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
October 31, 2018
and
2017
and the results of its operations and cash flows for the interim periods presented. The condensed consolidated balance sheet data for
January 31, 2018
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, (the "SEC"), 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 nine months ended
October 31, 2018
and
2017
are not necessarily indicative of the results of the entire fiscal year.
Certain prior year amounts have been reclassified to conform with the current year presentation. The Company adopted Accounting Standards Update ("ASU") 2017-07 -
Compensation
-
Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, on February 1, 2018. Certain provisions of this ASU require retrospective application and, as a result, non-service cost components of the net periodic benefit cost for the three and nine months ended October 31, 2017 were reclassified within the condensed consolidated statement of earnings. See "Note 2. New Accounting Standards" for additional information.
2. NEW ACCOUNTING STANDARDS
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02 –
Leases
, 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 will be classified as either financing or operating, similar to current accounting requirements, with the applicable classification determining the pattern of expense recognition in the statement of earnings.
This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and must be adopted using a modified retrospective approach, which requires lessees and lessors to recognize and measure all leases within the scope of this ASU using one of the following transition methods: (i) as of the beginning of the earliest comparative period presented in the financial statements, or (ii) as of the beginning of the period in which this ASU is adopted. The Company will adopt the ASU in the first quarter of 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 has also elected the package of practical expedients permitted under the transition guidance, which provides 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.
Management continues to evaluate the impact of this ASU on the consolidated financial statements, but expects that adoption will result in a significant increase in the Company's assets and liabilities. The
Company's implementation project team has developed additional processes and policies to support the requirements of this ASU and has collected key data for each leased asset.
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 ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018. Management continues to evaluate the impact of this ASU on the consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12 -
Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities
, which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. This ASU is 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 must be applied on a modified retrospective basis, while presentation and disclosure requirements set forth under this ASU are required prospectively in all interim periods and fiscal years ending after the date of adoption. Management is currently evaluating the impact of this ASU on the consolidated financial statements. The simplifications to the application of hedge accounting may result in management's expanding the use of hedge accounting in future periods.
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 allows 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 (the "2017 Tax Act"). ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2018-02 will result in a reclassification from AOCI to retained earnings, and will have no impact on the Company's results of operations, financial position or cash flows. Management is currently evaluating the impact of this ASU on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15
- Intangibles - Goodwill and Other - Internal-Use Software
(Subtopic 350-40): 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 for interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. Entities can choose to adopt the new guidance prospectively or retrospectively. Management is currently evaluating the impact of this ASU on the consolidated financial statements.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09 -
Revenue from Contracts with Customers
, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. The core principle of the guidance is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies need to use more judgment and make more estimates than under previous guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14 –
Revenue from Contracts with Customers: Deferral of the Effective Date
, deferring the effective date of ASU 2014-09 for one year to interim and annual reporting periods beginning after December 15, 2017. Early adoption was also permitted as of the original effective date (interim and annual periods beginning after December 15, 2016) and full or
modified retrospective application was permitted. Subsequently, the FASB issued a number of ASU's amending ASU 2014-09 and providing further guidance related to revenue recognition, which management evaluated. The effective date and transition requirements for these amendments were the same as ASU 2014-09, as amended by ASU 2015-14. Management adopted this guidance on February 1, 2018 using the modified retrospective approach. The impact of the adoption of ASU 2014-09 on the Company's condensed consolidated financial statements is as follows:
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•
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The Company's revenue is primarily generated from the sale of finished products to customers (primarily through the retail, e-commerce or wholesale channels). The Company's performance obligations underlying such sales, and the timing of revenue recognition related thereto, remain substantially unchanged following the adoption of this ASU.
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•
|
The Company now recognizes breakage income on gift cards and merchandise credits (which represents income recognized from the customer's unexercised right to receive merchandise through the redemption of such gift cards and merchandise credits) based on the historical pattern of gift card and merchandise credit redemptions. Breakage income recognized during the three and nine months ended
October 31, 2018
was not significant.
|
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•
|
This ASU requires sales returns reserves to be presented on a gross basis on the condensed consolidated balance sheet, with the asset related to merchandise expected to be returned recorded outside of Accounts receivable, net. Prior to the adoption of this ASU, sales returns reserves were recorded on a net basis within Accounts receivable, net.
|
The impact of the adoption of ASU 2014-09 on the Company's condensed consolidated balance sheet was as follows:
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October 31, 2018
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(in millions)
|
As Reported
|
|
Balances Without Adoption of ASC 606
|
|
Effect of Adoption
Increase/(Decrease)
|
Assets
|
|
|
|
|
|
Accounts receivable, net
|
$
|
212.4
|
|
|
$
|
226.9
|
|
|
$
|
(14.5
|
)
|
Prepaid expenses and other current assets
|
267.3
|
|
|
252.8
|
|
|
14.5
|
|
There was no significant impact from the adoption of ASU 2014-09 on the Company's condensed consolidated statement of earnings or condensed consolidated statement of cash flows.
In August 2016, the FASB issued ASU 2016-15 –
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
, which provides guidance on eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This ASU was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption was permitted and the amendments are applied using a retrospective method. Management adopted this ASU on February 1, 2018. The adoption of this ASU did not have any impact on the condensed consolidated statements of cash flows and related disclosures.
