NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tiffany & Co. is a holding company that operates through its subsidiary companies (collectively, the "Company"). Its principal subsidiary, Tiffany and Company ("Tiffany"), is a jeweler and specialty retailer. Through its subsidiaries, the Company designs and manufactures products and operates TIFFANY & CO. retail stores worldwide, and also sells its products through Internet, catalog, business-to-business and wholesale operations. The Company's principal merchandise offering is jewelry (representing 93% of worldwide net sales in 2015); it also sells timepieces, leather goods, sterling silverware, china, crystal, stationery, fragrances and accessories.
The Company's reportable segments are as follows:
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•
|
Americas includes sales in Company-operated TIFFANY & CO. stores in the United States, Canada and Latin America, as well as sales of TIFFANY & CO. products in certain markets through Internet, catalog, business-to-business and wholesale operations;
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|
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•
|
Asia-Pacific includes sales in Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations;
|
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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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•
|
Europe includes sales in Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through the Internet; and
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|
•
|
Other consists of all non-reportable segments. Other includes the Emerging Markets region, which consists of retail sales in Company-operated TIFFANY & CO. stores in the United Arab Emirates ("U.A.E.") and wholesale sales of TIFFANY & CO. merchandise to independent distributors for resale in certain emerging markets (primarily in the Middle East). In addition, Other includes wholesale sales of diamonds obtained through bulk purchases that were subsequently deemed not suitable for the Company's needs as well as earnings received from third-party licensing agreements.
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B.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Fiscal Year
The Company's fiscal year ends on January 31 of the following calendar year. All references to years relate to fiscal years rather than calendar years.
Basis of Reporting
The accompanying consolidated financial statements include the accounts of Tiffany & Co. and its subsidiaries in which a controlling interest is maintained. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities (VIEs), if the Company has the power to significantly direct the activities of a VIE, as well as the obligation to absorb significant losses of or the right to receive significant benefits from the VIE. Intercompany accounts, transactions and profits have been eliminated in consolidation. The equity method of accounting is used for investments in which the Company has significant influence, but not a controlling interest.
Use of Estimates
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America; these principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes to the consolidated financial statements. Actual results could differ from these estimates and the differences could be material. Periodically, the Company reviews all significant estimates and assumptions affecting the financial statements relative to current conditions and records the effect of any necessary adjustments.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents include highly liquid investments with an original maturity of three months or less and consist of time deposits and/or money market fund investments with a number of U.S. and non-U.S. financial institutions with high credit ratings. The Company's policy restricts the amount invested with any one financial institution.
Short-Term Investments
Short-term investments are classified as available-for-sale and are carried at fair value. At
January 31, 2016
and
2015
, the Company's short-term available-for-sale investments consisted entirely of time deposits. At the time of purchase, management determines the appropriate classification of these investments and reevaluates such designation as of each balance sheet date.
Receivables and Financing Arrangements
Receivables.
The Company's accounts receivable, net primarily consists of amounts due from Credit Receivables (defined below), department store operators that host TIFFANY & CO. boutiques in their stores, third-party credit card issuers and wholesale customers. The Company maintains an allowance for doubtful accounts for estimated losses associated with the accounts receivable recorded on the balance sheet. The allowance is determined based on a combination of factors including, but not limited to, the length of time that the receivables are past due, management's knowledge of the customer, economic and market conditions and historical write-off experiences.
For the receivables associated with Tiffany & Co. credit cards ("Credit Card Receivables"), management uses various indicators to determine whether to extend credit to customers and the amount of credit. Such indicators include reviewing prior experience with the customer, including sales and collection history, and using applicants' credit reports and scores provided by credit rating agencies. Certain customers may be granted payment terms which permit purchases above a minimum amount to be paid for in equal monthly installments over a period not to exceed 12 months (together with Credit Card Receivables, "Credit Receivables"). Credit Receivables require minimum balance payments. An account is classified as overdue if a minimum balance payment has not been received within the allotted timeframe (generally 30 days), after which internal collection efforts commence. For all Credit Receivables recorded on the balance sheet, once all internal collection efforts have been exhausted and management has reviewed the account, the account balance is written off and may be sent for external collection or legal action. At
January 31, 2016
and
2015
, the carrying amount of the Credit Receivables (recorded in accounts receivable, net) was
$75.2
million and $
63.9
million, of which
97%
and
98%
were considered current, respectively. The allowance for doubtful accounts for estimated losses associated with the Credit Receivables (approximately
$1.0
million at
January 31, 2016
and
2015
) was determined based on the factors discussed above. Finance charges earned on Credit Card accounts are not significant.
