SIGNET JEWELERS LTD, 10-K filed on 3/24/2016
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Jan. 30, 2016
Mar. 18, 2016
Jul. 31, 2015
Document And Entity Information [Abstract]
 
 
 
Document type
10-K 
 
 
Amendment flag
false 
 
 
Document period end date
Jan. 30, 2016 
 
 
Document fiscal year focus
2016 
 
 
Document fiscal period focus
FY 
 
 
Trading symbol
SIG 
 
 
Entity registrant name
SIGNET JEWELERS LTD 
 
 
Entity Central Index Key
0000832988 
 
 
Current Fiscal Year End Date
--01-30 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares outstanding
 
78,384,481 
 
Entity Public Float
 
 
$ 9,644,661,044 
Consolidated Income Statements (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 12 Months Ended
Jan. 30, 2016
Oct. 31, 2015
Aug. 1, 2015
May 2, 2015
Jan. 31, 2015
Nov. 1, 2014
Aug. 2, 2014
May 3, 2014
Feb. 1, 2014
Nov. 2, 2013
Aug. 3, 2013
Jan. 30, 2016
Jan. 31, 2015
Feb. 1, 2014
Income Statement [Abstract]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
 
 
 
 
 
 
 
 
 
 
 
$ 6,550.2 
$ 5,736.3 
$ 4,209.2 
Cost of sales
 
 
 
 
 
 
 
 
 
 
 
(4,109.8)
(3,662.1)
(2,628.7)
Gross margin
 
 
 
 
 
 
 
 
 
 
 
2,440.4 
2,074.2 
1,580.5 
Selling, general and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
(1,987.6)
(1,712.9)
(1,196.7)
Other operating income, net
 
 
 
 
 
 
 
 
 
 
 
250.9 
215.3 
186.7 
Operating income
 
 
 
 
 
 
 
 
 
 
 
703.7 
576.6 
570.5 
Interest expense, net
 
 
 
 
 
 
 
 
 
 
 
(45.9)
(36.0)
(4.0)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
657.8 
540.6 
566.5 
Income taxes
 
 
 
 
 
 
 
 
 
 
 
(189.9)
(159.3)
(198.5)
Net income (loss)
 
 
 
 
 
 
 
 
 
 
 
$ 467.9 
$ 381.3 
$ 368.0 
Earnings per share: basic (usd per share)
 
 
 
 
 
 
 
 
 
 
 
$ 5.89 
$ 4.77 
$ 4.59 
Earnings per share: diluted (usd per share)
 
 
 
 
 
 
 
 
 
 
 
$ 5.87 
$ 4.75 
$ 4.56 
Basic weighted average common shares outstanding (in shares)
 
 
 
 
 
 
 
 
 
 
 
79.5 
79.9 
80.2 
Weighted average common shares outstanding: diluted (in shares)
 
 
 
 
 
 
 
 
 
 
 
79.7 
80.2 
80.7 
Dividends declared per share (usd per share)
$ 0.22 
$ 0.22 
$ 0.22 
$ 0.22 
$ 0.18 
$ 0.18 
$ 0.18 
$ 0.18 
$ 0.15 
$ 0.15 
$ 0.15 
$ 0.88 
$ 0.72 
$ 0.6 
Consolidated Statements Of Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Jan. 30, 2016
Jan. 31, 2015
Feb. 1, 2014
Pre-tax amount
 
 
 
Foreign currency translation adjustments
$ (40.2)
$ (60.6)
$ 12.4 
Available-for-sale securities:
 
 
 
Unrealized loss on securities, net
(0.7)
Cash flow hedges:
 
 
 
Unrealized gain (loss)
(17.2)
9.1 
(33.0)
Reclassification adjustment for losses to net income
4.9 
18.6 
11.1 
Pension plan:
 
 
 
Actuarial gain (loss)
13.8 
(20.4)
0.2 
Reclassification adjustment to net income for amortization of actuarial losses
3.4 
2.0 
2.3 
Prior service costs
(0.6)
(0.9)
(0.9)
Reclassification adjustment to net income for amortization of net prior service credits
(2.2)
(1.7)
(1.5)
Total other comprehensive (loss) income
(38.8)
(53.9)
(9.4)
Tax (expense) benefit
 
 
 
Foreign currency translation adjustments
Available-for-sale securities:
 
 
 
Unrealized loss on securities, net
0.3 
Cash flow hedges:
 
 
 
Unrealized gain (loss)
5.4 
(2.9)
11.0 
Reclassification adjustment for losses to net income
(1.4)
(6.1)
(4.4)
Pension plan:
 
 
 
Actuarial gain (loss)
(2.9)
4.6 
Reclassification adjustment to net income for amortization of actuarial losses
(0.7)
(0.4)
(0.6)
Prior service costs
0.1 
0.2 
0.2 
Reclassification adjustment to net income for amortization of net prior service credits
0.5 
0.4 
0.4 
Total other comprehensive (loss) income
1.3 
(4.2)
6.6 
After-tax amount
 
 
 
Net income
467.9 
381.3 
368.0 
Foreign currency translation adjustments
(40.2)
(60.6)
12.4 
Available-for-sale securities:
 
 
 
Unrealized loss on securities, net
(0.4)
Cash flow hedges:
 
 
 
Unrealized gain (loss)
(11.8)
6.2 
(22.0)
Reclassification adjustment for losses to net income
(3.5)
(12.5)
(6.7)
Pension plan:
 
 
 
Actuarial gain (loss)
10.9 
(15.8)
0.2 
Reclassification adjustment to net income for amortization of actuarial losses
2.7 
1.6 
1.7 
Prior service costs
(0.5)
(0.7)
(0.7)
Reclassification adjustment to net income for amortization of net prior service credits
(1.7)
(1.3)
(1.1)
Total other comprehensive (loss) income
(37.5)
(58.1)
(2.8)
Total comprehensive income
$ 430.4 
$ 323.2 
$ 365.2 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Jan. 30, 2016
Jan. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 137.7 
$ 193.6 
Accounts receivable, net
1,756.4 
1,567.6 
Other receivables
84.0 
63.6 
Other current assets
154.4 
137.2 
Income taxes
3.5 
1.8 
Inventories
2,453.9 
2,439.0 
Total current assets
4,589.9 
4,402.8 
Non-current assets:
 
 
Property, plant and equipment, net
727.6 
665.9 
Goodwill
515.5 
519.2 
Intangible assets, net
427.8 
447.1 
Other assets
162.3 
140.0 
Deferred tax assets
2.3 
Retirement benefit asset
51.3 
37.0 
Total assets
6,474.4 
6,214.3 
Debt, Current
59.5 
97.5 
Current liabilities:
 
 
Loans and overdrafts
59.5 
97.5 
Accounts payable
269.1 
277.7 
Accrued expenses and other current liabilities
498.3 
482.4 
Deferred revenue
260.3 
248.0 
Income taxes
65.7 
86.9 
Total current liabilities
1,152.9 
1,192.5 
Non-current liabilities:
 
 
Long-term debt
1,328.7 
1,363.8 
Other liabilities
230.5 
230.2 
Deferred revenue
629.1 
563.9 
Deferred tax liabilities
72.5 
53.5 
Total liabilities
3,413.7 
3,403.9 
Commitments and contingencies
   
   
Shareholders’ equity:
 
 
Common shares of $0.18 par value: authorized 500 shares, 79.4 shares outstanding (2015: 80.3 outstanding)
15.7 
15.7 
Additional paid-in capital
279.9 
265.2 
Other reserves
0.4 
0.4 
Treasury shares at cost: 7.8 shares (2015: 6.9 shares)
(495.8)
(370.0)
Retained earnings
3,534.6 
3,135.7 
Accumulated other comprehensive loss
(274.1)
(236.6)
Total shareholders’ equity
3,060.7 
2,810.4 
Total liabilities and shareholders’ equity
$ 6,474.4 
$ 6,214.3 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data, unless otherwise specified
Jan. 30, 2016
Jan. 31, 2015
Statement of Financial Position [Abstract]
 
