Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - SIGNET JEWELERS LTDfy19q1exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - SIGNET JEWELERS LTDfy19q1exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - SIGNET JEWELERS LTDfy19q1exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - SIGNET JEWELERS LTDfy19q1exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - SIGNET JEWELERS LTDfy19q1exhbit101.htm


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

 
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the quarterly period ended May 5, 2018 or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to
Commission file number 1-32349
 
SIGNET JEWELERS LIMITED
(Exact name of Registrant as specified in its charter)

Bermuda
 
Not Applicable
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
Clarendon House
2 Church Street
Hamilton HM11
Bermuda
(441) 296 5872
(Address and telephone number including area code of principal executive offices)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o
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   o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one).
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   o     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 Shares, $0.18 par value, 59,203,161 shares as of June 6, 2018


1


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

2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIGNET JEWELERS LIMITED
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
 
 
13 weeks ended
 
 
(in millions, except per share amounts)
 
May 5, 2018
 
April 29, 2017
 
Notes
Sales
 
$
1,480.6

 
$
1,403.4

 
6
Cost of sales
 
(995.8
)
 
(912.2
)
 
 
Gross margin
 
484.8

 
491.2

 
 
Selling, general and administrative expenses
 
(482.8
)
 
(452.8
)
 
 
Credit transaction, net
 
(143.1
)
 

 
4
Restructuring charges
 
(6.5
)
 

 
7
Goodwill and intangible impairments
 
(448.7
)
 

 
15
Other operating income, net
 
22.1

 
76.9

 
 
Operating (loss) income
 
(574.2
)
 
115.3

 
6
Interest expense, net
 
(8.9
)
 
(12.6
)
 
 
Other non-operating income
 
0.6

 

 
 
(Loss) income before income taxes
 
(582.5
)
 
102.7

 
 
Income taxes
 
85.9

 
(24.2
)
 
12
Net (loss) income
 
$
(496.6
)
 
$
78.5

 
 
Dividends on redeemable convertible preferred shares
 
(8.2
)
 
(8.2
)
 
9
Net (loss) income attributable to common shareholders
 
$
(504.8
)
 
$
70.3

 
 
 
 
 
 
 
 
 
(Loss) earnings per common share:
 
 
 
 
 
 
Basic
 
$
(8.48
)
 
$
1.03

 
10
Diluted
 
$
(8.48
)
 
$
1.03

 
10
Weighted average common shares outstanding:
 
 
 
 
 
 
Basic
 
59.5

 
68.1

 
10
Diluted
 
59.5

 
68.2

 
10
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.37

 
$
0.31

 
9
The accompanying notes are an integral part of these condensed consolidated financial statements.

3


SIGNET JEWELERS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
13 weeks ended
 
May 5, 2018
 
April 29, 2017
(in millions)
Pre-tax
amount
 
Tax
(expense)
benefit
 
After-tax
amount
 
Pre-tax
amount
 
Tax
(expense)
benefit
 
After-tax
amount
Net income
 
 
 
 
$
(496.6
)
 
 
 
 
 
$
78.5
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(21.7
)
 
$
 
 
(21.7
)
 
$
0.5
 
 
$

 
0.5
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized (loss) gain (1)
(0.2
)
 
 
 
(0.2
)
 
0.3
 
 
(0.1
)
 
0.2
 
Impact from adoption of new accounting pronouncements (2)
(1.1
)
 
0.3
 
 
(0.8
)
 
 
 

 
 
Cash flow hedges:
 
 
 
 


 
 
 
 
 

 
Unrealized gain
1.9

 
(0.4
)
 
1.5

 
4.5
 
 
(1.8
)
 
2.7
 
Reclassification adjustment for (gains) losses to net income
(0.5
)
 
0.2
 
 
(0.3
)
 
(1.9
)
 
0.5

 
(1.4
)
Pension plan:
 
 
 
 
 
 
 
 
 
 
 
Reclassification adjustment to net income for amortization of actuarial losses
0.3

 
 
 
0.3

 
0.7
 
 
(0.1
)
 
0.6
 
Reclassification adjustment to net income for amortization of net prior service credits
(0.1
)
 
 
 
(0.1
)
 
(0.4
)
 
0.1

 
(0.3
)
Total other comprehensive income (loss)
$
(21.4
)
 
$
0.1
 
 
$
(21.3
)
 
$
3.7
 
 
$
(1.4
)
 
$
2.3
 
Total comprehensive income
 
 
 
 
$
(517.9
)
 
 
 
 
 
$
80.8
 
(1) 
During the 13 weeks ended May 5, 2018, amount represents unrealized losses related to the Company’s available-for-sale debt securities. During the 13 weeks ended April 29, 2017, amount represents unrealized gains related to the Company’s available-for-sale debt and equity securities.
(2) 
Adjustment reflects the reclassification of unrealized gains related to the Company’s equity security investments as of February 3, 2018 from AOCI into retained earnings associated with the adoption of ASU 2016-1.
The accompanying notes are an integral part of these condensed consolidated financial statements.

4


SIGNET JEWELERS LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except par value per share amount)
May 5, 2018
 
February 3, 2018
 
April 29, 2017
 
Notes
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
153.9

 
$
225.1

 
$
99.7

 
 
Accounts receivable, held for sale
484.6

 

 

 
4
Accounts receivable, net
6.8

 
692.5

 
1,726.3

 
13
Other receivables
83.6

 
87.2

 
88.6

 
 
Other current assets
153.2

 
158.2

 
159.0

 
 
Income taxes
55.2

 
2.6

 
1.8

 
 
Inventories
2,429.0

 
2,280.5

 
2,432.4

 
14
Total current assets
3,366.3

 
3,446.1

 
4,507.8

 
 
Non-current assets:
 
 
 
 
 
 
 
Property, plant and equipment, net of accumulated depreciation of $1,227.3, $1,197.6 and $1,093.9, respectively
847.2

 
877.9

 
829.8

 
 
Goodwill
509.1

 
821.7

 
516.1

 
15
Intangible assets, net
343.2

 
481.5

 
411.9

 
15
Other assets
167.0

 
171.2

 
165.1

 
 
Deferred tax assets
0.8

 
1.4

 
0.6

 
 
Retirement benefit asset
39.3

 
39.8

 
33.9

 
 
Total assets
$
5,272.9

 
$
5,839.6

 
$
6,465.2

 
 
Liabilities and Shareholders’ equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Loans and overdrafts
$
72.3

 
$
44.0

 
$
131.5

 
18
Accounts payable
287.5

 
237.0

 
177.8

 
 
Accrued expenses and other current liabilities
463.7

 
448.0

 
400.3

 
 
Deferred revenue
284.9

 
288.6

 
272.1

 
3
Income taxes

 
19.6

 
34.2

 
 
Total current liabilities
1,108.4

 
1,037.2

 
1,015.9

 
 
Non-current liabilities:
 
 
 
 
 
 
 
Long-term debt
679.7

 
688.2

 
1,311.6

 
18
Other liabilities
236.5

 
239.6

 
206.2

 
 
Deferred revenue
667.5

 
668.9

 
658.6

 
3
Deferred tax liabilities
74.2

 
92.3

 
117.2

 
 
Total liabilities
2,766.3

 
2,726.2

 
3,309.5

 
 
Commitments and contingencies


 


 


 
21
Series A redeemable convertible preferred shares of $.01 par value: authorized 500 shares, 0.625 shares outstanding (February 3, 2018 and April 29, 2017: 0.625 shares outstanding)
614.0

 
613.6

 
612.3

 
8
Shareholders’ equity:
 
 
 
 
 
 
 
Common shares of $0.18 par value: authorized 500 shares, 59.2 shares outstanding (February 3, 2018: 60.5 outstanding; April 29, 2017: 68.4 outstanding)
15.7

 
15.7

 
15.7

 
 
Additional paid-in capital
281.4

 
290.2

 
278.4

 
 
Other reserves
0.4

 
0.4

 
0.4

 
 
Treasury shares at cost: 28.0 shares (February 3, 2018: 26.7 shares; April 29, 2017: 18.8 shares)
(1,992.2
)
 
