NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tiffany & Co. (the "Registrant") is a holding company that operates through Tiffany and Company ("Tiffany") and the Registrant's other subsidiary companies (collectively, the "Company"). The Registrant, through its subsidiaries, designs and manufactures products and operates TIFFANY & CO. retail stores worldwide, and also sells its products through Internet, catalog, business-to-business and wholesale distribution. The Company's principal merchandise offering is jewelry (representing 92% of worldwide net sales in 2019); it also sells watches, home and accessories products and fragrances.
The Company's reportable segments are as follows:
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•
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Americas includes sales in Company-operated TIFFANY & CO. stores in the United States, Canada and Latin America, as well as sales of TIFFANY & CO. products in certain markets through Internet, catalog, business-to-business and wholesale operations;
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•
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Asia-Pacific includes sales in Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet, business-to-business and wholesale operations;
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•
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Japan includes sales in Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products through Internet, business-to-business and wholesale operations;
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•
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Europe includes sales in Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations; and
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•
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Other consists of all non-reportable segments. Other includes the Emerging Markets region, which includes sales in Company-operated TIFFANY & CO. stores and wholesale operations in the Middle East. In addition, Other includes wholesale sales of diamonds as well as earnings from third-party licensing agreements.
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B.
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ENTRY INTO MERGER AGREEMENT
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On November 24, 2019, the Registrant entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Registrant, LVMH Moët Hennessy - Louis Vuitton SE, a societas Europaea (European company) organized under the laws of France ("Parent"), Breakfast Holdings Acquisition Corp., a Delaware corporation and an indirect wholly owned subsidiary of Parent ("Holding"), and Breakfast Acquisition Corp., a Delaware corporation and a direct wholly owned subsidiary of Holding ("Merger Sub"). Pursuant to the Merger Agreement, Merger Sub will be merged with and into the Registrant (the "Merger"), with the Registrant continuing as the surviving company in the Merger and a wholly owned indirect subsidiary of Parent.
Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each share of Common Stock issued and outstanding immediately prior to the Effective Time (other than shares of Common Stock owned by the Registrant, Parent or any of their respective wholly owned subsidiaries, and shares of Common Stock owned by stockholders of the Registrant who have properly demanded and not withdrawn a demand for appraisal rights under Delaware law) will be converted into the right to receive $135.00 in cash, without interest and less any required tax withholding.
The consummation of the proposed Merger is subject to various conditions, including, among others, customary conditions relating to (a) the adoption of the Merger Agreement by holders of a majority of the outstanding shares of the Registrant's Common Stock entitled to vote on such matter at the meeting of stockholders of the Registrant (the "Special Meeting") held to vote on the adoption of the Merger Agreement and (b) the expiration or earlier termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended, and all rules and regulations promulgated thereunder, collectively, the "HSR Act"). As previously announced, on February 3, 2020, the waiting period under the HSR Act in connection with the proposed Merger expired, and on February 4, 2020, the Company held the Special Meeting, at which the holders of shares of Common Stock issued and outstanding as of the close of business on the record date for the Special Meeting considered and voted to approve
(i) the adoption of the Merger Agreement and (ii) by non-binding, advisory vote, certain compensation arrangements for the Company's named executive officers in connection with the proposed Merger. The proposed Merger remains subject to satisfaction or waiver of the remaining customary closing conditions, including, among others, (A) certain non-U.S. regulatory approvals, (B) clearance by the Committee on Foreign Investment in the United States ("CFIUS"), (C) the absence of a law or order in effect that enjoins, prevents or otherwise prohibits the consummation of the proposed Merger or any other transactions contemplated under the Merger Agreement issued by a governmental entity; (D) the absence of any legal proceeding seeking to enjoin, prevent or otherwise prohibit the consummation of the proposed Merger or any other transactions contemplated under the Merger Agreement instituted by a governmental entity of competent jurisdiction; and (E) the absence of a Material Adverse Effect (as defined in the Merger Agreement). The obligation of each party to consummate the proposed Merger is also conditioned on the accuracy of the other party's representations and warranties (subject to certain materiality exceptions) and the other party's compliance, in all material respects, with its covenants and agreements under the Merger Agreement.
The Merger Agreement provides for certain customary termination rights of the Registrant and Parent, including the right of either party to terminate the Merger Agreement if the Merger is not completed on or before August 24, 2020 (the "Outside Date"), provided that the Outside Date may be extended up to an additional 90 days by either party if all conditions are satisfied other than the receipt of regulatory approvals and CFIUS clearance or absence of legal restraints. The Merger Agreement also provides that the Registrant will be required to pay Parent a termination fee of $575.0 million in certain circumstances.
During the three months ended January 31, 2020, the Company incurred expenses of $21.2 million related to the proposed Merger for professional fees and incentive compensation costs.
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C.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Fiscal Year
The Company's fiscal year ends on January 31 of the following calendar year. All references to years relate to fiscal years rather than calendar years.
Basis of Reporting
The accompanying consolidated financial statements include the accounts of Tiffany & Co. and its subsidiaries in which a controlling interest is maintained. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities (VIEs), if the Company has the power to significantly direct the activities of a VIE, as well as the obligation to absorb significant losses of or the right to receive significant benefits from the VIE. Intercompany accounts, transactions and profits have been eliminated in consolidation. The equity method of accounting is used for investments in which the Company has significant influence, but not a controlling interest.
Use of Estimates
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"); these principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes to the consolidated financial statements. Actual results could differ from these estimates and the differences could be material. Periodically, the Company reviews all significant estimates and assumptions affecting the consolidated financial statements relative to current conditions and records the effect of any necessary adjustments.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents include highly liquid investments with an original maturity of three months or less and consist of time deposits and/or money market fund investments with a number of U.S. and non-U.S. financial institutions with high credit ratings. The Company's policy restricts the amount invested with any one financial institution.
Short-Term Investments
The Company's short-term investments consist of time deposits and are carried at fair value. At the time of purchase, management determines the appropriate classification of these investments and reevaluates such designation as of each balance sheet date.
Receivables and Financing Arrangements
Receivables. The Company's Accounts receivable, net primarily consists of amounts due from Credit Receivables (defined below), department store operators that host TIFFANY & CO. boutiques in their stores, third-party credit card issuers and wholesale customers. The Company maintains an allowance for doubtful accounts for estimated losses associated with outstanding accounts receivable. The allowance is determined based on a combination of factors including, but not limited to, the length of time that the receivables are past due, management's knowledge of the customer, economic and market conditions and historical write-off experiences.
For the receivables associated with Tiffany & Co. credit cards ("Credit Card Receivables"), management uses various indicators to determine whether to extend credit to customers and the amount of credit. Such indicators include reviewing prior experience with the customer, including sales and collection history, and using applicants' credit reports and scores provided by credit rating agencies. Certain customers may be granted payment terms which permit purchases above a minimum amount to be paid for in equal monthly installments over a period not to exceed 12 months (together with Credit Card Receivables, "Credit Receivables"). Credit Receivables require minimum balance payments. An account is classified as overdue if a minimum balance payment has not been received within the allotted timeframe (generally 30 days), after which internal collection efforts commence. In order for the account to return to current status, full payment on all past due amounts must be received by the Company. For all Credit Receivables, once all internal collection efforts have been exhausted and management has reviewed the account, the account balance is written off and may be sent for external collection or legal action. At January 31, 2020 and 2019, the carrying amount of Credit Receivables (recorded in Accounts receivable, net) was $98.5 million and $87.0 million, respectively, of which 97% and 98% was considered current. Finance charges earned on Credit Receivables accounts were not significant.
At January 31, 2020, accounts receivable allowances totaled $33.0 million compared to $31.5 million at January 31, 2019.
Inventories
Inventories are valued at the lower of cost or net realizable value using the average cost method, except for certain diamond and gemstone jewelry, which uses the specific identification method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the following estimated useful lives:
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Buildings
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39 years
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Machinery and equipment
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5-15 years
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Office equipment
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3-8 years
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Software
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5-10 years
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Furniture and fixtures
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3-10 years
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Leasehold improvements and building improvements are amortized over the shorter of their estimated useful lives (primarily ranging from 8-10 years) or the related lease terms or building life, respectively. Maintenance and repair costs are charged to earnings while expenditures for major renewals and improvements are capitalized. Upon the disposition of property, plant and equipment, the accumulated depreciation is deducted from the original cost and any gain or loss is reflected in current earnings.
The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets. The Company's capitalized interest costs were not significant in 2019, 2018 or 2017.
Information Systems Development Costs
Eligible costs incurred during the development stage of information systems projects are capitalized and amortized over the estimated useful life of the related project. Eligible costs include those related to the purchase, development, and installation of the related software. Costs incurred prior to the development stage, as well as costs for maintenance, data conversion, training, and other general and administrative costs, are expensed as incurred. Costs that are capitalized are included in Property, plant and equipment, net in Construction-in-progress while in the development stage and in Software once placed into service.
Capitalized software costs are subject to the Company's accounting policy related to the review of long-lived assets for impairment. See "Impairment of Long-Lived Assets" below for further details.
Intangible Assets and Key Money
Intangible assets, consisting of product rights and trademarks, are recorded at cost and are amortized on a straight-line basis over their estimated useful lives, which range from 15 to 20 years. Intangible assets are reviewed for impairment in accordance with the Company's policy for impairment of long-lived assets (see "Impairment of Long-Lived Assets" below).
Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the "right to lease" with an automatic right of renewal. This right can be subsequently sold by the Company or can be recovered should the landlord refuse to allow the automatic right of renewal to be exercised. Key money is amortized over the estimated useful life, 39 years.
The following table summarizes intangible assets and key money, included in Other assets, net:
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January 31, 2020
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January 31, 2019
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(in millions)
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Gross Carrying Amount
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Accumulated Amortization
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Gross Carrying
Amount
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Accumulated Amortization
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Product rights
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$
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48.9
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$
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(18.4
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)
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$
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48.9
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$
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(16.0
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)
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Key money
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32.2
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(6.3
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)
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34.1
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(6.0
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)
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Trademarks
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2.5
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(2.5
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)
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2.5
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(2.5
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)
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$
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83.6
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$
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(27.2
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)
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$
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85.5
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$
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(24.5
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)
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Amortization of intangible assets and key money was $3.3 million for year ended January 31, 2020 and $3.4 million for the years ended January 31, 2019 and 2018. Amortization expense is estimated to be $3.2 million in each of the next five years.
Goodwill
Goodwill represents the excess of cost over fair value of net assets acquired in a business combination. Goodwill is evaluated for impairment annually in the fourth quarter, or when events or changes in circumstances indicate that the value of goodwill may be impaired. A qualitative assessment is first performed for each reporting unit to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, a quantitative evaluation is performed and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value during that period. Goodwill, included in Other assets, net, consisted of the following by reportable segment:
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(in millions)
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Americas
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Asia-Pacific
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Japan
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Europe
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Other
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Total
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January 31, 2018
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$
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12.2
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$
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0.3
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$
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1.0
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$
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1.1
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$
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24.5
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$
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39.1
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|
Translation
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(0.1
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)
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—
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|
—
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|
—
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(0.3
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)
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(0.4
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)
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January 31, 2019
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12.1
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0.3
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|
1.0
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|
1.1
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24.2
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38.7
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|
Translation
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(0.1
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)
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—
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|
(0.1
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)
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—
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|
(0.1
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)
|
(0.3
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)
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January 31, 2020
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$
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12.0
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|
$
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0.3
|
|
$
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0.9
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$
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1.1
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|
$
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24.1
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$
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38.4
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The Company recorded no impairment charges related to goodwill in 2019, 2018 or 2017.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets (such as property, plant and equipment) other than goodwill for impairment when management determines that the carrying value of such assets may not be recoverable due to events or changes in circumstances. Recoverability of long-lived assets is evaluated by comparing the carrying value of the asset with its estimated future undiscounted cash flows. If the comparisons indicate that the value of the asset is not recoverable, an impairment loss is calculated as the difference between the carrying value and the fair value of the asset and the loss is recognized during that period. There were no significant impairment charges related to long-lived assets during 2019 or 2018. In 2017, the Company recorded aggregate impairment charges of $10.0 million within Selling, general and administrative expenses related to property, plant and equipment.
Leases
The Company leases certain office, distribution, retail and manufacturing facilities, land and equipment. Retail store leases may require the payment of minimum rentals and contingent rent based on a percentage of sales exceeding a stipulated amount. The lease agreements, which expire at various dates through 2062, are subject, in many cases, to renewal options and provide for the payment of taxes, insurance and maintenance. Certain leases contain escalation clauses resulting from the pass through of increases in operating costs, property taxes and the effect on costs from changes in consumer price indices.
The Company determines its lease payments based on predetermined rent escalations (including escalations based on consumer price indices), rent-free periods and other incentives. The Company recognizes rent expense on a straight-line basis over the related terms of such leases, beginning from when the Company takes possession of the leased facility. Variable rents, including contingent rent based on a percentage of sales and adjustments to consumer price indices, are recorded in the period such amounts and adjustments are determined. Lease terms include renewal options when exercise of such options is reasonably certain and within the control of the Company. There is generally no readily determinable discount rate implicit in the Company's leases. Accordingly, the Company uses its incremental borrowing rate for a term that corresponds to the applicable lease term in order to measure its lease liabilities.
The amounts of the Company's right-of-use asset and current and non-current lease liabilities are presented separately on the Consolidated Balance Sheet as of January 31, 2020. Substantially all of the Company's leases are operating leases as of January 31, 2020. The Company records lease expense within Cost of sales for leases of manufacturing facilities and within Selling, general and administrative expenses for all other leases.
Hedging Instruments
The Company uses derivative financial instruments to mitigate a portion of its foreign currency, precious metal price and interest rate exposures. Derivative instruments are recorded on the Consolidated Balance Sheet at their fair values, as either assets or liabilities, with an offset to current or other comprehensive earnings, depending on whether a derivative is designated as part of an effective hedge transaction and, if it is, the type of hedge transaction.
Marketable Securities
The Company's marketable securities primarily consist of investments in mutual funds and are recorded within Other assets, net, at fair value with realized and unrealized gains and losses recorded in earnings. Marketable securities are held for an indefinite period of time, but may be sold in the future as changes in market conditions or economic factors occur. The fair value of marketable securities is determined based on prevailing market prices.
Merchandise Credits and Deferred Revenue
Merchandise credits and deferred revenue primarily represent outstanding gift cards sold to customers and outstanding credits issued to customers for returned merchandise. All such outstanding items may be tendered for future merchandise purchases. A gift card liability is established when the gift card is sold. A merchandise credit liability is established when a merchandise credit is issued to a customer for a returned item and the original sale is reversed. These liabilities are relieved when revenue is recognized for transactions in which a merchandise credit or gift card is used as a form of payment.