In October 2016, the FASB issued ASU 2016-16 –
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
. This ASU eliminates the requirement to defer the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. Therefore, under this guidance, an entity recognizes the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption was permitted as of the first interim period of 2017. The amendments in this ASU are applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Management adopted this ASU on February 1, 2018. The adoption of this ASU did not have any impact on the condensed consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07 -
Compensation
-
Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. Under this ASU, only the service cost component of the net periodic benefit cost is presented in the same income statement line item as other employee compensation costs arising from services rendered during the period, while the non-service cost components of net periodic benefit cost are required to be presented in the income statement separate from Earnings from operations. In addition, only the service cost component is eligible for capitalization in assets. This ASU was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amendments in this ASU are applied retrospectively for the presentation of the components of net periodic benefit cost other than service cost in the statement of earnings, and prospectively for the capitalization of the service cost component. Management adopted this ASU on February 1, 2018 using the practical expedient permitted by this ASU and reclassified the non-service cost components of the net periodic benefit cost from within Earnings from operations to Other expense, net. This increased Earnings from operations for the three months ended
October 31, 2017
by
$3.7 million
(with
$1.6 million
reclassified from Cost of sales and
$2.1 million
reclassified from Selling, general and administrative expenses), but had no impact on Net earnings. This also increased Earnings from operations for the nine months ended
October 31, 2017
by
$11.0 million
(with
$4.5 million
reclassified from Cost of sales and
$6.5 million
reclassified from Selling, general and administrative expenses), but had no impact on Net earnings. The requirement set forth under this ASU that allows only the service cost component of net periodic benefit cost to be capitalized did not have a significant impact on the Company's results of operations in 2018.
In May 2017, the FASB issued ASU 2017-09 -
Compensation-Stock Compensation: Scope of Modification Accounting
, clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. This guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. This ASU was effective prospectively for annual periods beginning after December 15, 2017 and early adoption was permitted. Management adopted this ASU on February 1, 2018 and will apply the provisions of this ASU to any share-based payment awards modified on or after February 1, 2018.
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3.
|
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
October 31, 2018
and 2017, the carrying amount of the Credit Receivables (recorded in Accounts receivable, net) was
$79.9 million
and
$62.6 million
, respectively, of which
97%
was considered current at
October 31, 2018
and
95%
was considered current at
October 31, 2017
. The allowance for doubtful accounts for estimated losses associated with the Credit Receivables (
$1.1 million
at
October 31, 2018
and
$1.2 million
at
October 31, 2017
) was determined based on the factors discussed above. Finance charges earned on Credit Receivables were not significant.
At
October 31, 2018
, accounts receivable allowances totaled
$28.3 million
compared to
$17.2 million
at January 31, 2018 and
$11.5 million
at
October 31, 2017
, with
$14.5 million
of the increase at
October 31, 2018
due to the adoption of ASU 2014-09, which requires sales returns reserves to be presented on a gross basis on the condensed consolidated balance sheet, with the asset related to merchandise expected to be returned recorded outside of Accounts receivable, net.
Revenue Recognition
. The following table disaggregates the Company's net sales by major source:
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|
|
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|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net sales*:
|
|
|
|
|
|
|
|
Jewelry collections
|
$
|
543.3
|
|
|
$
|
503.8
|
|
|
$
|
1,642.6
|
|
|
$
|
1,433.4
|
|
Engagement jewelry
|
276.2
|
|
|
272.0
|
|
|
857.6
|
|
|
802.5
|
|
Designer jewelry
|
111.1
|
|
|
120.9
|
|
|
367.5
|
|
|
358.1
|
|
All other
|
81.8
|
|
|
79.5
|
|
|
253.8
|
|
|
241.4
|
|
|
$
|
1,012.4
|
|
|
$
|
976.2
|
|
|
$
|
3,121.5
|
|
|
$
|
2,835.4
|
|
*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 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 commission 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 nine months ended
October 31, 2018
, the Company recognized net sales of approximately
$30.0 million
related to the Merchandise credits and deferred revenue balance that existed at January 31, 2018.
4. INVENTORIES
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|
|
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|
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|
|
|
|
|
(in millions)
|
October 31, 2018
|
|
January 31, 2018
|
|
October 31, 2017
|
Finished goods
|
$
|
1,448.1
|
|
|
$
|
1,314.6
|
|
|
$
|
1,328.9
|
|
Raw materials
|
849.0
|
|
|
821.4
|
|
|
869.2
|
|
Work-in-process
|
176.3
|
|
|
117.5
|
|
|
129.3
|
|
Inventories, net
|
$
|
2,473.4
|
|
|
$
|
2,253.5
|
|
|
$
|
2,327.4
|
|
5. INCOME TAXES
In December 2017, 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, including a reduction of the statutory U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. Changes in tax law are accounted for in the period of enactment. As such, the Company's consolidated financial statements for its fiscal year ended January 31, 2018 reflected the estimated immediate tax effect of the 2017 Tax Act, which included an estimated net tax expense of
$146.2 million
consisting of:
|
|
•
|
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 one-time transition tax via a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits (the "Transition Tax"); and
|
|
|
•
|
A tax benefit of
$4.6 million
resulting from the effect of the 21% statutory tax rate for the month of January 2018 on the Company's annual statutory tax rate for the year ended January 31, 2018.
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Additionally, in December 2017, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does 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. SAB 118 also provides a measurement period for companies to evaluate the impacts of the 2017 Tax Act on their financial statements. This measurement period begins in the reporting period that includes the enactment date and ends when an entity has obtained, prepared and analyzed the information that was needed in order to complete the accounting requirements, and cannot exceed one year. The Company adopted the provisions of SAB 118 in the fourth quarter of fiscal 2017.
