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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
 
FORM 10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 1-9494
TIFFANY & CO.
(Exact name of registrant as specified in its charter)
Delaware
 
13-3228013
(State of incorporation)
 
(I.R.S. Employer Identification No.)

200 Fifth Avenue, New York, NY 10010
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (212755-8000
Former name, former address and former fiscal year, if changed since last report                     

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered

Common Stock, par value $0.01 per share
TIF
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Emerging growth company
Non-accelerated filer
Smaller reporting company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes    No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 121,368,585 shares outstanding at the close of business on July 31, 2020.



TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED July 31, 2020
 
 
Page
 
Item 1.
 
 

 
 
 
 

 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 6.





PART I. Financial Information
Item 1. Financial Statements
TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except per share amounts)
 
July 31, 2020
 
January 31, 2020
 
July 31, 2019
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
1,043.7

 
$
874.7

 
$
641.0

Short-term investments

 
22.7

 
39.6

Accounts receivable, net
196.6

 
240.0

 
241.0

Inventories, net
2,510.4

 
2,463.9

 
2,487.7

Prepaid expenses and other current assets
314.4

 
274.2

 
264.4

Total current assets
4,065.1

 
3,875.5

 
3,673.7

Operating lease right-of-use assets
1,120.6

 
1,102.7

 
1,073.4

Property, plant and equipment, net
1,090.7

 
1,098.8

 
1,021.2

Deferred income taxes
226.9

 
225.2

 
209.7

Other assets, net
353.0

 
357.9

 
337.9

 
$
6,856.3

 
$
6,660.1

 
$
6,315.9

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term borrowings
$
591.3

 
$
147.9

 
$
135.2

Accounts payable and accrued liabilities
394.0

 
541.5

 
430.3

Current portion of operating lease liabilities
209.6

 
202.8

 
217.1

Income taxes payable
19.5

 
16.4

 
17.1

Merchandise credits and deferred revenue
63.2

 
61.8

 
71.4

Total current liabilities
1,277.6

 
970.4

 
871.1

Long-term debt
887.7

 
884.1

 
884.0

Pension/postretirement benefit obligations
379.1

 
374.5

 
287.7

Long-term portion of operating lease liabilities
1,024.0

 
1,008.4

 
969.6

Other long-term liabilities
80.2

 
87.3

 
110.4

Commitments and contingencies


 


 

Stockholders' equity:
 
 
 
 
 
Preferred Stock, $0.01 par value; authorized 2.0 shares, none issued and outstanding

 

 

Common Stock, $0.01 par value; authorized 240.0 shares, issued and outstanding 121.4, 121.2, 120.8
1.2

 
1.2

 
1.2

Additional paid-in capital
1,396.1

 
1,387.3

 
1,276.5

Retained earnings
2,030.7

 
2,207.6

 
2,139.4

Accumulated other comprehensive loss, net of tax
(232.2
)
 
(273.2
)
 
(237.0
)
Total Tiffany & Co. stockholders' equity
3,195.8

 
3,322.9

 
3,180.1

Non-controlling interests
11.9

 
12.5

 
13.0

Total stockholders' equity
3,207.7

 
3,335.4

 
3,193.1

 
$
6,856.3

 
$
6,660.1

 
$
6,315.9

See notes to condensed consolidated financial statements.

TIFFANY & CO.
2


TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in millions, except per share amounts)

 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2020
 
2019
 
2020
 
2019
Net sales
$
747.1

 
$
1,048.5

 
$
1,302.6

 
$
2,051.6

Cost of sales
285.5

 
390.8

 
532.0

 
774.7

Gross profit
461.6

 
657.7

 
770.6

 
1,276.9

Selling, general and administrative expenses
401.9

 
473.4

 
816.3

 
931.7

Earnings (loss) from operations
59.7

 
184.3

 
(45.7
)
 
345.2

Interest expense and financing costs
11.1

 
9.8

 
20.9

 
20.2

Other income, net
(0.8
)
 
(0.9
)
 
(26.2
)
 
(1.9
)
Earnings (loss) from operations before income taxes
49.4

 
175.4

 
(40.4
)
 
326.9

Provision (benefit) for income taxes
17.5

 
39.1

 
(7.7
)
 
65.4

Net earnings (loss)
$
31.9

 
$
136.3

 
$
(32.7
)
 
$
261.5

Net earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.26

 
$
1.13

 
$
(0.27
)
 
$
2.16

Diluted
$
0.26

 
$
1.12

 
$
(0.27
)
 
$
2.15

Weighted-average number of common shares:
 
 
 
 
 
 
 
Basic
121.4

 
121.1

 
121.3

 
121.3

Diluted
121.7

 
121.4

 
121.3

 
121.6


See notes to condensed consolidated financial statements.


TIFFANY & CO.
3


TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)
(in millions)

 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2020
 
2019
 
2020
 
2019
Net earnings (loss)
    $
31.9

 
    $
136.3

 
    $
(32.7
)
 
    $
261.5

Other comprehensive earnings (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
49.0

 
(2.7
)
 
20.9

 
(26.9
)
Unrealized gain on hedging instruments
6.4

 
7.6

 
11.7

 
16.4

Unrealized gain on benefit plans
4.1

 
2.1

 
8.4

 
4.3

Total other comprehensive earnings (loss), net of tax
59.5

 
7.0

 
41.0

 
(6.2
)
Comprehensive earnings
    $
91.4

 
    $
143.3

 
    $
8.3

 
    $
255.3


See notes to condensed consolidated financial statements.