If merchandise credits or gift cards are not redeemed over an extended period of time (for example, approximately three to five years in the U.S.), the value associated with the merchandise credits or gift cards may be subject to remittance to the applicable jurisdiction in accordance with unclaimed property laws. The Company determines the amount of breakage income to be recognized on gift cards and merchandise credits using historical experience to estimate amounts that will ultimately not be redeemed. The Company recognizes such breakage income in proportion to redemption rates of the overall population of gift cards and merchandise credits.
In 2019, the Company recognized net sales of approximately $33.0 million related to the Merchandise credits and deferred revenue balance that existed at January 31, 2019.
Revenue Recognition
The following table disaggregates the Company's net sales by major source:
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Years Ended January 31,
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(in millions)
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2020
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|
2019
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2018
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Net sales*:
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|
|
|
|
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Jewelry collections
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$
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2,420.2
|
|
|
$
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2,374.3
|
|
|
$
|
2,146.6
|
|
Engagement jewelry
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1,139.5
|
|
|
1,157.4
|
|
|
1,111.9
|
|
Designer jewelry
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514.1
|
|
|
544.5
|
|
|
551.2
|
|
All other
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350.2
|
|
|
365.9
|
|
|
360.1
|
|
|
$
|
4,424.0
|
|
|
$
|
4,442.1
|
|
|
$
|
4,169.8
|
|
*Certain reclassifications within the jewelry categories have been made to the prior year amounts to conform to the current year category presentation.
The Company's performance obligations consist primarily of transferring control of merchandise to customers. Sales are recognized upon transfer of control, which occurs when merchandise is taken in an "over-the-counter" transaction or upon receipt by a customer in a shipped transaction, such as through the Internet and catalog channels. Sales are reported net of returns, sales tax and other similar taxes. The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority and collected by the entity from a customer.
Shipping and handling fees billed to customers are recognized in net sales when control of the underlying merchandise is transferred to the customer. The related shipping and handling charges incurred by the Company represent fulfillment activities and are included in Cost of sales.
The Company maintains a reserve for potential product returns and records (as a reduction to sales and cost of sales) its provision for estimated product returns, which is determined based on historical experience.
As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component when management expects, at contract inception, that the period between the transfer of a product to a customer and when the customer pays for that product is one year or less.
Additionally, outside of the U.S., the Company operates certain TIFFANY & CO. stores within various department stores. Sales transacted at these store locations are recognized upon transfer of control, which occurs when merchandise is taken in an "over-the-counter" transaction. The Company and these department store operators have distinct responsibilities and risks in the operation of such TIFFANY & CO. stores. The Company (i) owns and manages the merchandise; (ii) establishes retail prices; (iii) has merchandising, marketing and display responsibilities; and (iv) in almost all locations provides retail staff and bears the risk of inventory loss. The department store operators (i) provide and maintain store facilities; (ii) in almost all locations assume retail credit and certain other risks; and (iii) act for the Company in the sale of merchandise. In return for their services and use of their facilities, the department store operators retain a portion of net retail sales made in TIFFANY & CO. stores which is recorded as rent expense within Selling, general and administrative expenses.
Cost of Sales
Cost of sales includes costs to internally manufacture merchandise (primarily metals, gemstones, labor and overhead), costs related to the purchase of merchandise from third-parties, inbound freight, purchasing and receiving, inspection, warehousing, internal transfers and other costs associated with distribution and merchandising. Cost of sales also includes royalty fees paid to outside designers and customer shipping and handling charges.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses include costs associated with the selling and marketing of products as well as administrative expenses. The types of expenses associated with these functions are store operating expenses (such as labor, rent and utilities), advertising and other corporate level administrative expenses.
Advertising, Marketing, Public and Media Relations Costs
Advertising, marketing, public and media relations costs include media, production, catalogs, Internet, marketing events, visual merchandising costs (in-store and window displays) and other related costs. In 2019, 2018 and 2017, these costs totaled $378.8 million, $394.1 million and $314.9 million, respectively, representing 8.6%, 8.9% and 7.6% of worldwide net sales, respectively. Media and production costs for print and digital advertising are expensed as incurred, while catalog costs are expensed upon first distribution.
Pre-Opening Costs
Costs associated with the opening of new retail stores are expensed in the period incurred.
Stock-Based Compensation
New, modified and unvested share-based payment transactions with employees, such as stock options and restricted stock units, are measured at fair value and recognized as compensation expense over the requisite service period. Compensation expense recognized reflects an estimate of the number of awards expected to vest and incorporates an estimate of award forfeitures based on actual experience. Compensation expense is recognized on a straight-line basis over the requisite service period, which is generally the vesting period required to obtain full vesting.
Merchandise Design Activities
Merchandise design activities consist of conceptual formulation and design of possible products and creation of pre-production prototypes and molds. Costs associated with these activities are expensed as incurred.
Foreign Currency
The functional currency of most of the Company's foreign subsidiaries and branches is the applicable local currency. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded as a component of Accumulated other comprehensive loss, net of tax within stockholders' equity. The Company also recognizes gains and losses associated with transactions that are denominated in foreign currencies. The Company recorded net losses resulting from foreign currency transactions of $4.6 million, $5.3 million and $5.3 million within Other expense, net in 2019, 2018 and 2017, respectively.
Income Taxes
The Company accounts for income taxes under 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 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.
The Company records net deferred tax assets to the extent management believes these assets will more likely than not be realized. In making such determination, the Company considers all available evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial results. In the event management were to determine that the Company would be able to realize its deferred income tax assets in the future in excess of their net recorded amounts, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
In evaluating the exposures associated with the Company's various tax filing positions, management records reserves using a more-likely-than-not recognition threshold for income tax positions taken or expected to be taken.
The Registrant, its U.S. subsidiaries and the foreign branches of its U.S. subsidiaries file a consolidated Federal income tax return.
Earnings Per Share ("EPS")
Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the dilutive effect of the assumed exercise of stock options and unvested restricted stock units.
The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted EPS computations:
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|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
Net earnings for basic and diluted EPS
|
$
|
541.1
|
|
$
|
586.4
|
|
$
|
370.1
|
|
Weighted-average shares for basic EPS
|
121.1
|
|
122.9
|
|
124.5
|
|
Incremental shares based upon the assumed exercise of stock options and unvested restricted stock units
|
0.5
|
|
0.6
|
|
0.6
|
|
Weighted-average shares for diluted EPS
|
121.6
|
|
123.5
|
|
125.1
|
|
For the years ended January 31, 2020, 2019 and 2018, there were 1.3 million, 0.7 million and 0.6 million stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect, respectively.
New Accounting Standards
In June 2016, the FASB issued ASU 2016-13 – Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses. The new standard applies to financial assets measured at amortized cost basis, including receivables that result from revenue transactions and held-to-maturity debt securities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and early adoption was permitted for fiscal years beginning after December 15, 2018. The Company's allowances for doubtful accounts have historically not been significant and management does not expect the adoption of this ASU will have a significant impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15 – Intangibles – Goodwill and Other – Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs in such cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption was permitted. Entities can choose to adopt the new guidance prospectively or retrospectively. The Company does not expect that the adoption of ASU 2018-15 will have a significant impact on its consolidated financial statements. However, the impact of adopting this ASU will ultimately depend on the composition of the Company's cloud computing software arrangements under development at that time.
In December 2019, the FASB issued ASU 2019-12 – Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes. This guidance simplifies the approach for intraperiod tax allocations, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. Management is currently evaluating the impact of this ASU on the consolidated financial statements.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02 – Leases (ASC 842), which was amended in January 2018 and requires an entity that leases assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Leases are classified as either financing or operating with the applicable classification determining the pattern of expense recognition in the statement of earnings.
The Company adopted this ASU on February 1, 2019 by applying its provisions prospectively and recognizing a cumulative-effect adjustment to the opening balance of retained earnings as of February 1, 2019. The Company also elected the package of practical expedients permitted under the transition guidance, which provided that an entity need not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases. The Company also elected to not reassess lease terms using hindsight and to combine lease and non-lease components for new leases subsequent to February 1, 2019. Additionally, the Company used its incremental borrowing rate for a term that corresponded to lease terms remaining as of February 1, 2019 to measure its lease liabilities as of that date.
The adoption of ASU 2016-02 resulted in the following impacts to the Company's Consolidated Balance Sheet as of February 1, 2019:
|
|
•
|
The establishment of a lease liability of approximately $1.2 billion and a corresponding right-of-use asset;
|
|
|
•
|
The reclassification of existing balances in respect of unamortized lease incentives and lease straight-line liabilities from Other long-term liabilities to Operating lease right-of-use assets; and
|
|
|
•
|
The reclassification of $31.1 million of deferred gains on sale-leasebacks, and related deferred tax assets of $9.5 million, to opening retained earnings.
|
In August 2017, the FASB issued ASU 2017-12 – Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which expanded and refined hedge accounting for both financial and non-financial risk components, aligned the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and included certain targeted improvements to ease the application of previous guidance related to the assessment of hedge effectiveness. This ASU was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018, with early adoption permitted. The amendments in this ASU were required to be applied on a modified retrospective basis, while presentation and disclosure requirements set forth under this ASU are required prospectively after the date of adoption. Management adopted this ASU on February 1, 2019. The adoption of this ASU did not have any impact on the consolidated financial statements. The disclosures required by this ASU are included in "Note I. Hedging Instruments."
In February 2018, the FASB issued ASU 2018-02 – Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allowed for the reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for the tax effects on deferred tax items included within AOCI (referred to in the ASU as "stranded tax effects") resulting from the reduction of the U.S. federal statutory income tax rate to 21% from 35% that was effected by the 2017 U.S. Tax Cuts and Jobs Act. ASU 2018-02 was effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Management adopted this ASU on February 1, 2019. The adoption of ASU 2018-02 resulted in a reclassification of $26.2 million from AOCI to retained earnings, and had no impact on the Company's results of operations, financial position or cash flows.
D. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
Interest, net of interest capitalization
|
$
|
40.8
|
|
$
|
40.6
|
|
$
|
41.5
|
|
Income taxes
|
$
|
232.8
|
|
$
|
291.4
|
|
$
|
156.2
|
|
Supplemental noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
Accrued capital expenditures
|
$
|
26.1
|
|
$
|
11.0
|
|
$
|
20.1
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Finished goods
|
$
|
1,532.5
|
|
$
|
1,484.3
|
|
Raw materials
|
776.8
|
|
781.8
|
|
Work-in-process
|
154.6
|
|
161.9
|
|
Inventories, net
|
$
|
2,463.9
|
|
$
|
2,428.0
|
|
|
|
F.
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Land
|
$
|
41.7
|
|
$
|
41.8
|
|
Buildings
|
122.3
|
|
122.6
|
|
Leasehold and building improvements
|
1,489.9
|
|
1,378.1
|
|
Office equipment
|
300.1
|
|
286.0
|
|
Software
|
506.0
|
|
452.2
|
|
Furniture and fixtures
|
333.1
|
|
315.0
|
|
Machinery and equipment
|
208.2
|
|
197.8
|
|
Construction-in-progress
|
158.0
|
|
98.7
|
|
|
3,159.3
|
|
2,892.2
|
|
Accumulated depreciation and amortization
|
(2,060.5
|
)
|
(1,865.5
|
)
|
|
$
|
1,098.8
|
|
$
|
1,026.7
|
|
Depreciation and amortization expense for the years ended January 31, 2020, 2019 and 2018 was $253.8 million, $223.6 million and $200.8 million, respectively.
|
|
G.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Accounts payable - trade
|
$
|
261.3
|
|
$
|
217.1
|
|
Accrued compensation and commissions
|
90.8
|
|
120.9
|
|
Other
|
189.4
|
|
175.4
|
|
|
$
|
541.5
|
|
$
|
513.4
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Short-term borrowings:
|
|
|
Credit Facilities
|
$
|
13.8
|
|
$
|
13.5
|
|
Other credit facilities
|
134.1
|
|
99.9
|
|
|
$
|
147.9
|
|
$
|
113.4
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
Unsecured Senior Notes:
|
|
|
2012 4.40% Series B Notes, due July 2042 a
|
$
|
250.0
|
|
$
|
250.0
|
|
2014 3.80% Senior Notes, due October 2024 b, c
|
250.0
|
|
250.0
|
|
2014 4.90% Senior Notes, due October 2044 b, c
|
300.0
|
|
300.0
|
|
2016 0.78% Senior Notes, due August 2026 b, d
|
91.9
|
|
91.8
|
|
|
891.9
|
|
891.8
|
|
Less: unamortized discounts and debt issuance costs
|
(7.8
|
)
|
(8.4
|
)
|
|
$
|
884.1
|
|
$
|
883.4
|
|
|
|
a
|
The agreements governing these Senior Notes require repayments of $50.0 million in aggregate every five years beginning in July 2022.
|
|
|
b
|
These agreements require lump sum repayments upon maturity.
|
|
|
c
|
These Senior Notes were issued at a discount, which will be amortized until the debt maturity.
|
|
|
d
|
These Senior Notes were issued at par, ¥10.0 billion.
|
Credit Facilities
On October 25, 2018, the Registrant, along with certain of its subsidiaries designated as borrowers thereunder, entered into a five-year multi-bank, multi-currency committed unsecured revolving credit facility, including a letter of credit subfacility, consisting of basic commitments in an amount up to $750.0 million (which commitments may be increased, subject to certain conditions and limitations, at the request of the Registrant) ("Credit Facility"). The Credit Facility replaced the Registrant's previously existing $375.0 million four-year unsecured revolving credit facility and $375.0 million five-year unsecured revolving credit facility, which were each terminated and repaid in connection with the Registrant's entry into the Credit Facility.
Borrowings under the Credit Facility bear interest at a rate per annum equal to, at the option of the Registrant, (1) LIBOR (or other applicable or successor reference rate) for the relevant currency plus an applicable margin based upon the more favorable to the Registrant of (i) a leverage financial metric of the Registrant and (ii) the Registrant's debt rating for long-term unsecured senior, non-credit enhanced debt, or (2) an alternate base rate equal to the highest of (i) the federal funds effective rate plus 0.50%, (ii) MUFG Bank, Ltd.'s prime rate and (iii) one-month LIBOR plus 1.00%, plus an applicable margin based upon the more favorable to the Registrant of (x) a leverage financial metric of the Registrant and (y) the Registrant's debt rating for long-term unsecured senior, non-credit enhanced debt.
The Credit Facility also requires payment to the lenders of a facility fee on the amount of the lenders' commitments under the credit facility from time to time at rates based upon the more favorable to the Registrant of (1) a leverage financial metric of the Registrant and (2) the Registrant's debt rating for long-term unsecured senior, non-credit enhanced debt. Voluntary prepayments of the loans and voluntary reductions of the unutilized portion of the commitments under the Credit Facility are permissible without penalty, subject to certain conditions pertaining to minimum notice and minimum reduction amounts.
The Credit Facility is available for working capital and other corporate purposes.
The Credit Facility matures in 2023, provided that such maturity may be extended for one or two additional one-year periods at any time with the consent of the applicable lenders, as further described in the agreement governing such facility.