 
Common shares, par value (usd per share)
$ 0.18 
$ 0.18 
Common shares, authorized
500 
500 
Common shares, outstanding
79.4 
80.3 
Treasury shares, shares
7.8 
6.9 
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Jan. 30, 2016
Jan. 31, 2015
Feb. 1, 2014
Cash flows from operating activities:
 
 
 
Net income
$ 467.9 
$ 381.3 
$ 368.0 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
175.3 
149.7 
110.2 
Amortization of unfavorable leases and contracts
(28.7)
(23.7)
Pension benefit
(2.4)
(0.5)
Share-based compensation
16.4 
12.1 
14.4 
Deferred taxation
25.0 
(47.6)
(20.4)
Excess tax benefit from exercise of share awards
(6.9)
(11.8)
(6.5)
Amortization of debt discount and issuance costs
3.6 
7.4 
0.4 
Other non-cash movements
3.6 
2.7 
(3.3)
Changes in operating assets and liabilities:
 
 
 
Increase in accounts receivable
(189.8)
(194.6)
(168.3)
Increase in other receivables and other assets
(44.1)
(18.0)
(21.6)
Increase in other current assets
(26.5)
(35.5)
(4.1)
Increase in inventories
(46.0)
(121.6)
(98.4)
(Decrease) increase in accounts payable
(6.4)
23.7 
3.2 
Increase in accrued expenses and other liabilities
51.8 
64.8 
8.6 
Increase in deferred revenue
76.3 
102.3 
50.8 
(Decrease) increase in income taxes payable
(25.7)
(1.6)
7.9 
Pension plan contributions
(2.5)
(4.2)
(4.9)
Net cash provided by operating activities
443.3 
283.0 
235.5 
Investing activities
 
 
 
Purchase of property, plant and equipment
(226.5)
(220.2)
(152.7)
Purchase of available-for-sale securities
(6.2)
(5.7)
Proceeds from sale of available-for-sale securities
4.0 
2.5 
Net cash used in investing activities
(228.7)
(1,652.6)
(160.4)
Financing activities
 
 
 
Dividends paid
(67.1)
(55.3)
(46.0)
Proceeds from issuance of common shares
5.0 
6.1 
9.3 
Excess tax benefit from exercise of share awards
6.9 
11.8 
6.5 
Proceeds from revolving credit facility
316.0 
260.0 
57.0 
Repayments of revolving credit facility
(316.0)
(260.0)
(57.0)
Payment of debt issuance costs
(20.5)
Repurchase of common shares
(130.0)
(29.8)
(104.7)
Net settlement of equity based awards
(8.3)
(18.4)
(9.2)
Principal payments under capital lease obligations
(1.0)
(0.8)
Proceeds from (repayment of) short-term borrowings
(47.1)
39.4 
19.3 
Net cash (used in) provided by financing activities
(266.6)
1,320.9 
(124.8)
Cash and cash equivalents at beginning of period
193.6 
247.6 
301.0 
Decrease in cash and cash equivalents
(52.0)
(48.7)
(49.7)
Effect of exchange rate changes on cash and cash equivalents
(3.9)
(5.3)
(3.7)
Cash and cash equivalents at end of period
137.7 
193.6 
247.6 
Non-cash investing activities:
 
 
 
Capital expenditures in accounts payable
9.3 
6.2 
2.0 
Supplemental cash flow information:
 
 
 
Interest paid
41.6 
25.4 
3.5 
Income taxes paid
180.1 
208.8 
211.0 
Senior Notes
 
 
 
Financing activities
 
 
 
Proceeds from debt
398.4 
Term Loan
 
 
 
Financing activities
 
 
 
Proceeds from debt
400.0 
Repayments of debt
(25.0)
(10.0)
Securitization facility
 
 
 
Financing activities
 
 
 
Proceeds from debt
2,303.9 
1,941.9 
Repayments of debt
(2,303.9)
(1,341.9)
Ultra Acquisition
 
 
 
Investing activities
 
 
 
Acquisition of business
1.4 
Zale
 
 
 
Investing activities
 
 
 
Acquisition of business
(1,429.2)
Botswana Diamond Polishing Factory Acquisition
 
 
 
Investing activities
 
 
 