TIFFANY & CO.
4



TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in millions)

 
Three Months Ended July 31, 2020
 
Total
Stockholders'
Equity
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Common Stock
 
Additional
Paid-In
Capital
 
Non-
Controlling
Interests
Shares
 
Amount
Balance at April 30, 2020
$
3,181.0

 
$
2,069.7

 
$
(291.7
)
 
121.3

 
$
1.2

 
$
1,389.7

 
$
12.1

Exercise of stock options and vesting of restricted stock units
0.3

 

 

 
0.1

 

 
0.3

 

Shares withheld related to net share settlement of share-based compensation
(0.4
)
 

 

 

 

 
(0.4
)
 

Share-based compensation expense
6.4

 

 

 

 

 
6.4

 

Cash dividends on Common Stock ($0.58 per share)
(70.4
)
 
(70.4
)
 

 

 

 

 

Accrued dividends on share-based awards
(0.4
)
 
(0.5
)
 

 

 

 
0.1

 

Other comprehensive earnings, net of tax
59.5

 

 
59.5

 

 

 

 

Net earnings
31.9

 
31.9

 

 

 

 

 

Non-controlling interests
(0.2
)
 

 

 

 

 

 
(0.2
)
Balance at July 31, 2020
$
3,207.7

 
$
2,030.7

 
$
(232.2
)
 
121.4

 
$
1.2

 
$
1,396.1

 
$
11.9

 
Three Months Ended July 31, 2019
 
Total
Stockholders'
Equity
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Common Stock
 
Additional
Paid-In
Capital
 
Non-
Controlling
Interests
Shares
 
Amount
Balance at April 30, 2019
$
3,172.0

 
$
2,128.3

 
$
(244.0
)
 
121.4

 
$
1.2

 
$
1,273.1

 
$
13.4

Exercise of stock options and vesting of restricted stock units
0.6

 

 

 

 

 
0.6

 

Shares withheld related to net share settlement of share-based compensation
(1.0
)
 

 

 

 

 
(1.0
)
 

Share-based compensation expense
9.3

 

 

 

 

 
9.3

 

Purchase and retirement of Common Stock
(60.0
)
 
(54.5
)
 

 
(0.6
)
 

 
(5.5
)
 

Cash dividends on Common Stock ($0.58 per share)
(70.2
)
 
(70.2
)
 

 

 

 

 

Accrued dividends on share-based awards
(0.5
)
 
(0.5
)
 

 

 

 

 

Other comprehensive earnings, net of tax
7.0

 

 
7.0

 

 

 

 

Net earnings
136.3

 
136.3

 

 

 

 

 

Non-controlling interests
(0.4
)
 

 

 

 

 

 
(0.4
)
Balance at July 31, 2019
$
3,193.1

 
$
2,139.4

 
$
(237.0
)
 
120.8

 
$
1.2

 
$
1,276.5

 
$
13.0



TIFFANY & CO.
5


 
Six Months Ended July 31, 2020
 
Total
Stockholders'
Equity
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Common Stock
 
Additional
Paid-In
Capital
 
Non-
Controlling
Interests
Shares
 
Amount
Balance at January 31, 2020
$
3,335.4

 
$
2,207.6

 
$
(273.2
)
 
121.2

 
$
1.2

 
$
1,387.3

 
$
12.5

Exercise of stock options and vesting of restricted stock units
4.0

 

 

 
0.3

 

 
4.0

 

Shares withheld related to net share settlement of share-based compensation
(10.3
)
 

 

 
(0.1
)
 

 
(10.3
)
 

Share-based compensation expense
14.0

 

 

 

 

 
14.0

 

Purchase and retirement of Common Stock

 

 

 

 

 

 

Cash dividends on Common Stock ($1.16 per share)
(140.7
)
 
(140.7
)
 

 

 

 

 

Accrued dividends on share-based awards
0.1

 
(1.0
)
 

 

 

 
1.1

 

Other comprehensive earnings, net of tax
41.0

 

 
41.0

 

 

 

 

Cumulative effect adjustment from adoption of new accounting standards
(2.5
)
 
(2.5
)
 

 

 

 

 

Net loss
(32.7
)
 
(32.7
)
 

 

 

 

 

Non-controlling interests
(0.6
)
 

 

 

 

 

 
(0.6
)
Balance at July 31, 2020
$
3,207.7

 
$
2,030.7

 
$
(232.2
)
 
121.4

 
$
1.2

 
$
1,396.1

 
$
11.9

 
Six Months Ended July 31, 2019
 
Total
Stockholders'
Equity
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Common Stock
 
Additional
Paid-In
Capital
 
Non-
Controlling
Interests
Shares
 
Amount
Balance at January 31, 2019
$
3,130.9

 
$
2,045.6

 
$
(204.8
)
 
121.5

 
$
1.2

 
$
1,275.4

 
$
13.5

Exercise of stock options and vesting of restricted stock units
2.6

 

 

 
0.3

 

 
2.6

 

Shares withheld related to net share settlement of share-based compensation
(9.1
)
 

 

 
(0.1
)
 

 
(9.1
)
 

Share-based compensation expense
15.2

 

 

 

 

 
15.2

 

Purchase and retirement of Common Stock
(85.4
)
 
(77.6
)
 

 
(0.9
)
 

 
(7.8
)
 

Cash dividends on Common Stock ($1.13 per share)
(137.0
)
 
(137.0
)
 

 

 

 

 

Accrued dividends on share-based awards
(0.7
)
 
(0.9
)
 

 

 

 
0.2

 

Other comprehensive loss, net of tax
(6.2
)
 

 
(6.2
)
 

 

 

 

Cumulative effect adjustment from adoption of new accounting standards
21.8

 
47.8

 
(26.0
)
 

 

 

 

Net earnings
261.5

 
261.5

 

 

 

 

 

Non-controlling interests
(0.5
)
 

 

 

 

 

 
(0.5
)
Balance at July 31, 2019
$
3,193.1

 
$
2,139.4

 
$
(237.0
)
 
120.8

 
$
1.2

 
$
1,276.5

 
$
13.0


See notes to condensed consolidated financial statements.