(1,942.1
)
 
(1,488.6
)
 
9
Retained earnings
3,869.2

 
4,396.2

 
4,042.9

 
 
Accumulated other comprehensive loss
(281.9
)
 
(260.6
)
 
(305.4
)
 
11
Total shareholders’ equity
1,892.6

 
2,499.8

 
2,543.4

 
 
Total liabilities, redeemable convertible preferred shares and shareholders’ equity
$
5,272.9

 
$
5,839.6

 
$
6,465.2

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

5


SIGNET JEWELERS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
13 weeks ended
(in millions)
May 5, 2018
 
April 29, 2017
Cash flows from operating activities
 
 
 
Net (loss) income
$
(496.6
)
 
$
78.5

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
49.8

 
50.0

Amortization of unfavorable leases and contracts
(2.0
)
 
(4.6
)
Pension benefit
(0.3
)
 

Share-based compensation
1.8

 
2.7

Deferred taxation
(18.8
)
 
15.8

Credit transaction, net
141.0

 

Goodwill and intangible impairments
448.7

 

Amortization of debt discount and issuance costs
0.4

 
0.6

Other non-cash movements
(0.1
)
 
1.3

Changes in operating assets and liabilities:
 
 
 
Decrease in accounts receivable held for investment
40.4

 
132.0

Decrease in accounts receivable held for sale
19.5

 

Decrease (increase) in other assets and other receivables
10.8

 
(14.6
)
(Increase) decrease in inventories
(162.4
)
 
17.7

Increase (decrease) in accounts payable
55.7

 
(74.0
)
Increase (decrease) in accrued expenses and other liabilities
15.3

 
(77.7
)
Decrease in deferred revenue
(4.3
)
 
(4.9
)
Decrease in income taxes payable
(70.3
)
 
(65.2
)
Pension plan contributions
(0.7
)
 
(0.8
)
Net cash provided by operating activities
27.9

 
56.8

Investing activities
 
 
 
Purchase of property, plant and equipment
(26.1
)
 
(56.2
)
Purchase of available-for-sale securities
(0.4
)
 
(0.7
)
Proceeds from sale of available-for-sale securities
1.1

 
0.3

Net cash used in investing activities
(25.4
)
 
(56.6
)
Financing activities
 
 
 
Dividends paid on common shares
(18.8
)
 
(17.8
)
Dividends paid on redeemable convertible preferred shares
(7.8
)
 
(11.3
)
Repurchase of common shares
(60.0
)
 

Repayments of term loans
(6.7
)
 
(4.5
)
Proceeds from securitization facility

 
666.5

Repayments of securitization facility

 
(666.5
)
Proceeds from revolving credit facility
40.0

 
128.0

Repayments of revolving credit facility

 
(121.0
)
(Repayments of) proceeds from bank overdrafts
(13.9
)
 
31.2

Other financing activities
(2.1
)
 
(1.0
)
Net cash (used in) provided by financing activities
(69.3
)
 
3.6

Cash and cash equivalents at beginning of period
225.1

 
98.7

(Decrease) increase in cash and cash equivalents
(66.8
)
 
3.8

Effect of exchange rate changes on cash and cash equivalents
(4.4
)
 
(2.8
)
Cash and cash equivalents at end of period
$
153.9

 
$
99.7

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

6


SIGNET JEWELERS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(in millions)
Common
shares at
par value
 
Additional
paid-in
capital
 
Other
reserves
 
Treasury
shares
 
Retained
earnings
 
Accumulated
other
comprehensive
loss
 
Total
shareholders’
equity
Balance at February 3, 2018
$
15.7

 
$
290.2

 
$
0.4

 
$
(1,942.1
)
 
$
4,396.2

 
$
(260.6
)
 
$
2,499.8

Impact from adoption of new accounting pronouncements (1)

 

 

 

 
0.8

 
(0.8
)
 

Net loss

 

 

 

 
(496.6
)
 

 
(496.6
)
Other comprehensive income

 

 

 

 

 
(20.5
)
 
(20.5
)
Dividends on common shares

 

 

 

 
(21.8
)
 

 
(21.8
)
Dividends on redeemable convertible preferred shares

 

 

 

 
(8.2
)
 

 
(8.2
)
Repurchase of common shares

 

 

 
(60.0
)
 

 

 
(60.0
)
Net settlement of equity based awards

 
(10.6
)
 

 
9.9

 
(1.2
)
 

 
(1.9
)
Share-based compensation expense

 
1.8

 

 

 

 

 
1.8

Balance at May 5, 2018
$
15.7

 
$
281.4

 
$
0.4

 
$
(1,992.2
)
 
$
3,869.2

 
$
(281.9
)
 
$
1,892.6

(1) 
Adjustment reflects the reclassification of unrealized gains related to the Company’s equity security investments as of February 3, 2018 from AOCI into beginning retained earnings associated with the adoption of ASU 2016-1.
The accompanying notes are an integral part of these condensed consolidated financial statements.

7


SIGNET JEWELERS LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and principal accounting policies
Signet Jewelers Limited (“Signet” or the “Company”), a holding company incorporated in Bermuda, is the world’s largest retailer of diamond jewelry. The Company operates through its 100% owned subsidiaries with sales primarily in the United States (“US”), United Kingdom (“UK”) and Canada. During the first quarter of Fiscal 2019, the Company realigned its organizational structure. The new structure will allow for further integration of operational and product development processes and support growth strategies. In accordance with this organizational change, beginning with quarterly reporting for the 13 weeks ended May 5, 2018, the Company identified three reportable segments as follows: North America, which consists of the legacy Sterling Jewelers and Zale division; International, which consists of the legacy UK Jewelry division; and Other. The “Other” reportable segment consists of all non-reportable segments, including subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones and unallocated corporate administrative functions. See Note 6 for additional discussion of the Company’s segments.
On September 12, 2017, the Company completed the acquisition of R2Net Inc., a Delaware corporation (“R2Net”). See Note 5 for additional information regarding the acquisition.
In October 2017, the Company, through its subsidiary Sterling Jewelers Inc. (“Sterling”), completed the sale of the prime-only quality portion of Sterling’s in-house finance receivable portfolio to Comenity Bank (“Comenity”). Additionally, during the first quarter of Fiscal 2019, the Company, through its subsidiary Sterling, entered into definitive agreements with CarVal Investors (“CarVal”) and Castlelake, L.P. (“Castlelake”) to sell all eligible non-prime in-house accounts receivable. See Note 4 for additional information regarding the transaction.
Signet’s sales are seasonal, with the fourth quarter accounting for almost 40% of annual sales, with December being by far the most important month of the year. The “Holiday Season” consists of results for the months of November and December. As a result, approximately 45% to 55% of Signet’s annual operating income normally occurs in the fourth quarter, comprised of approximately 40% to 45% of the annual operating income in North America and nearly all of the annual operating income in the International segment. In Fiscal 2019, the Company expects all of its annual operating income to be generated in the fourth quarter of Fiscal 2019 due to the timing and impacts of the Company’s strategic credit outsourcing and transformation initiatives.
Basis of preparation
The condensed consolidated financial statements of Signet are 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 US generally accepted accounting principles (“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 fiscal year ended February 3, 2018 filed with the SEC on April 2, 2018. Related to the new accounting pronouncement adoptions discussed in Note 2 and the change in segments disclosed in Note 6, Signet has reclassified certain prior year amounts in its consolidated financial statements and notes to the consolidated financial statements to conform to the current year presentation.
Use of estimates
The preparation of these condensed consolidated financial statements, in conformity with US GAAP and SEC regulations for interim reporting, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are primarily made in relation to the valuation of accounts receivable, inventories, deferred revenue, derivatives, employee benefits, income taxes, contingencies, asset impairments, indefinite-lived intangible assets, depreciation and amortization of long-lived assets, as well as accounting for business combinations.
Fiscal year
The Company’s fiscal year ends on the Saturday nearest to January 31st. Fiscal 2019 and Fiscal 2018 refer to the 52 week period ending February 2, 2019 and the 53 week period ending February 3, 2018, respectively. Within these condensed consolidated financial statements, the first quarter of the relevant fiscal years 2019 and 2018 refer to the 13 weeks ended May 5, 2018 and April 29, 2017, respectively.