Acquisition of business
$ 0 
$ 0 
$ (9.1)
Consolidated Statements Of Shareholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common shares at par value
Additional paid-in- capital
Other reserves
Treasury shares
Retained earnings
Accumulated other comprehensive (loss) income
Balance at Feb. 02, 2013
$ 2,329.9 
$ 15.7 
$ 246.3 
$ 0.4 
$ (260.0)
$ 2,503.2 
$ (175.7)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Net income
368.0 
368.0 
Other comprehensive loss
(2.8)
(2.8)
Dividends
(48.2)
(48.2)
Repurchase of common shares
(104.7)
(104.7)
Net settlement of equity based awards
(2.7)
(1.7)
7.1 
(8.1)
Share options exercised
9.2 
(0.2)
11.4 
(2.0)
Share-based compensation expense
14.4 
14.4 
Balance at Feb. 01, 2014
2,563.1 
15.7 
258.8 
0.4 
(346.2)
2,812.9 
(178.5)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Net income
381.3 
381.3 
Other comprehensive loss
(58.1)
(58.1)
Dividends
(57.7)
(57.7)
Repurchase of common shares
(29.8)
(29.8)
Net settlement of equity based awards
(6.6)
(3.0)
(3.2)
(0.4)
Share options exercised
6.1 
(2.7)
9.2 
(0.4)
Share-based compensation expense
12.1 
12.1 
Balance at Jan. 31, 2015
2,810.4 
15.7 
265.2 
0.4 
(370.0)
3,135.7 
(236.6)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Net income
467.9 
467.9 
Other comprehensive loss
(37.5)
(37.5)
Dividends
(70.2)
(70.2)
Repurchase of common shares
(130.0)
(130.0)
Net settlement of equity based awards
(1.3)
(1.5)
(1.1)
1.3 
Share options exercised
5.0 
(0.2)
5.3 
(0.1)
Share-based compensation expense
16.4 
16.4 
Balance at Jan. 30, 2016
$ 3,060.7 
$ 15.7 
$ 279.9 
$ 0.4 
$ (495.8)
$ 3,534.6 
$ (274.1)
Organization and Critical Accounting Policies
Organization and critical accounting policies
Organization and critical accounting policies
Signet Jewelers Limited (“Signet” or the “Company”), a holding company incorporated in Bermuda, is the world’s largest retailer of diamond jewelry. The Company operates through its 100% owned subsidiaries with sales primarily in the US, UK and Canada. Signet manages its business as five reportable segments: the Sterling Jewelers division, the Zale division, which consists of the Zale Jewelry and Piercing Pagoda segments, the 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 4 for additional discussion of the Company’s segments.
Signet’s sales are seasonal, with the first quarter slightly exceeding 20% of annual sales, the second and third quarters each approximating 20% and the fourth quarter accounting for almost 40% of annual sales, with December being by far the most important month of the year. The “Holiday Season” consists of results for the months of November and December. As a result, approximately 45% to 55% of Signet’s annual operating income normally occurs in the fourth quarter, comprised of nearly all of the UK Jewelry and Zale divisions’ annual operating income and about 40% to 45% of the Sterling Jewelers division’s annual operating income.
The Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued. There are no material related party transactions. The following accounting policies have been applied consistently in the preparation of the Company’s financial statements.
(a) Basis of preparation
The consolidated financial statements of Signet are prepared in accordance with US generally accepted accounting principles (“US GAAP”) and include the results for the 52 week period ended January 30, 2016 (“Fiscal 2016”), as Signet’s fiscal year ends on the Saturday nearest to January 31. The comparative periods are for the 52 week period ended January 31, 2015 (“Fiscal 2015”) and the 52 week period ended February 1, 2014 (“Fiscal 2014”). Intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.
(b) Use of estimates
The preparation of these consolidated financial statements, in conformity with US GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Estimates and assumptions are primarily made in relation to the valuation of accounts receivables, inventories, deferred revenue, derivatives, employee benefits, income taxes, contingencies, asset impairments, depreciation and amortization of long-lived assets as well as accounting for business combinations.
The reported results of operations are not indicative of results expected in future periods.
(c) Foreign currency translation
The financial position and operating results of certain foreign operations, including the UK Jewelry division and the Canadian operations of the Zale Jewelry 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 consolidated statements of shareholders’ equity as a component of accumulated other comprehensive income (loss) (“AOCI”). Gains or losses resulting from foreign currency transactions are included within the consolidated income statements, whereas translation adjustments and gains or losses related to intercompany loans of a long-term investment nature are recognized as a component of AOCI.
See Note 7 for additional discussion of the Company’s foreign currency translation.
(d) Revenue recognition
The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery of products has occurred 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 or a third party credit card. 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 lifetime warranty sales in proportion to when the expected costs will be incurred. The deferral period for lifetime warranty sales in each division is determined from patterns of claims costs, including estimates of future claims costs expected to be incurred. Management reviews the trends in claims to assess whether changes are required to the revenue and cost recognition rates utilized. A significant change in estimates related to the time period or pattern in which warranty-related costs are expected to be incurred could materially impact revenues. All direct costs associated with the sale of these plans are deferred and amortized in proportion to the revenue recognized and disclosed as either other current assets or other assets.
The Sterling Jewelers division sells extended service plans, subject to certain conditions, to perform repair work over the life of the product. Revenue from the sale of these lifetime extended service plans is recognized consistent with the estimated pattern of claim costs expected to be incurred by the Company in connection with performing under the extended service plan 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.
In the second quarter of Fiscal 2016, an operational change related to the Sterling Jewelers division’s extended service plans associated with ring sizing was made to further align Zale and Sterling ESP policies. As a result, revenue from the sale of these lifetime extended service plans in the Sterling Jewelers division is deferred and recognized over 17 years for all plans, with approximately 57% of revenue recognized within the first two years for plans sold on or after May 2, 2015 and 42% of revenue recognized within the first two years for plans sold prior to May 2, 2015 (January 31, 2015: 45%; February 1, 2014: 45%).
The Zale division also sells extended service plans. Zale Jewelry customers are offered lifetime warranties on certain products that cover sizing and breakage with an option to purchase theft protection for a two-year period. Revenue from the sale of lifetime extended service plans is deferred and recognized over 10 years, with approximately 69% of revenue recognized within the first two years (January 31, 2015: 69%). Revenues related to the optional theft protection are deferred and recognized in proportion to when the expected claims costs will be incurred over the two-year contract period. Zale Jewelry customers are also offered a two-year watch warranty and a one-year warranty that covers breakage. Piercing Pagoda customers are also offered a one-year warranty that covers breakage. Revenue from the two-year watch warranty and one-year breakage warranty is recognized on a straight-line basis over the respective contract terms.
The Sterling Jewelers division also sells a Jewelry Replacement Plan (“JRP”). The JRP is designed to protect customers from damage or defects of purchased merchandise for a period of three years. If the purchased merchandise is defective or becomes damaged under normal use in that time period, the item will be replaced. JRP revenue is deferred and recognized on a straight-line basis over the period of expected claims costs.
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.
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.
(e) Cost of sales and selling, general and administrative expenses
Cost of sales includes merchandise costs net of discounts and allowances, freight, processing and distribution costs of moving merchandise from suppliers to distribution centers and stores, inventory shrinkage, store operating and occupancy costs, net bad debts and charges for late payments under the in-house customer finance programs. Store operating and occupancy costs include utilities, rent, real estate taxes, common area maintenance charges and depreciation. Selling, general and administrative expenses include store staff and store administrative costs; centralized administrative expenses, including information technology, credit and eCommerce; advertising and promotional costs and other operating expenses not specifically categorized elsewhere in the consolidated income statements.
Compensation and benefits costs included within cost of sales and selling, general and administrative expenses were as follows:
(in millions)
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
 
Wages and salaries
$
1,222.8

 
$
1,095.6

 
$
753.3

 
Payroll taxes
101.1

 
91.8

 
65.8

 
Employee benefit plans expense
17.5

 
9.6

 
10.2

 
Share-based compensation expense
16.4

 
12.1

 
14.4

 
Total compensation and benefits
$
1,357.8

 
$
1,209.1

 
$
843.7

 

(f ) Store opening costs
The opening costs of new locations are expensed as incurred.
(g) Advertising and promotional costs
Advertising and promotional costs are expensed within selling, general and administrative expenses. Production costs are expensed at the first communication of the advertisements, while communication expenses are recognized each time the advertisement is communicated. For catalogs and circulars, costs are all expensed at the first date they can be viewed by the customer. Point of sale promotional material is expensed when first displayed in the stores. Gross advertising costs totaled $384.2 million in Fiscal 2016 (Fiscal 2015: $333.0 million; Fiscal 2014: $253.8 million).
(h) In-house customer finance programs
Sterling Jewelers division operates customer in-house finance programs that allow customers to finance merchandise purchases from its stores. Finance charges are recognized in accordance with the contractual agreements. Gross interest earned is recorded as other operating income in the consolidated income statements. See Note 9 for additional discussion of the Company’s other operating income. In addition to interest-bearing accounts, a portion of credit sales are made using interest-free financing for one year or less, subject to certain conditions.
Accrual of interest is suspended when accounts become more than 90 days aged on a recency basis. Upon suspension of the accrual of interest, interest income is subsequently recognized to the extent cash payments are received. Accrual of interest is resumed when receivables are removed from the non-accrual status.
(i) Income taxes
Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are recognized by applying statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company does not recognize tax benefits related to positions taken on certain tax matters unless the position is more likely than not to be sustained upon examination by tax authorities. At any point in time, various tax years are subject to or are in the process of being audited by various taxing authorities. The Company records a reserve for uncertain tax positions, including interest. To the extent that management’s estimates of settlements change, or the final tax outcome of these matters is different than the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made.
See Note 8 for additional discussion of the Company’s income taxes.
(j) Cash and cash equivalents
Cash and cash equivalents are comprised of cash on hand, money market deposits and amounts placed with external fund managers with an original maturity of three months or less. Cash and cash equivalents are carried at cost which approximates fair value. In addition, receivables from third-party credit card issuers typically converted to cash within 5 days of the original sales transaction are considered cash equivalents.
Additional detail regarding the composition of cash and cash equivalents as of January 30, 2016 and January 31, 2015 follows:
(in millions)
January 30, 2016
 
January 31, 2015
 
Cash and cash equivalents held in money markets and other accounts
$
100.4

 
$
153.5

 
Cash equivalents from third-party credit card issuers
35.4

 
38.2

 
Cash on hand
1.9

 
1.9

 
Total cash and cash equivalents
$
137.7

 
$
193.6

 