Consistent with SAB 118, for the year ended
January 31, 2018
, 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 resulting charges represented provisional amounts for which the Company's analysis was incomplete but a reasonable estimate could be determined and recorded during the fourth quarter of 2017.
During the nine months ended October 31, 2018, on the basis of additional guidance that became available, the Company recognized measurement-period adjustments to decrease the estimated Transition Tax obligation by
$5.0 million
, with a corresponding offset to the Provision for income taxes, resulting in a total estimated Transition Tax obligation recognized to date of
$51.0 million
. However, the Company is continuing to gather additional information and refine its analysis to more precisely compute the amount of the Transition Tax and, as a result, the Company's accounting for this item is not yet complete.
The Company also adopted the provisions of SAB 118 as it relates to the assertion of the indefinite reinvestment of foreign earnings and profits. The impact of the 2017 Tax Act on the Company's assertion to indefinitely reinvest foreign earnings remains incomplete as the Company continues to analyze the relevant provisions of the 2017 Tax Act and related accounting guidance. Therefore, a provisional estimate has not been recorded or disclosed as it relates to the potential tax consequences of an actual repatriation of unremitted foreign earnings. The Company will account for the tax on global intangible low-taxed income ("GILTI") as a period cost and thus has not adjusted any of the deferred tax assets and liabilities of its foreign subsidiaries in connection with the 2017 Tax Act. As the Company continues to refine its provisional estimate calculations, and further analyzes provisions of the 2017 Tax Act and any subsequent guidance related thereto, these provisional estimates could be affected, which could have a material impact on the Company's future financial results. Additionally, further regulatory or GAAP accounting guidance regarding the 2017 Tax Act could also materially affect the Company's future financial results.
The effective income tax rate for the
three months ended October 31, 2018
was
17.1%
compared to
33.4%
in the prior year. The effective income tax rate for the nine months ended
October 31, 2018
was
21.6%
compared to
32.9%
in the prior year. The effective income tax rate for the three and nine months ended October 31, 2018 was reduced by 380 basis points and 90 basis points, respectively as a result of the true-up of
$4.4 million
of the Company's prior year tax provision in conjunction with the filing of the 2017 tax returns. The effective income tax rate for the three months ended October 31, 2018 was reduced by 240 basis points due to an income tax benefit of
$2.7 million
recognized as a result of additional guidance issued in respect of the 2017 Tax Act during the third quarter. The effective income tax rate for the nine months ended October 31, 2018 was reduced by (i) 160 basis points due to the recognition of an income tax benefit of
$8.0 million
primarily as a result of a decrease in the gross amount of unrecognized tax benefits and accrued interest and penalties related thereto due to a lapse in a statute of limitations and (ii) 100 basis points due to the recognition of an income tax benefit of
$5.0 million
related to a reduction in the estimated obligation for the Transition Tax. The remaining decrease in the effective income tax rate for the three and nine months ended
October 31, 2018
compared to the prior year was primarily due to the enactment of 2017 Tax Act, including the reduction in the statutory U.S. federal corporate income tax rate and the introduction of the foreign derived intangible income deduction, which were partly offset by the GILTI inclusion.
During the three months ended
October 31, 2018
, the gross amount of unrecognized tax benefits, accrued interest and penalties increased by
$1.1 million
. During the nine months ended
October 31, 2018
, the gross amount of unrecognized tax benefits increased by
$2.7 million
and accrued interest and penalties decreased by
$4.4 million
, primarily due to a lapse in a statute of limitations referenced above.
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 in several jurisdictions, both in the U.S. and in foreign jurisdictions. Ongoing audits where subsidiaries have a material presence include New York City (tax years
2011
–
2014
) and New York State (tax years
2012
–
2014
). 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
October 31, 2018
, unrecognized tax benefits are not expected to change significantly in the next 12 months. Future developments may result in a change in this assessment.
6. 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:
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|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net earnings for basic and diluted EPS
|
$
|
94.9
|
|
|
$
|
100.2
|
|
|
$
|
381.9
|
|
|
$
|
308.2
|
|
Weighted-average shares for basic EPS
|
122.3
|
|
|
124.4
|
|
|
123.3
|
|
|
124.5
|
|
Incremental shares based upon the assumed exercise of stock options and unvested restricted stock units
|
0.8
|
|
|
0.6
|
|
|
0.7
|
|
|
0.6
|
|
Weighted-average shares for diluted EPS
|
123.1
|
|
|
125.0
|
|
|
124.0
|
|
|
125.1
|
|
For the three and nine months ended
October 31, 2018
, there were
0.4
million and
0.6 million
, respectively, stock options and restricted stock units that were excluded from the computations of earnings per diluted share due to their antidilutive effect. For the three and nine months ended
October 31, 2017
, there were
0.4 million
and
0.7 million
, respectively, stock options and restricted stock units that were excluded from the computations of earnings per diluted share due to their antidilutive effect.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
October 31, 2018
|
|
January 31, 2018
|
|
October 31, 2017
|
Short-term borrowings:
|
|
|
|
|
|
Credit Facilities
|
$
|
—
|
|
|
$
|
33.5
|
|
|
$
|
58.8
|
|
Commercial Paper
|
—
|
|
|
—
|
|
|
43.0
|
|
Other credit facilities
|
68.9
|
|
|
87.1
|
|
|
91.4
|
|
|
$
|
68.9
|
|
|
$
|
120.6
|
|
|
$
|
193.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
88.5
|
|
|
91.9
|
|
|
88.3
|
|
|
888.5
|
|
|
891.9
|
|
|
888.3
|
|
Less unamortized discounts and debt issuance costs
|
8.5
|
|
|
9.0
|
|
|
9.1
|
|
|
$
|
880.0
|
|
|
$
|
882.9
|
|
|
$
|
879.2
|
|
|
|
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
.
|
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 will 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
five
-year
$750.0 million
multi-bank, multi-currency, committed unsecured revolving 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 will rank equally with the Registrant's present and future unsecured and unsubordinated indebtedness. As of October 31, 2018 and January 31, 2018, there were
no
borrowings outstanding under the Commercial Paper Program. As of October 31, 2017, there were
$43.0 million
of borrowings outstanding under the Commercial Paper Program with a weighted average interest rate of
1.28%
.