At January 31, 2020, there were $13.8 million of borrowings outstanding, $3.6 million of letters of credit issued and $732.6 million available for borrowing under the Credit Facility. At January 31, 2019, there were $13.5 million of borrowings outstanding, $6.1 million of letters of credit issued and $730.4 million available for borrowing under the previously existing revolving credit facilities. The weighted-average interest rate for borrowings outstanding was 0.90% at January 31, 2020 and 1.05% at January 31, 2019.
Commercial Paper
In August 2017, the Registrant and one of its wholly owned subsidiaries established a commercial paper program (the "Commercial Paper Program") for the issuance of commercial paper in the form of short-term promissory notes in an aggregate principal amount not to exceed $750.0 million. Borrowings under the Commercial Paper Program may be used for general corporate purposes. The aggregate amount of borrowings that the Company is currently authorized to have outstanding under the Commercial Paper Program and the Registrant's Credit Facility is $750.0 million. The Registrant guarantees the obligations of its wholly owned subsidiary under the Commercial Paper Program. Maturities of commercial paper notes may vary, but cannot exceed 397 days from the date of issuance. Notes issued under the Commercial Paper Program rank equally with the Registrant's present and future unsecured and unsubordinated indebtedness. As of January 31, 2020 and 2019, there were no borrowings outstanding under the Commercial Paper Program.
Other Credit Facilities
Tiffany-Shanghai Credit Agreement. In June 2019, the Registrant's indirect, wholly owned subsidiary, Tiffany & Co. (Shanghai) Commercial Company Limited ("Tiffany-Shanghai"), entered into a three-year multi-bank revolving credit agreement (the "Tiffany-Shanghai Credit Agreement"). The Tiffany-Shanghai Credit Agreement has an aggregate borrowing limit of RMB 408.0 million ($59.0 million at January 31, 2020), which may be increased to the RMB equivalent of $100.0 million, subject to certain conditions and limitations, at the request of Tiffany-Shanghai. The Tiffany-Shanghai Credit Agreement, which matures in July 2022, was made available to refinance amounts outstanding under Tiffany-Shanghai's previously existing RMB 990.0 million three-year multi-bank revolving credit agreement (the "2016 Agreement"), which expired pursuant to its terms on July 11, 2019, as well as for Tiffany-Shanghai's ongoing general working capital requirements. The participating lenders will make loans, upon Tiffany-Shanghai's request, for periods of up to 12 months at the applicable interest rates equal to 95% of the applicable rate as announced by the People's Bank of China (provided, that if such announced rate is below zero, the applicable interest rate shall be deemed to be zero). In connection with the Tiffany-Shanghai Credit Agreement, in June 2019, the Registrant entered into a Guaranty Agreement by and between the Registrant and the facility agent under the Tiffany-Shanghai Credit Agreement (the "Guaranty"). At January 31, 2020, there was $33.0 million available to be borrowed under the Tiffany-Shanghai Credit Agreement and $26.1 million was outstanding at a weighted-average interest rate of 4.13%.
Other. The Company has various other revolving credit facilities, primarily in Japan and China. At January 31, 2020, the facilities totaled $188.8 million and $108.0 million was outstanding at a weighted-average interest rate of 5.36%. At January 31, 2019, the facilities totaled $135.6 million and $73.1 million was outstanding at a weighted-average interest rate of 3.93%.
Debt Covenants
The agreement governing the Credit Facility includes a specific financial covenant, as well as other covenants that limit the ability of the Company to incur certain subsidiary indebtedness, incur liens and engage in mergers, consolidations and sales of all or substantially all of its and its subsidiaries' assets, in addition to other requirements. The agreement governing the Credit Facility also includes certain "Events of Default" (as defined in the agreement governing the Credit Facility) customary to such borrowings, including a "Change of Control" (as defined in the agreement governing the Credit Facility) of the Registrant, such as the proposed Merger.
The Tiffany-Shanghai Credit Agreement includes certain covenants that limit Tiffany-Shanghai's ability to incur liens and incur certain indebtedness, and the Guaranty requires maintenance by the Registrant of a specific leverage ratio. The Tiffany Shanghai Credit Agreement also includes certain other requirements and "Events of Default" (as defined in the Tiffany-Shanghai Credit Agreement) customary to such borrowings, including the Registrant's shares ceasing to be listed on New York Stock Exchange for 14 consecutive trading days, such as following the proposed Merger.
The indenture governing the 2014 3.80% Senior Notes and 2014 4.90% Senior Notes, as amended and supplemented in respect of each such series of Notes (the "Indenture"), contains covenants that, among other things, limit the ability of the Registrant and its subsidiaries under certain circumstances to create liens and impose conditions on the Registrant's ability to engage in mergers, consolidations and sales of all or substantially all of its or its subsidiaries' assets. The Indenture also contains certain "Events of Default" (as defined in the Indenture) customary for indentures of this type. The Indenture does not contain any specific financial covenants.
The agreements governing the 2012 4.40% Series B Senior Notes and the Yen Notes require maintenance of a specific financial covenant and limit certain changes to indebtedness of the Registrant and its subsidiaries and the general nature of the business, in addition to other requirements customary to such borrowings.
At January 31, 2020, the Company was in compliance with all debt covenants. In the event of any default of payment or performance obligations extending beyond applicable cure periods as set forth in the agreements governing the Company's applicable debt instruments, such agreements may be terminated or payment of the applicable debt may be accelerated. Further, each of the Credit Facility, the Tiffany-Shanghai Credit Agreement, the agreements governing the 2012 4.40% Series B Senior Notes and the Yen Notes, and certain other loan agreements contain cross default provisions permitting the termination and acceleration of the loans, or acceleration of the notes, as the case may be, in the event that certain of the Company's other debt obligations are terminated or accelerated prior to their maturity.
Once consummated, the proposed Merger may result in certain of the Company's outstanding indebtedness becoming due, and the Company will need to comply with certain covenants of the agreements governing its outstanding indebtedness relating to the proposed Merger. Under the terms of the Merger Agreement, if reasonably requested by Parent, the Company must use its commercially reasonable efforts to, among other things, take actions required to facilitate repayment of the Company's outstanding indebtedness.
Long-Term Debt Maturities
Aggregate maturities of long-term debt as of January 31, 2020 are as follows:
|
|
|
|
|
Years Ending January 31,
|
Amount a
(in millions)
|
|
2021
|
$
|
—
|
|
2022
|
—
|
|
2023
|
50.0
|
|
2024
|
—
|
|
2025
|
250.0
|
|
Thereafter
|
591.9
|
|
|
$
|
891.9
|
|
|
|
a
|
Amounts exclude any unamortized discount or premium.
|
Letters of Credit
The Company has available letters of credit and financial guarantees of $73.7 million, of which $48.5 million was outstanding at January 31, 2020. Of those available letters of credit and financial guarantees, $46.5 million expires within one year. These amounts do not include letters of credit issued under the Credit Facility.
I. HEDGING INSTRUMENTS
Background Information
The Company uses derivative financial instruments, including interest rate swaps, cross-currency swaps, forward contracts and net-zero-cost collar arrangements (combination of call and put option contracts) to mitigate a portion of its exposures to changes in interest rates, foreign currency exchange rates and precious metal prices.
Derivative Instruments Designated as Hedging Instruments. If a derivative instrument meets certain hedge accounting criteria, it is recorded on the Consolidated Balance Sheet at its fair value, as either an asset or a liability, with an offset to current or other comprehensive earnings, depending on whether the hedge is designated as one of the following on the date it is entered into:
|
|
•
|
Fair Value Hedge – A hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. For fair value hedge transactions, the changes in the fair value of the derivative and changes in the fair value of the item being hedged are recorded in current earnings.
|
|
|
•
|
Cash Flow Hedge – A hedge of the exposure to variability in the cash flows of a recognized asset, liability or a forecasted transaction. For cash flow hedge transactions, the changes in fair value of derivatives is reported as other comprehensive income ("OCI") and is recognized in current earnings in the period or periods during which the hedged transaction affects current earnings.
|
The Company formally documents the nature of and relationships between the hedging instruments and hedged items for a derivative to qualify as a hedge at inception and throughout the hedged period. The Company also documents its risk management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative financial instrument would be recognized in current earnings. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedge instrument and the item being hedged, both at inception and throughout the hedged period.
Derivative Instruments Not Designated as Hedging Instruments. Derivative instruments which do not meet the criteria to be designated as a hedge are recorded on the Consolidated Balance Sheet at their fair values, as either assets or liabilities, with an offset to current earnings. The gains or losses on undesignated foreign exchange forward contracts substantially offset foreign exchange losses or gains on the underlying liabilities or transactions being hedged.
The Company does not use derivative financial instruments for trading or speculative purposes.
Types of Derivative Instruments
Interest Rate Swaps – In 2012, the Company entered into forward-starting interest rate swaps to hedge the impact of interest rate volatility on future interest payments associated with the anticipated incurrence of $250.0 million of debt which was incurred in July 2012. The Company accounted for the forward-starting interest rate swaps as cash flow hedges. The Company settled the interest rate swaps in 2012 and recorded a loss within accumulated other comprehensive loss. As of January 31, 2020, $16.1 million remains recorded as a loss in accumulated other comprehensive loss, which is being amortized over the term of the 2042 Notes to which the interest rate swaps related.
In 2014, the Company entered into forward-starting interest rate swaps to hedge the impact of interest rate volatility on future interest payments associated with the anticipated incurrence of long-term debt which was incurred in September 2014. The Company accounted for the forward-starting interest rate swaps as cash flow hedges. The Company settled the interest rate swaps in 2014 and recorded a loss within accumulated other comprehensive loss. As of January 31, 2020, $3.3 million remains recorded as a loss in accumulated other comprehensive loss, which is being amortized over the terms of the respective 2024 Notes or 2044 Notes to which the interest rate swaps related.
Cross-currency Swaps – In 2016, 2017 and 2019, the Company entered into cross-currency swaps to hedge the foreign currency exchange risk associated with Japanese yen-denominated and Euro-denominated intercompany loans. These cross-currency swaps are designated and accounted for as cash flow hedges. As of January 31, 2020, the notional amounts of cross-currency swaps accounted for as cash flow hedges and the respective maturity dates were as follows:
|
|
|
|
|
|
|
|
|
Cross-Currency Swap
|
|
Notional Amount
|
Effective Date
|
Maturity Date
|
(in millions)
|
(in millions)
|
July 2016
|
October 2024
|
¥
|
10,620.0
|
|
$
|
100.0
|
|
March 2017
|
April 2027
|
¥
|
11,000.0
|
|
$
|
96.1
|
|
May 2017
|
April 2027
|
¥
|
5,634.5
|
|
$
|
50.0
|
|
August 2019
|
August 2026
|
€
|
21.1
|
|
$
|
23.6
|
|
Foreign Exchange Forward Contracts – The Company uses foreign exchange forward contracts to offset a portion of the foreign currency exchange risks associated with foreign currency-denominated liabilities, intercompany transactions and forecasted purchases of merchandise between entities with differing functional currencies. The Company assesses hedge effectiveness based on the total changes in the foreign exchange forward contracts' cash flows. These foreign exchange forward contracts are designated and accounted for as either cash flow hedges or economic hedges that are not designated as hedging instruments.
As of January 31, 2020, the notional amounts of foreign exchange forward contracts were as follows:
|
|
|
|
|
|
|
|
(in millions)
|
|
Notional Amount
|
|
|
USD Equivalent
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
Japanese yen
|
¥
|
19,917.3
|
|
$
|
187.4
|
|
British pound
|
£
|
13.2
|
|
|
17.1
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
U.S. dollar
|
$
|
130.0
|
|
$
|
130.0
|
|
Euro
|
€
|
6.8
|
|
|
7.6
|
|
Australian dollar
|
AU$
|
23.2
|
|
|
15.7
|
|
Czech koruna
|
CZK
|
142.7
|
|
|
6.1
|
|
Japanese yen
|
¥
|
2,320.5
|
|
|
21.2
|
|
New Zealand dollar
|
NZ$
|
10.2
|
|
|
6.8
|
|
Singapore dollar
|
S$
|
20.9
|
|
|
15.2
|
|
Chinese renminbi
|
CNY
|
361.2
|
|
|
51.6
|
|
Canadian dollar
|
CAD
|
15.9
|
|
|
12.2
|
|
Danish kroner
|
DKK
|
52.6
|
|
|
7.8
|
|
Korean won
|
KRW
|
29,019.0
|
|
|
24.8
|
|
The maximum term of the Company's outstanding foreign exchange forward contracts as of January 31, 2020 is 12 months.
Precious Metal Collars and Forward Contracts – The Company periodically hedges a portion of its forecasted purchases of precious metals for use in its internal manufacturing operations in order to manage the effect of volatility in precious metal prices. The Company may use either a combination of call and put option contracts in net-zero-cost collar arrangements ("precious metal collars") or forward contracts. For precious metal collars, if the price of the precious metal at the time of the expiration of the precious metal collar is within the call and put price, the precious metal collar expires at no cost to the Company. The Company accounts for its precious metal collars and forward contracts as cash flow hedges. The Company assesses hedge effectiveness based on the total changes in the precious metal collars and forward contracts' cash flows. As of January 31, 2020, the maximum term over which
the Company is hedging its exposure to the variability of future cash flows for all forecasted precious metals transactions is 18 months. As of January 31, 2020, there were precious metal derivative instruments outstanding for approximately 29,000 ounces of platinum, 557,000 ounces of silver and 84,000 ounces of gold.