(k) Accounts receivable
Accounts receivable under the customer finance programs are presented net of an allowance for uncollectible amounts. This allowance represents management’s estimate of the expected losses in the accounts receivable portfolio as of the balance sheet date, and is calculated using a model that analyzes factors such as delinquency rates and recovery rates. An allowance for amounts 90 days aged and under on a recency basis is established based on historical loss experience and payment performance information. A 100% allowance is made for any amount aged more than 90 days on a recency basis and any amount associated with an account the owner of which has filed for bankruptcy.
Signet’s recency method of aging has been in place and unchanged since the inception of the in-house consumer financing program. The delinquency level is measured by the number of days since the last qualifying payment was received, with the qualifying payment increasing with delinquency level. The average minimum scheduled payment on a customer account is 9%. The minimum payment does not decline as the balance declines. These two facts combined (higher scheduled payment requirement and no decline in payment requirement as balance decreases) allow Signet to collect on the receivable significantly faster than other retail/bank card accounts, reducing risk and more quickly freeing up customer open to buy for additional purchases.
See Note 10 for additional discussion of the Company’s accounts receivables.
(l) Inventories
Inventories are primarily held for resale and are valued at the lower of cost or market value. Cost is determined using weighted-average cost for all inventories except for inventories held in the Company’s diamond sourcing operations where cost is determined using specific identification. Cost includes charges directly related to bringing inventory to its present location and condition. Such charges would include warehousing, security, distribution and certain buying costs. Market value is defined as estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Inventory write-downs are recorded for obsolete, slow moving or defective items and shrinkage. Inventory write-downs are equal to the difference between the cost of inventory and its estimated market value based upon assumptions of targeted inventory turn rates, future demand, management strategy and market conditions. Shrinkage is estimated and recorded based on historical physical inventory results, expectations of future inventory losses and current inventory levels. Physical inventories are taken at least once annually for all store locations and distribution centers.
See Note 11 for additional discussion of the Company’s inventories.
(m) Vendor contributions
Contributions are received from vendors through various programs and arrangements including cooperative advertising. Where vendor contributions related to identifiable promotional events are received, contributions are matched against the costs of promotions. Vendor contributions, which are received as general contributions and not related to specific promotional events, are recognized as a reduction of inventory costs.
(n) Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation, amortization and impairment charges. Maintenance and repair costs are expensed as incurred. Depreciation and amortization are recognized on the straight-line method over the estimated useful lives of the related assets as follows:
Buildings
 
30 – 40 years when land is owned or the remaining term of lease, not to exceed 40 years
Leasehold improvements
 
Remaining term of lease, not to exceed 10 years
Furniture and fixtures
 
Ranging from 3 – 10 years
Equipment, including software
 
Ranging from 3 – 5 years

Equipment, which includes computer software purchased or developed for internal use, is stated at cost less accumulated amortization. Signet’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, Signet also capitalizes certain payroll and payroll-related costs for employees directly associated with internal use computer projects. Amortization is charged on a straight-line basis over periods from three to five years.
Property, plant and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Potentially impaired assets or asset groups are identified by reviewing the cash flows of individual stores. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the undiscounted cash flow is less than the asset’s carrying amount, the impairment charge recognized is determined by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value. Property and equipment at stores planned for closure are depreciated over a revised estimate of their useful lives.
See Note 12 for additional discussion of the Company’s property, plant and equipment.
(o) Goodwill and intangibles
In a business combination, the Company estimates and records the fair value of identifiable intangible assets and liabilities acquired. The fair value of these intangible assets and liabilities is estimated based on management’s assessment, including determination of appropriate valuation technique and consideration of any third party appraisals, when necessary. Significant estimates in valuing intangible assets and liabilities acquired include, but are not limited to, future expected cash flows associated with the acquired asset or liability, expected life and discount rates. The excess purchase price over the estimated fair values of the assets acquired and liabilities assumed is recognized as goodwill. Goodwill is recorded by the Company’s reporting units based on the acquisitions made by each. Goodwill is evaluated for impairment annually and more frequently if indicators of impairment arise. In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not (that is, likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying value (including goodwill). If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then no further testing is required. However, if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the two-step goodwill impairment test is performed to identify a potential goodwill impairment and measure the amount of impairment to be recognized, if any.
The annual testing date for goodwill allocated to the Sterling Jewelers reporting unit is the last day of the fourth quarter. The annual testing date for goodwill allocated to the reporting units associated with the Zale division acquisition and the Other reporting unit is May 31. There have been no goodwill impairment charges recorded during the fiscal periods presented in the consolidated financial statements. If future economic conditions are different than those projected by management, future impairment charges may be required.
Intangible assets with definite lives are amortized and reviewed for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. If the estimated undiscounted future cash flows related to the asset are less than the carrying amount, the Company recognizes an impairment charge equal to the difference between the carrying value and the estimated fair value, usually determined by the estimated discounted future cash flows of the asset.
Intangible assets with indefinite lives are reviewed for impairment each year in the second quarter and may be reviewed more frequently if certain events occur or circumstances change. The Company first performs a qualitative assessment to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If the Company determines that it is more likely than not that the fair value of the asset is less than its carrying amount, the Company estimates the fair value, usually determined by the estimated discounted future cash flows of the asset, compares that value with its carrying amount and records an impairment charge, if any. If future economic conditions are different than those projected by management, future impairment charges may be required.
See Note 13 for additional discussion of the Company’s goodwill and intangibles.
(p) Derivatives and hedge accounting
The Company enters into various types of derivative instruments to mitigate certain risk exposures related to changes in commodity costs and foreign exchange rates. Derivative instruments are recorded in the consolidated balance sheets at fair value, as either assets or liabilities, with an offset to net income or other comprehensive income (“OCI”), depending on whether the derivative qualifies as an effective hedge.
If a derivative instrument meets certain criteria, it may be designated as a cash flow hedge on the date it is entered into. For cash flow hedge transactions, the effective portion of the changes in fair value of the derivative instrument is recognized directly in equity as a component of AOCI and is recognized in the consolidated income statements in the same period(s) and on the same financial statement line in which the hedged item affects net income. Amounts excluded from the effectiveness calculation and any ineffective portions of the change in fair value of the derivatives are recognized immediately in other operating income, net in the consolidated income statements. In addition, gains and losses on derivatives that do not qualify for hedge accounting are recognized immediately in other operating income, net.
In the normal course of business, the Company may terminate cash flow hedges prior to the occurrence of the underlying forecasted transaction. For cash flow hedges terminated prior to the occurrence of the underlying forecasted transaction, management monitors the probability of the associated forecasted cash flow transactions to assess whether any gain or loss recorded in AOCI should be immediately recognized in net income. Cash flows from derivative contracts are included in net cash provided by operating activities.
See Note 16 for additional discussion of the Company’s derivatives and hedge activities.
(q) Employee Benefits
Signet operates a defined benefit pension plan in the UK (the “UK Plan”) which ceased to admit new employees effective April 2004. The UK Plan provides benefits to participating eligible employees. Beginning in Fiscal 2014, a change to the benefit structure was implemented and members’ benefits that accumulate after that date are now based upon career average salaries, whereas previously, all benefits were based on salaries at retirement. The UK Plan’s assets are held by the UK Plan.
The net periodic pension cost of the UK Plan is measured on an actuarial basis using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and the expected long-term rate of return on plan assets. Other material assumptions include rates of participant mortality, the expected long-term rate of compensation and pension increases, and rates of employee attrition. Gains and losses occur when actual experience differs from actuarial assumptions. If such gains or losses exceed 10% of the greater of plan assets or plan liabilities, Signet amortizes those gains or losses over the average remaining service period of the employees. The net periodic pension cost is charged to selling, general and administrative expenses in the consolidated income statements.
The funded status of the UK Plan is recognized on the balance sheet, and is the difference between the fair value of plan assets and the benefit obligation measured at the balance sheet date. Gains or losses and prior service costs or credits that arise and not included as components of net periodic pension cost are recognized, net of tax, in OCI.
Signet also operates a defined contribution plan in the UK and a defined contribution retirement savings plan in the US. Contributions made by Signet to these pension arrangements are charged primarily to selling, general and administrative expenses in the consolidated income statements as incurred.
See Note 18 for additional discussion of the Company’s employee benefits.
(r) Borrowing costs
Borrowings include interest-bearing bank loans, accounts receivable securitization program and bank overdrafts. Borrowing costs are capitalized and amortized into interest expense over the contractual term of the related loan.
See Note 19 for additional discussion of the Company’s borrowing costs.
(s) Share-based compensation
Signet measures share-based compensation cost for awards classified as equity at the grant date based on the estimated fair value of the award and recognizes the cost as an expense on a straight-line basis (net of estimated forfeitures) over the requisite service period of employees. Certain share plans include a condition whereby vesting is contingent on growth exceeding a given target, and therefore awards granted with this condition are considered to be performance-based awards.
Signet estimates fair value using a Black-Scholes model for awards granted under the Omnibus Plan and the binomial valuation model for awards granted under the Share Saving Plans. Deferred tax assets for awards that result in deductions on the income tax returns of subsidiaries are recorded by Signet based on the amount of compensation cost recognized and the subsidiaries’ statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the subsidiaries’ income tax return are recorded in additional paid-in-capital (if the tax deduction exceeds the deferred tax asset) or in the income statement (if the deferred tax asset exceeds the tax deduction and no additional paid-in-capital exists from previous awards).
Share-based compensation is primarily recorded in selling, general and administrative expenses in the consolidated income statements, along with the relevant salary cost.
See Note 23 for additional discussion of the Company’s share-based compensation plans.
(t) Contingent liabilities
Provisions for contingent liabilities are recorded for probable losses when management is able to reasonably estimate the loss or range of loss. When it is reasonably possible that a contingent liability may result in a loss or additional loss, the range of the loss is disclosed.
See Note 24 for additional discussion of the Company’s contingencies.
(u) Leases
Signet’s operating leases generally include retail store locations. Certain operating leases include predetermined rent increases, which are charged to the income statement on a straight-line basis over the lease term, including any construction period or other rental holiday. Other amounts paid under operating leases, such as contingent rentals, taxes and common area maintenance, are charged to the income statement as incurred. Premiums paid to acquire short-term leasehold properties and inducements to enter into a lease are recognized on a straight-line basis over the lease term. In addition, certain leases provide for contingent rentals that are not measurable at inception. These contingent rentals are primarily based on a percentage of sales in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the determination of rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.
See Note 24 for additional discussion of the Company’s leases.
(v) Common shares
New shares are recorded in common shares at their par value when issued. The excess of the issue price over the par value is recorded in additional paid-in capital.
(w) Dividends
Dividends are reflected as a reduction of retained earnings in the period in which they are formally declared by the Board of Directors (the “Board”).
New Accounting Pronouncements
New accounting pronouncements
New accounting pronouncements
New accounting pronouncements adopted during the period
Income Taxes
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. ASU No. 2015-17 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, with early adoption permitted. Signet adopted ASU 2015-17 during Fiscal 2016 and applied the standard retrospectively. Accordingly, Signet has adjusted the consolidated balance sheet as of January 31, 2015 to reflect the reclassifications required as follows:
 