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) (the “New Credit Facility”). The New 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 New Credit Facility.
Borrowings under the New 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 New 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 New Credit Facility is available for working capital and other corporate purposes.
The New 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.
Debt Covenants
The agreement governing the New 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 and "Events of Default" (as defined in the agreement governing the New Credit Facility) customary to such borrowings.
At
October 31, 2018
, the Company was
in compliance
with all debt covenants.
8. 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, both the effective and ineffective portions of 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 effective portion of 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. Amounts excluded from the effectiveness calculation and any ineffective portions of the change in fair value of the derivative are recognized in 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 condensed 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 additional 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 swap in 2012 and recorded an unrealized loss within accumulated other comprehensive loss. As of
October 31, 2018
,
$17.6
million remains recorded as an unrealized 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 an unrealized loss within accumulated other comprehensive loss. As of
October 31, 2018
,
$3.5
million remains recorded as an unrealized 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
– The Company entered into cross-currency swaps to hedge the foreign currency exchange risk associated with Japanese yen-denominated intercompany loans. These cross-currency swaps are designated and accounted for as cash flow hedges. As of
October 31, 2018
, 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 billions)
|
(in millions)
|
July 2016
|
October 1, 2024
|
¥
|
10.6
|
|
$
|
100.0
|
|
March 2017
|
April 1, 2027
|
11.0
|
|
96.1
|
|
May 2017
|
April 1, 2027
|
5.6
|
|
50.0
|
|
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
October 31, 2018
, the notional amounts of foreign exchange forward contracts were as follows:
|
|
|
|
|
|
|
|
(in millions)
|
|
Notional Amount
|
|
USD Equivalent
|
Derivatives designated as hedging instruments:
|
|
|
|
|
Japanese yen
|
¥
|
16,606.2
|
|
$
|
154.0
|
|
British pound
|
£
|
14.6
|
|
|
19.7
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
U.S. dollar
|
$
|
72.6
|
|
$
|
72.6
|
|
Euro
|
€
|
10.4
|
|
|
12.1
|
|
Australian dollar
|
AU$
|
44.2
|
|
|
31.5
|
|
British pound
|
£
|
7.7
|
|
|
10.0
|
|
Czech koruna
|
CZK
|
129.1
|
|
|
5.8
|
|
Swiss Franc
|
CHF
|
10.2
|
|
|
10.3
|
|
Hong Kong dollar
|
HKD
|
64.8
|
|
|
8.3
|
|
Japanese yen
|
¥
|
894.0
|
|
|
7.9
|
|
Korean won
|
₩
|
21,466.5
|
|
|
19.2
|
|
New Zealand dollar
|
NZ$
|
11.2
|
|
|
7.3
|
|
Danish Kroner
|
DKK
|
37.7
|
|
|
5.9
|
|
Singapore dollar
|
S$
|
30.0
|
|
|
21.8
|
|
The maximum term of the Company's outstanding foreign exchange forward contracts as of
October 31, 2018
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
October 31, 2018
, 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
October 31, 2018
, there were precious metal derivative instruments outstanding for approximately
40,300
ounces of platinum,
756,000
ounces of silver and
94,700
ounces of gold.
Information on the location and amounts of derivative gains and losses in the condensed consolidated financial statements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2018
|
|
2017
|
(in millions)
|
Pre-Tax Gain
(Loss) Recognized
in OCI
(Effective Portion)
|
|
Pre-Tax Gain (Loss) Reclassified
from Accumulated
OCI into Earnings
(Effective Portion)
|
|
Pre-Tax Gain
(Loss) Recognized
in OCI
(Effective Portion)
|
|
Pre-Tax Gain (Loss) Reclassified
from Accumulated
OCI into Earnings
(Effective Portion)
|
Derivatives in Cash Flow Hedging Relationships:
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
a
|
$
|
4.3
|
|
|
$
|
(0.1
|
)
|
|
$
|
4.3
|
|
|
$
|
1.5
|
|
Precious metal collars
a
|
—
|
|
|
0.2
|
|
|
0.3
|
|
|
0.1
|
|
Precious metal forward contracts
a
|
(1.4
|
)
|
|
(0.6
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Cross-currency swaps
b
|
2.8
|
|
|
4.2
|
|
|
5.0
|
|
|
5.7
|
|
Forward-starting interest rate swaps
c
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
$
|
5.7
|
|
|
$
|
3.4
|
|
|
$
|
9.5
|
|
|
$
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
2018
|
|
2017
|
(in millions)
|
Pre-Tax Gain
(Loss) Recognized
in OCI
(Effective Portion)
|
|
Pre-Tax Gain (Loss) Reclassified
from Accumulated
OCI into Earnings
(Effective Portion)
|
|
Pre-Tax Gain
(Loss) Recognized
in OCI
(Effective Portion)
|
|
Pre-Tax Gain (Loss) Reclassified
from Accumulated
OCI into Earnings
(Effective Portion)
|
Derivatives in Cash Flow Hedging Relationships:
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
a
|
$
|
10.6
|
|
|
$
|
2.2
|
|
|
$
|
0.5
|
|
|
$
|
(2.2
|
)
|
Precious metal collars
a
|
—
|
|
|
0.4
|
|
|
0.3
|
|
|
0.2
|
|
Precious metal forward contracts
a
|
(13.5
|
)
|
|
(0.1
|
)
|
|
(2.7
|
)
|
|
(1.3
|
)
|
Cross-currency swaps
b
|
5.7
|
|
|
9.3
|
|
|
(3.8
|
)
|
|
(1.3
|
)
|
Forward-starting interest rate swaps
c
|
—
|
|
|
(1.0
|
)
|
|
—
|
|
|
(1.1
|
)
|
|
$
|
2.8
|
|
|
$
|
10.8
|
|
|
$
|
(5.7
|
)
|
|
$
|
(5.7
|
)
|
a
The gain or loss recognized in earnings is included within Cost of sales.