Financing Arrangements.
The Company has provided financing to diamond mining and exploration companies in order to obtain rights to purchase the mine's output (see "Note J - Commitments and
Contingencies"). Management evaluates these financing arrangements for potential impairment by reviewing the parties' financial statements along with projections and business, operational and other economic factors on a periodic basis. At
January 31, 2016
and
2015
, the current portion of the carrying amount of financing arrangements including accrued interest was
$2.1
million and
$18.6
million and was recorded in prepaid expenses and other current assets. At
January 31, 2016
and
2015
, the non-current portion of the carrying amount of financing arrangements including accrued interest was
$18.9
million and
$40.7
million and was included in other assets, net.
As of January 31, 2016, the Company had a
$43.8 million
financing arrangement (the "Loan") with Koidu Limited (previously Koidu Holdings S.A.) ("Koidu"). On April 30, 2015, the Company agreed to defer Koidu's principal payment due on March 30, 2015 ("2015 Amendment"), subject to certain conditions set forth in the 2015 Amendment, which were met in June 2015.
In August 2015, Koidu requested that its interest payment due in July 2015 be deferred until a future date to be determined, and it advised the Company that it was likely to request a deferral of interest payments due in August and September of 2015. Based on these requests and other discussions with Koidu, in which Koidu had informed the Company that it was seeking additional sources of capital to fund ongoing operations of the mine, and with consideration given to the fact that Koidu did not respond to the Company's request for a proposed revised payment schedule for its obligations under the Loan, management believed that it was probable that the Company would be unable to collect all amounts due according to the contractual terms of the Loan, and recorded an impairment charge, and related valuation allowance, of
$9.6 million
in the second quarter of 2015. Additionally, the Company ceased accruing interest income on the outstanding Loan balance as of July 31, 2015.
As of January 31, 2016, Koidu has not made any of its interest payments due in July 2015 and thereafter, nor its principal payment due in September 2015. The missed payments constitute events of default under the Loan. Koidu has yet to provide a proposed revised payment schedule for its obligations under the Loan. In February 2016, the Company received the results from two separate and independent reviews of Koidu's operational plans, forecasts, and cash flow projections for the mine, which were commissioned by the Company and by Koidu's largest creditor, respectively. Based on these factors, ongoing discussions with Koidu, and consideration of the possible actions that all parties, including the Government of Sierra Leone and Koidu's largest creditor, may take under the circumstances, management believes that it is probable that the portion of the amounts due under the contractual terms of the Loan that the Company will be unable to collect will be greater than originally estimated, and recorded an impairment charge, and related valuation allowance, of
$28.3 million
in the fourth quarter of 2015. The carrying amount of the Company’s loan receivable from Koidu, net of the valuation allowance, is
$5.9 million
at January 31, 2016. See "Note J. - Commitments and Contingencies" for additional information on this financing arrangement.
The Company recorded no material impairment charges on such loans as of
January 31, 2015
.
Inventories
Inventories are valued at the lower of cost or market using the average cost method except for certain diamond and gemstone jewelry which uses the specific identification method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the following estimated useful lives:
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|
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Buildings
|
39 years
|
Machinery and equipment
|
5-15 years
|
Office equipment
|
3-8 years
|
Furniture and fixtures
|
2-10 years
|
Leasehold improvements and building improvements are amortized over the shorter of their estimated useful lives (ranging from 8-10 years) or the related lease terms or building life, respectively. Maintenance and repair costs are charged to earnings while expenditures for major renewals and improvements are capitalized. Upon the disposition of property, plant and equipment, the accumulated depreciation is deducted from the original cost and any gain or loss is reflected in current earnings.
The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets. The Company's capitalized interest costs were not significant in
2015
,
2014
or
2013
.
Intangible Assets and Key Money
Intangible assets, consisting of product rights and trademarks, are recorded at cost and are amortized on a straight-line basis over their estimated useful lives which range from
15
to
20
years. Intangible assets are reviewed for impairment in accordance with the Company's policy for impairment of long-lived assets (see "Impairment of Long-Lived Assets" below).
Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the "right to lease" with an automatic right of renewal. This right can be subsequently sold by the Company or can be recovered should the landlord refuse to allow the automatic right of renewal to be exercised. Key money is amortized over the estimated useful life,
39
years.