January 31, 2015
 
 
(in millions)
As previously reported
 
As currently reported
 
Reclassifications
Current assets
$
4.5

 
$

 
$
(4.5
)
Current liabilities
(145.8
)
 

 
145.8

Non-current assets
111.1

 
2.3

 
(108.8
)
Non-current liabilities
(21.0
)
 
(53.5
)
 
(32.5
)
Deferred tax assets (liabilities)
$
(51.2
)
 
$
(51.2
)
 
$


New accounting pronouncements to be adopted in future periods
Revenue recognition
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 provides alternative methods of retrospective adoption. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers-Deferral of the Effective Date.” The new guidance defers the effective date of ASU No. 2014-09 by one year. As a result, ASU No. 2014-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016, including interim periods within that annual period. Signet is currently assessing the impact, if any, as well as the available methods of implementation, that the adoption of this accounting pronouncement will have on the Company’s financial position or results of operations.
Share-based compensation
In June 2014, the FASB issued ASU No. 2014-12, “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The new guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU No. 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. The standard is effective for Signet in the first quarter of Fiscal 2017. Signet does not expect the adoption of this guidance to have a material impact on the Company’s financial position or results of operations.
Debt issuance costs
In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The new guidance requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. In August 2015, the FASB issued ASU No. 2015-15, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The new guidance provides clarity that the SEC would not object to the deferral and presentation of debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. ASU Nos. 2015-03 and 2015-15 are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. The standard is effective for Signet in the first quarter of Fiscal 2017. At January 30, 2016, Signet had unamortized debt issuance costs, excluding amounts related to the Company’s revolving credit facility agreement, of $9.9 million recorded as assets in the consolidated balance sheets. These amounts are expected to be reclassified as direct deductions from the related long-term debt upon adoption. The Company also expects to continue presenting debt issuance costs relating to its revolving credit facility as an asset.
Inventory
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” The new guidance states that inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted and should be applied prospectively. Signet is currently assessing the impact, if any, the adoption of this guidance will have on the Company’s financial position or results of operations.
Financial instruments
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The new guidance primarily 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. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Signet does not expect the adoption of this guidance to have a material impact on the Company’s financial position or results of operations.
Leases
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new guidance primarily impacts lessee accounting by requiring 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. ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. Signet is currently assessing the impact the adoption of this guidance will have on the Company’s financial position or results of operations.
Liabilities
In March 2016, the FASB issued ASU No. 2016-04, “Liabilities - Extinguishments of Liabilities (Subtopic 405-20).” The new guidance 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. ASU 2016-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. Signet does not expect the adoption of this guidance to have a material impact on the Company’s financial position or results of operations.
Acquisitions
Acquisitions
Acquisitions
Zale Corporation
On May 29, 2014, the Company acquired 100% of the outstanding shares of Zale Corporation, making the entity a wholly-owned consolidated subsidiary of Signet (the “Zale Acquisition” or “Acquisition”). Under the terms of the Agreement and Plan of Merger, Zale Corporation shareholders received $21 per share in cash for each outstanding share of common stock and the vesting, upon consummation of the Acquisition, of certain outstanding Zale Corporation restricted stock units and stock options, which converted into the right to receive the merger consideration of $1,458.0 million, including $478.2 million to extinguish Zale Corporation’s existing debt. The Acquisition was funded by the Company through existing cash and the issuance of $1,400.0 million of long-term debt, including: (a) $400.0 million of senior unsecured notes due in 2024, (b) $600.0 million of two-year revolving asset-backed variable funding notes, and (c) a $400.0 million five-year senior unsecured term loan facility. See Note 19 for additional information related to the Company’s long-term debt instruments.
The transaction was accounted for as a business combination during the second quarter of Fiscal 2015. The Acquisition aligns with the Company’s strategy to expand its footprint. The following table summarizes the consideration transferred in conjunction with the Acquisition as of May 29, 2014:
(in millions, except per share amounts)
Amount
Cash consideration paid to Zale Corporation shareholders ($21 per share)
$
910.2

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

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

Total consideration transferred
$
1,458.0

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

Inventories
856.7

Other current assets
22.4

Property, plant and equipment
103.6

Intangible assets:
 
Trade names
417.0

Favorable leases
50.2

Deferred tax assets
132.8

Other assets
25.4

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

Goodwill
499.4

Total consideration transferred
$
1,458.0


(1) Includes loans and overdrafts, accounts payable, income taxes payable, accrued expenses and other current liabilities.
The excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed was recognized as goodwill. The goodwill attributable to the Acquisition is not deductible for tax purposes. See Note 13 for additional discussion of the Company’s goodwill.
The following unaudited consolidated pro forma information summarizes the results of operations of the Company as if the Acquisition and related issuance of $1,400.0 million of long-term debt (see Note 19) had occurred as of February 2, 2013. The unaudited consolidated pro forma financial information was prepared in accordance with the acquisition method of accounting under existing standards and is not necessarily indicative of the results of operations that would have occurred if the Acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.
(in millions, except per share amounts)
Fiscal 2015
 