b
The gain or loss recognized in earnings is included within Other expense, net.
c
The gain or loss recognized in earnings is included within Interest expense and financing costs.
The pre-tax gains (losses) on derivatives not designated as hedging instruments were not significant in the three and nine months ended
October 31, 2018
. The Company had pre-tax gains (losses) of
$2.3 million
and
$(0.2) million
on such instruments in the three and nine months ended
October 31, 2017
, respectively, which were included in Other expense, net. There was no material ineffectiveness related to the Company's hedging instruments for the three and nine months ended
October 31, 2018
and
2017
. The Company expects approximately
$0.9
million of net pre-tax derivative losses included in accumulated other comprehensive loss at
October 31, 2018
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 9. 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.
9. 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 purposes 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 8. Hedging Instruments."
Financial assets and liabilities carried at fair value at
October 31, 2018
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
|
$
|
35.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35.9
|
|
Time deposits
b
|
12.8
|
|
|
—
|
|
|
—
|
|
|
12.8
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Precious metal forward contracts
c
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.4
|
|
Foreign exchange forward contracts
c
|
—
|
|
|
5.6
|
|
|
—
|
|
|
5.6
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts
c
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
Total financial assets
|
$
|
48.7
|
|
|
$
|
7.8
|
|
|
$
|
—
|
|
|
$
|
56.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
—
|
|
|
$
|
6.4
|
|
|
$
|
—
|
|
|
$
|
6.4
|
|
Foreign exchange forward contracts
d
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Cross-currency swaps
d
|
—
|
|
|
14.5
|
|
|
—
|
|
|
14.5
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts
d
|
—
|
|
|
0.9
|
|
|
—
|
|
|
0.9
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
21.9
|
|
|
$
|
—
|
|
|
$
|
21.9
|
|
Financial assets and liabilities carried at fair value at
January 31, 2018
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
|
$
|
22.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22.5
|
|
Time deposits
b
|
320.5
|
|
|
—
|
|
|
—
|
|
|
320.5
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Precious metal forward contracts
c
|
—
|
|
|
3.6
|
|
|
—
|
|
|
3.6
|
|
Foreign exchange forward contracts
c
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts
c
|
—
|
|
|
1.0
|
|
|
—
|
|
|
1.0
|
|
Total financial assets
|
$
|
343.0
|
|
|
$
|
4.7
|
|
|
$
|
—
|
|
|
$
|
347.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
—
|
|
|
$
|
1.9
|
|
|
$
|
—
|
|
|
$
|
1.9
|
|
Foreign exchange forward contracts
d
|
—
|
|
|
4.8
|
|
|
—
|
|
|
4.8
|
|
Cross-currency swaps
d
|
—
|
|
|
20.2
|
|
|
—
|
|
|
20.2
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts
d
|
—
|
|
|
1.4
|
|
|
—
|
|
|
1.4
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
28.3
|
|
|
$
|
—
|
|
|
$
|
28.3
|
|
Financial assets and liabilities carried at fair value at
October 31, 2017
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
|
$
|
32.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32.1
|
|
Time deposits
b
|
164.4
|
|
|
—
|
|
|
—
|
|
|
164.4
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Precious metal forward contracts
c
|
—
|
|
|
1.9
|
|
|
—
|
|
|
1.9
|
|
Cross-currency swaps
c
|
—
|
|
|
0.9
|
|
|
—
|
|
|
0.9
|
|
Foreign exchange forward contracts
c
|
—
|
|
|
3.4
|
|
|
—
|
|
|
3.4
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts
c
|
—
|
|
|
1.9
|
|
|
—
|
|
|
1.9
|
|
Total financial assets
|
$
|
196.5
|
|
|
$
|
8.1
|
|
|
$
|
—
|
|
|
$
|
204.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
—
|
|
|
$
|
6.2
|
|
|
$
|
—
|
|
|
$
|
6.2
|
|
Precious metal collars
d
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Foreign exchange forward contracts
d
|
—
|
|
|
0.7
|
|
|
—
|
|
|
0.7
|
|
Cross-currency swaps
d
|
—
|
|
|
5.1
|
|
|
—
|
|
|
5.1
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts
d
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
12.9
|
|
|
$
|
—
|
|
|
$
|
12.9
|
|
|
|
a
|
Included within Other assets, net.
|
|
|
b
|
Included within Short-term investments.
|
|
|
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
$0.9
billion and
$1.1
billion at
October 31, 2018
and
2017
and the corresponding fair value was
$0.9
billion and
$1.1
billion, respectively.