8


Foreign currency translation
The financial position and operating results of certain foreign operations, including certain subsidiaries operating in the UK as part of the International segment and Canada as part of the North America segment, are consolidated using the local currency as the functional currency. Assets and liabilities are translated at the rates of exchange on the balance sheet date, and revenues and expenses are translated at the monthly average rates of exchange during the period. Resulting translation gains or losses are included in the accompanying condensed consolidated statements of equity as a component of accumulated other comprehensive income (loss) (“AOCI”). Gains or losses resulting from foreign currency transactions are included within the condensed consolidated income statements.
See Note 11 for additional information regarding the Company’s foreign currency translation.
2. New accounting pronouncements
The following section provides a description of new accounting pronouncements ("Accounting Standard Update" or "ASU") issued by the Financial Accounting Standards Board ("FASB") that are applicable to the Company.
New accounting pronouncements adopted during the period
Revenue recognition
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has issued several updates to the standard that i) defer the original effective date; ii) clarify the application of principal versus agent guidance; iii) clarify the guidance on inconsequential and perfunctory promises and licensing; and iv) clarify the guidance on the de-recognition of non-financial assets. Signet adopted ASU 2014‑09 and related updates effective February 4, 2018 using the modified retrospective approach applied only to contracts not completed as of the date of adoption with no restatement of prior periods and by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of equity.
As a result of the adoption, the Company identified that the new standard required the Company to adjust its presentation related to customer trade-ins, accounting for returns reserves and treatment of the amortization of certain bonus and profit-sharing arrangements related to third-party credit card programs. After the adoption of ASU 2014-09, the fair value of customer trade-ins will be considered non-cash consideration when determining the transaction price, and therefore classified as revenue rather than its previous classification as a reduction to cost of goods sold. During the 13 weeks ended May 5, 2018, the recognition of this non-cash consideration resulted in an additional $24.5 million of revenue due to the adoption of ASU 2014-09. Also, the Company will record its current sales return reserve within separate refund liability and asset for recovery accounts within other current asset and liabilities, respectively. Further, subsequent amortization of certain signing bonuses and receipt of funds in connection with economic profit sharing arrangements will be recognized as a component of sales rather than as an offset to selling, general and administrative expense. The change in balance classification and change in amortization treatment were immaterial to the Company’s consolidated financial statements. See additional disclosure requirements within Note 3.
In addition to the pronouncement above, the following ASUs were adopted as of February 4, 2018. The impact on the Company's consolidated financial statements is described within the table below:
Standard
 
Description
ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, issued January 2016.
 
Impacts accounting for equity investments and financial liabilities under the fair value option, as well as, the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments will generally be measured at fair value, with subsequent changes in fair value recognized in net income. The adoption of ASU 2016-01 did not have a material impact on the Company’s financial position or results of operations. See immaterial presentation changes on the condensed consolidated balance sheet and income statements and adoption adjustment within Note 11.
ASU No. 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20), issued March 2016.
 
Addresses diversity in practice related to the derecognition of a prepaid stored-value product liability. Liabilities related to the sale of prepaid stored-value products within the scope of this update are financial liabilities. The adoption of ASU 2016-04 did not have a material impact on the Company’s financial position or results of operations.
ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, issued January 2017.
 
Requires a single-step quantitative test to identify and measure goodwill impairment based on the excess of a reporting unit's carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative impairment test is necessary. ASU No. 2017-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Signet early adopted this guidance in the first quarter of Fiscal 2019. The adoption of ASU 2017-04 did not have a material impact on the Company’s financial position or results of operations.

9



Standard
 
Description
ASU No. 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, issued March 2017.
 
Requires entities to present the service cost component of the net periodic pension cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Entities will present the other components of net benefit cost separately from the service cost component and outside of operating profit within the income statement. In addition, only the service cost component will be eligible for capitalization in assets. The adoption of ASU 2017-07 did not have a material impact on the Company’s financial position or results of operations. See immaterial presentation changes on the condensed consolidated income statements.
New accounting pronouncements to be adopted in future periods
The Company is currently evaluating the impact on its financial statements of the following ASUs:
Standard
 
Description
ASU No. 2016-02, Leases (Topic 842), issued February 2016.
 
Requires the recognition of a right-of-use asset and a corresponding lease liability on the balance sheet for long-term lease agreements. The lease liability will be equal to the present value of all reasonably certain lease payments. The right-of-use asset will be based on the liability, subject to adjustment for initial direct costs. Lease agreements that are 12 months or less are permitted to be excluded from the balance sheet. In general, leases will be amortized on a straight-line basis with the exception of finance lease agreements. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. Signet will adopt this guidance in the first quarter of our fiscal year ending February 1, 2020. Signet continues to evaluate available transition methodologies and assess the impact that adopting this guidance will have on the Company’s financial position or results of operations.
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, issued June 2016.
 
Requires entities to measure and recognize expected credit losses for financial assets measured at amortized cost basis. The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts of expected losses over the remaining contractual life that affect collectability. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted.
ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, issued August 2017.
 
Expands the types of risk management strategies eligible for hedge accounting, refines the documentation and effectiveness assessment requirements and modifies the presentation and disclosure requirements for hedge accounting activities. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted.
3. Revenue recognition
The following tables provide the Company’s revenue, disaggregated by major product and channel, for the 13 weeks ended May 5, 2018 and April 29, 2017:
 
13 weeks ended May 5, 2018
 
13 weeks ended April 29, 2017
(in millions)
North America
 
International
 
Other
 
Consolidated
 
North America
 
International
 
Other
 
Consolidated
Sales by product:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bridal
$
617.9

 
$
55.6

 
$

 
$
673.5

 
$
562.9

 
$
53.1

 
$

 
$
616.0

Fashion
461.1

 
25.9

 

 
487.0

 
450.9

 
25.8

 

 
476.7

Watches
52.2

 
39.1

 

 
91.3

 
51.5

 
36.5

 

 
88.0

Other(1)
216.6

 
8.1

 
4.1

 
228.8

 
209.1

 
7.1

 
6.5

 
222.7

Total sales
$
1,347.8

 
$
128.7

 
$
4.1

 
$
1,480.6

 
$
1,274.4

 
$
122.5

 
$
6.5

 
$
1,403.4

(1)  
Other revenue primarily includes gift and other miscellaneous jewelery sales, repairs, warranty and other miscellaneous non-jewelry sales.

10


 
13 weeks ended May 5, 2018
 
13 weeks ended April 29, 2017
(in millions)
North America
 
International
 
Other
 
Consolidated
 
North America
 
International
 
Other
 
Consolidated
Sales by channel:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Store
$
1,213.7

 
$
116.3

 
$
4.1

 
$
1,334.1

 
$
1,203.3

 
$
112.6

 
$
6.5

 
$
1,322.4

E-commerce(1)
134.1

 
12.4

 

 
146.5

 
71.1

 
9.9

 