Information on the location and amounts of derivative gains and losses in the consolidated financial statements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31, 2020
|
|
(in millions)
|
Cost of sales
|
Interest expense and financing costs
|
Other expense, net
|
Other comprehensive loss, net of tax
|
Reported amounts of financial statement line items in which effects of cash flow hedges are recorded
|
$
|
1,662.1
|
|
$
|
38.5
|
|
$
|
3.8
|
|
$
|
(42.4
|
)
|
Derivatives in Cash Flow Hedging
Relationships:
|
|
|
|
|
Foreign exchange forward contracts
|
|
|
|
|
Pre-tax gain recognized in OCI
|
—
|
|
—
|
|
—
|
|
5.4
|
|
Pre-tax gain reclassified from accumulated OCI into earnings
|
(4.1
|
)
|
—
|
|
—
|
|
4.1
|
|
Precious metal collars
|
|
|
|
|
Pre-tax gain reclassified from accumulated OCI into earnings
|
(0.3
|
)
|
—
|
|
—
|
|
0.3
|
|
Precious metal forward contracts
|
|
|
|
|
Pre-tax gain recognized in OCI
|
—
|
|
—
|
|
—
|
|
18.1
|
|
Pre-tax loss reclassified from accumulated OCI into earnings
|
2.8
|
|
—
|
|
—
|
|
(2.8
|
)
|
Cross-currency swaps
|
|
|
|
|
Pre-tax gain recognized in OCI
|
—
|
|
—
|
|
—
|
|
27.0
|
|
Pre-tax gain reclassified from accumulated OCI into earnings
|
—
|
|
(6.1
|
)
|
(0.1
|
)
|
6.2
|
|
Forward-starting interest rate swaps
|
|
|
|
|
Pre-tax loss reclassified from accumulated OCI into earnings
|
—
|
|
1.3
|
|
—
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31, 2019
|
|
(in millions)
|
Cost of sales
|
Interest expense and financing costs
|
Other expense, net
|
Other comprehensive loss, net of tax
|
Reported amounts of financial statement line items in which effects of cash flow hedges are recorded
|
$
|
1,631.1
|
|
$
|
39.7
|
|
$
|
7.1
|
|
$
|
(68.6
|
)
|
Derivatives in Cash Flow Hedging
Relationships:
|
|
|
|
|
Foreign exchange forward contracts
|
|
|
|
|
Pre-tax gain recognized in OCI
|
—
|
|
—
|
|
—
|
|
5.8
|
|
Pre-tax gain reclassified from accumulated OCI into earnings
|
(2.6
|
)
|
—
|
|
—
|
|
2.6
|
|
Precious metal collars
|
|
|
|
|
Pre-tax gain reclassified from accumulated OCI into earnings
|
(0.6
|
)
|
—
|
|
—
|
|
0.6
|
|
Precious metal forward contracts
|
|
|
|
|
Pre-tax loss recognized in OCI
|
—
|
|
—
|
|
—
|
|
(7.2
|
)
|
Pre-tax loss reclassified from accumulated OCI into earnings
|
1.0
|
|
—
|
|
—
|
|
(1.0
|
)
|
Cross-currency swaps
|
|
|
|
|
Pre-tax gain recognized in OCI
|
—
|
|
—
|
|
—
|
|
0.3
|
|
Pre-tax gain reclassified from accumulated OCI into earnings
|
—
|
|
—
|
|
(0.4
|
)
|
0.4
|
|
Forward-starting interest rate swaps
|
|
|
|
|
Pre-tax loss reclassified from accumulated OCI into earnings
|
—
|
|
1.4
|
|
—
|
|
(1.4
|
)
|
The pre-tax gains or losses on derivatives not designated as hedging instruments were not significant for the years ended January 31, 2020 and 2019 and were included in Other expense, net. The Company expects approximately $6.7 million of net pre-tax derivative gains included in accumulated other comprehensive loss at January 31, 2020 will be reclassified into earnings within the next 12 months. The actual amount reclassified will vary due to fluctuations in foreign currency exchange rates and precious metal prices.
For information regarding the location and amount of the derivative instruments in the Consolidated Balance Sheet, see "Note J. Fair Value of Financial Instruments."
Concentration of Credit Risk
A number of major international financial institutions are counterparties to the Company's derivative financial instruments. The Company enters into derivative financial instrument agreements only with counterparties meeting certain credit standards (an investment grade credit rating at the time of the agreement) and limits the amount of agreements or contracts it enters into with any one party. The Company may be exposed to credit losses in the event of nonperformance by individual counterparties or the entire group of counterparties.
|
|
J.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. U.S. GAAP prescribes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities, which are considered to be most reliable.
Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 – Unobservable inputs reflecting the reporting entity's own assumptions, which require the most judgment.
The Company's derivative instruments are considered Level 2 instruments for the purpose of determining fair value. The Company's foreign exchange forward contracts, as well as its put option contracts and cross-currency swaps, are primarily valued using the appropriate foreign exchange spot rates. The Company's precious metal forward contracts and collars are primarily valued using the relevant precious metal spot rate. For further information on the Company's hedging instruments and program, see "Note I. Hedging Instruments."
Financial assets and liabilities carried at fair value at January 31, 2020 are classified in the table below in one of the three categories described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Total Fair
Value
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial assets
|
|
|
|
|
|
|
|
Time deposits a
|
$
|
22.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22.7
|
|
Marketable securities b
|
39.3
|
|
|
—
|
|
|
—
|
|
|
39.3
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Precious metal forward contracts c
|
—
|
|
|
13.0
|
|
|
—
|
|
|
13.0
|
|
Foreign exchange forward contracts c
|
—
|
|
|
2.7
|
|
|
—
|
|
|
2.7
|
|
Cross-currency swaps c
|
—
|
|
|
2.9
|
|
|
—
|
|
|
2.9
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts c
|
—
|
|
|
2.1
|
|
|
—
|
|
|
2.1
|
|
Total financial assets
|
$
|
62.0
|
|
|
$
|
20.7
|
|
|
$
|
—
|
|
|
$
|
82.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Total Fair
Value
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial liabilities
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Precious metal forward contracts d
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
Foreign exchange forward contracts d
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
Cross-currency swaps d
|
—
|
|
|
1.9
|
|
|
—
|
|
|
1.9
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts d
|
—
|
|
|
2.9
|
|
|
—
|
|
|
2.9
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
5.5
|
|
|
$
|
—
|
|
|
$
|
5.5
|
|
Financial assets and liabilities carried at fair value at January 31, 2019 are classified in the table below in one of the three categories described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Total Fair
Value
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial assets
|
|
|
|
|
|
|
|
Time deposits a
|
$
|
62.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62.7
|
|
Marketable securities b
|
36.3
|
|
|
—
|
|
|
—
|
|
|
$
|
36.3
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Precious metal forward contracts c
|
—
|
|
|
5.2
|
|
|
—
|
|
|
5.2
|
|
Foreign exchange forward contracts c
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts c
|
—
|
|
|
0.9
|
|
|
—
|
|
|
0.9
|
|
Total financial assets
|
$
|
99.0
|
|
|
$
|
7.9
|
|
|
$
|
—
|
|
|
$
|
106.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Total Fair
Value
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial liabilities
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Precious metal forward contracts d
|
$
|
—
|
|
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
2.7
|
|
Foreign exchange forward contracts d
|
—
|
|
|
2.1
|
|
|
—
|
|
|
2.1
|
|
Cross-currency swaps d
|
—
|
|
|
19.9
|
|
|
—
|
|
|
19.9
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts d
|
—
|
|
|
2.7
|
|
|
—
|
|
|
2.7
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
27.4
|
|
|
$
|
—
|
|
|
$
|
27.4
|
|
|
|
a
|
Included within Short-term investments.
|
|
|
b
|
Included within Other assets, net.
|
|
|
c
|
Included within Prepaid expenses and other current assets or Other assets, net based on the maturity of the contract.
|
|
|
d
|
Included within Accounts payable and accrued liabilities or Other long-term liabilities based on the maturity of the contract.
|
The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to the short-term maturities of these assets and liabilities and as such are measured using Level 1 inputs. The fair value of debt with variable interest rates approximates carrying value and is measured using Level 2 inputs. The fair value of debt with fixed interest rates was determined using the quoted market prices of debt instruments with similar terms and maturities, which are considered Level 2 inputs. The total carrying value of short-term borrowings and long-term debt was approximately $1.0 billion at January 31, 2020 and 2019 and the corresponding fair value was approximately $1.2 billion at January 31, 2020 and $1.0 billion at January 31, 2019.
Amounts recognized in the Consolidated Statement of Earnings were as follows:
|
|
|
|
|
(in millions)
|
Year Ended January 31, 2020
|
|
Fixed operating lease expense
|
$
|
313.8
|
|
Variable operating lease expense
|
156.4
|
|
Sublease income
|
(5.3
|
)
|
Net lease expense
|
$
|
464.9
|
|
The weighted average remaining lease term was seven years and the weighted average discount rate was 3.8% for all of the Company's operating leases as of January 31, 2020.
The following table provides supplemental cash flow information related to the Company's operating leases:
|
|
|
|
|
(in millions)
|
Year Ended January 31, 2020
|
|
Cash outflows from operating activities attributable to operating leases
|
$
|
314.1
|
|
Right-of-use assets obtained in exchange for operating leases liabilities
|
312.4
|
|
The following table reconciles the undiscounted cash flows expected to be paid in each of the next five fiscal years and thereafter to the operating lease liability recorded on the Consolidated Balance Sheet for operating leases existing as of January 31, 2020.
|
|
|
|
|
Years ending January 31,
|
Minimum Lease Payments as of January 31, 2020
(in millions)
|
2021
|
$
|
245.1
|
|
2022
|
255.2
|
|
2023
|
211.1
|
|
2024
|
178.9
|
|
2025
|
144.8
|
|
Thereafter
|
368.5
|
|
Total minimum lease payments
|
1,403.6
|
|
Less: amount of total minimum lease payments representing interest
|
(192.4
|
)
|
Present value of future total minimum lease payments
|
1,211.2
|
|
Less: current portion of operating lease liabilities
|
(202.8
|
)
|
Long-term portion of operating lease liabilities
|
$
|
1,008.4
|
|
As of January 31, 2020, there were nine executed agreements in respect of store relocations, new stores, office space and other facilities without commencement dates, which had total commitments of $88.7 million.
As previously disclosed in "Note J. Commitments and Contingencies" to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended January 31, 2019, under previous lease accounting, future minimum lease payments for operating leases having an initial or remaining non-cancelable lease term in excess of one year were as follows:
|
|
|
|
|
Years ending January 31,
|
Minimum Lease Payments as of January 31, 2019
(in millions)
|
2020
|
$
|
292.8
|
|
2021
|
239.2
|
|
2022
|
212.8
|
|
2023
|
177.4
|
|
2024
|
146.8
|
|
Thereafter
|
438.0
|
|
Total minimum lease payments
|
$
|
1,507.0
|
|
The Company entered into sale-leaseback arrangements for its Retail Service Center, a distribution and administrative office facility in New Jersey, in 2005 and for the TIFFANY & CO. stores in Tokyo's Ginza shopping district and on London's Old Bond Street in 2007. These sale-leaseback arrangements resulted in total deferred gains of $144.5 million, which were amortized in SG&A expenses over periods ranging from 15 to 20 years. As of January 31, 2019, $31.1 million of these deferred gains remained on the Company's Consolidated Balance Sheet and were reclassified to opening retained earnings in the first quarter of 2019 in accordance with ASU 2016-02 (see "Note C. Summary of Significant Accounting Policies – New Accounting Standards" for additional information).
Rent expense for the Company's operating leases consisted of the following:
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Minimum rent for retail locations
|
$
|
225.1
|
|
$
|
206.6
|
|
Contingent rent based on sales
|
167.9
|
|
151.6
|
|
Office, distribution and manufacturing facilities and equipment
|
43.8
|
|
44.8
|
|
Gains on sale-leaseback arrangements
|
(8.4
|
)
|
(8.2
|
)
|
Sublease income
|
(5.2
|
)
|
(4.5
|
)
|
|
$
|
423.2
|
|
$
|
390.3
|
|
L. COMMITMENTS AND CONTINGENCIES
Diamond Sourcing Activities
The Company has agreements with various diamond producers to purchase a minimum volume of rough diamonds at prevailing fair market prices. Under those agreements, management anticipates that it will purchase approximately $30.0 million of rough diamonds in 2020. The Company also regularly purchases rough and polished diamonds from other suppliers, although it has no contractual obligations to do so. Purchases beyond 2020 under the aforementioned agreements cannot be reasonably estimated.
Contractual Cash Obligations and Contingent Funding Commitments
At January 31, 2020, the Company's contractual cash obligations and contingent funding commitments were for inventory purchases of $229.8 million (which includes the $30.0 million obligation discussed in Diamond Sourcing Activities above), as well as for other contractual obligations of $152.1 million (primarily for construction-in-
progress, technology licensing and service contracts, advertising and media agreements and fixed royalty commitments).
Litigation
Litigation Matters. The Company is from time to time involved in routine litigation incidental to the conduct of its business, including proceedings to protect its trademark rights, litigation with parties claiming infringement of patents and other intellectual property rights by the Company, litigation instituted by persons alleged to have been injured upon premises under the Company's control and litigation with present and former employees and customers. Although litigation with present and former employees is routine and incidental to the conduct of the Company's business, as well as for any business employing significant numbers of employees, such litigation can result in large monetary awards when a civil jury is allowed to determine compensatory and/or punitive damages for actions such as those claiming discrimination on the basis of age, gender, race, religion, disability or other legally-protected characteristic or for termination of employment that is wrongful or in violation of implied contracts. However, the Company believes that all such litigation currently pending to which it is a party or to which its properties are subject will be resolved without any material adverse effect on the Company's financial position, earnings or cash flows.
Gain Contingency. On February 14, 2013, Tiffany and Company and Tiffany (NJ) LLC (collectively, the "Tiffany plaintiffs") initiated a lawsuit against Costco Wholesale Corp. ("Costco") for trademark infringement, false designation of origin and unfair competition, trademark dilution and trademark counterfeiting (the "Costco Litigation"). The Tiffany plaintiffs sought injunctive relief, monetary recovery and statutory damages on account of Costco's use of "Tiffany" on signs in the jewelry cases at Costco stores used to describe certain diamond engagement rings that were not manufactured by Tiffany. Costco filed a counterclaim arguing that the TIFFANY trademark was a generic term for multi-pronged ring settings and seeking to have the trademark invalidated, modified or partially canceled in that respect. On September 8, 2015, the U.S. District Court for the Southern District of New York (the "Court") granted the Tiffany plaintiffs' motion for summary judgment of liability in its entirety, dismissing Costco's genericism counterclaim and finding that Costco was liable for trademark infringement, trademark counterfeiting and unfair competition under New York law in its use of "Tiffany" on the above-referenced signs. On September 29, 2016, a civil jury rendered its verdict, finding that Costco's profits on the sale of the infringing rings should be awarded at $5.5 million, and further finding that an award of punitive damages was warranted. On October 5, 2016, the jury awarded $8.25 million in punitive damages. The aggregate award of $13.75 million was not final, as it was subject to post-verdict motion practice and ultimately to adjustment by the Court. On August 14, 2017, the Court issued its ruling, finding that the Tiffany plaintiffs are entitled to recover (i) $11.1 million in respect of Costco's profits on the sale of the infringing rings (which amount is three times the amount of such profits, as determined by the Court); (ii) prejudgment interest on such amount (calculated at the applicable statutory rate) from February 15, 2013 through August 14, 2017; (iii) an additional $8.25 million in punitive damages; and (iv) Tiffany's reasonable attorneys' fees, and, on August 24, 2017, the Court entered judgment in the amount of $21.0 million in favor of the Tiffany plaintiffs (reflecting items (i) through (iii) above). On February 7, 2019, the Court awarded the Tiffany plaintiffs $5.9 million in respect of the aforementioned attorneys' fees and costs, bringing the total judgment to $26.9 million. The Court has denied a motion made by Costco for a new trial; however, Costco has also filed an appeal from the judgment before the Second Circuit Court of Appeals. A three-judge panel presided over an appellate hearing on January 23, 2020, and that panel's decision is pending. As the Tiffany plaintiffs may not enforce the Court's judgment during the appeals process, the Company has not recorded any amount in its consolidated financial statements related to this gain contingency as of January 31, 2020. The Company expects that this matter will not ultimately be resolved until, at the earliest, a future date during the Company's fiscal year ending January 31, 2021.