10. COMMITMENTS AND CONTINGENCIES
Arbitration Award.
As most recently disclosed by the Registrant in its quarterly report on Form 10-Q filed on August 28, 2018, the Registrant and its wholly owned subsidiaries, Tiffany and Company and Tiffany (NJ) Inc. (the Registrant and such subsidiaries, together, the "Tiffany Parties") took action in the courts of the Netherlands to annul the arbitration award issued on December 21, 2013 (the “Arbitration Award”) in favor of the Swatch Group Ltd. (“Swatch”) and its wholly owned subsidiary Tiffany Watch Co. (together with Swatch, the “Swatch Parties”). The Arbitration Award was issued by a three-member arbitral panel convened in the Netherlands pursuant to the Arbitration Rules of the Netherlands Arbitration Institute, and reflected the panel’s ruling with respect to certain claims and counterclaims among the Swatch Parties and the Tiffany Parties under the agreements entered into by and among the Swatch Parties and the Tiffany Parties in December 2007 (the “Agreements”). Pursuant to the Arbitration Award, the Tiffany Parties paid the Swatch Parties damages of CHF
402.7
million (the "Arbitration Damages"), as well as interest from June 30, 2012 to the date of payment, two-thirds of the cost of the Arbitration and two-thirds of the Swatch Parties' legal fees, expenses and costs. These amounts were paid in full in January 2014, and, in the fourth quarter of 2013, the Company recorded a charge of
$480.2
million, which included the damages, interest, and other costs associated with the ruling and which was classified as Arbitration award expense in the consolidated statement of earnings.
On March 4, 2015, the District Court of Amsterdam issued a decision in respect of the Tiffany Parties’ petition to annul the Arbitration Award. Under the District Court’s decision, which was in favor of the Tiffany Parties, the Arbitration Award was set aside. However, the Swatch Parties took action in the Dutch courts to appeal the District Court's decision, and a three-judge panel of the Appellate Court of Amsterdam issued its decision on April 25, 2017, finding in favor of the Swatch Parties and ordering the Tiffany Parties to reimburse the Swatch Parties a de-minimis amount for their legal costs. The Tiffany Parties subsequently took action to appeal the decision of the Appellate Court to the Supreme Court of the Netherlands, and the
Supreme Court issued its decision on November 23, 2018, dismissing the appeal and ordering the Tiffany Parties to reimburse the Swatch Parties a de-minimis amount for their legal costs. As the Supreme Court is the highest court of appeal in the Netherlands, the Tiffany Parties have exhausted all rights of appeal with respect to the Appellate Court's decision and, as a consequence, the Tiffany Parties' annulment action, and their related claim for the return of the Arbitration Damages and related costs, have been ultimately resolved and the Arbitration Award has been rendered final.
Management had not established any accrual in the Company's condensed consolidated financial statements related to the annulment process or any potential subsequent litigation because it did not believe that the final annulment of the Arbitration Award and a subsequent award of damages exceeding the Arbitration Damages was probable. Therefore, the Supreme Court’s decision has no impact on the Company's financial position, results of operations, or cash flows, other than with respect to the de-minimis reimbursement noted above.
Other 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 (which will be determined at a later date), 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). Costco has filed an appeal from the judgment, as well as a motion in the Court for a new trial. The appeal has been automatically stayed pending determination of the Court motion. Costco has also filed an appeal bond to secure the amount of the judgment entered by the Court pending appeal, so the Tiffany plaintiffs will be unable to enforce the judgment while the motion for a new trial and the appeal are pending. As such, the Company has not recorded any amount in its condensed consolidated financial statements related to this gain contingency as of
October 31, 2018
, and 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, 2020.
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 reflects the possibility of a 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 has indicated that the settlement option may be made available to additional parties beyond those notified on March 30, 2017. Although the EPA must determine which additional parties are eligible for the settlement option, the Company does not expect any settlement amount that it might agree with the EPA to be material to its financial position, results of operations or cash flows.
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 (the "RoD Design Phase"). 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 (1) its obligations under the 2007 AOC and the Mile 10.9 AOC, and (2) its estimate related to a de-minimis cash-out settlement for the RoD Remediation, 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.
11. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
October 31, 2018
|
|
January 31, 2018
|
|
October 31, 2017
|
Accumulated other comprehensive (loss) earnings, net of tax:
|
|
|
|
|
|
Foreign currency translation adjustments
|
$
|
(131.9
|
)
|
|
$
|
(48.0
|
)
|
|
$
|
(102.4
|
)
|
Unrealized (loss) on marketable securities
a
|
—
|
|
|
(1.8
|
)
|
|
(0.8
|
)
|
Deferred hedging loss
|
(28.7
|
)
|
|
(22.9
|
)
|
|
(16.5
|
)
|
Net unrealized loss on benefit plans
|
(57.1
|
)
|
|
(65.3
|
)
|
|
(91.2
|
)
|
|
$
|
(217.7
|
)
|
|
$
|
(138.0
|
)
|
|
$
|
(210.9
|
)
|
|
|
a
|
The Company adopted ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, on February 1, 2018 using the modified retrospective method. Under ASU 2016-01, the Company recognizes both realized and unrealized gains and losses on marketable securities in Other expense, net. Previously, unrealized gains and losses were recorded as a separate component of stockholders' equity.