 
81.0

Total sales
$
1,347.8

 
$
128.7

 
$
4.1

 
$
1,480.6

 
$
1,274.4

 
$
122.5

 
$
6.5

 
$
1,403.4

(1) 
North America includes $53.3 million in the 13 weeks ended May 5, 2018 from James Allen which was acquired during the third quarter of Fiscal 2018. See Note 5 for additional information regarding the acquisition.
For the majority of the Company’s transactions, revenue is recognized when there is persuasive evidence of an arrangement, products have been delivered or services have been rendered, the sale price is fixed and determinable, and collectability is reasonably assured. The Company’s revenue streams and their respective accounting treatments are discussed below.
Merchandise sale and repairs
Store sales are recognized when the customer receives and pays for the merchandise at the store with cash, in-house customer finance, private label credit card programs, a third-party credit card or a lease purchase option. For online sales shipped to customers, sales are recognized at the estimated time the customer has received the merchandise. Amounts related to shipping and handling that are billed to customers are reflected in sales and the related costs are reflected in cost of sales. Revenues on the sale of merchandise are reported net of anticipated returns and sales tax collected. Returns are estimated based on previous return rates experienced. Any deposits received from a customer for merchandise are deferred and recognized as revenue when the customer receives the merchandise. Revenues derived from providing replacement merchandise on behalf of insurance organizations are recognized upon receipt of the merchandise by the customer. Revenues on repair of merchandise are recognized when the service is complete and the customer collects the merchandise at the store.
Extended service plans and lifetime warranty agreements (“ESP”)
The Company recognizes revenue related to ESP sales in proportion to when the expected costs will be incurred. The deferral period for ESP sales is determined from patterns of claims costs, including estimates of future claims costs expected to be incurred. Management reviews the trends in claims to assess whether changes are required to the revenue and cost recognition rates utilized. A significant change in estimates related to the time period or pattern in which warranty-related costs are expected to be incurred could materially impact revenues. All direct costs associated with the sale of these plans are deferred and amortized in proportion to the revenue recognized and disclosed as either other current assets or other assets in the consolidated balance sheets. Unamortized deferred selling costs as of May 5, 2018, February 3, 2018 and April 29, 2017 were as follows:
(in millions)
May 5, 2018
 
February 3, 2018
 
April 29, 2017
Deferred ESP selling costs
 
 
 
 
 
Other current assets
$
30.6

 
$
30.9

 
$
29.6

Other assets
89.2

 
89.5

 
86.7

Total deferred ESP selling costs
$
119.8

 
$
120.4

 
$
116.3

The North America segment sells ESP, subject to certain conditions, to perform repair work over the life of the product. Revenue from the sale of the lifetime ESP is recognized consistent with the estimated pattern of claim costs expected to be incurred by the Company in connection with performing under the ESP obligations. Based on an evaluation of historical claims data, management currently estimates that substantially all claims will be incurred within 17 years of the sale of the warranty contract.
The North America segment sells a Jewelry Replacement Plan (“JRP”). The JRP is designed to protect customers from damage or defects of purchased merchandise for a period of three years. If the purchased merchandise is defective or becomes damaged under normal use in that time period, the item will be replaced. JRP revenue is deferred and recognized on a straight-line basis over the period of expected claims costs.
Signet also sells warranty agreements in the capacity of an agent on behalf of a third-party. The commission that Signet receives from the third-party is recognized at the time of sale less an estimate of cancellations based on historical experience.
Sale vouchers
Certain promotional offers award sale vouchers to customers who make purchases above a certain value, which grant a fixed discount on a future purchase within a stated time frame. The Company accounts for such vouchers by allocating the fair value of the voucher between the initial purchase and the future purchase using the relative-selling-price method. Sale vouchers are not sold on a stand-alone basis. The fair value of the voucher is determined based on the average sales transactions in which the vouchers were issued, when the vouchers are expected to be redeemed and the estimated voucher redemption rate. The fair value allocated to the future purchase is recorded as deferred revenue.

11


Consignment inventory sales
Sales of consignment inventory are accounted for on a gross sales basis as the Company is the primary obligor providing independent advice, guidance and after-sales service to customers. The products sold from consignment inventory are indistinguishable from other products that are sold to customers and are sold on the same terms. Supplier products are selected at the discretion of the Company. The Company is responsible for determining the selling price, physical security of the products and collections of accounts receivable.
Deferred revenue
Deferred revenue is comprised primarily of ESP and sale voucher promotions and other as follows:
(in millions)
May 5, 2018
 
February 3, 2018
 
April 29, 2017
ESP deferred revenue
$
913.5

 
$
916.1

 
$
903.7

Voucher promotions and other
38.9

 
41.4

 
27.0

Total deferred revenue
$
952.4

 
$
957.5

 
$
930.7

 
 
 
 
 
 
Disclosed as:
 
 
 
 
 
Current liabilities
$
284.9

 
$
288.6

 
$
272.1

Non-current liabilities
667.5

 
668.9

 
658.6

Total deferred revenue
$
952.4

 
$
957.5

 
$
930.7

 
 
13 weeks ended
(in millions)
 
May 5, 2018
 
April 29, 2017
ESP deferred revenue, beginning of period
 
$
916.1

 
$
905.6

Plans sold(1)
 
96.0

 
96.6

Revenue recognized
 
(98.6
)
 
(98.5
)
ESP deferred revenue, end of period
 
$
913.5

 
$
903.7

(1) 
Includes impact of foreign exchange translation.
4. Credit transaction, net
During Fiscal 2018, Signet announced a strategic initiative to outsource its North America private label credit card programs and sell the existing in-house finance receivables. Below is a summary of the transactions the Company has entered into as a result of this strategic initiative:
Fiscal 2018
In October 2017, Signet, through its subsidiary Sterling, completed the sale of the prime-only credit quality portion of Sterling’s in-house finance receivable portfolio to Comenity. The following events summarize the credit transaction:
Receivables reclassification: In the second quarter of Fiscal 2018, certain in-house finance receivables that met the criteria for sale to Comenity were reclassified from "held for investment" to "held for sale." Accordingly, the receivables were recorded at the lower of cost (par) or fair value, resulting in the reversal of the related allowance for credit losses.
Proceeds received: In October 2017, the Company received $952.5 million in cash consideration reflecting the par value of the receivables sold. In addition, the Company recognized a beneficial interest asset representing the present value of the cash flows the Company expects to receive under the economic profit sharing agreement related to the receivables sold.
Asset-backed securitization facility termination: In October 2017, the Company terminated the asset-backed securitization facility in order to transfer the receivables free and clear. The asset-backed securitization facility had a principal balance outstanding of $600.0 million at the time of termination. The payoff was funded through the proceeds received from the par value of receivables sold.

12


Program agreement: Comenity provides credit to prime-only credit quality customers with an initial term of seven years and, unless terminated by either party, additional renewal terms of two years. Under the Program Agreement, Comenity established a program to issue Sterling credit cards to be serviced, marketed and promoted in accordance with the terms of the agreement. Subject to limited exceptions, Comenity is the exclusive issuer of private label credit cards or an installment or other closed end loan product in the United States bearing specified Company trademarks, including “Kay”, “Jared” and specified regional brands, but excluding “Zale”, during the term of the agreement. The pre-existing arrangement with Comenity for the issuing of Zale credit cards will be unaffected by the execution of the Program Agreement. Upon expiration or termination by either party of the Program Agreement, Sterling retains the option to purchase, or arrange the purchase by a third party of, the program assets from Comenity on terms that are no more onerous to Sterling than those applicable to Comenity under the Purchase Agreement, or in the case of a purchase by a third party, on customary terms. Additionally, the Company received a signing bonus, which may be repayable under certain conditions if the Program Agreement is terminated, and a right to receive future payments related to the performance of the credit program under an economic profit sharing agreement. The Program Agreement contains customary representations, warranties and covenants.
Additionally, Signet and Genesis Financial Solutions (“Genesis”) entered into a five-year servicing agreement in October 2017, under which Genesis will provide credit servicing functions for Signet’s existing non-prime accounts receivable, as well as future non-prime account originations.
Fiscal 2019
During March 2018, the Company, through its subsidiary Sterling, entered into a definitive agreement with CarVal to sell all eligible non-prime in-house accounts receivable. In May 2018, the Company exercised its option to appoint a minority party, Castlelake, to purchase 30% of the eligible receivables sold to CarVal under the Receivables Purchase Agreement. The accounts receivable will be sold at a price expressed as a percentage of the par value of the accounts receivable of 72% of par. The purchase price is expected to be settled with 95% received as cash upon closing and the remaining 5% deferred until the second anniversary of the closing date and subject to the non-prime in-house finance receivable portfolio achieving a pre-defined yield. The Company will adjust the asset to fair value in each period of the performance period. The agreement contains customary representations, warranties and covenants.
Receivables reclassification: In March 2018, the eligible non-prime in-house accounts receivables that met the criteria for sale were reclassified from "held for investment" to "held for sale" on the condensed consolidated balance sheets. Accordingly, the receivables were recorded at the lower of cost (par) or fair value as of the date of the reclassification. Subsequent adjustments to the asset fair value are required to occur until the transaction closes, which is expected during the second quarter of Fiscal 2019 subject to certain closing conditions. During the first quarter of Fiscal 2019, total valuation losses of $141.0 million were recorded within credit transaction, net in the condensed consolidated income statement.
Expenses: During Fiscal 2019, the Company incurred $2.1 million of transaction-related costs. These costs were recorded within credit transaction, net in the condensed consolidated income statement during Fiscal 2019.
In addition, for a five-year term, Signet will remain the issuer of non-prime credit with investment funds managed by CarVal and Castlelake purchasing forward receivables at a discount rate determined in accordance with the agreement. Servicing of the non-prime receivables, including operational interfaces and customer servicing, will continue to be provided by Genesis. The credit transaction is subject to certain closing conditions.
5. Acquisition
On September 12, 2017, the Company acquired the outstanding shares of R2Net, the owner of online jewelry retailer JamesAllen.com and Segoma Imaging Technologies. The acquisition rapidly enhanced the Company’s digital capabilities and accelerated its OmniChannel strategy, while adding a millennial-focused online retail brand to the Company’s portfolio. The Company paid $331.7 million, net of acquired cash of $47.3 million, for R2Net.
The transaction was accounted for as a business combination during the third quarter of Fiscal 2018 with R2Net becoming a wholly-owned consolidated subsidiary of Signet. The results of R2Net subsequent to the acquisition date are reported as a component of the results of the North America segment. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial results was not material.