Fiscal 2014
Pro forma sales
$
6,325.1

 
$
6,039.9

Pro forma net income
$
462.1

 
$
361.9

Pro forma earnings per share – basic
$
5.78

 
$
4.51

Pro forma earnings per share – diluted
$
5.76

 
$
4.48


The unaudited pro forma information gives effect to actual operating results prior to the Acquisition and has been adjusted with respect to certain aspects of the Acquisition to reflect the following:
Acquisition accounting adjustments to reset deferred revenue associated with extended service plans sold by Zale Corporation prior to the Acquisition to fair value as of the acquisition date. The fair value of deferred revenue is determined based on the estimated costs remaining to be incurred for future obligations associated with the outstanding plans at the time of the Acquisition, plus a reasonable profit margin on the estimated costs. These adjustments also reflect the impact of deferring the revenue associated with the lifetime extended service plans over a 10-year period as disclosed in Note 1.
Additional depreciation and amortization expenses that would have been recognized assuming fair value adjustments to the existing Zale Corporation assets acquired and liabilities assumed, including intangible assets, favorable and unfavorable leases, and unfavorable contracts and expense associated with the fair value step-up of inventory acquired.
Tax impact of the Company’s amended capital structure as a result of the Acquisition and related issuance of $1,400.0 million of long-term debt.
Adjustment of valuation allowances associated with US and Canadian deferred tax assets, including net operating loss carryforwards.
Exclusion of acquisition-related costs of $58.0 million, which were included in the Company’s results of operations for the year ended January 31, 2015, respectively. Also excluded were costs associated with the unsecured bridge facility discussed in Note 19 of $4.0 million, which were expensed in Fiscal 2015. All amounts were reported within the Other segment.
The unaudited pro forma results do not reflect future events that either have occurred or may occur after the Acquisition, including, but not limited to, the anticipated realization of expected operating synergies in subsequent periods. They also do not give effect to acquisition-related costs that the Company expects to incur in connection with the Acquisition, including, but not limited to, additional professional fees, employee integration, retention and severance costs.
Botswana diamond polishing factory
On November 4, 2013, Signet acquired a diamond polishing factory in Gaborone, Botswana for $9.1 million. The acquisition expands the Company’s long-term diamond sourcing capabilities and provides resources for the Company to cut and polish stones.
The transaction was accounted for as a business combination during the fourth quarter of Fiscal 2014. During the second quarter of Fiscal 2015, the Company finalized the valuation of net assets acquired. There were no material changes to the valuation of net assets acquired from the initial allocation reported during the fourth quarter of Fiscal 2014. The total consideration paid by the Company was funded through existing cash and allocated to the net assets acquired based on the final fair values as follows: property, plant and equipment acquired of $5.5 million and goodwill of $3.6 million. See Note 13 for additional information related to goodwill. None of the goodwill is deductible for income tax purposes.
The results of operations related to the acquired diamond polishing factory are reported within the Other reportable segment of Signet’s consolidated results. Pro forma results of operations have not been presented, as the impact to the Company’s consolidated financial results was not material.
Segment Information
Segment information
Segment information
Financial information for each of Signet’s reportable segments is presented in the tables below. Signet’s chief operating decision maker utilizes sales and operating income, after the elimination of any inter-segment transactions, to determine resource allocations and performance assessment measures. Signet’s sales are derived from the retailing of jewelry, watches, other products and services as generated through the management of its five reportable segments: the Sterling Jewelers division, the Zale division, which consists of the Zale Jewelry and Piercing Pagoda segments, the UK Jewelry division and Other.
The Sterling Jewelers division operates in all 50 US states. Its stores operate nationally in malls and off-mall locations as Kay Jewelers and Kay Jewelers Outlet and regionally under a number of well-established mall-based brands. Destination superstores operate nationwide as Jared The Galleria Of Jewelry (“Jared”) and Jared Vault.
The Zale division operates jewelry stores (Zale Jewelry) and kiosks (Piercing Pagoda), located primarily in shopping malls throughout the US, Canada and Puerto Rico. Zale Jewelry includes national brands Zales Jewelers, Zales Outlet and Peoples Jewellers, along with regional brands Gordon’s Jewelers and Mappins Jewellers. Piercing Pagoda operates through mall-based kiosks.
The UK Jewelry division operates stores in the UK, Republic of Ireland and Channel Islands. Its stores operate in major regional shopping malls and prime “high street” locations (main shopping thoroughfares with high pedestrian traffic) as “H.Samuel,” “Ernest Jones” and “Leslie Davis.”
The Other reportable segment consists of all non-reportable segments, including subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones, that are below the quantifiable threshold for separate disclosure as a reportable segment and unallocated corporate administrative functions.
(in millions)
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
Sales:
 
 
 
 
 
Sterling Jewelers
$
3,988.7

 
$
3,765.0

 
$
3,517.6

Zale Jewelry(1)
1,568.2

 
1,068.7

 
n/a

Piercing Pagoda
243.2

 
146.9

 
n/a

UK Jewelry
737.6

 
743.6

 
685.6

Other
12.5

 
12.1

 
6.0

Total sales
$
6,550.2

 
$
5,736.3

 
$
4,209.2

 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
Sterling Jewelers
$
718.6

 
$
624.3

 
$
553.2

Zale Jewelry(2)
44.3

 
(1.9
)
 
n/a

Piercing Pagoda(3)
7.8

 
(6.3
)
 
n/a

UK Jewelry
61.5

 
52.2

 
42.4

Other(4)
(128.5
)
 
(91.7
)
 
(25.1
)
Total operating income
$
703.7

 
$
576.6

 
$
570.5

 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
Sterling Jewelers
$
106.2

 
$
95.7

 
$
88.8

Zale Jewelry
44.8

 
29.4

 
n/a

Piercing Pagoda
3.3

 
1.6

 
n/a

UK Jewelry
20.1

 
22.1

 
21.4

Other
0.9

 
0.9

 

Total depreciation and amortization
$
175.3

 
$
149.7

 
$
110.2

 
 
 
 
 
 
Capital additions:
 
 
 
 
 
Sterling Jewelers
$
141.6

 
$
157.6

 
$
134.2

Zale Jewelry
47.7

 
35.1

 
n/a

Piercing Pagoda
10.2

 
6.9

 
n/a

UK Jewelry
26.4

 
20.2

 
18.4

Other
0.6

 
0.4

 
0.1

Total capital additions
$
226.5

 
$
220.2

 
$
152.7

(1)    Includes sales of $248.7 million and $205.5 million generated by Canadian operations in Fiscal 2016 and Fiscal 2015, respectively.
(2) 
Includes net operating loss of $23.1 million and $35.1 million related to the effects of purchase accounting associated with the acquisition of Zale Corporation for the years ended January 30, 2016 and January 31, 2015, respectively. See Note 3 for additional information.
(3) 
Includes net operating loss of $3.3 million and $10.8 million related to the effects of purchase accounting associated with the acquisition of Zale Corporation for the years ended January 30, 2016 and January 31, 2015, respectively. See Note 3 for additional information.
(4)
Includes $78.9 million and $59.8 million of transaction and integration expenses, including the impact of the appraisal rights legal settlement discussed in Note 24, for the years ended January 30, 2016 and January 31, 2015, respectively. Transaction and integration costs include expenses associated with advisor fees for legal, tax, accounting, information technology implementation and consulting services, as well as severance costs related to Zale and other management changes.
n/a Not applicable as Zale division was acquired on May 29, 2014. See Note 3 for additional information.
(in millions)
January 30, 2016
 