|
Additions to and reclassifications out of accumulated other comprehensive (loss) earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(
in millions
)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Foreign currency translation adjustments
|
$
|
(25.0
|
)
|
|
$
|
(10.0
|
)
|
|
$
|
(83.8
|
)
|
|
$
|
40.8
|
|
Income tax (expense) benefit
|
(0.6
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
0.5
|
|
Foreign currency translation adjustments, net of tax
|
(25.6
|
)
|
|
(10.0
|
)
|
|
(83.9
|
)
|
|
41.3
|
|
Unrealized (loss) gain on marketable securities
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
0.5
|
|
Reclassification for gain included in net earnings
a
|
—
|
|
|
(1.4
|
)
|
|
—
|
|
|
(2.2
|
)
|
Income tax benefit
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.1
|
|
Unrealized loss on marketable securities, net of tax
|
—
|
|
|
(1.3
|
)
|
|
—
|
|
|
(1.6
|
)
|
Unrealized gain (loss) on hedging instruments
|
5.7
|
|
|
9.5
|
|
|
2.8
|
|
|
(5.7
|
)
|
Reclassification adjustment for (gain) loss included in net earnings
b
|
(3.4
|
)
|
|
(6.9
|
)
|
|
(10.8
|
)
|
|
5.7
|
|
Income tax (expense) benefit
|
(0.4
|
)
|
|
(1.0
|
)
|
|
2.2
|
|
|
(0.4
|
)
|
Unrealized gain (loss) on hedging instruments, net of tax
|
1.9
|
|
|
1.6
|
|
|
(5.8
|
)
|
|
(0.4
|
)
|
Amortization of net loss included in net earnings
c
|
3.7
|
|
|
3.3
|
|
|
11.2
|
|
|
9.9
|
|
Amortization of prior service credit included in net earnings
c
|
(0.2
|
)
|
|
(0.1
|
)
|
|
(0.5
|
)
|
|
(0.3
|
)
|
Income tax expense
|
(0.8
|
)
|
|
(1.2
|
)
|
|
(2.5
|
)
|
|
(3.6
|
)
|
Net unrealized gain on benefit plans, net of tax
|
2.7
|
|
|
2.0
|
|
|
8.2
|
|
|
6.0
|
|
Total other comprehensive (loss) earnings, net of tax
|
$
|
(21.0
|
)
|
|
$
|
(7.7
|
)
|
|
$
|
(81.5
|
)
|
|
$
|
45.3
|
|
|
|
a
|
These gains were reclassified into Other expense, net.
|
|
|
b
|
These (gains) losses are reclassified into Cost of Sales, Interest expense and financing costs and Other expense, net (see "Note 8. Hedging Instruments" for additional details).
|
|
|
c
|
These accumulated other comprehensive income components are included in the computation of net periodic pension costs (see "Note 12. Employee Benefit Plans" for additional details).
|
Share 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. Purchases under this program are discretionary and will be made from time to time based on market conditions and the Company's liquidity needs. The Company may fund repurchases under the 2018 Program from existing cash at such time or from proceeds of any existing borrowing facilities at such time and/or the issuance of new debt. The 2018 Program replaced the Company's previous share repurchase program approved in January 2016 (the "2016 Program"), under which the Company was authorized to repurchase up to
$500.0 million
of its Common Stock. At the time of termination,
$154.9 million
remained available for repurchase under the 2016 Program. As of
October 31, 2018
,
$679.1 million
remained available under the 2018 Program.
During the three months ended July 31, 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 also spent
$15.9 million
to repurchase shares under the 2016 Program during the three months ended July 31, 2018, prior to the replacement of that program with the 2018 Program.
The Company's share repurchase activity was as follows:
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|
|
|
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|
|
|
|
|
Three Months Ended
October 31,
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|
Nine Months Ended
October 31,
|
(in millions, except per share amounts)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of repurchases
|
$
|
71.0
|
|
|
$
|
27.7
|
|
|
$
|
377.3
|
|
|
$
|
60.2
|
|
Shares repurchased and retired
|
0.6
|
|
|
0.3
|
|
|
3.0
|
|
|
0.7
|
|
Average cost per share
|
$
|
118.36
|
|
|
$
|
92.31
|
|
|
$
|
123.99
|
|
|
$
|
92.16
|
|
Cash Dividends
. The Company's Board of Directors declared quarterly dividends of
$0.55
and
$0.50
per share of Common Stock in the
three months ended October 31, 2018
and
2017
, respectively, and
$1.60
and $
1.45
per share of Common Stock in the nine months ended
October 31, 2018
and
2017
, respectively.
Cumulative effect adjustment from adoption of new accounting standards
. The amounts presented within this line item on the condensed consolidated statement of stockholders' equity represent the effects of the Company's adoption, on a modified retrospective basis, of ASU 2014-09,
Revenue from Contracts with Customers
(as discussed in "Note 2. New Accounting Standards") and ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
(as discussed above).
12. EMPLOYEE BENEFIT PLANS
The Company maintains several pension and retirement plans and provides certain health-care and life insurance benefits.