13


Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed are recorded at their estimated fair values on the acquisition date, with the remaining unallocated net purchase price recorded as goodwill. The following table summarizes the preliminary fair values identified for the assets acquired and liabilities assumed in the R2Net acquisition as of September 12, 2017:
(in millions)
Preliminary amounts
Cash and cash equivalents
$
47.3

Inventories
12.1

Other current assets
9.7

Property, plant and equipment
3.5

Intangible assets:
 
Trade names
70.6

Technology-related
4.2

Current liabilities
(42.4
)
Deferred tax liabilities
(25.1
)
Fair value of net assets acquired
79.9

Goodwill(1)
299.1

Total consideration transferred
$
379.0

(1) 
The amount of goodwill generated will be adjusted for any additional assets or liabilities identified by the Company or for any adjustments to the preliminary fair values identified for the assets acquired and liabilities assumed in the R2Net acquisition reflected above.
As of May 5, 2018, the Company is in the process of finalizing the net assets acquired in the acquisition, most notably, the valuation of intangible assets and income taxes. The estimates and assumptions utilized in the preliminary valuation are subject to change within the measurement period as additional information is obtained. The Company expects to finalize the valuation within one year from the date of acquisition. The goodwill generated from the acquisition is primarily attributable to expected synergies and will not be deductible for tax purposes.
6. Segment information
Financial information for each of Signet’s reportable segments is presented in the tables below. Signet’s chief operating decision maker utilizes sales and operating income, after the elimination of any inter-segment transactions, to determine resource allocations and performance assessment measures. During the first quarter of Fiscal 2019, the Company realigned its organizational structure. The new structure will allow for further integration of operational and product development processes and support growth strategies. In accordance with this organizational change, beginning with quarterly reporting for the 13 weeks ended May 5, 2018, the Company reported three reportable segments as follows: North America, which consists of the legacy Sterling Jewelers and Zale division; International, which consists of the legacy UK Jewelry division; and Other. Signet’s sales are derived from the retailing of jewelry, watches, other products and services as generated through the management of its reportable segments.
The North America reportable segment operates across the US and Canada. Its US stores operate nationally in malls and off-mall locations principally as Kay (Kay Jewelers and Kay Jewelers Outlet), Jared (Jared The Galleria Of Jewelry and Jared Vault), Zales (Zales Jewelers and Zales Outlet) and Piercing Pagoda, which operates through mall-based kiosks. Its Canadian stores operate as the Peoples Jewellers store banner. The segment also operates a variety of mall-based regional brands, including Gordon’s Jewelers in the US and Mappins in Canada, and the JamesAllen.com website, which was acquired in the R2Net acquisition.
The International reportable segment operates stores in the UK, Republic of Ireland and Channel Islands. Its stores operate in shopping malls and off-mall locations (i.e. high street) principally as H.Samuel and Ernest Jones.
The Other reportable segment consists of all non-reportable segments that are below the quantifiable threshold for separate disclosure as a reportable segment, including subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones and unallocated corporate administrative functions.
 
 
13 weeks ended
(in millions)
 
May 5, 2018
 
April 29, 2017
Sales:
 
 
 
 
North America segment
 
$
1,347.8

 
$
1,274.4

International segment
 
128.7

 
122.5

Other
 
4.1

 
6.5

Total sales
 
$
1,480.6

 
$
1,403.4

 
 
 
 
 
Operating (loss) income:
 
 
 
 
North America segment
 
$
(537.3
)
 
$
134.8

International segment
 
(7.6
)
 
(2.5
)
Other
 
(29.3
)
 
(17.0
)
Total operating (loss) income
 
$
(574.2
)
 
$
115.3

(in millions)
May 5, 2018
 
February 3, 2018
 
April 29, 2017
Total assets:
 
 
 
 
 
North America segment
$
4,722.3

 
$
5,309.0

 
$
5,961.8

International segment
401.7

 
420.3

 
394.3

Other
148.9

 
110.3

 
109.1

Total assets
$
5,272.9

 
$
5,839.6

 
$
6,465.2

7. Restructuring Plans
Signet Path to Brilliance Plan
During the first quarter of Fiscal 2019, Signet launched a three-year comprehensive transformation plan, the “Signet Path to Brilliance” plan (the “Plan”), to reposition the Company to be a share gaining, OmniChannel jewelry category leader. The Plan is expected to result in pre-tax charges in the range of $170 million - $190 million over the duration of the plan of which $105 million - $120 million are expected to be cash charges. In Fiscal 2019, the Company's preliminary estimates for pre-tax charges related to cost reduction activities is a range of $125 million - $135 million of which $60 million - $65 million are expected to be cash charges. Signet also expects a net reduction in net selling square footage of 4.0% - 5.0% related to a net reduction in stores in Fiscal 2019. Restructuring charges of $6.5 million were recognized in the 13 weeks ended May 5, 2018 primarily related to severance and professional fees for consulting services related to the Plan. No Plan liabilities were recorded as of May 5, 2018.
8. Redeemable preferred shares
On October 5, 2016, the Company issued 625,000 shares of Series A Convertible Preference Shares (“preferred shares”) to Green Equity Investors VI, L.P., Green Equity Investors Side VI, L.P., LGP Associates VI-A LLC and LGP Associates VI-B LLC, all affiliates of Leonard Green & Partners, L.P., (together, the “Investors”) for an aggregate purchase price of $625.0 million, or $1,000 per share (the “Stated Value”) pursuant to the investment agreement dated August 24, 2016. Preferred shareholders are entitled to a cumulative dividend at the rate of 5% per annum, payable quarterly in arrears. Refer to Note 9 for additional discussion of the Company’s dividends on preferred shares.
(in millions, except conversion rate and conversion price)
May 5, 2018
 
February 3, 2018
 
April 29, 2017
Conversion rate
10.9409

 
10.9409

 
10.7707

Conversion price
$
91.4002

 
$
91.4002

 
$
92.8445

Potential impact of preferred shares if-converted to common shares
6.8

 
6.8

 
6.7

Liquidation preference
$
632.8

 
$
632.8

 
$
632.8

In connection with the issuance of the preferred shares, the Company incurred direct and incremental expenses of $13.7 million. These direct and incremental expenses originally reduced the preferred shares carrying value, and will be accreted through retained earnings as a deemed dividend from the date of issuance through the first possible known redemption date, November 2024. Accumulated accretion recorded in the condensed consolidated balance sheets was $2.7 million as of May 5, 2018 (February 3, 2018 and April 29, 2017: $2.3 million and $1.0 million, respectively). Accretion of $0.4 million was recorded to preferred shares in the condensed consolidated balance sheets during the 13 weeks ended May 5, 2018 ($0.4 million for the 13 weeks ended April 29, 2017).

