It is the objective of the Group to maintain a strong balance sheet, after implementing its 8% – 10% new store space growth strategy in the US, the continuing programme of store refurbishments and relocations on both sides of the Atlantic, payment of dividends, and any repurchase of shares. Factors which could affect this objective would be the acquisition of a business or a change in the Group’s distribution policy to shareholders or if there was a variation in the operating performance of the Group.
The cash flow performance of the Group depends on a number of factors, such as the:
Investment in new space requires significant investment in working capital, as well as fixed capital investment, due to the slow inventory turn, and the additional investment required to fund sales in the US utilising the in-house credit card.
In years when the rate of new store space expansion in the US is below the planned 8% – 10% range, the Group will have reduced levels of investment in fixed and working capital. The level of store refurbishment and relocation varies from year to year and fixed capital investment will reflect these changes. In 2007/08 the decline in profits meant that there was a cash outflow of $120.6 million (2006/07: $30.7 million) before exchange adjustments and the repurchase of shares amounting to $29.0 million (2006/07: $63.4 million) and proceeds from the issue of shares of $6.0 million (2006/07: $7.7 million).
The Group’s working capital requirements fluctuate during the year as a result of the seasonal nature of its business. As inventory is purchased for the Christmas season there is a working capital outflow which reaches its highest levels in late autumn. This position then reverses over the key selling period of November and December. The working capital needs of the business are then relatively stable from January to August. The rough diamond sourcing initiative will require the Group to hold an element of its inventory for approximately an additional 60 days. The timing of the payment of the final dividend, normally in July, is also material to working capital requirements during the year.
The Board considers that the capital resources currently available are sufficient for both its present and near term requirements. A description of the main credit facilities of the Group are given in the next section, “Net debt”.
In 2007/08 cash generated from operations amounted to $294.7 million (2006/07: $346.4 million) after funding a working capital increase of $171.0 million (2006/07: $173.5 million), principally as a result of the growth of space in the US division and slightly higher than planned inventory at the year end. It is anticipated that in 2008/09 there will be a further increase in the level of working capital due to planned US store openings however, this is expected to be significantly less than in 2007/08. Interest of $29.8 million (2006/07: $31.4 million) and tax of $128.5 million (2006/07: $130.1 million) were paid. Net cash flows from operating activities was $136.4 million (2006/07: $184.9 million).
Group capital expenditure was $140.4 million (2006/07: $124.4 million). The level of capital expenditure was some 1.2 times the depreciation and amortisation charge of $114.1 million (2007/08: $98.4 million). Equity dividends of $123.9 million (2006/07: $108.7 million) were paid, and $29.0 million (2006/07: $63.4 million) was utilised to repurchase shares. $6.0 million (2006/07: $7.7 million) was received from the proceeds of issuing shares. The increase in net debt before exchange adjustment was $143.6 million (2006/07: $86.4 million). In 2008/09, subject to the general economic uncertainty, the increase in net debt is expected to be between $40 million and $80 million before exchange adjustments and movements in equity, reflecting a similar level of capital expenditure, lower investment in working capital and an anticipated decrease in tax payments.
Net debt at 2 February 2008 was $374.6 million (3 February 2007: $233.2 million). Group gearing at the year end was 20.7% (3 February 2007: 13.4%).
In October 2007 the Group entered into a 364 day $200m Series 2007 asset backed variable funding note conduit securitisation facility for general corporate purposes. Under this securitisation, interests in the US receivables portfolio are sold to Bryant Park, a conduit administered by HSBC Securities (USA) Inc. This facility has not been utilised.
On 30 March 2006 Signet entered into a US Private Placement Note Term Series Purchase Agreement (“Note Purchase Agreement”) which was funded largely from US insurance sector institutional investors in the form of fixed rate investor certificate notes (“Notes”). These Notes represent 7, 10 or 12 year maturities, with Series (A) $100 million 5.95% due 2013; Series (B) $150 million 6.11% due 2016 and Series (C) $130 million 6.26% due 2018. The aggregate issuance was $380 million and the funding date was 23 May 2006. The proceeds from this debt issuance were used to refinance the maturing securitisation programme of $251.0 million which ended in November 2006 and for general corporate purposes. The Notes rank pari passu with the Group’s other senior unsecured debt. The principal financial covenants on this Note Purchase Agreement are identical to the Group’s $390 million multi-currency revolving credit facility which are as follows:
On 28 September 2004 Signet entered into a $390 million unsecured multi-currency five year revolving credit facility agreement (the “Facility Agreement”). Under the Facility Agreement, a syndicate of banks made facilities available to the Group in the form of multi-currency cash advances and sterling acceptance credits on, inter alia, the following terms:
The continued availability of the Facility Agreement is conditional upon the Group achieving certain financial performance criteria (see above). It also has certain provisions which are customary for this type of agreement, including standard “negative pledge” and “pari passu” clauses. At 2 February 2008 and 9 April 2008 the amount outstanding under the Facility Agreement was $nil.
It is the policy of the Group to enter into interest rate protection agreements in respect of at least 75% of its forecast US dollar borrowings. At 2 February 2008 the interest rate of 72% of forecast US dollar borrowings for 2008/09 was capped effectively at 6.1%.
The Group has one defined benefit plan (the “Group Scheme”) for UK based staff, which was closed to new members in 2004. All other pension arrangements consist of defined contribution plans. The IAS 19 present value of obligations of the Group Scheme decreased by $4.2 million (2006/07: increase of $6.9 million) the largest movement being an actuarial gain of $15.1 million (2006/07: actuarial gain of $32.5 million). The market value of the Group Scheme’s assets decreased by $13.5 million (2006/07: increased by $38.0 million). As a result there was a retirement benefit deficit on the balance sheet of $5.6 million (3 February 2007: $3.7 million asset) before a related deferred tax asset of $1.6 million (3 February 2007: $1.2 million liability). The triennial actuarial valuation was carried out as at 5 April 2006. There was a surplus and as a result no additional contributions were required as part of a recovery plan to eliminate a deficit.
The cash contribution to the Group Scheme in 2007/08 was $7.2 million (2006/07: $6.8 million), and the Group expects to contribute some $7.4 million in 2008/09.
and three years
and five years
|Long term debt obligations||–||–||–||380.0||380.0|
|Operating lease obligations||299.0||541.2||460.4||1,227.8||2,528.4|
|Fixed interest and commitment fee payments||23.9||47.0||46.5||459.8||577.2|
|Creditors falling due after one year||–||–||–||38.1||38.1|
(1)As at 2 February 2008 the Group had no significant outstanding floating rate indebtedness.
(2)The expected Group pension contribution to the Group Scheme has been excluded from the table as have obligations for subsequent years. The Group expects to contribute some $7.4 million in 2008/09.
Approximately 130 UK property leases had been assigned by the Group up to 2 February 2008 (and remained unexpired and occupied by assignees at that date) and approximately 26 additional properties were sub-let at that date. Should the assignees or sub-tenants fail to fulfil any obligations in respect of those leases or any other leases which have at any other time been assigned or sub-let, the Group or one of its UK subsidiaries may be liable for those defaults. The number of such claims arising to date has been small, and the liability, which is charged to the income statement as it arises, has not been material.
Long term debt obligations comprise borrowings with an original maturity of greater than one year. Purchase obligations comprise contracts entered into for the forward purchase of gold and US dollars with an original maturity of greater than one year. These contracts are taken out to manage market risks. It is expected that operating commitments will be funded from future operating cash flows and no additional facilities will be required to meet these obligations.