January 31, 2015
Total assets:
 
 
 
Sterling Jewelers
$
3,788.0

 
$
3,505.0

Zale Jewelry
1,955.1

 
1,932.6

Piercing Pagoda
141.8

 
132.8

UK Jewelry
427.8

 
413.5

Other
161.7

 
230.4

Total assets
$
6,474.4

 
$
6,214.3

 
 
 
 
Total long-lived assets:
 
 
 
Sterling Jewelers
$
519.7

 
$
488.3

Zale Jewelry
1,013.7

 
1,014.4

Piercing Pagoda
53.3

 
46.5

UK Jewelry
75.3

 
73.8

Other
8.9

 
9.2

Total long-lived assets
$
1,670.9

 
$
1,632.2

 
 
 
 
Total liabilities:
 
 
 
Sterling Jewelers
$
1,982.2

 
$
1,880.6

Zale Jewelry
530.3

 
543.6

Piercing Pagoda
28.5

 
47.1

UK Jewelry
132.0

 
128.1

Other
740.7

 
804.5

Total liabilities
$
3,413.7

 
$
3,403.9


(in millions)
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
Sales by product:
 
 
 
 
 
Diamonds and diamond jewelry
$
3,918.1

 
$
3,450.6

 
$
2,552.1

Gold, silver jewelry, other products and services
2,116.4

 
1,784.5

 
1,236.9

Watches
515.7

 
501.2

 
420.2

Total sales
$
6,550.2

 
$
5,736.3

 
$
4,209.2

Earnings Per Share
Earnings per share
Earnings per share
(in millions, except per share amounts)
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
Net income
$
467.9

 
$
381.3

 
$
368.0

Basic weighted average number of shares outstanding
79.5

 
79.9

 
80.2

Dilutive effect of share awards
0.2

 
0.3

 
0.5

Diluted weighted average number of shares outstanding
79.7

 
80.2

 
80.7

Earnings per share – basic
$
5.89

 
$
4.77

 
$
4.59

Earnings per share – diluted
$
5.87

 
$
4.75

 
$
4.56


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 and the Executive Plans. The potential impact is calculated under the treasury stock method. The calculation of fully diluted EPS for Fiscal 2016 excludes share awards of 104,545 shares (Fiscal 2015: 24,378 share awards; Fiscal 2014: 70,447 share awards) on the basis that their effect would be anti-dilutive.
Common Shares, Treasury Shares, Reserves and Dividends
Common Shares, Treasury Shares, Reserves and Dividends
Common shares, treasury shares, reserves and dividends
Common shares
The par value of each Common Share is 18 cents. The consideration received for common shares relating to options issued during the year was $5.0 million (Fiscal 2015: $6.1 million; Fiscal 2014: $9.3 million).
Treasury shares
Signet may from time to time repurchase common shares under various share repurchase programs authorized by Signet’s Board. Repurchases may be made in the open market, through block trades or otherwise. The timing, manner, price and amount of any repurchases will be determined by the Company at its discretion, and will be subject to economic and market conditions, stock prices, applicable legal requirements and other factors. The repurchase programs are funded through Signet’s existing cash reserves and liquidity sources. Repurchased shares are held as treasury shares and may be used by Signet for general corporate purposes.
Treasury shares represent the cost of shares that the Company purchased in the market under the applicable authorized repurchase program, shares forfeited under the Omnibus Incentive Plan and those previously held by the Employee Stock Ownership Trust (“ESOT”) to satisfy options under the Company’s share option plans.
Shares held in treasury by the Company were 7,746,591 and 6,933,684 for Fiscal 2016 and Fiscal 2015, respectively. Shares were reissued in the amounts of 205,661 and 309,305, net of taxes and forfeitures, in Fiscal 2016 and Fiscal 2015, respectively, to satisfy awards outstanding under existing share-based compensation plans. The share repurchase activity is outlined in the table below:
 
 
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
 
Amount
authorized
 
Shares
repurchased
 
Amount
repurchased
 
Average
repurchase
price per
share
 
Shares
repurchased
 
Amount
repurchased
 
Average
repurchase
price per
share
 
Shares
repurchased
 
Amount
repurchased
 
Average
repurchase
price per
share
 
(in millions)
 
 
 
(in millions)
 
 
 
 
 
(in millions)
 
 
 
 
 
(in millions)
 
 
2013 Program(1)
$
350.0

 
1,018,568

 
$
130.0

 
$
127.63

 
288,393

 
29.8

 
$
103.37

 
808,428

 
$
54.6

 
$
67.54

2011 Program(2)
$
350.0

 
n/a

 
n/a

 
n/a

 
n/a

 
n/a

 
n/a

 
749,245

 
$
50.1

 
$
66.92

Total
 
 
1,018,568

 
$
130.0

 
$
127.63

 
288,393

 
29.8

 
$
103.37

 
1,557,673

 
$
104.7

 
$
67.24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
On June 14, 2013, the Board authorized the repurchase of up to $350 million of Signet’s common shares (the “2013 Program”). The 2013 Program may be suspended or discontinued at any time without notice. The 2013 Program had $135.6 million remaining as of January 30, 2016.
(2) 
In October 2011, the Board authorized the repurchase of up to $300 million of Signet’s common shares (the “2011 Program”), which authorization was subsequently increased to $350 million. The 2011 Program was completed as of May 4, 2013.
n/a
Not applicable.

In February 2016, the Board authorized a new program to repurchase up to $750 million of Signet’s common shares (the “2016 Program”). The 2016 Program may be suspended or discontinued at any time without notice.
Dividends
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
(in millions, except per share amounts)
Cash dividend
per share
 
Total
dividends
 
Cash dividend
per share
 
Total
dividends
 
Cash dividend
per share
 
Total
dividends
First quarter
$
0.22

 
$
17.6

 
$
0.18

 
$
14.4

 
$
0.15

 
$
12.1

Second quarter
0.22

 
17.6

 
0.18

 
14.4

 
0.15

 
12.1

Third quarter
0.22

 
17.5

 
0.18

 
14.5

 
0.15

 
12.0

Fourth quarter
0.22

 
17.5

(1) 
0.18

 
14.4

(1) 
0.15

 
12.0

Total
$
0.88

 
$
70.2

 
$
0.72

 
$
57.7

 
$
0.60

 
$
48.2

 
 
 
 
 
 
 
 
 
 
 
 
(1) 
Signet’s dividend policy results in the dividend payment date being a quarter in arrears from the declaration date. As a result, as of January 30, 2016 and January 31, 2015, $17.5 million and $14.4 million, respectively, has been recorded in accrued expenses and other current liabilities in the consolidated balance sheets reflecting the cash dividends declared for the fourth quarter of Fiscal 2016 and Fiscal 2015, respectively.
In addition, on February 26, 2016, Signet’s Board declared a quarterly dividend of $0.26 per share on its common shares. This dividend will be payable on May 27, 2016 to shareholders of record on April 29, 2016, with an ex-dividend date of April 27, 2016.
Other
The principal trading market for the Company’s common shares is the New York Stock Exchange (symbol: SIG). The Company also maintained a standard listing of its common shares on the London Stock Exchange (“LSE”) (symbol: SIG) during Fiscal 2016. On February 16, 2016, the Company filed a voluntary application with the United Kingdom’s Financial Conduct Authority to delist its common shares from the LSE. Common shares of the Company continued to trade on the LSE until close of business on March 15, 2016.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss)
The following tables present the changes in AOCI by component and the reclassifications out of AOCI, net of tax:
 
 
 
 
 
 
 