14


9. Shareholders’ equity
Share repurchases
Common shares repurchased during the 13 weeks ended May 5, 2018 and April 29, 2017 were as follows:
 
 
 
13 weeks ended May 5, 2018
 
13 weeks ended April 29, 2017
(in millions, except per share amounts)
Amount
authorized
 
Shares
repurchased
 
Amount
repurchased
 
Average
repurchase
price per
share
 
Shares
repurchased
 
Amount
repurchased
 
Average
repurchase
price per
share
2017 Program(1)
$
600.0

 
0.2

 
$
9.4

 
$
38.86

 
n/a

 
n/a

 
n/a

2016 Program(2)
$
1,375.0

 
1.3

 
$
50.6

 
$
39.76

 

 
$

 
$

Total
 
 
1.5

 
$
60.0

 
$
39.62

 

 
$

 
$

(1) 
The 2017 Program had $590.6 million remaining as of May 5, 2018.
(2) 
The 2016 Program was completed in March 2018.
n/a
Not applicable.
Dividends on common shares
Dividends declared on common shares during the 13 weeks ended May 5, 2018 and April 29, 2017 were as follows:
 
Fiscal 2019
 
Fiscal 2018
(in millions, except per share amounts)
Cash dividend per share
 
Total
dividends
 
Cash dividend
per share
 
Total
dividends
First quarter(1)
$
0.37

 
$
21.8

 
$
0.31

 
$
21.3

(1) 
Signet’s dividend policy for common shares results in the dividend payment date being a quarter in arrears from the declaration date. As a result, as of May 5, 2018 and April 29, 2017, $21.8 million and $21.3 million, respectively, has been recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheets reflecting the cash dividends on common shares declared for the first quarter of Fiscal 2019 and Fiscal 2018, respectively.
Dividends on preferred shares
Dividends declared on preferred shares during the 13 weeks ended May 5, 2018 and April 29, 2017 were as follows:
 
Fiscal 2019
 
Fiscal 2018
(in millions)
Total cash
dividends
 
Total cash
dividends
First quarter (1)
$
7.8

 
$
7.8

(1) 
Signet’s preferred shares dividends results in the dividend payment date being a quarter in arrears from the declaration date. As a result, as of May 5, 2018 and April 29, 2017, $7.8 million and $7.8 million, respectively, has been recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheets reflecting the cash dividends on preferred shares declared for the first quarter of Fiscal 2019 and Fiscal 2018, respectively.
There were no cumulative undeclared dividends on the preferred shares that reduced net (loss) income attributable to common shareholders during the 13 weeks ended May 5, 2018 or the 13 weeks ended April 29, 2017. In addition, deemed dividends of $0.4 million related to accretion of issuance costs associated with the preferred shares was recognized during the 13 weeks ended May 5, 2018 ($0.4 million for the 13 weeks ended April 29, 2017). See Note 8 for additional discussion of the Company’s preferred shares.
10. Earnings (loss) per common share (EPS)
During Fiscal 2019, basic EPS is computed by dividing net (loss) income attributable to common shareholders by the weighted average number of common shares outstanding for the period. The computation of basic EPS is outlined in the table below:
 
 
13 weeks ended
(in millions, except per share amounts)
 
May 5, 2018
 
April 29, 2017
Numerator:
 
 
 
 
Net (loss) income attributable to common shareholders
 
$
(504.8
)
 
$
70.3

Denominator:
 
 
 
 
Weighted average common shares outstanding
 
59.5

 
68.1

EPS – basic
 
$
(8.48
)
 
$
1.03


15


The dilutive effect of share awards represents the potential impact of outstanding awards issued under the Company’s share-based compensation plans, including restricted shares and restricted stock units issued under the Omnibus Plan and stock options issued under the Share Saving Plans. The dilutive effect of preferred shares represents the potential impact for common shares that would be issued upon conversion. Potential common share dilution related to share awards and preferred shares is determined using the treasury stock and if-converted methods, respectively. Under the if-converted method, the preferred shares are assumed to be converted at the beginning of the period, and the resulting common shares are included in the denominator of the diluted EPS calculation for the entire period being presented, only in the periods in which such effect is dilutive. Additionally, in periods in which preferred shares are dilutive, cumulative dividends and accretion for issuance costs associated with the preferred shares are added back to net (loss) income attributable to common shareholders. See Note 8 for additional discussion of the Company’s preferred shares.
The computation of diluted EPS is outlined in the table below:
 
 
13 weeks ended
(in millions, except per share amounts)
 
May 5, 2018
 
April 29, 2017
Numerator:
 
 
 
 
Net (loss) income attributable to common shareholders
 
$
(504.8
)
 
$
70.3

Add: Dividends on preferred shares
 

 

Numerator for diluted EPS
 
$
(504.8
)
 
$
70.3

 
 
 
 
 
Denominator:
 
 
 
 
Weighted average common shares outstanding
 
59.5

 
68.1

Plus: Dilutive effect of share awards
 

 
0.1

Diluted weighted average common shares outstanding
 
59.5

 
68.2

 
 
 
 
 
EPS – diluted
 
$
(8.48
)
 
$
1.03

The calculation of diluted EPS excludes the following items for each respective period on the basis that their effect would be anti-dilutive.
(in millions)
May 5, 2018
 
April 29, 2017
Share awards
0.5

 
0.3

Potential impact of preferred shares
6.8

 
6.7

Total anti-dilutive shares
7.3

 
7.0

11. Accumulated other comprehensive income (loss)
The following tables present the changes in AOCI by component and the reclassifications out of AOCI, net of tax:
 
 
 
 
 
 
 
Pension plan
 
 
(in millions)
Foreign
currency
translation
 
Losses on available-for-sale securities, net
 
Gains (losses)
on cash flow
hedges
 
Actuarial
losses
 
Prior
service
credits
 
Accumulated
other
comprehensive
loss
Balance at February 3, 2018
$
(212.5
)
 
$
(0.1
)
 
$
0.7

 
$
(51.1
)
 
$
2.4

 
$
(260.6
)
Other comprehensive income (“OCI”) before reclassifications
(21.7
)
 
(0.2
)
 
1.5

 

 

 
(20.4
)
Amounts reclassified from AOCI to net income

 

 
(0.3
)
 
0.3

 
(0.1
)
 
(0.1
)
Impact from adoption of new accounting pronouncements (1)

 
(0.8
)
 

 

 

 
(0.8
)
Net current period OCI
(21.7
)
 
(1.0
)
 
1.2

 
0.3

 
(0.1
)
 
(21.3
)
Balance at May 5, 2018
$
(234.2
)
 
$
(1.1
)
 
$
1.9

 
$
(50.8
)
 
$
2.3

 
$
(281.9
)
(1) 
Adjustment reflects the reclassification of unrealized gains related to the Company’s equity security investments as of February 3, 2018 from AOCI into retained earnings associated with the adoption of ASU 2016-1.