Environmental Matter
In 2005, the U.S. Environmental Protection Agency ("EPA") designated a 17-mile stretch of the Passaic River (the "River") part of the Diamond Alkali "Superfund" site. This designation resulted from the detection of hazardous substances emanating from the site, which was previously home to the Diamond Shamrock Corporation, a manufacturer of pesticides and herbicides. Under the Superfund law, the EPA will negotiate with potentially responsible parties to agree on remediation approaches and may also enter into settlement agreements pursuant to an allocation process.
The Company, which operated a silverware manufacturing facility near a tributary of the River from approximately 1897 to 1985, is one of more than 300 parties (the "Potentially Responsible Parties") designated in litigation as potentially responsible parties with respect to the River. The EPA issued general notice letters to 125 of these
parties. The Company, along with approximately 70 other Potentially Responsible Parties (collectively, the "Cooperating Parties Group" or "CPG") voluntarily entered into an Administrative Settlement Agreement and Order on Consent ("AOC") with the EPA in May 2007 to perform a Remedial Investigation/Feasibility Study (the "RI/FS") of the lower 17 miles of the River. In June 2012, most of the CPG voluntarily entered into a second AOC related to focused remediation actions at Mile 10.9 of the River. The actions under the Mile 10.9 AOC are complete (except for continued monitoring), the Remedial Investigation ("RI") portion of the RI/FS was submitted to the EPA on February 19, 2015, and the Feasibility Study ("FS") portion of the RI/FS was submitted to the EPA on April 30, 2015. The Company nonetheless remained in the CPG until October 24, 2017. The Company has accrued for its financial obligations under both AOCs, which have not been material to its financial position or results of operations in previous financial periods or on a cumulative basis.
The FS presented and evaluated three options for remediating the lower 17 miles of the River, including the approach recommended by the EPA in its Focused Feasibility Study discussed below, as well as a fourth option of taking no action, and recommended an approach for a targeted remediation of the entire 17-mile stretch of the River. The estimated cost of the approach recommended by the CPG in the FS is approximately $483.0 million. The RI and FS are being reviewed by the EPA and other governmental agencies and stakeholders. Ultimately, the Company expects that the EPA will identify and negotiate with any or all of the potentially responsible parties regarding any remediation action that may be necessary, and issue a Record of Decision with a proposed approach to remediating the entire lower 17-mile stretch of the River.
Separately, on April 11, 2014, the EPA issued a proposed plan for remediating the lower eight miles of the River, which is supported by a Focused Feasibility Study (the "FFS"). The FFS evaluated three remediation options, as well as a fourth option of taking no action. Following a public review and comment period and the EPA's review of comments received, the EPA issued a Record of Decision on March 4, 2016 that set forth a remediation plan for the lower eight miles of the River (the "RoD Remediation"). The RoD Remediation is estimated by the EPA to cost $1.38 billion. The Record of Decision did not identify any party or parties as being responsible for the design of the remediation or for the remediation itself. The EPA did note that it estimates the design of the necessary remediation activities will take three to four years, with the remediation to follow, which is estimated to take an additional six years to complete.
On March 31, 2016, the EPA issued a letter to approximately 100 companies (including the Company) (collectively, the "notified companies") notifying them of potential liability for the RoD Remediation and of the EPA's planned approach to addressing the cost of the RoD Remediation, which included the possibility of a de-minimis cash-out settlement (the "settlement option") for certain parties. In April of 2016, the Company notified the EPA of its interest in pursuing the settlement option, and accordingly recorded an immaterial liability representing its best estimate of its minimum liability for the RoD Remediation, which was based on the amount of a potential de-minimis settlement. On March 30, 2017, the EPA issued offers related to the settlement option to 20 parties; while the Company was not one of the parties receiving such an offer, the EPA indicated at that time that the settlement option might be made available to additional parties beyond those notified on March 30, 2017. On October 24, 2019, the EPA informed certain of the notified parties (including the Company) that the early settlement option would not be made available to them at that time.
In the absence of a viable settlement option with the EPA, the Company is unable to determine its participation in the overall RoD Remediation, if any, relative to the other potentially responsible parties, or the allocation of the estimated cost thereof among the potentially responsible parties, until such time as the EPA reaches an agreement with any potentially responsible party or parties to fund the RoD Remediation (or pursues legal or administrative action to require any potentially responsible party or parties to perform, or pay for, the RoD Remediation). With respect to the RI/FS (which is distinct from the RoD Remediation), until a Record of Decision is issued with respect to the RI/FS, neither the ultimate remedial approach for the remaining upper nine miles of the relevant 17-mile stretch of the River and its cost, nor the Company's participation, if any, relative to the other potentially responsible parties in this approach and cost, can be determined.
In October 2016, the EPA announced that it entered into a legal agreement with Occidental Chemical Corporation ("OCC"), pursuant to which OCC agreed to spend $165.0 million to perform the engineering and design work required in advance of the clean-up contemplated by the RoD Remediation. OCC has waived any rights to collect contribution from the Company (the "Waiver") for certain costs, including those associated with such engineering and design work, incurred by OCC through July 14, 2016. However, on June 29, 2018, OCC filed a lawsuit in the United States District Court for the District of New Jersey against Tiffany and Company and 119 other companies (the "defendant
companies") seeking to have the defendant companies reimburse OCC for certain response costs incurred by OCC in connection with its and its predecessors' remediation work relating to the River, other than those costs subject to the Waiver. OCC is also seeking a declaratory judgment to hold the defendant companies liable for their alleged shares of future response costs, including costs related to the RoD Remediation. The suit does not quantify damages sought, and the Company is unable to determine at this time whether, or to what extent, the OCC lawsuit will impact the cost allocation described in the immediately preceding paragraph or will otherwise result in any liabilities for the Company.
Given the uncertainties described above, the Company's liability, if any, beyond that already recorded for its obligation under the 2007 AOC and the Mile 10.9 AOC, cannot be determined at this time. However, the Company does not expect that its ultimate liability related to the relevant 17-mile stretch of the River will be material to its financial position, in light of the number of companies that have previously been identified as Potentially Responsible Parties (i.e., the more than 300 parties that were initially designated in litigation as potentially responsible parties), which includes, but goes well beyond those approximately 70 CPG member companies that participated in the 2007 AOC and the Mile 10.9 AOC, and the Company's relative participation in the costs related to the 2007 AOC and Mile 10.9 AOC. It is nonetheless possible that any resulting liability when the uncertainties discussed above are resolved could be material to the Company's results of operations or cash flows in the period in which such uncertainties are resolved.
Other
In the normal course of business, the Company entrusts precious scrap metals generated through its internal manufacturing operations to metal refiners. In November 2018, one such refiner filed for relief under chapter 11 of the U.S. Bankruptcy Code. As a result, the Company recognized a charge of $8.5 million during the three months ended October 31, 2018, which represented the carrying value of such precious scrap metals entrusted to the refiner, net of expected insurance recoveries.
During 2018, the Company received an offer of AUD $48.0 million as compensation for the previous acquisition of the premises containing one of its leased retail stores and an administrative office in Sydney, Australia under compulsory acquisition laws in Australia. The Company did not accept the offer of compensation and has filed an appeal of the compensation amount with the Land and Environment Court in Australia. In accordance with local law, the Company received an advance payment of 90% ($31.1 million, based on foreign currency exchange rates on the date of receipt) of the offered compensation during the fourth quarter of 2018. The appeal process is inherently uncertain and the Land and Environment Court will make an independent assessment of the amount of compensation in this matter, which may require the Company to repay all or a portion of the advance payment. Therefore, the Company cannot currently determine an amount, or any minimum amount, it ultimately expects to realize in connection with this matter. Accordingly, the Company did not recognize any gain in the accompanying Consolidated Statement of Earnings for the year ended January 31, 2020 or 2019. Instead, the Company recognized the advance payment within Cash and cash equivalents and as a liability within Accounts payable and accrued liabilities as of January 31, 2019. The Company classified $19.2 million of the advance payment within operating cash flows and $11.9 million within investing cash flows on the Consolidated Statement of Cash Flows for the year ended January 31, 2019, with such classification determined by the nature of the underlying components of the cash receipt.
M. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2020
|
|
|
2019
|
|
Accumulated other comprehensive loss, net of tax:
|
|
|
|
Foreign currency translation adjustments
|
$
|
(130.4
|
)
|
|
$
|
(108.2
|
)
|
Deferred hedging gain (loss)
|
5.4
|
|
|
(24.5
|
)
|
Net unrealized loss on benefit plans
|
(148.2
|
)
|
|
(72.1
|
)
|
|
$
|
(273.2
|
)
|
|
$
|
(204.8
|
)
|
Additions to and reclassifications out of accumulated other comprehensive earnings (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
Foreign currency translation adjustments
|
$
|
(21.3
|
)
|
$
|
(62.9
|
)
|
$
|
97.9
|
|
Income tax (expense) benefit
|
(1.1
|
)
|
2.7
|
|
(2.2
|
)
|
Foreign currency translation adjustments, net of tax
|
(22.4
|
)
|
(60.2
|
)
|
95.7
|
|
Unrealized gain on marketable securities
|
—
|
|
—
|
|
0.2
|
|
Reclassification for gain included in net earnings
|
—
|
|
—
|
|
(3.5
|
)
|
Income tax benefit
|
—
|
|
—
|
|
0.7
|
|
Unrealized loss on marketable securities, net of tax
|
—
|
|
—
|
|
(2.6
|
)
|
Unrealized gain (loss) on hedging instruments
|
50.5
|
|
(1.1
|
)
|
(21.0
|
)
|
Reclassification adjustment for (gain) loss included in
net earnings a
|
(6.5
|
)
|
(1.2
|
)
|
13.0
|
|
Income tax (expense) benefit
|
(9.3
|
)
|
0.7
|
|
1.2
|
|
Unrealized gain (loss) on hedging instruments, net of tax
|
34.7
|
|
(1.6
|
)
|
(6.8
|
)
|
Net actuarial (loss) gain
|
(82.0
|
)
|
(24.2
|
)
|
30.6
|
|
Amortization of net loss included in net earnings b
|
11.2
|
|
15.1
|
|
13.3
|
|
Amortization of prior service credit included in net earnings b
|
(0.5
|
)
|
(0.6
|
)
|
(0.5
|
)
|
Income tax benefit (expense)
|
16.6
|
|
2.9
|
|
(11.5
|
)
|
Net unrealized (loss) gain on benefit plans, net of tax
|
(54.7
|
)
|
(6.8
|
)
|
31.9
|
|
Total other comprehensive (loss) earnings, net of tax
|
$
|
(42.4
|
)
|
$
|
(68.6
|
)
|
$
|
118.2
|
|
|
|
a
|
These (gains) losses are reclassified into Interest expense and financing costs and Cost of sales (see "Note I. Hedging Instruments" for additional details).
|
|
|
b
|
These losses (gains) are included in the computation of net periodic benefit cost (see "Note O. Employee Benefit Plans" for additional details) and are reclassified into Other expense, net.
|
Stock Repurchase Program
In May 2018, the Registrant's Board of Directors approved a new share repurchase program (the "2018 Program"). The 2018 Program, which became effective June 1, 2018 and expires on January 31, 2022, authorizes the Company to repurchase up to $1.0 billion of its Common Stock through open market transactions, including through Rule 10b5-1 plans and one or more accelerated share repurchase ("ASR") or other structured repurchase transactions, and/or privately negotiated transactions. The 2018 Program replaced the Company's previous share repurchase program approved in January 2016, under which the Company was authorized to repurchase up to
$500.0 million of its Common Stock. As of January 31, 2020, $471.6 million remained available under the 2018 Program; however, pursuant to the terms of the Merger Agreement, and subject to certain limited exceptions, the Company may not repurchase its Common Stock other than in connection with the forfeiture provisions of Company equity awards or the cashless exercise or tax withholding provisions of such Company equity awards, in each case, granted under the Company's stock-based compensation plans.
During 2018, the Company entered into ASR agreements with two third-party financial institutions to repurchase an aggregate of $250.0 million of its Common Stock. The ASR agreements were entered into under the 2018 Program. Pursuant to the ASR agreements, the Company made an aggregate payment of $250.0 million from available cash on hand in exchange for an initial delivery of 1,529,286 shares of its Common Stock. Final settlement of the ASR agreements was completed in July 2018, pursuant to which the Company received an additional 353,112 shares of its Common Stock. In total, 1,882,398 shares of the Company's Common Stock were repurchased under these ASR agreements at an average cost per share of $132.81 over the term of the agreements.
The Company's share repurchase activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions, except per share amounts)
|
2020
|
|
2019
|
|
2018
|
|
Cost of repurchases
|
$
|
163.4
|
|
$
|
421.4
|
|
$
|
99.2
|
|
Shares repurchased and retired
|
1.8
|
|
3.5
|
|
1.0
|
|
Average cost per share
|
$
|
91.15
|
|
$
|
121.28
|
|
$
|
94.86
|
|
Cash Dividends
The Company's Board of Directors declared quarterly dividends which, on an annual basis, totaled $2.29, $2.15 and $1.95 per share of Common Stock in 2019, 2018 and 2017, respectively.
On February 20, 2020, the Company's Board of Directors declared a quarterly dividend of $0.58 per share of Common Stock. This dividend will be paid on April 10, 2020 to stockholders of record on March 20, 2020.
Cumulative Effect Adjustment From Adoption of New Accounting Standards
The amounts presented within this line item on the Consolidated Statements of Stockholders' Equity represent the effects of the Company's adoption, on a modified retrospective basis, of ASU 2016-02 - Leases and ASU 2018-02 - Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (each as discussed in "Note C. Summary of Significant Accounting Policies") for the year ended January 31, 2020, and ASU 2014-09 - Revenue from Contracts with Customers and ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities for the year ended January 31, 2019.
N. STOCK COMPENSATION PLANS
The Company has two stock compensation plans under which awards may be made: the Employee Incentive Plan and the Directors Equity Compensation Plan, both of which were approved by the Company's stockholders. No award may be made under the Employee Incentive Plan after May 22, 2024 or under the Directors Equity Compensation Plan after May 25, 2027.
Under the Employee Incentive Plan, the maximum number of common shares authorized for issuance is 8.7 million. Awards may be made to employees of the Company in the form of stock options, stock appreciation rights, shares of stock (or rights to receive shares of stock) and cash. Awards made in the form of non-qualified stock options, tax-qualified incentive stock options or stock appreciation rights have a maximum term of 10 years from the grant date and may not be granted for an exercise price below fair market value.
