2     

Closures, planned

     (10 )     (3 )     (13 )  
  

 

 

   

 

 

   

 

 

   

February 2, 2013

     318        193        511        (3 )% 
  

 

 

   

 

 

   

 

 

   

 

(1) Includes stores selling under the Leslie Davis nameplate.
(2) Includes one H.Samuel store rebranded to an Ernest Jones store.

Free cash flow

Free cash flow is net cash provided by operating activities less net cash flow used in investing activities; positive free cash flow was $62.0 million in the 26 weeks ended July 28, 2012 as compared to $153.8 million in the 26 weeks ended July 30, 2011; see non-GAAP measures discussed herein. The increase in net income adjusted for non-cash items was offset by a lower inflow from changes in operating assets and liabilities and an increase in investing activities.

Financing activities

Dividends

On February 27, 2012, the $0.10 per share cash dividend for the fourth quarter of Fiscal 2012 was paid out in the aggregate amount of $8.7 million. The Fiscal 2013 first quarter cash dividend of $0.12 per share was paid out on May 29, 2012 in the amount of $10.3 million. Further, in the second quarter of Fiscal 2013, a cash dividend of $0.12 per share on Signet’s Common Shares was approved on June 19, 2012 for payment on August 28, 2012 to shareholders of record on July 27, 212. As a result, $9.7 million has been recorded in accrued expenses and other current liabilities reflecting this dividend, which is not presented in the condensed consolidated statement of cash flows as it is a non-cash transaction as of July 28, 2012.

Share repurchase

The Company’s share repurchase activity was as follows:

 

     Second Quarter      Year To Date  
     Fiscal
2013
     Fiscal
2012
     Fiscal
2013
     Fiscal
2012
 

Cost of repurchases (in millions)

   $ 196.5         —         $ 287.2         —     

Shares repurchased (in thousands)

     4,469.1         —           6,425.3         —     

Average cost per share

   $ 43.97         —         $ 44.70         —     

At July 28, 2012, $50.1 million remained available for future repurchases under the Board authorized $350 million repurchase program, which is set to expire in January 2014.

Proceeds from exercise of share options

During the 26 weeks ended July 28, 2012, $5.4 million (26 weeks ended July 30, 2011: $4.4 million) was received for the exercise of share options pursuant to Signet’s equity compensation programs. Other than equity based compensation awards granted to employees and directors, Signet has not issued Common Shares as a financing activity for over ten years.

 

25


Table of Contents

Movement in cash and indebtedness

Net cash at July 28, 2012 was $237.5 million as compared to $427.1 million at July 30, 2011; see non-GAAP measures discussed herein. Signet has significant amounts of cash and cash equivalents invested in various ‘AAA’ rated liquidity funds and at a number of financial institutions. The amount invested in each liquidity fund or at each financial institution takes into account the credit rating and size of the liquidity fund or financial institution and is invested for short-term durations.

Signet maintains its $400 million Credit Facility which, at July 28, 2012 and July 30, 2011, was undrawn, with no intra-period borrowings. Signet had stand-by letters of credit of $8.2 million and $5.5 million as of July 28, 2012 and July 30, 2011, respectively.

OBLIGATIONS AND COMMITMENTS

Signet’s contractual obligations and commitments at July 28, 2012 and the effects such obligations and commitments are expected to have on Signet’s liquidity and cash flows in future periods have not changed materially outside the ordinary course from those disclosed in Signet’s Annual Report on Form 10-K for the year ended January 28, 2012, filed with the SEC on March 22, 2012.

SEASONALITY

Signet’s sales are seasonal, with the first and second quarters each normally accounting for slightly more than 20% of annual sales, the third quarter a little under 20% and the fourth quarter for about 40% of sales, with December being by far the most important month of the year. Sales made in November and December are known as the “Holiday Season.” Due to sales leverage, Signet’s operating income is even more seasonal; about 45% to 50% of operating income normally occurs in the fourth quarter, comprised of nearly all of the UK division’s and about 40% to 50% of the US division’s operating income.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with US GAAP requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. Management maintains a process to review the application of Signet’s accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a multinational organization. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. There have been no material changes to the policies and estimates as discussed in Signet’s Annual Report on Form 10-K for the year ended January 28, 2012, filed with the SEC on March 22, 2012.