TIFFANY & CO.
6


TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
 
Six Months Ended July 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net (loss) earnings
   $
(32.7
)
 
   $
261.5

Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
133.0

 
125.6

Provision for inventories
18.5

 
11.1

Deferred income taxes
(1.0
)
 
(9.6
)
Provision for pension/postretirement benefits
19.0

 
14.7

Share-based compensation expense
13.9

 
15.1

Changes in assets and liabilities:
 
 
 
Accounts receivable
39.1

 
3.0

Inventories
(45.0
)
 
(91.4
)
Prepaid expenses and other current assets
5.6

 
(36.4
)
Accounts payable and accrued liabilities
(135.4
)
 
(78.3
)
Income taxes payable
(30.3
)
 
(28.9
)
Merchandise credits and deferred revenue
1.1

 
2.0

Other, net
0.9

 
(34.5
)
Net cash (used in) provided by operating activities
(13.3
)
 
153.9

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of marketable securities and short-term investments
(0.1
)
 
(39.8
)
Proceeds from sales of marketable securities and short-term investments
22.4

 
59.8

Capital expenditures
(132.1
)
 
(121.9
)
Other, net
1.2

 

Net cash used in investing activities
(108.6
)
 
(101.9
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from credit facility borrowings, net
501.2

 
11.5

Proceeds from other credit facility borrowings
23.5

 
48.9

Repayment of other credit facility borrowings
(76.6
)
 
(34.9
)
Repurchase of Common Stock

 
(85.4
)
Proceeds from exercised stock options
4.0

 
2.6

Payments related to tax withholding for share-based payment arrangements
(10.3
)
 
(8.8
)
Cash dividends on Common Stock
(140.7
)
 
(137.0
)
Financing fees
(0.9
)
 

Net cash provided by (used in) financing activities
300.2

 
(203.1
)
Effect of exchange rate changes on cash and cash equivalents
(9.3
)
 
(0.5
)
Net increase (decrease) in cash and cash equivalents
169.0

 
(151.6
)
Cash and cash equivalents at beginning of year
874.7

 
792.6

Cash and cash equivalents at end of six months
   $
1,043.7

 
   $
641.0

See notes to condensed consolidated financial statements.

TIFFANY & CO.
7


TIFFANY & CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements include the accounts of Tiffany & Co. (also referred to as the "Registrant") and its subsidiaries (the "Company") 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 interim financial statements are unaudited and, in the opinion of management, include all adjustments (which represent normal recurring adjustments) necessary to fairly state the Company's financial position as of July 31, 2020 and 2019 and the results of its operations and cash flows for the interim periods presented. The condensed consolidated balance sheet data for January 31, 2020 are derived from the audited financial statements, which are included in the Company's Annual Report on Form 10-K and should be read in connection with these financial statements. As permitted by the rules of the Securities and Exchange Commission, these financial statements do not include all disclosures required by generally accepted accounting principles.

The Company's business is seasonal in nature, with the fourth quarter typically representing approximately one-third of annual net sales and a higher percentage of annual net earnings. Therefore, the results of its operations for the three and six months ended July 31, 2020 and 2019 are not necessarily indicative of the results of the entire fiscal year.

An outbreak of a novel strain of the coronavirus, COVID-19, was identified in China in December 2019 and was subsequently recognized as a pandemic by the World Health Organization on March 11, 2020. This COVID-19 outbreak has severely restricted the level of economic activity around the world. In response to COVID-19, 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 time outside of their homes. In addition to travel restrictions put in place in early 2020 in response to COVID-19, governments have closed borders, imposed prolonged quarantines and may continue or reinstate those measures or implement other restrictions and requirements in light of the continuing or renewed spread of COVID-19 and concern of additional waves of outbreaks. Such actions, together with changes in consumers' willingness to congregate in populated areas and lower levels of disposable income due to elevated unemployment rates, have resulted in significant business disruptions across a wide array of industries and an overall decline of the global economy. These factors, among others, have resulted in a significant decline in customer traffic, consumer confidence and local and tourist spending on discretionary items around the world.

As a result of the COVID-19 outbreak, a substantial number of the Company's retail stores was closed for some portion of time in the three and six months ended July 31, 2020. Company retail store closures peaked at approximately 75% to 80% of the Company's retail stores worldwide during the month of April. However, the Company gradually reopened many of its stores throughout the three months ended July 31, 2020, in accordance with applicable guidelines established by local governments. As of July 31, 2020, virtually all of the Company's retail stores worldwide were fully or partially open, in accordance with such guidelines. The Company's e-commerce sales in the three and six months ended July 31, 2020 increased 123% and 73%, respectively, worldwide, with key markets such as the United States having increased 122% and 67%, respectively, and the United Kingdom having increased 93% and 53%, respectively, compared to the prior year periods.