16


The amounts reclassified from AOCI were as follows:
 
Amounts reclassified from AOCI
 
 
 
 
13 weeks ended
 
 
(in millions)
 
May 5, 2018
 
April 29, 2017
 
Income statement caption
(Gains) losses on cash flow hedges:
 
 
 
 
 
 
Foreign currency contracts
 
$
0.3

 
$
(1.0
)
 
Cost of sales (see Note 16)
Interest rate swaps
 
(0.3
)
 
0.3

 
Interest expense, net
(see Note 16)
Commodity contracts
 
(0.5
)
 
(1.2
)
 
Cost of sales (see Note 16)
Total before income tax
 
(0.5
)
 
(1.9
)
 
 
Income taxes
 
0.2

 
0.5

 
 
Net of tax
 
(0.3
)
 
(1.4
)
 
 
 
 
 
 
 
 
 
Defined benefit pension plan items:
 
 
 
 
 
 
Amortization of unrecognized actuarial losses
 
0.3

 
0.7

 
Other non-operating income
Amortization of unrecognized net prior service credits
 
(0.1
)
 
(0.4
)
 
Other non-operating income
Total before income tax
 
0.2

 
0.3

 
 
Income taxes
 

 

 
 
Net of tax
 
0.2

 
0.3

 
 
 
 
 
 
 
 
 
Total reclassifications, net of tax
 
$
(0.1
)
 
$
(1.1
)
 
 
12. Income taxes
 
13 weeks ended
 
May 5, 2018
 
April 29, 2017
Effective tax rate
28.3
 %
 
23.0
%
Discrete items recognized
(13.5
)%
 
0.6
%
Effective tax rate recognized in income statement
14.8
 %
 
23.6
%
During the 13 weeks ended May 5, 2018, the Company’s effective tax rate was lower than the US federal income tax rate primarily due to the favorable impact of foreign tax rate differences and benefits from global reinsurance and financing arrangements offset by the unfavorable impact of the impairment of goodwill which was not deductible for tax purposes. The effective tax rate excludes the effects of any discrete items that may be recognized in future periods.
On December 22, 2017, the US government enacted “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “TCJ Act”). The TCJ Act provides for comprehensive tax legislation that reduces the US federal statutory corporate tax rate from 35.0% to 21.0% effective January 1, 2018, limits certain deductions, including limiting the deductibility of interest expense to 30.0% of US Earnings Before Interest, Taxes, Depreciation, and Amortization, broadens the US federal income tax base, requires companies to pay a one-time repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred (“transition tax”), and creates new taxes on certain foreign sourced earnings. As we have a 52-53-week tax year ending the Saturday nearest October 31, the lower corporate income tax rate is administratively phased in, resulting in a blended U.S. federal statutory rate of approximately 23.4% for our fiscal tax year from October 29, 2017 through November 3, 2018 and 21.0% for our fiscal tax years thereafter.
The SEC issued rules to allow a measurement period of up to 12 months following the enactment of the TCJ Act for registrants to finalize their accounting for the related income tax effects.
In the quarter ended February 3, 2018, we recorded a provisional net tax benefit associated with the TCJ Act. In the quarter ended May 5, 2018, we recorded a provisional benefit of $0.6 million as an adjustment to the amounts recorded at February 3, 2018 related to the re-measurement of deferred tax balances recorded in purchase accounting with respect to the R2Net acquisition.

17


As of May 5, 2018, the amounts recorded for the TCJ Act remain provisional for the re-measurement of deferred taxes. Within our calculations of the income tax effects of the TCJ Act, we used assumptions and estimates that may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the FASB and/or various other taxing jurisdictions. In particular, we anticipate that the US state jurisdictions will continue to determine and announce their conformity or decoupling from the Act, either in its entirety or with respect to specific provisions. All of these potential legislative and interpretive actions could result in adjustments to any of the provisional estimates when the accounting for the income tax effects of the TCJ Act is completed.
Tax effects for these items will be recorded in subsequent quarters, as discrete adjustments to our income tax provision, once complete. We elected to adopt the SEC issued guidance that allows for a measurement period, not to exceed one year after the enactment date of the TCJ Act, to finalize the recording of related tax impacts. We currently anticipate finalizing and recording any resulting adjustments during the fourth quarter.
There has been no material change in the amounts of unrecognized tax benefits, or the related accrued interest and penalties (where appropriate), in respect of uncertain tax positions identified as of February 3, 2018.
13. 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.
In October 2017, the Company completed the sale of the prime portion of the Sterling Jewelers customer in-house finance receivables. The receivables sold, which were classified as "held for sale" as of the second quarter of Fiscal 2018, are no longer reported within the condensed consolidated balance sheets. See Note 4 for additional information regarding the sale of the prime portion of the customer in-house finance receivable portfolio.
In March 2018, the Company entered into an agreement to sell the remaining Sterling Jewelers and Zale customer in-house finance receivables. As a result, these receivables have been classified as “held for sale” in the condensed consolidated balance sheet and recorded at the lower of cost (par) or fair value. See Note 4 for additional information regarding the agreement. As of May 5, 2018, the accounts receivable held for sale were recorded at fair value. See Note 17 for additional information regarding the assumptions utilized in the calculation of fair value of the finance receivables held for sale.
(in millions)
May 5, 2018
 
February 3, 2018
 
April 29, 2017
Accounts receivable by portfolio segment, net:
 
 
 
 
 
Legacy Sterling Jewelers customer in-house finance receivables
$

 
$
649.4

 
$
1,683.8

Legacy Zale customer in-house finance receivables
$

 
33.5

 
32.8

North America customer in-house finance receivables
$

 
$
682.9

 
$
1,716.6

Other accounts receivable
6.8

 
9.6

 
9.7

Total accounts receivable, net
$
6.8

 
$
692.5

 
$
1,726.3

 
 
 
 
 
 
Accounts receivable, held for sale
$
484.6

 
$

 
$

Signet grants credit to customers based on a variety of credit quality indicators, including consumer financial information and prior payment experience. On an ongoing basis, management monitors the credit exposure based on past due status and collection experience, as it has found a meaningful correlation between the past due status of customers and the risk of loss.
During the third quarter of Fiscal 2016, Signet implemented a program to provide in-house credit to customers in the Zale division’s US locations. The allowance for credit losses associated with Zale customer in-house finance receivables was immaterial as of February 3, 2018 and April 29, 2017. Effective October 20, 2017, the Zale customer in-house financing programs are being underwritten and serviced by a third party for newly originated balances after the effective date.
Other accounts receivable is comprised primarily of accounts receivable relating to the insurance loss replacement business in the International segment of $5.8 million (February 3, 2018 and April 29, 2017: $9.3 million and $8.9 million, respectively).

18


The allowance for credit losses associated with the portion of customer in-house finance receivables reclassified as “held for sale” was reversed during the first quarter of Fiscal 2019. The activity in the allowance for credit losses on Sterling Jewelers customer in-house finance receivables is shown below:
 
13 weeks ended
(in millions)
May 5, 2018
 
April 29, 2017
Beginning balance
$
(113.5
)
 
$
(138.7
)
Charge-offs, net
56.3

 
54.4

Recoveries
4.2

 
9.1

Provision
(54.6
)
 
(51.7
)
Reversal of allowance on receivables previously held for sale
107.6

 

Ending balance
$

 
$
(126.9
)
Ending receivable balance evaluated for impairment

 
1,810.7

Sterling Jewelers customer in-house finance receivables, net
$

 
$
1,683.8

As a result of the sale of the prime-only credit portion of the customer in-house finance receivable portfolio and the outsourcing of the credit servicing on the remaining in-house finance receivable portfolio in October 2017 as disclosed in Note 4, the Company revised its methodology for measuring delinquency to be based on the contractual basis.
As of May 5, 2018, the customer in-house finance receivables were held for sale and recorded at fair value in the condensed consolidated balance sheet. As such, no valuation allowance for credit losses was required to be recorded. The credit quality indicator and age analysis of customer in-house finance receivables as of February 3, 2018 are shown below under the contractual basis:
   
 
February 3, 2018
(in millions)
 
Gross
 
Valuation
allowance
Performing (accrual status):
 
 
 
 
0 - 120 days past due
 
$
703.4

 
$
(54.0
)
121 or more days past due
 
59.5

 
(59.5
)
 
 
$
762.9

 
$
(113.5
)
 
 
 
 
 
Valuation allowance as a % of ending receivable balance
 


 
14.9
%
Prior to the fourth quarter of Fiscal 2018, the Company’s calculation of the allowance for credit losses was based on a recency measure of delinquency. The credit quality indicator and age analysis of customer in-house finance receivables prior to the sale of the prime-only credit portion of the in-house receivable portfolio as of April 29, 2017 are shown below under the recency basis:
   
 
April 29, 2017
(in millions)
 
Gross
 
Valuation
allowance
Performing (accrual status):
 
 
 
 
Current, aged 0 – 30 days
 
$
1,445.9

 
$
(44.5
)
Past due, aged 31 – 60 days
 
251.9

 
(8.3
)
Past due, aged 61 – 90 days
 
40.9

 
(2.1
)
Non Performing:
 