The following table summarizes intangible assets and key money, included in other assets, net, as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2016
|
January 31, 2015
|
(in millions)
|
Gross Carrying Amount
|
Accumulated Amortization
|
Gross Carrying
Amount
|
Accumulated Amortization
|
Product rights
|
$
|
49.6
|
|
$
|
(9.2
|
)
|
$
|
59.4
|
|
$
|
(16.2
|
)
|
Key money deposits
|
32.7
|
|
(3.3
|
)
|
33.7
|
|
(2.4
|
)
|
Trademarks
|
2.5
|
|
(2.5
|
)
|
2.5
|
|
(2.5
|
)
|
|
$
|
84.8
|
|
$
|
(15.0
|
)
|
$
|
95.6
|
|
$
|
(21.1
|
)
|
Amortization of intangible assets and key money for the years ended January 31,
2016
,
2015
and
2014
was
$3.7
million,
$7.8
million and
$4.2
million. Amortization expense is estimated to be approximately
$3.5
million in each of the next five years.
Goodwill
Goodwill represents the excess of cost over fair value of net assets acquired in a business combination. Goodwill is evaluated for impairment annually in the fourth quarter or when events or changes in circumstances indicate that the value of goodwill may be impaired. A qualitative assessment is first
performed for each reporting unit to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, a quantitative evaluation, based on discounted cash flows, is performed and requires management to estimate future cash flows, growth rates and economic and market conditions. If the quantitative evaluation indicates that goodwill is not recoverable, an impairment loss is calculated and recognized during that period. At
January 31, 2016
and
2015
, goodwill, included in other assets, net, consisted of the following by segment:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Americas
|
Asia-Pacific
|
Japan
|
Europe
|
Other
|
Total
|
January 31, 2014
|
$
|
12.4
|
|
$
|
0.3
|
|
$
|
1.1
|
|
$
|
1.1
|
|
$
|
24.8
|
|
$
|
39.7
|
|
Translation
|
(0.1
|
)
|
—
|
|
—
|
|
—
|
|
(0.8
|
)
|
(0.9
|
)
|
January 31, 2015
|
12.3
|
|
0.3
|
|
1.1
|
|
1.1
|
|
24.0
|
|
38.8
|
|
Translation
|
(0.1
|
)
|
—
|
|
—
|
|
(0.1
|
)
|
(0.1
|
)
|
(0.3
|
)
|
January 31, 2016
|
$
|
12.2
|
|
$
|
0.3
|
|
$
|
1.1
|
|
$
|
1.0
|
|
$
|
23.9
|
|
$
|
38.5
|
|
The Company recorded no impairment charges in
2015
,
2014
or
2013
.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets (such as property, plant and equipment) other than goodwill for impairment when management determines that the carrying value of such assets may not be recoverable due to events or changes in circumstances. Recoverability of long-lived assets is evaluated by comparing the carrying value of the asset with the estimated future undiscounted cash flows. If the comparisons indicate that the asset is not recoverable, an impairment loss is calculated as the difference between the carrying value and the fair value of the asset and the loss is recognized during that period. The Company recorded no material impairment charges in
2015
,
2014
or
2013
.
Hedging Instruments
The Company uses derivative financial instruments to mitigate a portion of its foreign currency, precious metal price and interest rate exposures. Derivative instruments are recorded on the consolidated balance sheet at their fair values, as either assets or liabilities, with an offset to current or other comprehensive earnings, depending on whether a derivative is designated as part of an effective hedge transaction and, if it is, the type of hedge transaction.
Marketable Securities
The Company's marketable securities, recorded within other assets, net, are classified as available-for-sale and are recorded at fair value with unrealized gains and losses reported as a separate component of stockholders' equity. Realized gains and losses are recorded in other expense (income), net. The marketable securities are held for an indefinite period of time, but may be sold in the future as changes in market conditions or economic factors occur. The fair value of the marketable securities is determined based on prevailing market prices. The Company recorded
$0.9
million and
$5.1
million of gross unrealized gains and
$1.8
million and
$1.9
million of gross unrealized losses within accumulated other comprehensive loss as of
January 31, 2016
and
2015
.
Realized gains or losses reclassified from other comprehensive earnings are determined on the basis of specific identification.