In light of the impact of COVID-19, the Company continues to review and carefully manage its operating expenses and eliminate certain non-essential spending. As part of these efforts, the Company has negotiated, and continues to negotiate, with its landlords for rent concessions principally under leases for retail stores. As a result of COVID-19, governments in many markets in which the Company operates have also implemented programs to encourage companies to retain and pay employees who are unable to work, or who are limited in the work that they can perform due to limitations resulting from travel bans, work-from-

TIFFANY & CO.
8


home policies and shelter-in-place orders, among others. These programs generally provide credits for retaining and continuing to pay employees. To date, the Company has continued to pay its employees, although at a reduced level after a period of time for certain employees in locations impacted by COVID-19 who cannot work from home, and has not taken action to reduce its workforce in connection with COVID-19.

The Company's liquidity needs have been, and are expected to remain, primarily a function of its ongoing, seasonal and expansion-related working capital requirements and capital expenditure needs. Over the long term, the Company manages its cash and capital structure to maintain a strong financial position that provides flexibility to pursue strategic priorities. Management regularly assesses its working capital needs, capital expenditure requirements, debt service, dividend payouts, share repurchases and future investments. In response to the COVID-19 outbreak, the Company has taken steps to further strengthen its financial position and balance sheet, and to maintain financial liquidity and flexibility, which included drawing down $500.0 million on its Credit Facility (as defined in "Note 8. Debt") during the three months ended April 30, 2020, as a precautionary measure in order to increase its cash position and maintain financial flexibility in light of the uncertainty in the global markets resulting from COVID-19. This drawdown was permitted under the Merger Agreement (as defined in "Note 2. Merger Agreement").

The agreements governing certain of the Company's material debt instruments include covenants that incorporate a (i) debt incurrence test premised on a fixed charge coverage ratio, which is the ratio of the Company's EBIT (earnings before interest and taxes) plus rent expense to its interest expense plus rent expense, and (ii) leverage ratio, which is the ratio of the Company's total adjusted debt to its consolidated EBITDAR (earnings before interest, taxes, depreciation, amortization and rent expenses). Specifically, under the terms of the Company's Senior Notes due 2026 and 2042, the Company was, prior to the amendments described below, restricted from incurring, or permitting its subsidiaries to incur, indebtedness if, among other conditions, the Company's fixed charge coverage ratio was less than 2.0 to 1.0. Under the terms of the Credit Facility, the Shanghai Guaranty (as defined in "Note 8. Debt") and the Company's Senior Notes due 2026 and 2042, the Company was, prior to the amendments described below, required to maintain a maximum leverage ratio of 3.50 to 1.00 for the four quarter period ending as of the end of each fiscal quarter.

As a precautionary measure in order to maintain flexibility with respect to its liquidity sources and provide additional financial maintenance covenant headroom, the Company entered into amendments to its Credit Facility, the Shanghai Guaranty, and its Senior Notes due 2026 and 2042, in order to modify the leverage ratio financial maintenance covenant and, in the case of the Senior Notes due 2026 and 2042, the fixed charge coverage ratio test for debt incurrence, through and including the Company's fiscal quarter ending April 30, 2021. These amendments are permitted under the Merger Agreement (as defined in "Note 2. Merger Agreement").

These amendments were executed on June 8, 2020 and effect changes to certain provisions and covenants during the period beginning with the fiscal quarter ended July 31, 2020 and continuing through the fiscal quarter ending April 30, 2021 (such period of time, the "Covenant Relief Period"), including, among others: (a) an increase in the maximum leverage ratio under the Credit Facility, the Shanghai Guaranty, and the 2026 and 2042 Senior Notes, to 4.50 to 1.00; and (b) a reduction of the fixed charge coverage ratio in the 2026 and 2042 Senior Notes to 0.75 to 1.00.

During the Covenant Relief Period, the facility fee under the Credit Facility is increased by 5 basis points at all pricing levels, and the applicable margin is increased by (i) 10 basis points at all pricing levels through the quarter ended July 31, 2020, (ii) 20 basis points at all pricing levels from August 1, 2020 until November 1, 2020 and (iii) 30 basis points at all pricing levels from November 1, 2020 through April 30, 2021. The coupon rate under the 2026 and 2042 Senior Notes is increased by 25 basis points during the Covenant Relief Period. The Company has the right to terminate the Covenant Relief Period under the Credit Facility, Shanghai Guaranty and the 2026 and 2042 Senior Notes, including the attendant covenant and pricing modifications referenced above, prior to April 30, 2021, subject to the Company's certification that its leverage ratio does not exceed 3.50 to 1.00 at such time. Management believes that cash on hand, internally generated cash flows and the funds available under its revolving credit facilities are sufficient to support the Company's liquidity and capital requirements for the foreseeable future, including the next 12 months.


TIFFANY & CO.
9


The extent to which the COVID-19 outbreak will continue to impact the Company's business operations, financial results, and liquidity will depend on numerous factors that the Company may not be able to accurately predict or assess due to their dynamic and evolving nature, including the duration and scope of the COVID-19 outbreak (including whether there are additional waves caused by additional periods of increases or spikes in the number of COVID-19 cases); the possibility of future mutations or outbreaks of related strains of the virus in areas in which the Company operates; whether a vaccine or cure that mitigates the effect of the virus will be synthesized, and, if so, when such vaccine or cure will be ready to be used; the extent of the protective and preventative measures that have been or will be put in place by both governmental entities and other businesses; whether the virus's impact will be seasonal; the negative impact the outbreak has on global and regional economies and economic activity, including the duration and magnitude of its impact on consumer discretionary spending and levels of consumer confidence; and how quickly economies recover after the COVID-19 outbreak subsides. Accordingly, management cannot predict with certainty for how long and to what extent the COVID-19 outbreak will impact its business operations or the global economy as a whole. The Company will continue to take steps to mitigate the potential risks posed by the spread and related circumstances and impacts of COVID-19. The Company's management also remains focused on addressing these recent challenges presented by COVID-19 by preserving the Company's liquidity and managing its cash flows with preemptive actions such as those described above.