The Company has granted time-vesting restricted stock units ("RSUs"), performance-based restricted stock units ("PSUs") and stock options under the Employee Incentive Plan. Stock options and RSUs typically vest in increments of 25% per year over four years. PSUs vest at the end of a three-year period. PSU grant terms provide that vesting is
contingent on the Company's performance against objectives established by the Compensation Committee of the Company's Board of Directors. The PSUs and RSUs require no payment from the employee. PSU and RSU payouts are in shares of Company stock at vesting (aside from fractional dividend equivalents, which are settled in cash). Compensation expense is recognized using the fair market value of the award at the date of grant and recorded ratably over the vesting period. However, PSU compensation expense may be adjusted over the vesting period based on interim estimates of performance against the established objectives. Award holders are not entitled to receive dividends or dividend equivalents on PSUs or RSUs granted prior to January 2017 or on unvested stock options. PSUs and RSUs granted in or after January 2017 accrue dividend equivalents that may only be paid or delivered upon vesting of the underlying stock units.
Under the Directors Equity Compensation Plan, the maximum number of shares of Common Stock authorized for issuance is 1.0 million (subject to adjustment); awards may be made to non-employee directors of the Company in the form of stock options or shares of stock but may not exceed $750,000 of total compensation (including without limitation, non-equity compensation and the grant-date fair value of options or stock awards, or any combination of options and stock awards) that may be awarded to any one participant in any single fiscal year of the Company in connection with his or her service as a member of the Board of Directors; provided, however, that this limitation shall not apply to a non-executive chairperson of the Board of Directors. Awards made in the form of stock options may have a maximum term of 10 years from the grant date and may not be granted for an exercise price below fair market value. Director options vest immediately. Director RSUs vest at the end of a one-year period.
The Company uses newly issued shares to satisfy stock option exercises and the vesting of PSUs and RSUs.
The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model and compensation expense is recognized ratably over the vesting period. The valuation model uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company's stock. The Company uses historical data to estimate the expected term of the option that represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the grant date.
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Dividend yield
|
2.2
|
%
|
2.2
|
%
|
1.8
|
%
|
Expected volatility
|
24.6
|
%
|
24.2
|
%
|
22.0
|
%
|
Risk-free interest rate
|
2.1
|
%
|
2.5
|
%
|
2.2
|
%
|
Expected term in years
|
4
|
|
4
|
|
5
|
|
A summary of the Company's stock option activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(in millions)
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term in Years
|
Aggregate
Intrinsic
Value
(in millions)
|
|
Outstanding at January 31, 2019
|
2.4
|
|
$
|
89.84
|
|
8.33
|
$
|
11.3
|
|
Granted
|
0.1
|
|
94.68
|
|
|
|
Exercised
|
(1.3
|
)
|
88.40
|
|
|
|
Forfeited/canceled
|
—
|
|
97.13
|
|
|
|
Outstanding at January 31, 2020
|
1.2
|
|
$
|
91.53
|
|
7.64
|
$
|
52.8
|
|
Exercisable at January 31, 2020
|
0.4
|
|
$
|
88.09
|
|
6.27
|
$
|
18.4
|
|
The weighted-average grant-date fair value of options granted for the years ended January 31, 2020, 2019 and 2018 was $16.57, $16.97 and $18.33, respectively. The total intrinsic value (market value on date of exercise less
grant price) of options exercised during the years ended January 31, 2020, 2019 and 2018 was $52.8 million, $16.3 million and $31.2 million, respectively.
A summary of the Company's RSU activity is presented below:
|
|
|
|
|
|
|
|
Number of Shares
(in millions)
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Non-vested at January 31, 2019
|
0.6
|
|
$
|
88.49
|
|
Granted
|
0.5
|
|
117.12
|
|
Vested
|
(0.3
|
)
|
86.84
|
|
Forfeited
|
(0.1
|
)
|
94.86
|
|
Non-vested at January 31, 2020
|
0.7
|
|
$
|
108.28
|
|
A summary of the Company's PSU activity is presented below:
|
|
|
|
|
|
|
|
Number of Shares
(in millions)
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Non-vested at January 31, 2019
|
0.5
|
|
$
|
85.30
|
|
Granted
|
0.1
|
|
134.12
|
|
Vested
|
(0.1
|
)
|
63.05
|
|
Forfeited/canceled
|
—
|
|
57.08
|
|
Non-vested at January 31, 2020
|
0.5
|
|
$
|
102.46
|
|
The weighted-average grant-date fair value of RSUs granted for the years ended January 31, 2019 and 2018 was $103.40 and $91.96, respectively. The weighted-average grant-date fair value of PSUs granted for the years ended January 31, 2019 and 2018 was $85.26 and $108.99, respectively. The total fair value of RSUs vested during the years ended January 31, 2020, 2019 and 2018 was $28.1 million, $24.3 million and $22.2 million, respectively. The total fair value of PSUs vested during the years ended January 31, 2020, 2019 and 2018 was $9.8 million, $2.7 million and $3.4 million, respectively.
As of January 31, 2020, there was $94.7 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Employee Incentive Plan and Directors Equity Compensation Plan. The expense is expected to be recognized over a weighted-average period of 3.0 years.
Total compensation cost for stock-based compensation awards recognized in income and the related income tax benefit was $33.2 million and $6.5 million for the year ended January 31, 2020, $34.1 million and $6.8 million for the year ended January 31, 2019 and $28.0 million and $8.5 million for the year ended January 31, 2018. Total stock-based compensation cost capitalized in inventory was not significant.
|
|
O.
|
EMPLOYEE BENEFIT PLANS
|
Pensions and Other Postretirement Benefits
The Company maintains the following pension plans: a noncontributory defined benefit pension plan qualified in accordance with the Internal Revenue Service Code ("Qualified Plan") covering substantially all U.S. employees hired before January 1, 2006, a non-qualified unfunded retirement income plan ("Excess Plan") covering certain U.S. employees hired before January 1, 2006 and affected by Internal Revenue Service Code compensation limits, a non-qualified unfunded Supplemental Retirement Income Plan ("SRIP") covering certain executive officers of the Company hired before January 1, 2006 and noncontributory defined benefit pension plans in certain of its international locations ("Other Plans").
Qualified Plan benefits are based on (i) average compensation in the highest paid five years of the last 10 years of employment ("average final compensation") and (ii) the number of years of service. The normal retirement age under the Qualified Plan is age 65; however, participants who retire with at least 10 years of service may elect to receive reduced retirement benefits starting at age 55. The Company funds the Qualified Plan's trust in accordance with regulatory limits to provide for current service and for the unfunded benefit obligation over a reasonable period and for current service benefit accruals. To the extent that these requirements are fully covered by assets in the Qualified Plan, the Company may elect not to make any contribution in a particular year. No cash contribution was required in 2018 and none is required in 2019 to meet the minimum funding requirements of the Employee Retirement Income Security Act. However, the Company periodically evaluates whether to make discretionary cash contributions to the Qualified Plan and made voluntary cash contributions of $30.0 million in 2019, $11.8 million in 2018 and $15.0 million in 2017. The Company does not currently expect to make any contributions to the Qualified Plan in 2020.
The Qualified Plan, Excess Plan and SRIP exclude all employees hired on or after January 1, 2006. Instead, employees hired on or after January 1, 2006 are eligible to receive a defined contribution retirement benefit under the Employee Profit Sharing and Retirement Savings ("EPSRS") Plan (see "Employee Profit Sharing and Retirement Savings Plan" below). Employees hired before January 1, 2006 continue to be eligible for and accrue benefits under the Qualified Plan.
The Excess Plan uses the same retirement benefit formula set forth in the Qualified Plan, but includes earnings that are excluded under the Qualified Plan due to Internal Revenue Service Code qualified pension plan limitations. Benefits payable under the Qualified Plan offset benefits payable under the Excess Plan. Employees vested under the Qualified Plan are vested under the Excess Plan; however, benefits under the Excess Plan are subject to forfeiture if employment is terminated for cause and, for those who leave the Company prior to age 65, if they fail to execute and adhere to noncompetition and confidentiality covenants. Under the Excess Plan, participants who retire with at least 10 years of service may elect to receive reduced retirement benefits starting at age 55.
The SRIP supplements the Qualified Plan, Excess Plan and Social Security by providing additional payments upon a participant's retirement. SRIP benefits are determined by a percentage of average final compensation; this percentage increases as specified service plateaus are achieved. Benefits payable under the Qualified Plan, Excess Plan and Social Security offset benefits payable under the SRIP. Under the SRIP, benefits vest when a participant both (i) attains age 55 while employed by the Company and (ii) has provided at least 10 years of service. In certain limited circumstances, early vesting can occur due to a change in control. Benefits under the SRIP are forfeited if benefits under the Excess Plan are forfeited.
Benefits for the Other Plans are typically based on monthly eligible compensation and the number of years of service. Benefits are typically payable in a lump sum upon retirement, termination, resignation or death if the participant has completed the requisite service period.
The Company accounts for pension expense using the projected unit credit actuarial method for financial reporting purposes. The actuarial present value of the benefit obligation is calculated based on the expected date of separation or retirement of the Company's eligible employees.
The Company provides certain health-care and life insurance benefits ("Other Postretirement Benefits") for certain retired employees and accrues the cost of providing these benefits throughout the employees' active service period until they attain full eligibility for those benefits. Substantially all of the Company's U.S. full-time employees hired on or before March 31, 2012 may become eligible for these benefits if they reach normal or early retirement age while working for the Company. The cost of providing postretirement health-care benefits is shared by the retiree and the Company, with retiree contributions evaluated annually and adjusted in order to maintain the Company/retiree cost-sharing target ratio. The life insurance benefits are noncontributory. The Company's employee and retiree health-care benefits are administered by an insurance company, and premiums on life insurance are based on prior years' claims experience.
Obligations and Funded Status
The following tables provide a reconciliation of benefit obligations, plan assets and funded status of the pension and other postretirement benefit plans as of the measurement date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
(in millions)
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
Change in benefit obligation:
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
$
|
795.0
|
|
$
|
795.6
|
|
|
$
|
76.1
|
|
$
|
78.5
|
|
Service cost
|
17.0
|
|
17.9
|
|
|
2.6
|
|
3.0
|
|
Interest cost
|
32.5
|
|
30.7
|
|
|
3.3
|
|
3.0
|
|
Participants' contributions
|
—
|
|
—
|
|
|
1.3
|
|
1.3
|
|
MMA retiree drug subsidy
|
—
|
|
—
|
|
|
0.1
|
|
0.1
|
|
Actuarial loss (gain)
|
139.8
|
|
(22.4
|
)
|
|
15.4
|
|
(7.0
|
)
|
Benefits paid
|
(28.2
|
)
|
(26.8
|
)
|
|
(2.7
|
)
|
(2.8
|
)
|
Projected benefit obligation at end of year
|
956.1
|
|
795.0
|
|
|
96.1
|
|
76.1
|
|
Change in plan assets:
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
549.7
|
|
578.1
|
|
|
—
|
|
—
|
|
Actual return on plan assets
|
109.9
|
|
(20.1
|
)
|
|
—
|
|
—
|
|
Employer contributions
|
37.3
|
|
18.5
|
|
|
1.3
|
|
1.4
|
|
Participants' contributions
|
—
|
|
—
|
|
|
1.3
|
|
1.3
|
|
MMA retiree drug subsidy
|
—
|
|
—
|
|
|
0.1
|
|
0.1
|
|
Benefits paid
|
(28.2
|
)
|
(26.8
|
)
|
|
(2.7
|
)
|
(2.8
|
)
|
Fair value of plan assets at end of year
|
668.7
|
|
549.7
|
|
|
—
|
|
—
|
|
Funded status at end of year
|
$
|
(287.4
|
)
|
$
|
(245.3
|
)
|
|
$
|
(96.1
|
)
|
$
|
(76.1
|
)
|
Actuarial losses in 2019 reflect decreases in the discount rates for all plans.
The following tables provide additional information regarding the Company's pension plans' projected benefit obligations and assets (included in pension benefits in the table above) and accumulated benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2020
|
|
(in millions)
|
Qualified
|
|
Excess/SRIP
|
|
Other
|
|
Total
|
|
Projected benefit obligation
|
$
|
800.3
|
|
$
|
127.8
|
|
$
|
28.0
|
|
$
|
956.1
|
|
Fair value of plan assets
|
668.7
|
|
—
|
|
—
|
|
668.7
|
|
Funded status
|
$
|
(131.6
|
)
|
$
|
(127.8
|
)
|
$
|
(28.0
|
)
|
$
|
(287.4
|
)
|
Accumulated benefit obligation
|
$
|
722.1
|
|
$
|
110.6
|
|
$
|
22.8
|
|
$
|
855.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2019
|
|
(in millions)
|
Qualified
|
|
Excess/SRIP
|
|
Other
|
|
Total
|
|
Projected benefit obligation
|
$
|
658.5
|
|
$
|
109.4
|
|
$
|
27.1
|
|
$
|
795.0
|
|
Fair value of plan assets
|
549.7
|
|
—
|
|
—
|
|
549.7
|
|
Funded status
|
$
|
(108.8
|
)
|
$
|
(109.4
|
)
|
$
|
(27.1
|
)
|
$
|
(245.3
|
)
|
Accumulated benefit obligation
|
$
|
598.8
|
|
$
|
94.0
|
|
$
|
22.2
|
|
$
|
715.0
|
|
At January 31, 2020, the Company had a current liability of $9.0 million and a non-current liability of $374.5 million for pension and other postretirement benefits. At January 31, 2019, the Company had a current liability of $9.0 million and a non-current liability of $312.4 million for pension and other postretirement benefits.
Pre-tax amounts recognized in accumulated other comprehensive loss consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
(in millions)
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
Net actuarial loss (gain)
|
$
|
188.0
|
|
$
|
132.7
|
|
|
$
|
9.7
|
|
$
|
(5.8
|
)
|
Prior service cost (credit)
|
0.4
|
|
0.5
|
|
|
(0.4
|
)
|
(1.0
|
)
|
Total before tax
|
$
|
188.4
|
|
$
|
133.2
|
|
|
$
|
9.3
|
|
$
|
(6.8
|
)
|
Components of Net Periodic Benefit Cost and
Other Amounts Recognized in Other Comprehensive Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
|
2020
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
17.0
|
|
$
|
17.9
|
|
$
|
17.3
|
|
|
$
|
2.6
|
|
$
|
3.0
|
|
$
|
2.8
|
|
Interest cost
|
32.5
|
|
30.7
|
|
32.0
|
|
|
3.3
|
|
3.0
|
|
3.0
|
|
Expected return on plan assets
|
(36.7
|
)
|
(33.4
|
)
|
(32.9
|
)
|
|
—
|
|
—
|
|
—
|
|
Amortization of prior service cost (credit)
|
0.1
|
|
0.1
|
|
0.2
|
|
|
(0.6
|
)
|
(0.7
|
)
|
(0.7
|
)
|
Amortization of net loss (gain)
|
11.3
|
|
15.0
|
|
13.2
|
|
|
(0.1
|
)
|
0.1
|
|
0.1
|
|
Net periodic benefit cost
|
24.2
|
|
30.3
|
|
29.8
|
|
|
5.2
|
|
5.4
|
|
5.2
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
66.6
|
|
31.2
|
|
(32.1
|
)
|
|
15.4
|
|
(7.0
|
)
|
1.5
|
|
Recognized actuarial (loss) gain
|
(11.3
|
)
|
(15.0
|
)
|
(13.2
|
)
|
|
0.1
|
|
(0.1
|
)
|
(0.1
|
)
|
Recognized prior service (cost) credit
|
(0.1
|
)
|
(0.1
|
)
|
(0.2
|
)
|
|
0.6
|
|
0.7
|
|
0.7
|
|
Total recognized in other comprehensive earnings
|
55.2
|
|
16.1
|
|
(45.5
|
)
|
|
16.1
|
|
(6.4
|
)
|
2.1
|
|
Total recognized in net periodic benefit cost and other comprehensive earnings
|
$
|
79.4
|
|
$
|
46.4
|
|
$
|
(15.7
|
)
|
|
$
|
21.3
|
|
$
|
(1.0
|
)
|
$
|
7.3
|
|
The non-service cost components of the net periodic benefit cost are included within Other expense, net on the Consolidated Statements of Earnings.