Net periodic pension and other postretirement benefit expense included the following components:
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Three Months Ended October 31,
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Pension Benefits
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|
Other
Postretirement Benefits
|
(in millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net Periodic Benefit Cost:
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|
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|
Service cost
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|
$
|
4.5
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|
|
$
|
4.3
|
|
|
$
|
0.7
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|
|
$
|
0.7
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Interest cost
|
|
7.7
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|
|
7.9
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|
|
0.8
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|
|
0.8
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Expected return on plan assets
|
|
(8.4
|
)
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|
(8.2
|
)
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|
—
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|
|
—
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Amortization of prior service cost (credit)
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|
—
|
|
|
0.1
|
|
|
(0.2
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)
|
|
(0.2
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)
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Amortization of net loss
|
|
3.7
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|
|
3.3
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|
|
—
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—
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Net expense
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|
$
|
7.5
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|
|
$
|
7.4
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|
$
|
1.3
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|
$
|
1.3
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Nine Months Ended October 31,
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Pension Benefits
|
|
Other
Postretirement Benefits
|
(in millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net Periodic Benefit Cost:
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|
|
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Service cost
|
|
$
|
13.4
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|
$
|
13.0
|
|
|
$
|
2.2
|
|
|
$
|
2.1
|
|
Interest cost
|
|
23.1
|
|
|
23.9
|
|
|
2.3
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|
|
2.2
|
|
Expected return on plan assets
|
|
(25.1
|
)
|
|
(24.7
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
|
—
|
|
|
0.2
|
|
|
(0.5
|
)
|
|
(0.5
|
)
|
Amortization of net loss
|
|
11.2
|
|
|
9.9
|
|
|
—
|
|
|
—
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Net expense
|
|
$
|
22.6
|
|
|
$
|
22.3
|
|
|
$
|
4.0
|
|
|
$
|
3.8
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The components of net periodic benefit cost other than the service cost component are included in Other expense, net on the condensed consolidated statements of earnings.
The Company maintains a noncontributory defined benefit pension qualified in accordance with the Internal Revenue Service Code ("Qualified Plan") covering substantially all U.S. employees hired before January 1, 2006. 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 the fiscal year ending January 31, 2018 and none is required in the fiscal year ending January 31, 2019 ("fiscal 2018") 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 a voluntary cash contribution of
$11.8 million
in the three months ended
October 31, 2018
. The Company currently does not anticipate making additional discretionary contributions in the three months ending
January 31, 2019
. This expectation is subject to change based on management's assessment of a variety of factors, including, but not limited to, asset performance, interest rates and changes in actuarial assumptions.
13. SEGMENT INFORMATION
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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•
|
Asia-Pacific includes sales in Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet 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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•
|
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 received from third-party licensing agreements.
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Certain information relating to the Company's segments is set forth below:
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Three Months Ended
October 31,
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Nine Months Ended
October 31,
|
(in millions)
|
2018
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2017
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|
2018
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|
2017
|
Net sales:
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|
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|
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Americas
|
$
|
442.1
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|
$
|
421.4
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|
$
|
1,342.2
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|
$
|
1,251.7
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|
Asia-Pacific
|
294.0
|
|
|
283.2
|
|
|
923.1
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|
775.2
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|
Japan
|
142.1
|
|
|
138.7
|
|
|
447.3
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|
|
406.8
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|
Europe
|
114.1
|
|
|
111.3
|
|
|
342.6
|
|
|
321.7
|
|
Total reportable segments
|
992.3
|
|
|
954.6
|
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|
3,055.2
|
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|
2,755.4
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Other
|
20.1
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|
|
21.6
|
|
|
66.3
|
|
|
80.0
|
|
|
$
|
1,012.4
|
|
|
$
|
976.2
|
|
|
$
|
3,121.5
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|
|
$
|
2,835.4
|
|
Earnings from operations*:
|
|
|
|
|
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Americas
|
$
|
60.0
|
|
|
$
|
69.5
|
|
|
$
|
230.4
|
|
|
$
|
229.7
|
|
Asia-Pacific
|
66.2
|
|
|
75.4
|
|
|
245.8
|
|
|
206.0
|
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Japan
|
49.3
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|
|
46.5
|
|
|
165.3
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|
|
136.0
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|
Europe
|
12.3
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|
|
14.9
|
|
|
44.2
|
|
|
50.7
|
|
Total reportable segments
|
187.8
|
|
|
206.3
|
|
|
685.7
|
|
|
622.4
|
|
Other
|
(2.0
|
)
|
|
0.6
|
|
|
(0.5
|
)
|
|
4.4
|
|
|
$
|
185.8
|
|
|
$
|
206.9
|
|
|
$
|
685.2
|
|
|
$
|
626.8
|
|
* Represents earnings from operations before (i) unallocated corporate expenses, (ii) Interest expense and financing costs and (iii) Other expense, net.
The following table sets forth a reconciliation of the segments' earnings from operations to the Company's consolidated earnings from operations before income taxes:
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|
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|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Earnings from operations for segments
|
$
|
185.8
|
|
|
$
|
206.9
|
|
|
$
|
685.2
|
|
|
$
|
626.8
|
|
Unallocated corporate expenses
|
(59.4
|
)
|
|
(42.9
|
)
|
|
(163.3
|
)
|
|
(128.5
|
)
|
Interest expense and financing costs
|
(10.1
|
)
|
|
(10.8
|
)
|
|
(29.7
|
)
|
|
(31.9
|
)
|
Other expense, net
|
(1.8
|
)
|
|
(2.8
|
)
|
|
(5.1
|
)
|
|
(7.3
|
)
|
Earnings from operations before income taxes
|
$
|
114.5
|
|
|
$
|
150.4
|
|
|
$
|
487.1
|
|
|
$
|
459.1
|
|
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.
On
November 15, 2018
, the Company's Board of Directors approved a quarterly dividend of
$0.55
per share of Common Stock. This dividend will be paid on
January 10, 2019
to shareholders of record on
December 20, 2018
.
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 represents the carrying value of such precious scrap metals entrusted to the refiner, net of expected insurance recoveries.