The Company's marketable securities primarily consist of investments in mutual funds. When evaluating the marketable securities for other-than-temporary impairment, the Company reviews factors such as the length of time and the extent to which fair value has been below cost basis, the financial condition of the
issuer, and the Company's ability and intent to hold the investments for a period of time which may be sufficient for anticipated recovery in market value. Based on the Company's evaluations, it determined that any unrealized losses on its outstanding mutual funds were temporary in nature and, therefore, did not record any impairment charges as of January 31,
2016
,
2015
or
2014
.
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. The liabilities are relieved and revenue is recognized when merchandise is purchased and delivered to the customer and the 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 of the merchandise credits or gift cards is generally remitted to the applicable jurisdiction in accordance with unclaimed property laws.
Revenue Recognition
Sales are recognized at the "point of sale," 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. Revenue associated with gift cards and merchandise credits is recognized upon redemption. Sales are reported net of returns, sales tax and other similar taxes. Shipping and handling fees billed to customers are included in net sales. The Company maintains a reserve for potential product returns and it records, as a reduction to sales and cost of sales, its provision for estimated product returns, which is determined based on historical experience.
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 at the "point of sale." 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.
Cost of Sales
Cost of sales includes costs to internally manufacture merchandise (primarily metal, gemstones, labor and overhead), costs related to the purchase of merchandise from third-parties, inbound freight, purchasing and receiving, inspection, warehousing, internal transfers and other costs associated with distribution and merchandising. Cost of sales also includes royalty fees paid to outside designers and customer shipping and handling charges.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses include costs associated with the selling and marketing of products as well as administrative expenses. The types of expenses associated with these functions are store operating expenses (such as labor, rent and utilities), advertising and other corporate level administrative expenses.
Advertising, Marketing, Public and Media Relations Costs
Advertising, marketing, public and media relations costs include media, production, catalogs, Internet, marketing events, visual merchandising costs (in-store and window displays) and other related costs. In
2015
,
2014
and
2013
, these costs totaled
$302.0
million,
$284.0
million and
$253.2
million, representing
7.4%
,
6.7%
and
6.3%
of worldwide net sales in each of those periods. Media and production costs for print and digital advertising are expensed as incurred, while catalog costs are expensed upon first distribution.
Pre-opening Costs
Costs associated with the opening of new retail stores are expensed in the period incurred.
Stock-Based Compensation
New, modified and unvested share-based payment transactions with employees, such as stock options and restricted stock, are measured at fair value and recognized as compensation expense over the requisite service period.
Merchandise Design Activities
Merchandise design activities consist of conceptual formulation and design of possible products and creation of pre-production prototypes and molds. Costs associated with these activities are expensed as incurred.
Foreign Currency
The functional currency of most of the Company's foreign subsidiaries and branches is the applicable local currency. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded as a component of other comprehensive earnings within stockholders' equity. The Company also recognizes gains and losses associated with transactions that are denominated in foreign currencies. Within other expense (income), net, the Company recorded net losses resulting from foreign currency transactions of
$9.8
million and
$3.7
million in
2015
and
2014
and a net gain of
$4.7
million in
2013
. Included within the amount for 2013 was a
$7.5
million transaction gain related to amounts associated with the award issued in the arbitration between the Swatch Group Ltd. and the Company. See "Note J - Commitments and Contingencies."
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are recognized by applying statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent management believes these assets will more likely than not be realized. In making such determination, the Company considers all available evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event management were to determine that the Company would be able to realize its deferred income tax assets in the future in excess of their net
recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
In evaluating the exposures associated with the Company's various tax filing positions, management records reserves using a more-likely-than-not recognition threshold for income tax positions taken or expected to be taken.
The Company, its U.S. subsidiaries and the foreign branches of its U.S. subsidiaries file a consolidated Federal income tax return.
Earnings Per Share ("EPS")
Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the dilutive effect of the assumed exercise of stock options and unvested restricted stock units.