Assumptions
Weighted-average assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
January 31,
|
|
|
2020
|
|
2019
|
|
Discount rate:
|
|
|
Qualified Plan
|
3.25
|
%
|
4.25
|
%
|
Excess Plan/SRIP
|
3.00
|
%
|
4.25
|
%
|
Other Plans
|
0.76
|
%
|
0.81
|
%
|
Other Postretirement Benefits
|
3.25
|
%
|
4.50
|
%
|
Rate of increase in compensation:
|
|
|
Qualified Plan
|
3.00
|
%
|
3.00
|
%
|
Excess Plan
|
4.25
|
%
|
4.25
|
%
|
SRIP
|
6.50
|
%
|
6.50
|
%
|
Other Plans
|
2.56
|
%
|
2.56
|
%
|
Weighted-average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Discount rate:
|
|
|
|
Qualified Plan
|
4.25
|
%
|
4.00
|
%
|
4.25
|
%
|
Excess Plan/SRIP
|
4.25
|
%
|
3.75
|
%
|
4.25
|
%
|
Other Plans
|
1.32
|
%
|
1.54
|
%
|
1.49
|
%
|
Other Postretirement Benefits
|
4.50
|
%
|
4.00
|
%
|
4.25
|
%
|
Expected return on plan assets
|
7.00
|
%
|
7.00
|
%
|
7.00
|
%
|
Rate of increase in compensation:
|
|
|
|
Qualified Plan
|
3.00
|
%
|
3.00
|
%
|
3.00
|
%
|
Excess Plan
|
4.25
|
%
|
4.25
|
%
|
4.25
|
%
|
SRIP
|
6.50
|
%
|
6.50
|
%
|
6.50
|
%
|
Other Plans
|
2.66
|
%
|
1.41
|
%
|
1.38
|
%
|
The expected long-term rate of return on Qualified Plan assets is selected by taking into account the average rate of return expected on the funds invested or to be invested to provide for benefits included in the projected benefit obligation. More specifically, consideration is given to the expected rates of return (including reinvestment asset return rates) based upon the plan's current asset mix, investment strategy and the historical performance of plan assets.
For postretirement benefit measurement purposes, a 6.50% annual rate of increase in the per capita cost of covered health care was assumed for 2020. This rate was assumed to decrease gradually to 4.75% by 2023 and remain at that level thereafter.
Plan Assets
The Company's investment objectives related to the Qualified Plan's assets are the preservation of principal and balancing the management of interest rate risk associated with the duration of the plan's liabilities with the achievement of a reasonable rate of return over time. The Qualified Plan's assets are allocated based on an
expectation that equity securities will outperform debt securities over the long term, but that as the plan's funded status (assets relative to liabilities) increases, the amount of assets allocated to fixed income securities which match the interest rate risk profile of the plan's liabilities will increase. The Company's target asset allocation based on its funded status as of January 31, 2020 is as follows: approximately 50% in equity securities; approximately 35% in fixed income securities; and approximately 15% in other securities. The Company attempts to mitigate investment risk by rebalancing the asset allocation periodically.
The fair value of the Qualified Plan's assets at January 31, 2020 and 2019 by asset category is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
Fair Value Measurements
Using Inputs Considered as*
|
(in millions)
|
January 31, 2020
|
Level 1
|
Level 2
|
Level 3
|
Equity securities:
|
|
|
|
|
U.S. equity securities
|
$
|
53.0
|
|
$
|
53.0
|
|
$
|
—
|
|
$
|
—
|
|
Mutual funds
|
119.5
|
|
119.5
|
|
—
|
|
—
|
|
Fixed income securities:
|
|
|
|
|
Government bonds
|
100.5
|
|
99.3
|
|
1.2
|
|
—
|
|
Corporate bonds
|
139.9
|
|
—
|
|
139.9
|
|
—
|
|
Other types of investments:
|
|
|
|
|
Cash and cash equivalents
|
2.5
|
|
2.5
|
|
—
|
|
—
|
|
Mutual funds
|
73.9
|
|
61.8
|
|
12.1
|
|
—
|
|
Net assets in fair value hierarchy
|
489.3
|
|
336.1
|
|
153.2
|
|
—
|
|
Investments at NAV practical expedient a
|
179.4
|
|
|
|
|
Plan assets at fair value
|
$
|
668.7
|
|
$
|
336.1
|
|
$
|
153.2
|
|
$
|
—
|
|
|
|
|
|
|
|
Fair Value at
|
Fair Value Measurements
Using Inputs Considered as*
|
(in millions)
|
January 31, 2019
|
Level 1
|
Level 2
|
Level 3
|
Equity securities:
|
|
|
|
|
U.S. equity securities
|
$
|
63.4
|
|
$
|
63.4
|
|
$
|
—
|
|
$
|
—
|
|
Mutual fund
|
38.7
|
|
38.7
|
|
—
|
|
—
|
|
Fixed income securities:
|
|
|
|
|
Government bonds
|
80.8
|
|
79.6
|
|
1.2
|
|
—
|
|
Corporate bonds
|
122.7
|
|
—
|
|
122.7
|
|
—
|
|
Other types of investments:
|
|
|
|
|
Cash and cash equivalents
|
2.7
|
|
2.7
|
|
—
|
|
—
|
|
Mutual funds
|
52.0
|
|
52.0
|
|
—
|
|
—
|
|
Net assets in fair value hierarchy
|
360.3
|
|
236.4
|
|
123.9
|
|
—
|
|
Investments at NAV practical expedient a
|
189.4
|
|
|
|
|
Plan assets at fair value
|
$
|
549.7
|
|
$
|
236.4
|
|
$
|
123.9
|
|
$
|
—
|
|
|
|
*
|
See "Note J. Fair Value of Financial Instruments" for a description of the levels of inputs.
|
|
|
a
|
In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value ("NAV") per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the Qualified Plan's fair value of plan assets at the end of each respective year.
|
Valuation Techniques
Investments within the fair value hierarchy. Securities traded on the national securities exchange (certain government bonds) are valued at the last reported sales price or closing price on the last business day of the fiscal year. Investments traded in the over-the-counter market and listed securities for which no sales were reported (certain government bonds, corporate bonds and mortgage obligations) are valued at the last reported bid price. Certain fixed income investments are held in separately managed accounts and those investments are valued using the underlying securities in the accounts.
Investments in mutual funds are stated at fair value as determined by quoted market prices based on the NAV of shares held by the Qualified Plan at year-end. Investments in U.S. equity securities are valued at the closing price reported on the active market on which the individual securities are traded.
Investments measured at NAV. This category consists of common/collective trusts and limited partnerships.
Common/collective trusts include investments in U.S. and international large, middle and small capitalization equities. Investments in common/collective trusts are stated at estimated fair value, which represents the NAV of shares held by the Qualified Plan as reported by the investment advisor. The NAV is based on the value of the underlying assets owned by the common/collective trust, minus its liabilities and then divided by the number of shares outstanding. The NAV is used as a practical expedient to estimate fair value.
The Qualified Plan maintains investments in limited partnerships that are valued at estimated fair value based on financial information received from the investment advisor and/or general partner. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities and then divided by the number of shares outstanding. The NAV is used as a practical expedient to estimate fair value.
Benefit Payments
The Company estimates the following future benefit payments:
|
|
|
|
|
|
|
|
Years Ending January 31,
|
Pension Benefits
(in millions)
|
|
Other Postretirement Benefits
(in millions)
|
|
2021
|
$
|
29.3
|
|
$
|
2.0
|
|
2022
|
30.4
|
|
2.1
|
|
2023
|
31.1
|
|
2.2
|
|
2024
|
32.6
|
|
2.4
|
|
2025
|
33.9
|
|
2.5
|
|
2026-2030
|
197.5
|
|
16.1
|
|
Employee Profit Sharing and Retirement Savings ("EPSRS") Plan
The Company maintains an EPSRS Plan that covers substantially all U.S.-based employees. Under the profit-sharing feature of the EPSRS Plan, the Company made contributions, in the form of newly issued Company Common Stock through 2014, to the employees' accounts based on the achievement of certain targeted earnings objectives established by, or as otherwise determined by, the Company's Board of Directors. Beginning in 2015, these contributions were made in cash. The EPSRS Plan provides a retirement savings feature, a profit sharing feature and a defined contribution retirement benefit ("DCRB"). The DCRB is provided to eligible employees hired on or after January 1, 2006. Contributions related to the retirement savings feature and profit sharing feature for a particular plan year are made the following year.
Under the retirement savings feature of the EPSRS Plan, employees who meet certain eligibility requirements may participate by contributing up to 50% of their annual compensation, not to exceed Internal Revenue Service limits, and the Company may provide a matching cash contribution of 50% of each participant's contributions, with a maximum matching contribution of 3% of each participant's total compensation. The Company recorded expense of $9.2 million, $8.6 million and $8.2 million in 2019, 2018 and 2017, respectively, related to the retirement savings feature of the EPSRS Plan.
Under the profit-sharing feature of the EPSRS Plan, contributions are made in cash and are allocated within the respective participant's account based on investment elections made under the EPSRS Plan. If the participant has made no election, the contribution will be invested in the appropriate default target fund as determined by each participant's date of birth. Under the retirement savings portion of the EPSRS Plan, employees may invest their contributions and the related matching contribution to their accounts in a similar manner. Under both the profit-sharing and retirement savings features, employees may elect to invest a portion of the contributions to their accounts in Company stock. At January 31, 2020, investments in Company stock represented 19% of total EPSRS Plan assets. The Company recorded expense of $4.9 million and $3.9 million in 2018 and 2017, respectively, related to the profit sharing feature of the EPSRS Plan and did not record any such expense in 2019.
Under the DCRB, the Company makes contributions each year to each employee's account at a rate based upon age and years of service. These contributions are deposited into individual accounts in each employee's name to be invested in a manner similar to the profit-sharing and retirement savings portions of the EPSRS Plan (except that DCRB contributions may not be invested in Company stock). The Company recorded expense of $7.2 million, $4.7 million and $5.2 million in 2019, 2018 and 2017, respectively, related to the DCRB.
Deferred Compensation Plan
The Company has a non-qualified deferred compensation plan for directors, executives and certain management employees, whereby eligible participants may defer a portion of their compensation for payment at specified future dates, upon retirement, death or termination of employment. This plan also provides for an excess defined contribution retirement benefit ("Excess DC benefit") for certain eligible executives and management employees, hired on or after January 1, 2006. The Excess DC benefit is credited to the eligible employee's account, based on the compensation paid to the employee in excess of the IRS limits for contributions under the DCRB Plan. Under the plan, the deferred compensation is adjusted to reflect performance, whether positive or negative, of selected investment options chosen by each participant during the deferral period. The amounts accrued under the plans were $27.6 million and $22.6 million at January 31, 2020 and 2019, respectively, and are reflected in Other long-term liabilities. The Company does not promise or guarantee any rate of return on amounts deferred.
P. INCOME TAXES
U.S. Federal Income Tax Reform
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the "2017 Tax Act") was enacted in the U.S. This enactment resulted in a number of significant changes to U.S. federal income tax law for U.S. taxpayers. Changes in tax law are accounted for in the period of enactment. As such, the Company's 2017 consolidated financial statements reflected the estimated immediate tax effect of the 2017 Tax Act. The 2017 Tax Act contains a number of key provisions, including, among other items:
|
|
•
|
The reduction of the statutory U.S. federal corporate income tax rate from 35.0% to 21.0% effective January 1, 2018;
|
|
|
•
|
A one-time transition tax via a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits (the "Transition Tax");
|
|
|
•
|
A deduction for Foreign Derived Intangible Income ("FDII") for tax years beginning after December 31, 2017;
|
|
|
•
|
A tax on global intangible low-taxed income ("GILTI") for tax years beginning after December 31, 2017;
|
|
|
•
|
A limitation on net interest expense deductions to 30% of adjusted taxable income for tax years beginning after December 31, 2017;
|
|
|
•
|
Broader limitations on the deductibility of compensation of certain highly compensated employees;
|
|
|
•
|
The ability to elect to accelerate tax depreciation on certain qualified assets;
|
|
|
•
|
A territorial tax system providing a 100% dividends received deduction on certain qualified dividends from foreign subsidiaries for tax years beginning after December 31, 2017;
|
|
|
•
|
The Base Erosion and Anti-Abuse Tax ("BEAT") for tax years beginning after December 31, 2017; and
|
|
|
•
|
Changes in the application of the U.S. foreign tax credit regulations for tax years beginning after December 31, 2017.
|
Additionally, on December 22, 2017, the SEC issued SAB 118 to address the application of U.S. GAAP in situations when a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. Specifically, SAB 118 provided a measurement period for companies to evaluate the impacts of the 2017 Tax Act on their financial statements. This measurement period began in the reporting period that included the enactment date and ended when an entity obtained, prepared and analyzed the information that was needed in order to complete the accounting requirements, but could not exceed one year. The Company adopted the provisions of SAB 118 with respect to the impact of the 2017 Tax Act on its 2017 consolidated financial statements.
During the year ended January 31, 2018, the Company recorded an estimated net tax expense of $146.2 million as a result of the effects of the 2017 Tax Act. The tax effects recorded included:
|
|
•
|
Estimated tax expense of $94.8 million for the impact of the reduction in the U.S. statutory tax rate on the Company's deferred tax assets and liabilities;
|
|
|
•
|
Estimated tax expense of $56.0 million for the Transition Tax; and
|
|
|
•
|
A tax benefit of $4.6 million resulting from the effect of the 21% statutory income tax rate for the month of January 2018 on the Company's annual statutory income tax rate for the year ended January 31, 2018. Because the Company's fiscal year ended on January 31, 2018, the Company's statutory income tax rate for fiscal 2017 was 33.8% rather than 35.0%.
|
Consistent with SAB 118, the Company calculated and recorded reasonable estimates for the impact of the Transition Tax and the remeasurement of its deferred tax assets and deferred tax liabilities, as set forth above. The Company also adopted the provisions of SAB 118 as it related to the assertion of the indefinite reinvestment of foreign earnings and profits. The charges associated with the Transition Tax and the remeasurement of the Company's deferred tax assets and deferred tax liabilities, as a result of applying the 2017 Tax Act, represented provisional amounts for which the Company's analysis was incomplete but reasonable estimates could be determined and were recorded during the fourth quarter of 2017. Further, the impact of the 2017 Tax Act on the Company's assertion to indefinitely reinvest foreign earnings was incomplete as the Company was analyzing the relevant provisions of the 2017 Tax Act and related accounting guidance.