 

26


Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Signet is exposed to market risk from fluctuations in foreign currency exchange rates, interest rates and precious metal prices, which could affect its consolidated financial position, earnings and cash flows. Signet manages its exposure to market risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Signet uses derivative financial instruments as risk management tools and not for trading purposes.

As certain of the UK division’s purchases are denominated in US dollars and its net cash flows are in pounds sterling, Signet’s policy is to enter into foreign currency forward exchange contracts and foreign currency swaps to manage the exposure to the US dollar. Signet also hedges a significant portion of forecasted merchandise purchases using commodity forward contracts. These contracts are entered into with large, reputable financial institutions, thereby minimizing the credit exposure from our counter-parties.

Signet has significant amounts of cash and cash equivalents invested at several financial institutions. The amount invested at each financial institution takes into account the long-term credit rating and size of the financial institution. However, with the current financial environment and the possible instability of financial institutions, Signet cannot be assured that it will not experience any losses on these balances. The interest rates earned on cash and cash equivalents will fluctuate in line with short-term interest rates.

Signet’s market risk profile as of July 28, 2012 has not materially changed since January 28, 2012. The market risk profile as of January 28, 2012 is disclosed in Signet’s Fiscal 2012 Annual Report on Form 10-K, filed with the SEC on March 22, 2012.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on this review, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 28, 2012.

Changes in Internal Control over Financial Reporting

During the second quarter of Fiscal 2013, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Information regarding legal proceedings is incorporated by reference from Note 10 of the Financial Statements set forth in Part I of this Quarterly Report on Form 10-Q.

 

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of Signet’s Fiscal 2012 Annual Report on Form 10-K, filed with the SEC on March 22, 2012.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Repurchases of Equity Securities

The following table contains the Company’s repurchases of equity securities in the second quarter of Fiscal 2013:

 

Period

   Total
number of
shares
purchased(1)
     Average
price paid
per share
     Total
number of
shares
purchased
as part of
publicly
announced
plans or
programs(1)
     Maximum
number (or
approximate
dollar value)

of shares that
may yet be
purchased

under the
plans or
programs
 

April 29, 2012 to May 26, 2012

     1,188,992       $ 45.92         1,188,992       $ 142,017,805   

May 27, 2012 to June 23, 2012

     1,606,840       $ 43.21         1,606,840       $ 72,578,524   

June 24, 2012 to July 28, 2012

     1,673,317       $ 43.29         1,673,317       $ 50,135,969   
  

 

 

       

 

 

    

Total

     4,469,149       $ 43.97         4,469,149       $ 50,135,969   

 

27


Table of Contents
(1) On October 26, 2011, Signet announced a program to repurchase up to $300 million of Signet’s Common Shares, which amount was increased on July 17, 2012 to $350 million (the “Repurchase Program”). The Repurchase Program became effective on January 16, 2012, and will last 24 months from that date.

During the first quarter of Fiscal 2013, the Company repurchased an aggregate of 1,956,147 Common Shares at an average price of $46.83 under the Repurchase Program. Those repurchases occurred as follows: January 29, 2012 to February 25, 2012: 749,881 shares at an average price of $46.05, leaving $253,695,915 million available for repurchase; February 26, 2012 to March 24, 2012: 86,700 shares at an average price of $46.96, leaving $249,624,170 million available for repurchase; and March 25, 2012 to April 28, 2012: 1,119,566 shares at an average price of $47.34, leaving $196,620,012 million available for future repurchase.

 

28


Table of Contents
ITEM 6. EXHIBITS

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

 

Number

 

Description of Exhibits

31.1*   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**   XBRL Instance Document.
101.SCH**   XBRL Taxonomy Extension Schema Document.
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Filed herewith
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    SIGNET JEWELERS LIMITED
    (Registrant)

August 23, 2012

    By:    /s/ Ronald Ristau
      Ronald Ristau
      Chief Financial Officer
      (Principal Financial Officer and Principal Accounting Officer)

 

29

XLON:SIG Signet Jewelers Ltd Quarterly Report 10-Q Filling

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