Pension plan
 
 
(in millions)
Foreign
currency
translation
 
Losses on available-for-sale securities, net
 
Gains (losses)
on cash flow
hedges
 
Actuarial
gains
(losses)
 
Prior
service
credits (costs)
 
Accumulated
other
comprehensive
(loss) income
Balance at February 2, 2013
$
(149.4
)
 
$

 
$
1.0

 
$
(44.4
)
 
$
17.1

 
$
(175.7
)
OCI before reclassifications
12.4

 

 
(22.0
)
 
0.2

 
(0.7
)
 
(10.1
)
Amounts reclassified from AOCI to net income

 

 
6.7

 
1.7

 
(1.1
)
 
7.3

Net current-period OCI
12.4

 

 
(15.3
)
 
1.9

 
(1.8
)
 
(2.8
)
Balance at February 1, 2014
$
(137.0
)
 
$

 
$
(14.3
)
 
$
(42.5
)
 
$
15.3

 
$
(178.5
)
OCI before reclassifications
(60.6
)
 

 
6.2

 
(15.8
)
 
(0.7
)
 
(70.9
)
Amounts reclassified from AOCI to net income

 

 
12.5

 
1.6

 
(1.3
)
 
12.8

Net current-period OCI
(60.6
)
 

 
18.7

 
(14.2
)
 
(2.0
)
 
(58.1
)
Balance at January 31, 2015
$
(197.6
)
 
$

 
$
4.4

 
$
(56.7
)
 
$
13.3

 
$
(236.6
)
OCI before reclassifications
(40.2
)
 
(0.4
)
 
(11.8
)
 
10.9

 
(0.5
)
 
(42.0
)
Amounts reclassified from AOCI to net income

 

 
3.5

 
2.7

 
(1.7
)
 
4.5

Net current-period OCI
(40.2
)
 
(0.4
)
 
(8.3
)
 
13.6

 
(2.2
)
 
(37.5
)
Balance at January 30, 2016
$
(237.8
)
 
$
(0.4
)
 
$
(3.9
)
 
$
(43.1
)
 
$
11.1

 
$
(274.1
)

 The amounts reclassified from AOCI were as follows:
 
 
Amounts reclassified from AOCI
 
 
(in millions)
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
 
Income statement caption
(Gains) losses on cash flow hedges:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
(0.4
)
 
$
1.3

 
$
(0.9
)
 
Cost of sales (see Note 16)
Interest rate swaps
 
2.7

 

 

 
Interest expense, net (see Note 16)
Commodity contracts
 
2.6

 
17.3

 
12.0

 
Cost of sales (see Note 16)
Total before income tax
 
4.9

 
18.6

 
11.1

 
 
Income taxes
 
(1.4
)
 
(6.1
)
 
(4.4
)
 
 
Net of tax
 
3.5

 
12.5

 
6.7

 
 
 
 
 
 
 
 
 
 
 
Defined benefit pension plan items:
 
 
 
 
 
 
 
 
Amortization of unrecognized actuarial losses
 
3.4

 
2.0

 
2.3

 
Selling, general and administrative expenses(1)
Amortization of unrecognized net prior service credits
 
(2.2
)
 
(1.7
)
 
(1.5
)
 
Selling, general and administrative expenses(1)
Total before income tax
 
1.2

 
0.3

 
0.8

 
 
Income taxes
 
(0.2
)
 

 
(0.2
)
 
 
Net of tax
 
1.0

 
0.3

 
0.6

 
 
 
 
 
 
 
 
 
 
 
Total reclassifications, net of tax
 
$
4.5

 
$
12.8

 
$
7.3

 
 
(1) These items are included in the computation of net periodic pension benefit (cost). See Note 18 for additional information.
Income Taxes
Income taxes
Income taxes
(in millions)
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
Income before income taxes:
 
 
 
 
 
– US
$
426.1

 
$
380.8

 
$
493.7

– Foreign
231.7

 
159.8

 
72.8

Total income before income taxes
$
657.8

 
$
540.6

 
$
566.5

 
 
 
 
 
 
Current taxation:
 
 
 
 
 
– US
$
161.7

 
$
199.5

 
$
211.8

– Foreign
3.5

 
7.8

 
7.1

Deferred taxation:
 
 
 
 
 
– US
22.3

 
(47.9
)
 
(22.8
)
– Foreign
2.4

 
(0.1
)
 
2.4

Total income taxes
$
189.9

 
$
159.3

 
$
198.5


As the statutory rate of corporation tax in Bermuda is 0%, the differences between the US federal income tax rate and the effective tax rates for Signet have been presented below:
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
US federal income tax rates
35.0
 %
 
35.0
 %
 
35.0
 %
US state income taxes
2.7
 %
 
2.1
 %
 
2.5
 %
Differences between US federal and foreign statutory income tax rates
(0.5
)%
 
(0.8
)%
 
(0.9
)%
Expenditures permanently disallowable for tax purposes, net of permanent tax benefits
0.5
 %
 
0.8
 %
 
0.6
 %
Disallowable transaction costs
2.1
 %
 
0.7
 %
 
 %
Impact of global reinsurance arrangements
(2.4
)%
 
(1.5
)%
 
(0.2
)%
Impact of global financing arrangements
(8.7
)%
 
(7.2
)%
 
(1.9
)%
Other items
0.2
 %
 
0.4
 %
 
(0.1
)%
Effective tax rate
28.9
 %
 
29.5
 %
 
35.0
 %

In Fiscal 2016, Signet’s effective tax rate was lower than the US federal income tax rate primarily due to the impact of Signet’s global reinsurance and financing arrangements utilized to fund the acquisition of Zale. Signet’s future effective tax rate is dependent on changes in the geographic mix of income and the movement in foreign exchange translation rates.
Deferred tax assets (liabilities) consisted of the following:
 
January 30, 2016
 
January 31, 2015
(in millions)
Assets
 
(Liabilities)
 
Total
 
Assets
 
(Liabilities)
 
Total
Intangible assets
$

 
$
(156.2
)
 
$
(156.2
)
 
$

 
$
(133.0
)
 
$
(133.0
)
US property, plant and equipment

 
(73.6
)
 
(73.6
)
 

 
(50.7
)
 
(50.7
)
Foreign property, plant and equipment
5.4

 

 
5.4

 
7.0

 

 
7.0

Inventory valuation

 
(252.8
)
 
(252.8
)
 

 
(256.4
)
 
(256.4
)
Allowances for doubtful accounts
54.1

 

 
54.1

 
46.0

 

 
46.0

Revenue deferral
188.5

 

 
188.5

 
172.7

 

 
172.7

Derivative instruments
1.6

 

 
1.6

 

 
(2.2
)
 
(2.2
)
Straight-line lease payments
35.0

 

 
35.0

 
31.8

 

 
31.8

Deferred compensation
13.9

 

 
13.9

 
11.1

 

 
11.1

Retirement benefit obligations

 
(10.3
)
 
(10.3
)
 

 
(7.5
)
 
(7.5
)
Share-based compensation
7.4

 

 
7.4

 
5.8

 

 
5.8

Other temporary differences
52.4

 

 
52.4

 
49.8

 

 
49.8

Net operating losses and foreign tax credits
80.6

 

 
80.6

 
91.8

 

 
91.8

Value of foreign capital losses
13.4

 

 
13.4

 
15.0

 

 
15.0

Total gross deferred tax assets (liabilities)
$
452.3

 
$
(492.9
)
 
$
(40.6
)
 
$
431.0

 
$
(449.8
)
 
$
(18.8
)
Valuation allowance
(31.9
)
 

 
(31.9
)
 
(32.4
)
 

 
(32.4
)
Deferred tax assets (liabilities)
$
420.4

 
$
(492.9
)
 
$
(72.5
)
 
$
398.6

 
$
(449.8
)
 
$
(51.2
)