During the year ended January 31, 2019, as permitted by SAB 118, the Company completed its analyses under the 2017 Tax Act, including those related to: (i) the provisional estimate recorded during the year ended January 31, 2018 for the Transition Tax; (ii) the provisional estimate recorded during the year ended January 31, 2018 to remeasure the Company's deferred tax assets and liabilities; and (iii) the Company's assertion to indefinitely reinvest undistributed foreign earnings and profits.
As a result of completing these analyses, during the year ended January 31, 2019, the Company: (i) recorded tax benefits totaling $12.6 million to adjust the provisional estimate recorded in the year ended January 31, 2018 to remeasure the Company's deferred tax assets and liabilities; (ii) recorded tax benefits totaling $3.3 million to adjust the provisional estimate recorded in the year ended January 31, 2018 for the Transition Tax; and (iii) determined to maintain its assertion to indefinitely reinvest undistributed foreign earnings and profits.
The Company continues to maintain its assertion to indefinitely reinvest undistributed foreign earnings and profits, which amounted to approximately $1.0 billion as of January 31,2020.
Upon distribution of those foreign earnings and profits in the form of dividends or otherwise, the Company would be subject to U.S. state and local taxes, taxes on foreign currency gains and withholding taxes payable in various jurisdictions, which may be partially offset by foreign tax credits. Determination of the amount of the unrecognized deferred tax liability is not practicable because of the complexities associated with its hypothetical calculation.
The Company expects to continue to account for the tax on GILTI as a period cost and therefore has not adjusted any of the deferred tax assets and liabilities of its foreign subsidiaries in connection with the 2017 Tax Act.
Income Taxes
Earnings from operations before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
United States
|
$
|
520.1
|
|
$
|
584.5
|
|
$
|
597.1
|
|
Foreign
|
170.2
|
|
159.0
|
|
163.4
|
|
|
$
|
690.3
|
|
$
|
743.5
|
|
$
|
760.5
|
|
Components of the provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
Current:
|
|
|
|
Federal
|
$
|
79.7
|
|
$
|
112.5
|
|
$
|
227.9
|
|
State
|
11.7
|
|
18.2
|
|
16.7
|
|
Foreign
|
51.2
|
|
47.7
|
|
49.0
|
|
|
142.6
|
|
178.4
|
|
293.6
|
|
Deferred:
|
|
|
|
Federal
|
10.9
|
|
(23.2
|
)
|
94.1
|
|
State
|
0.6
|
|
(2.0
|
)
|
1.1
|
|
Foreign
|
(4.9
|
)
|
3.9
|
|
1.6
|
|
|
6.6
|
|
(21.3
|
)
|
96.8
|
|
|
$
|
149.2
|
|
$
|
157.1
|
|
$
|
390.4
|
|
Reconciliations of the provision for income taxes at the statutory Federal income tax rate to the Company's effective income tax rate were as follows:
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Statutory Federal income tax rate
|
21.0
|
%
|
21.0
|
%
|
33.8
|
%
|
State income taxes, net of Federal benefit
|
1.4
|
|
1.5
|
|
1.5
|
|
Foreign losses with no tax benefit
|
—
|
|
—
|
|
0.2
|
|
Effect of Foreign Operations
|
1.8
|
|
1.1
|
|
(1.4
|
)
|
Net change in uncertain tax positions
|
1.1
|
|
(0.4
|
)
|
0.2
|
|
Domestic manufacturing deduction
|
—
|
|
—
|
|
(1.8
|
)
|
Foreign Derived Intangible Income deduction
|
(4.0
|
)
|
(2.6
|
)
|
—
|
|
Impact of the 2017 Tax Act
|
—
|
|
1.3
|
|
19.8
|
|
Other
|
0.3
|
|
(0.8
|
)
|
(1.0
|
)
|
|
21.6
|
%
|
21.1
|
%
|
51.3
|
%
|
Deferred tax assets (liabilities) consisted of the following:
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Deferred tax assets:
|
|
|
Operating lease liabilities
|
$
|
293.7
|
|
$
|
—
|
|
Pension/postretirement benefits
|
101.9
|
|
82.1
|
|
Accrued expenses
|
21.7
|
|
31.3
|
|
Share-based compensation
|
5.7
|
|
7.9
|
|
Depreciation and amortization
|
54.7
|
|
18.1
|
|
Foreign and state net operating losses
|
6.5
|
|
7.0
|
|
Sale-leasebacks
|
—
|
|
13.1
|
|
Inventory
|
33.3
|
|
42.5
|
|
Unearned income
|
7.9
|
|
7.2
|
|
Other
|
22.2
|
|
28.8
|
|
|
547.6
|
|
238.0
|
|
Valuation allowance
|
(10.9
|
)
|
(8.5
|
)
|
|
536.7
|
|
229.5
|
|
Deferred tax liabilities:
|
|
|
Operating lease right-of-use assets
|
(301.2
|
)
|
—
|
|
Foreign tax credit and other tax liabilities
|
(12.3
|
)
|
(21.5
|
)
|
Net deferred tax asset
|
$
|
223.2
|
|
$
|
208.0
|
|
The Company has recorded a valuation allowance against certain deferred tax assets related to foreign net operating loss carryforwards where management has determined it is more likely than not that deferred tax assets will not be realized in the future. The overall valuation allowance relates to tax loss carryforwards and temporary differences for which no benefit is expected to be realized. Tax loss carryforwards of $21.8 million exist in certain foreign jurisdictions. Whereas some of these tax loss carryforwards do not have an expiration date, others expire at various times from 2020 through 2036.
The following table reconciles the unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
Unrecognized tax benefits at beginning of year
|
$
|
17.3
|
|
$
|
10.1
|
|
$
|
7.2
|
|
Gross increases – tax positions in prior period
|
6.3
|
|
8.0
|
|
3.2
|
|
Gross decreases – tax positions in prior period
|
(0.7
|
)
|
—
|
|
(0.9
|
)
|
Gross increases – tax positions in current period
|
1.9
|
|
1.3
|
|
0.6
|
|
Settlements
|
(5.2
|
)
|
—
|
|
—
|
|
Lapse of statute of limitations
|
0.1
|
|
(2.1
|
)
|
—
|
|
Unrecognized tax benefits at end of year
|
$
|
19.7
|
|
$
|
17.3
|
|
$
|
10.1
|
|
The amount of tax benefits included in the balance of unrecognized tax benefits at January 31, 2020 that, if recognized, would affect the effective income tax rate was $18.5 million.
The Company recognizes expense for interest and penalties related to unrecognized tax benefits within the provision for income taxes. The Company recognized a benefit of $1.3 million in 2019, a benefit of $6.2 million in 2018 and
expense of $2.0 million in 2017 for interest and penalties. Accrued interest and penalties, which amounted to $2.9 million and $4.2 million at January 31, 2020 and 2019, respectively, is included within Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets.
The Company conducts business globally and, as a result, is subject to taxation in the U.S. and various state and foreign jurisdictions. As a matter of course, tax authorities regularly audit the Company. The Company's tax filings are currently being examined by a number of tax authorities, both in the U.S. and in foreign jurisdictions. Ongoing audits where subsidiaries have a material presence include New York City (tax years 2011–2015) and New York State (tax years 2012–2018). Tax years from 2010–present are open to examination in the U.S. Federal jurisdiction and 2006–present are open in various state, local and foreign jurisdictions. As part of these audits, the Company engages in discussions with taxing authorities regarding tax positions. As of January 31, 2020, unrecognized tax benefits are not expected to change materially in the next 12 months. Future developments may result in a change in this assessment.
Q. SEGMENT INFORMATION
Net sales by geographic area are presented by attributing revenues from external customers on the basis of the country in which the merchandise is sold. In deciding how to allocate resources and assess performance, the Company's Chief Operating Decision Maker regularly evaluates the performance of its reportable segments on the basis of net sales and earnings from operations, after the elimination of inter-segment sales and transfers. The accounting policies of the reportable segments are the same as those described in "Note C. Summary of Significant Accounting Policies."
Certain information relating to the Company's segments is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net sales:
|
|
|
|
|
|
Americas
|
$
|
1,924.0
|
|
|
$
|
1,960.3
|
|
|
$
|
1,870.9
|
|
Asia-Pacific
|
1,258.2
|
|
|
1,239.0
|
|
|
1,095.0
|
|
Japan
|
649.8
|
|
|
643.0
|
|
|
596.3
|
|
Europe
|
498.3
|
|
|
504.4
|
|
|
489.0
|
|
Total reportable segments
|
4,330.3
|
|
|
4,346.7
|
|
|
4,051.2
|
|
Other
|
93.7
|
|
|
95.4
|
|
|
118.6
|
|
|
$
|
4,424.0
|
|
|
$
|
4,442.1
|
|
|
$
|
4,169.8
|
|
Earnings from operations*:
|
|
|
|
|
|
Americas
|
$
|
382.2
|
|
|
$
|
386.7
|
|
|
$
|
399.0
|
|
Asia-Pacific
|
254.3
|
|
|
311.5
|
|
|
287.7
|
|
Japan
|
229.7
|
|
|
237.2
|
|
|
209.3
|
|
Europe
|
83.1
|
|
|
86.2
|
|
|
90.4
|
|
Total reportable segments
|
949.3
|
|
|
1,021.6
|
|
|
986.4
|
|
Other
|
11.3
|
|
|
(6.4
|
)
|
|
3.6
|
|
|
$
|
960.6
|
|
|
$
|
1,015.2
|
|
|
$
|
990.0
|
|
|
|
*
|
Represents earnings from operations before (i) unallocated corporate expenses, (ii) Interest expense and financing costs and Other expense, net, and (iii) other operating expenses.
|
The Company's Chief Operating Decision Maker does not evaluate the performance of the Company's assets on a segment basis for internal management reporting and, therefore, such information is not presented. The following table sets forth a reconciliation of the segments' earnings from operations to the Company's consolidated earnings from operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
Earnings from operations for segments
|
$
|
960.6
|
|
$
|
1,015.2
|
|
$
|
990.0
|
|
Unallocated corporate expenses
|
(206.8
|
)
|
(224.9
|
)
|
(180.6
|
)
|
Interest expense and financing costs and Other expense, net
|
(42.3
|
)
|
(46.8
|
)
|
(48.9
|
)
|
Other operating expenses
|
(21.2
|
)
|
—
|
|
—
|
|
Earnings from operations before income taxes
|
$
|
690.3
|
|
$
|
743.5
|
|
$
|
760.5
|
|
Unallocated corporate expenses include certain costs related to administrative support functions which the Company does not allocate to its segments. Such unallocated costs include those for centralized information technology, finance, legal and human resources departments.
Other operating expenses in the year ended January 31, 2020 represent charges related to the proposed Merger. See "Note B. Entry into Merger Agreement" for additional details.
Sales to unaffiliated customers by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
Net sales:
|
|
|
|
United States
|
$
|
1,796.9
|
|
$
|
1,837.5
|
|
$
|
1,739.0
|
|
Japan
|
649.8
|
|
643.0
|
|
596.3
|
|
Other countries
|
1,977.3
|
|
1,961.6
|
|
1,834.5
|
|
|
$
|
4,424.0
|
|
$
|
4,442.1
|
|
$
|
4,169.8
|
|
Net sales information for classes of similar products is presented in "Note C. Summary of Significant Accounting Policies."
Long-lived assets by geographic area were as follows:
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Long-lived assets:
|
|
|
United States
|
$
|
819.6
|
|
$
|
762.9
|
|
Japan
|
17.9
|
|
18.9
|
|
Other countries
|
324.8
|
|
306.1
|
|
|
$
|
1,162.3
|
|
$
|
1,087.9
|
|
R. QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarters Ended
|
|
(in millions, except per share amounts)
|
April 30
|
|
July 31
|
|
October 31
|
|
January 31 a
|
|
Net sales
|
$
|
1,003.1
|
|
$
|
1,048.5
|
|
$
|
1,014.6
|
|
$
|
1,357.8
|
|
Gross profit
|
619.2
|
|
657.7
|
|
625.7
|
|
859.3
|
|
Earnings from operations
|
160.9
|
|
184.3
|
|
118.5
|
|
268.9
|
|
Net earnings
|
125.2
|
|
136.3
|
|
78.4
|
|
201.2
|
|
Net earnings per share:
|
|
|
|
|
Basic
|
$
|
1.03
|
|
$
|
1.13
|
|
$
|
0.65
|
|
$
|
1.67
|
|
Diluted
|
$
|
1.03
|
|
$
|
1.12
|
|
$
|
0.65
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Quarters Ended
|
|
(in millions, except per share amounts)
|
April 30
|
|
July 31
|
|
October 31
|
|
January 31
|
|
Net sales
|
$
|
1,033.2
|
|
$
|
1,075.9
|
|
$
|
1,012.4
|
|
$
|
1,320.6
|
|
Gross profit
|
650.9
|
|
688.8
|
|
629.3
|
|
842.0
|
|
Earnings from operations
|
204.3
|
|
191.2
|
|
126.4
|
|
268.4
|
|
Net earnings
|
142.3
|
|
144.7
|
|
94.9
|
|
204.5
|
|
Net earnings per share:
|
|
|
|
|
Basic
|
$
|
1.14
|
|
$
|
1.17
|
|
$
|
0.78
|
|
$
|
1.68
|
|
Diluted
|
$
|
1.14
|
|
$
|
1.17
|
|
$
|
0.77
|
|
$
|
1.67
|
|
|
|
a
|
Net earnings included $21.2 million of pre-tax expense ($17.1 million after tax expense, or $0.14 per diluted share) for expenses incurred related to the proposed Merger (see "Note B. Entry into Merger Agreement") for the quarter ended January 31, 2020.
|
Basic and diluted earnings per share are computed independently for each quarter presented. Accordingly, the sum of the quarterly earnings per share may not agree with the calculated full year earnings per share.
S. SUBSEQUENT EVENT
In March 2020, the World Health Organization recognized the novel strain of coronavirus, COVID-19, as a pandemic. This coronavirus outbreak has severely restricted the level of economic activity around the world. In response to this coronavirus outbreak, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. Further, individuals' ability to travel has been curtailed through mandated travel restrictions and may be further limited through additional voluntary or mandated closures of travel-related businesses. This coronavirus outbreak has had a significant effect on the Company's sales results to date in fiscal 2020. For example, as of March 19, 2020, the Company has temporarily closed all of its stores in the United States and Canada, and has temporarily closed nearly all of its stores across Europe and the United Kingdom. Given the uncertainty regarding the spread of this coronavirus, the related financial impact cannot be reasonably estimated at this time.