 
 
 
Past due, aged more than 90 days
 
72.0

 
(72.0
)
 
 
$
1,810.7

 
$
(126.9
)
 
 


 


Valuation allowance as a % of ending receivable balance
 


 
7.0
%

19


14. Inventories
The following table summarizes the Company’s inventory by classification:
(in millions)
May 5, 2018
 
February 3, 2018
 
April 29, 2017
Raw materials
$
69.7

 
$
72.0

 
$
51.2

Finished goods
2,359.3

 
2,208.5

 
2,381.2

Total inventories
$
2,429.0

 
$
2,280.5

 
$
2,432.4

15. Goodwill and intangibles
In connection with the acquisition of R2Net on September 12, 2017, the Company recognized $299.1 million of goodwill, which is reported in the North America segment. The amount of goodwill generated will be adjusted for any additional assets or liabilities identified by the Company or for any adjustments to the preliminary fair values identified for the assets acquired and liabilities assumed in the R2Net acquisition.
Goodwill and other indefinite-lived intangible assets, such as indefinite-lived trade names, are evaluated for impairment annually during the second quarter of the fiscal year. Additionally, if events or conditions were to indicate the carrying value of a reporting unit or an indefinite-lived intangible asset may not be recoverable, the Company would evaluate the asset for impairment at that time. Impairment testing compares the carrying amount of the reporting unit or other intangible assets with its fair value. When the carrying amount of the reporting unit or other intangible assets exceeds its fair value, an impairment charge is recorded.
Due to a sustained decline in the Company’s market capitalization during the 13 weeks ended May 5, 2018, the Company determined a triggering event had occurred that required an interim impairment assessment for all of its reporting units and indefinite-lived intangible assets. As part of the assessment, it was determined that the an increase in the discount rate applied in the valuation was required to align with market-based assumptions and company-specific risk. This higher discount rate, in conjunction with revised long-term projections associated with finalizing certain initial aspects of the Company’s Path to Brilliance transformation plan in the first quarter, resulted in lower than previously projected long-term future cash flows for the reporting units which negatively affected the valuation compared to previous valuations. Due to the inherent uncertainties involved in making the estimates and assumptions used in the fair value analysis, actual results may differ, which could alter the fair value of the reporting units and trade names, and possibly result in impairment charges in future periods. As a result of the interim impairment assessment, the Company recognized pre-tax impairment charges totaling $448.7 million in the 13 weeks ended May 5, 2018.
Goodwill
Using a combination of discounted cash flow and guideline public company methodologies, the Company compared the fair value of each of its reporting units with their carrying value and concluded that a deficit existed. Accordingly, in the 13 weeks ended May 5, 2018, the Company recognized pre-tax impairment charges in operations of $23.2 million and $285.6 million at its’ legacy Sterling Jewelers and Zale Jewelry segments, which are within the Company’s current North America segment.
The following table summarizes the Company’s goodwill by reportable segment:
(in millions)
 
North America
 
Other
 
Total
Balance at January 28, 2017
 
$
514.0

 
$
3.6

 
$
517.6

Acquisitions
 
301.7

 

 
301.7

Impact of foreign exchange and other adjustments
 
2.4

 

 
2.4

Balance at February 3, 2018
 
818.1

 
3.6

 
821.7

Impairment
 
(308.8
)
 

 
(308.8
)
Impact of foreign exchange and other adjustments (1)
 
(3.8
)
 

 
(3.8
)
Balance at May 5, 2018
 
$
505.5

 
$
3.6

 
$
509.1

(1)
During the 13 weeks ended May 5, 2018, other adjustments include a purchase price accounting adjustment of $2.6 million related to a revised valuation of acquired intangible assets from the R2Net acquisition. Refer to Note 5 for additional details.
Intangibles
Definite-lived intangible assets include trade names and favorable lease agreements. Indefinite-lived intangible assets include trade names. Both definite and indefinite-lived assets are recorded within intangible assets, net on the consolidated balance sheets. Intangible liabilities, net is comprised of unfavorable lease agreements and contracts and is recorded within other liabilities on the consolidated balance sheets.
In conjunction with the interim goodwill impairment tests, the Company reviewed its indefinite-lived intangible assets for potential impairment by calculating the fair values of the assets using the relief from royalty method and comparing the fair value to their respective carrying amounts.

20


The interim impairment test resulted in the determination that the fair values of indefinite-lived intangible assets related to certain Zales trade names were less than their carrying value. Accordingly, in the 13 weeks ended May 5, 2018, the Company recognized pre-tax impairment charges in operations of $139.9 million at its’ legacy Zale Jewelry segment, which is within the Company’s current North America segment.
The following table provides additional detail regarding the composition of intangible assets and liabilities:
 
 
May 5, 2018
 
February 3, 2018
 
April 29, 2017
(in millions)
 
Gross
carrying
amount
 
Accumulated
amortization
 
Accumulated impairment loss
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Intangible assets, net:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Definite-lived intangible assets
 
53.5

 
(47.2
)
 

 
6.3

 
49.8

 
(46.7
)
 
3.1

 
48.6

 
(39.7
)
 
8.9

Indefinite-lived intangible assets
 
476.6

 

 
(139.7
)
 
336.9

 
478.4

 

 
478.4

 
403.0

 

 
403.0

Total intangible assets, net
 
$
530.1

 
$
(47.2
)
 
$
(139.7
)
 
$
343.2

 
$
528.2

 
$
(46.7
)
 
$
481.5

 
$
451.6

 
$
(39.7
)
 
$
411.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible liabilities, net
 
$
(114.1
)
 
$
87.1

 
$

 
$
(27.0
)
 
$
(114.5
)
 
$
85.2

 
$
(29.3
)
 
$
(113.5
)
 
$
76.2

 
$
(37.3
)
16. Derivatives
Derivative transactions are used by Signet for risk management purposes to address risks inherent in Signet’s business operations and sources of financing. The main risks arising from Signet’s operations are market risk including foreign currency risk, commodity risk, liquidity risk and interest rate risk. Signet uses derivative financial instruments to manage and mitigate certain of these risks under policies reviewed and approved by the Board of Directors. Signet does not enter into derivative transactions for speculative purposes.
Market risk
Signet generates revenues and incurs expenses in US dollars, Canadian dollars and British pounds. As a portion of the International segment purchases and purchases made by the Canadian operations of the North America segment are denominated in US dollars, Signet enters into forward foreign currency exchange contracts and foreign currency swaps to manage this exposure to the US dollar.
Signet holds a fluctuating amount of British pounds and Canadian dollars reflecting the cash generative characteristics of operations. Signet’s objective is to minimize net foreign exchange exposure to the income statement on non-US dollar denominated items through managing cash levels, non-US dollar denominated intra-entity balances and foreign currency swaps. In order to manage the foreign exchange exposure and minimize the level of funds denominated in British pounds and Canadian dollars, dividends are paid regularly by subsidiaries to their immediate holding companies and excess British pounds and Canadian dollars are sold in exchange for US dollars.
Signet’s policy is to minimize the impact of precious metal commodity price volatility on operating results through the use of outright forward purchases of, or by entering into options to purchase, precious metals within treasury guidelines approved by the Board of Directors. In particular, Signet undertakes some hedging of its requirements for gold through the use of options, net zero-cost collar arrangements (a combination of call and put option contracts), forward contracts and commodity purchasing, while fluctuations in the cost of diamonds are not hedged.
Liquidity risk
Signet’s objective is to ensure that it has access to, or the ability to generate, sufficient cash from either internal or external sources in a timely and cost-effective manner to meet its commitments as they become due and payable. Signet manages liquidity risks as part of its overall risk management policy. Management produces forecasting and budgeting information that is reviewed and monitored by the Board of Directors. Cash generated from operations and external financing are the main sources of funding, which supplement Signet’s resources in meeting liquidity requirements.
The main external sources of funding are a senior unsecured credit facility and senior unsecured notes as described in Note 18.
Interest rate risk