2.
MERGER AGREEMENT

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 pending 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 pending Merger expired; on February 4, 2020, the Registrant 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 Registrant's named executive officers in connection with the pending Merger; on March 26, 2020, the Committee on Foreign Investment in the United States cleared the pending Merger, informing the Registrant that its review of the pending Merger had concluded and that there are no unresolved national security concerns with respect to the transaction; on March 30, 2020, the Australian Competition and Consumer Commission issued a no-action letter clearing the transaction; on April 7, 2020, the parties received a no-action letter from the Canadian Competition Bureau indicating that it does not intend to challenge the pending Merger and thereby clearing the transaction; on June 4, 2020, the Federal Antimonopoly Service of Russia formally cleared the pending Merger; on June 12, 2020, the Korea Fair Trade Commission of South Korea formally cleared the pending Merger; on July 3, 2020, the Australian Foreign Investment Review Board issued a notification indicating that it has no objection to the pending Merger; and on July 25, 2020, the State Administration for Market Regulation of China decided that it will not prohibit the pending Merger.

TIFFANY & CO.
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The pending Merger remains subject to regulatory clearance by the European Commission, the Japan Fair Trade Commission, the Mexican competition authority (Comisión Federal de Competencia Económica) and the Taiwan Fair Trade Commission.

The pending Merger remains subject to satisfaction or waiver of the remaining customary closing conditions, including, among others, (A) certain remaining regulatory approvals, as outlined above, (B) the absence of a law or order in effect that enjoins, prevents or otherwise prohibits the consummation of the pending Merger or any other transactions contemplated under the Merger Agreement issued by a governmental entity; (C) the absence of any legal proceeding seeking to enjoin, prevent or otherwise prohibit the consummation of the pending Merger or any other transactions contemplated under the Merger Agreement instituted by a governmental entity of competent jurisdiction; and (D) the absence of a Material Adverse Effect (as defined under the Merger Agreement). The obligation of each party to consummate the pending 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. As previously announced, on August 24, 2020, Registrant delivered to Parent a notice that Registrant thereby extended the Outside Date (as defined under the Merger Agreement) to November 24, 2020, in accordance with the terms of the Merger Agreement, and Parent notified Registrant that it reserved the right to challenge the validity of the extension of the Outside Date under the Merger Agreement.

During the three and six months ended July 31, 2020, the Company incurred expenses of $7.8 million and $24.5 million, respectively, related to the pending Merger for incentive compensation costs and professional fees.

3.
NEW ACCOUNTING STANDARDS

Recently Issued Accounting Standards

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 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. The Company adopted this ASU on February 1, 2020 by applying its provisions prospectively and recognizing a cumulative-effect adjustment to the opening balance of retained earnings as of February 1, 2020. The adoption of this ASU did not have a significant impact on the Company's condensed 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 is permitted. The Company elected to adopt this guidance on a prospective basis. The adoption of this ASU did not have a significant impact on the Company's condensed consolidated financial statements.

TIFFANY & CO.
11



4.
RECEIVABLES AND REVENUE RECOGNITION

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 time frame (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 July 31, 2020 and 2019, the carrying amount of the Credit Receivables (recorded in Accounts receivable, net) was $59.8 million and $98.1 million, respectively, of which 96% was considered current at July 31, 2020 and 98% was considered current at July 31, 2019. Finance charges earned on Credit Receivables accounts were not significant.

At July 31, 2020, accounts receivable allowances totaled $38.4 million, compared to $33.0 million at January 31, 2020 and $30.9 million at July 31, 2019.

Revenue Recognition. The following table disaggregates the Company's net sales by major source:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
(in millions)
2020
 
2019
 
2020
 
2019
Net sales*:
 
 
 
 
 
 
 
Jewelry collections
$
428.9

 
$
570.6

 
$
725.6

 
$
1,102.9

Engagement jewelry
200.6

 
276.4

 
343.1

 
556.8

Designer jewelry
85.1

 
114.9

 
152.7

 
225.8

All other
32.5

 
86.6

 
81.2

 
166.1

 
$
747.1

 
$
1,048.5

 
$
1,302.6

 
$
2,051.6


*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.


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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.

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 the six months ended July 31, 2020, the Company recognized net sales of approximately $17.0 million related to the Merchandise credits and deferred revenue balance that existed at January 31, 2020.

5.
INVENTORIES

(in millions)
July 31, 2020
 
January 31, 2020
 
July 31, 2019
Finished goods
          $
1,586.8

 
          $
1,532.5

 
          $
1,535.1

Raw materials
796.2

 
776.8

 
832.2

Work-in-process
127.4

 
154.6

 
120.4

Inventories, net
          $
2,510.4

 
          $
2,463.9

 
          $
2,487.7



6.
INCOME TAXES

The effective income tax rate for the three months ended July 31, 2020 was 35.4% versus 22.3% in the prior year. The effective income tax rate for the six months ended July 31, 2020 was 19.0% versus 20.0% in the prior year. The increase in the effective income tax rate for the three months ended July 31, 2020 was primarily due to the application of an updated estimated annual effective income tax rate, which is influenced by the jurisdictional mix of earnings taxed at the statutory tax rates applicable to each jurisdiction and an estimated increase in the Global Intangible Low-Taxed Income ("GILTI") tax, each of which reflect the

TIFFANY & CO.
13


impact of COVID-19 on the Company's results of operations. The effective income tax rate for the six months ended July 31, 2020 reflected the impact of certain discrete items recognized in the period. The Company's effective income tax rate could be negatively impacted to the extent earnings are lower than anticipated in countries that have lower statutory tax rates and higher than anticipated in countries that have higher statutory tax rates. The effective income tax rate for the six months ended July 31, 2019 included the recognition of an income tax benefit of $7.5 million, or 230 basis points, related to an increase in the estimated 2018 Foreign Derived Intangible Income ("FDII") benefit as a result of U.S. Treasury guidance issued during the three months ended April 30, 2019.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted. The Company has analyzed the provisions of the CARES Act, which provide for the full expensing of qualified leasehold improvements, modifications to charitable contribution and net operating loss limitations, modifications to the deductibility of business interest expense, as well as Alternative Minimum Tax ("AMT") credit acceleration. The enactment of this legislation did not have a significant impact on the effective income tax rate in the six months ended July 31, 2020.

During the three and six months ended July 31, 2020, the change in the gross amount of unrecognized tax benefits and accrued interest and penalties was not significant.

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 2013–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 July 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.

7.
EARNINGS PER SHARE

Basic earnings per share ("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:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
(in millions)
2020
 
2019
 
2020
 
2019
Net earnings (loss) for basic and diluted EPS
$
31.9

 
$
136.3

 
$
(32.7
)
 
$
261.5

Weighted-average shares for basic EPS
121.4

 
121.1

 
121.3

 
121.3

Incremental shares based upon the assumed exercise of stock options and unvested restricted stock units
0.3

 
0.3

 

 
0.3

Weighted-average shares for diluted EPS
121.7

 
121.4

 
121.3

 
121.6


For the three months ended July 31, 2020, there were 0.1 million stock options and restricted stock units that were excluded from the computation of earnings per diluted share due to their antidilutive effect. For the six months ended July 31, 2020, stock options and restricted stock units were excluded from the computation of diluted earnings per share due to the net loss incurred during the period. For the three and six months ended July 31, 2019, there were 1.7 million stock options and restricted stock units that were excluded from the computation of earnings per diluted share due to their antidilutive effect.


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8.    DEBT

(in millions)
July 31, 2020
 
January 31, 2020
 
July 31, 2019
Short-term borrowings:
 
 
 
 
 
Credit Facilities
$
516.1

 
$
13.8

 
$
23.1

Other credit facilities
75.2

 
134.1

 
112.1

 
$
591.3

 
$
147.9

 
$
135.2


Long-term debt:
 
 
 
 
 
Unsecured Senior Notes:
 
 
 
 
 
2012 4.40% Series B Senior Notes, due July 2042 a
$
250.0

 
$
250.0

 
$
250.0

2014 3.80% Senior Notes, due October 2024 b, c
250.0

 
250.0

 
250.0

2014 4.90% Senior Notes, due October 2044 b, c
300.0

 
300.0

 
300.0

2016 0.78% Senior Notes, due August 2026 b, d
95.4

 
91.9

 
92.1

 
895.4

 
891.9

 
892.1

Less: unamortized discounts and debt issuance costs
(7.7
)
 
(7.8
)
 
(8.1
)
 
$
887.7

 
$
884.1

 
$
884.0


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.

On October 25, 2018, 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 Registrant) (the "Credit Facility"). During the three months ended April 30, 2020, the Company drew down $500.0 million on its Credit Facility as a precautionary measure in order to increase its cash position and maintain financial flexibility in light of uncertainty in the global markets resulting from COVID-19. This drawdown was permitted under the Merger Agreement.

At July 31, 2020, the Company was in compliance with all debt covenants.

The agreements governing certain of the Company's material debt instruments include covenants that incorporate a (i) debt incurrence test premised on a fixed charge coverage ratio, which is the ratio of the Company's EBIT (earnings before interest and taxes) plus rent expense to its interest expense plus rent expense, and (ii) leverage ratio, which is the ratio of the Company's total adjusted debt to its consolidated EBITDAR (earnings before interest, taxes, depreciation, amortization and rent expenses). Specifically, under the terms of the Company's Senior Notes due 2026 and 2042, the Company was, prior to the amendments described below, restricted from incurring, or permitting its subsidiaries to incur, indebtedness if, among other conditions, the Company's fixed charge coverage ratio was less than 2.0 to 1.0. Under the terms of the Credit Facility, the Guaranty in respect of the three-year, multi-bank revolving credit agreement entered into by the Company's wholly owned subsidiary, Tiffany & Co. (Shanghai) Commercial Company Limited (the "Shanghai Guaranty"), and the Company's Senior Notes due 2026 and 2042, the Company was, prior to the amendments described below, required to maintain a maximum leverage ratio of 3.50 to 1.00 for the four quarter period ending as of the end of each fiscal quarter.


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As a precautionary measure in order to maintain flexibility with respect to its liquidity sources and provide additional financial maintenance covenant headroom, the Company entered into amendments to its Credit Facility, the Shanghai Guaranty, and its Senior Notes due 2026 and 2042, in order to modify the leverage ratio financial maintenance covenant and, in the case of the Senior Notes due 2026 and 2042, the fixed charge coverage ratio test for debt incurrence, through and including the Company's fiscal quarter ending April 30, 2021. These amendments are permitted under the Merger Agreement.

These amendments were executed on June 8, 2020 and effect changes to certain provisions and covenants during the period beginning with the fiscal quarter ended July 31, 2020 and continuing through the fiscal quarter ending April 30, 2021 (such period of time, the "Covenant Relief Period"), including, among others: (a) an increase in the maximum leverage ratio under the Credit Facility, the Shanghai Guaranty, and the 2026 and 2042 Senior Notes, to 4.50 to 1.00; and (b) a reduction of the fixed charge coverage ratio in the 2026 and 2042 Senior Notes to 0.75 to 1.00.

During the Covenant Relief Period, the facility fee under the Credit Facility is increased by 5 basis points at all pricing levels, and the applicable margin is increased by (i) 10 basis points at all pricing levels through the quarter ended July 31, 2020, (ii) 20 basis points at all pricing levels from August 1, 2020 until November 1, 2020 and (iii) 30 basis points at all pricing levels from November 1, 2020 through April 30, 2021. The coupon rate under the 2026 and 2042 Senior Notes is increased by 25 basis points during the Covenant Relief Period. The Company has the right to terminate the Covenant Relief Period under the Credit Facility, Shanghai Guaranty and the 2026 and 2042 Senior Notes, including the attendant covenant and pricing modifications referenced above, prior to April 30, 2021, subject to the Company's certification that its leverage ratio does not exceed 3.50 to 1.00 at such time.

9.
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 Condensed 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. 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 Condensed Consolidated Balance Sheet at their

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fair values, as either assets or liabilities, with an offset to current earnings. The gains or losses on undesignated foreign exchange and precious metals forward contracts substantially offset foreign exchange and commodity 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 July 31, 2020, $15.5 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 July 31, 2020, $3.2 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 July 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.


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As of July 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
¥
19,115.1

 
179.7

British pound
£
10.4

 
13.2

Derivatives not designated as hedging instruments:
 
 
 
 
U.S. dollar
$
126.5

 
126.5

Euro
14.2

 
16.6

Australian dollar
AU$
29.2

 
18.8

Czech koruna
CZK
154.3

 
6.3

Japanese yen
¥
132.2

 
1.3

Korean won
KRW
20,897.9

 
17.8

New Zealand dollar
NZ$
8.7

 
5.2

Chinese renminbi

CNY
361.2

 
51.6

Singapore dollar
S$
25.3

 
17.9

Danish kroner
DKK
49.6

 
7.6

British pound
GBP
13.9

 
18.0

Hong Kong dollar
HKD
404.4

 
52.0



The maximum term of the Company's outstanding foreign exchange forward contracts as of July 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 July 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 transaction is 18 months. As of July 31, 2020, there were precious metal forward contracts outstanding for approximately 24,900 ounces of platinum, 422,000 ounces of silver and 74,500 ounces of gold.

As a result of increases in inventory resulting from decreased sales, as well as the full or partial temporary closure of certain of the Company's manufacturing facilities due to COVID-19 during the three months ended April 30, 2020, the Company revised its projections for purchases of precious metals. Accordingly, certain hedged transactions that were previously considered to be probable were deemed improbable and the Company discontinued cash flow hedge accounting for the related precious metal forward contracts and reclassified net deferred hedging gains of $4.2 million from Accumulated OCI to Cost of sales on the Condensed Consolidated Statement of Earnings during the six months ended July 31, 2020. As of July 31, 2020, there were precious metal forward contracts outstanding for purchases not designated as hedging instruments for approximately 5,400 ounces of gold and 24,500 ounces of silver (included within the notional amounts disclosed above).


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Information on the location and amounts of derivative gains and losses in the condensed consolidated financial statements is as follows:
 
Three Months Ended July 31, 2020
(in millions)
Cost of sales
Interest expense and financing costs
Other income, net
Other comprehensive loss, net of tax
Reported amounts of financial statement line items in which effects of cash flow hedges are recorded
$
285.5

$
11.1

$
(0.8
)
$
59.5

Derivatives in Cash Flow Hedging
Relationships:
 
 
 
 
Foreign exchange forward contracts
 
 
 
 
Pre-tax loss recognized in OCI



(3.2
)
Pre-tax gain reclassified from accumulated OCI into earnings
(0.7
)


0.7

Precious metal forward contracts
 
 
 
 
Pre-tax gain recognized in OCI



9.1

Pre-tax gain reclassified from accumulated OCI into earnings
(0.9
)


0.9

Cross-currency swaps
 
 
 
 
Pre-tax loss recognized in OCI



(1.1
)
Pre-tax loss reclassified from accumulated OCI into earnings

(1.5
)
6.4

(4.9
)
Forward-starting interest rate swaps
 
 
 
 
Pre-tax loss reclassified from accumulated OCI into earnings

0.3


(0.3
)



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Six Months Ended July 31, 2020
(in millions)
Cost of sales
Interest expense and financing costs
Other income, net
Other comprehensive loss, net of tax
Reported amounts of financial statement line items in which effects of cash flow hedges are recorded
$
532.0

$
20.9

$
(26.2
)
$
41.0

Derivatives in Cash Flow Hedging
Relationships:
 
 
 
 
Foreign exchange forward contracts
 
 
 
 
Pre-tax loss recognized in OCI



(4.3
)
Pre-tax gain reclassified from accumulated OCI into earnings
(1.1
)


1.1

Precious metal forward contracts
 
 
 
 
Pre-tax gain recognized in OCI



9.7

Pre-tax gain reclassified from accumulated OCI into earnings a
(5.5
)


5.5

Cross-currency swaps
 
 
 
 
Pre-tax gain recognized in OCI



7.7

Pre-tax loss reclassified from accumulated OCI into earnings

(3.1
)
11.2

(8.1
)
Forward-starting interest rate swaps
 
 
 
 
Pre-tax loss reclassified from accumulated OCI into earnings

0.7


(0.7
)

a 
Includes net gains of $4.2 million in the six months ended July 31, 2020 reclassified from Accumulated OCI into Cost of sales on the Condensed Consolidated Statement of Earnings as a result of the discontinuation of hedge accounting on certain precious metal forward contracts.

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Three Months Ended July 31, 2019
(in millions)
Cost of sales
Interest expense and financing costs
Other income, net
Other comprehensive earnings, net of tax
Reported amounts of financial statement line items in which effects of cash flow hedges are recorded
$
390.8

$
9.8

$
(0.9
)
$
7.0

Derivatives in Cash Flow Hedging
Relationships:
 
 
 
 
Foreign exchange forward contracts
 
 
 
 
Pre-tax loss recognized in OCI



(2.6
)
Pre-tax gain reclassified from accumulated OCI into earnings
(1.4
)


1.4

Precious metal collars
 
 
 
 
Pre-tax gain reclassified from accumulated OCI into earnings
(0.1
)


0.1

Precious metal forward contracts
 
 
 
 
Pre-tax gain recognized in OCI



8.0

Pre-tax loss reclassified from accumulated OCI into earnings
1.1



(1.1
)
Cross-currency swaps
 
 
 
 
Pre-tax loss recognized in OCI



(0.9
)
Pre-tax loss reclassified from accumulated OCI into earnings


5.5

(5.5
)
Forward-starting interest rate swaps
 
 
 
 
Pre-tax loss reclassified from accumulated OCI into earnings

0.3


(0.3
)



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Six Months Ended July 31, 2019
(in millions)
Cost of sales
Interest expense and financing costs
Other income, net
Other comprehensive loss, net of tax
Reported amounts of financial statement line items in which effects of cash flow hedges are recorded
$
774.7

$
20.2

$
(1.9
)
$
(6.2
)
Derivatives in Cash Flow Hedging
Relationships:
 
 
 
 
Foreign exchange forward contracts
 
 
 
 
Pre-tax gain recognized in OCI



3.1

Pre-tax gain reclassified from accumulated OCI into earnings
(2.5
)


2.5

Precious metal collars
 
 
 
 
Pre-tax gain reclassified from accumulated OCI into earnings
(0.2
)


0.2

Precious metal forward contracts
 
 
 
 
Pre-tax gain recognized in OCI



6.6

Pre-tax loss reclassified from accumulated OCI into earnings
2.2



(2.2
)
Cross-currency swaps
 
 
 
 
Pre-tax gain recognized in OCI



12.5

Pre-tax gain reclassified from accumulated OCI into earnings


(2.3
)
2.3

Forward-starting interest rate swaps
 
 
 
 
Pre-tax loss reclassified from accumulated OCI into earnings

0.6


(0.6
)


The pre-tax losses on derivatives not designated as hedging instruments were $8.3 million for the three months ended July 31, 2020 and were included in Other income, net. Such gains or losses were not significant in the six months ended July 31, 2020 and the three and six months ended July 31, 2019. The Company expects approximately $7.9 million of net pre-tax derivative gains included in accumulated other comprehensive loss at July 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 Condensed Consolidated Balance Sheet, see "Note 10. 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.


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10.
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 9. Hedging Instruments."

Financial assets and liabilities carried at fair value at July 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
 
 
 
 
 
 
 
Marketable securities a
$
38.9

 
$

 
$

 
$
38.9

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Precious metal forward contracts b

 
14.8

 

 
14.8

Foreign exchange forward contracts b

 
0.4

 

 
0.4

Cross-currency swaps b

 
5.7

 

 
5.7

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Precious metal forward contracts b

 
1.5

 

 
1.5

Foreign exchange forward contracts b

 
2.3

 

 
2.3

Total financial assets
$
38.9

 
$
24.7

 
$

 
$
63.6


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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 c
$

 
$
2.1

 
$

 
$
2.1

Foreign exchange forward contracts c

 
3.7

 

 
3.7

Cross-currency swaps c

 
0.2

 

 
0.2

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Precious metal forward contracts c

 
0.7

 

 
0.7

Foreign exchange forward contracts c

 
10.8

 

 
10.8

Total financial liabilities
$

 
$
17.5

 
$

 
$
17.5



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 d
$
22.7

 
$

 
$

 
$
22.7

Marketable securities a
39.3

 

 

 
39.3

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Precious metal forward contracts b

 
13.0

 

 
13.0

Foreign exchange forward contracts b

 
2.7

 

 
2.7

Cross-currency swaps b

 
2.9

 

 
2.9

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts b

 
2.1

 

 
2.1

Total financial assets
$
62.0

 
$
20.7

 
$

 
$
82.7

 
Estimated Fair Value