The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted EPS computations:
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|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Net earnings for basic and diluted EPS
|
$
|
463.9
|
|
$
|
484.2
|
|
$
|
181.4
|
|
Weighted-average shares for basic EPS
|
128.6
|
|
129.2
|
|
127.8
|
|
Incremental shares based upon the assumed
exercise of stock options and unvested restricted
stock units
|
0.5
|
|
0.7
|
|
1.1
|
|
Weighted-average shares for diluted EPS
|
129.1
|
|
129.9
|
|
128.9
|
|
For the years ended January 31,
2016
,
2015
and
2014
, there were
0.8
million,
0.3
million and
0.4
million stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 –
Revenue From Contracts with Customers
, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. Generally Accepted Accounting Principles ("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 will need to use more judgment and make more estimates than under current 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 (Topic 606): Deferral of the Effective Date
, deferring the effective date for one year to interim and annual periods beginning after December 15, 2017. Early adoption is also permitted as of the original effective date (interim and annual periods beginning after December 15, 2016) and retrospective application is required. Management is currently evaluating the impact of this ASU on the consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02 –
Amendments to the Consolidation Analysis
, which amends the criteria for determining which entities are considered VIEs, amends the criteria for determining if a service provider possesses a variable interest in a VIE, and ends the deferral granted to investment companies for application of the VIE consolidation model. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2015 and early adoption is permitted. This ASU is not expected to have a material impact on the consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03 –
Simplifying the Presentation of Debt Issuance Costs
, which changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity will present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. In August 2015, the FASB issued ASU No. 2015-15 –
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
, which indicates the Securities and Exchange Commission staff would not object to an entity deferring and continuing to present debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 is effective retrospectively for interim and annual periods beginning after December 15, 2015 and early adoption is permitted. The Company expects to adopt ASU 2015-03 beginning on February 1, 2016 and the adoption of the new guidance is not expected to have a material impact on the Company's financial condition and financial statement disclosures.
In April 2015, the FASB issued ASU No. 2015-05 –
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
(an update to
Subtopic 350-40, Intangibles
–
Goodwill and Other
–
Internal-Use Software
), which provides guidance on accounting for cloud computing fees. If a cloud computing arrangement includes a software license, then the customer should account for the license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. This ASU is effective for arrangements entered into, or materially modified, in interim and annual periods beginning after December 15, 2015. Retrospective application is permitted but not required. This ASU is not expected to have a material impact on the consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11 –
Inventory (Topic 330): Simplifying the Measurement of Inventory
, which states an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This amendment applies to all inventory that is measured using the average costs or first-in first-out (FIFO) methods. This supersedes prior guidance which allowed entities to measure inventory at the lower of cost or market, where market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. This ASU is effective for interim and annual periods beginning after December 15, 2016. The amendments should be applied prospectively and earlier application is permitted. This ASU is not expected to have a material impact on the consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17 –
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
, which states an entity should classify deferred tax liabilities and assets as noncurrent amounts. This supersedes prior guidance under which an entity was required to classify deferred tax liabilities and assets as current or noncurrent based on the classification of the related asset or liability. This ASU is effective for interim and annual periods beginning after December 15, 2016, with earlier adoption permitted. The amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted this ASU retrospectively as of January 31, 2016. Accordingly, current deferred taxes were reclassified to noncurrent on the January 31, 2015 Consolidated Balance Sheet, which increased noncurrent assets by
$102.6 million
and noncurrent liabilities by
$0.1 million
.
In February 2016, the FASB issued ASU No. 2016-02 –
Leases
, which 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. 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. Management is currently evaluating the impact of this ASU on the consolidated financial statements.
|
|
C.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Interest, net of interest capitalization
|
$
|
42.5
|
|
$
|
59.7
|
|
$
|
58.5
|
|
Income taxes
|
$
|
237.5
|
|
$
|
133.4
|
|
$
|
160.7
|
|
Supplemental noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Issuance of Common Stock under the Employee Profit Sharing and Retirement Savings Plan
|
$
|
|
|
$
|
3.9
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2016
|
|
|
2015
|
|
Finished goods
|
$
|
1,292.9
|
|
|
$
|
1,386.8
|
|
Raw materials
|
813.7
|
|
|
866.9
|
|
Work-in-process
|
118.4
|
|
|
108.4
|
|
Inventories, net
|
$
|
2,225.0
|
|
|
$
|
2,362.1
|
|
|
|
E.
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2016
|
|
|
2015
|
|
Land
|
$
|
45.6
|
|
|
$
|
42.7
|
|
Buildings
|
120.9
|
|
|
125.8
|
|
Leasehold and building improvements
|
1,102.8
|
|
|
1,036.4
|
|
Office equipment
|
554.9
|
|
|
586.2
|
|
Furniture and fixtures
|
265.3
|
|
|
261.1
|
|
Machinery and equipment
|
169.2
|
|
|
155.2
|
|
Construction-in-progress
|
95.7
|
|
|
59.8
|
|
|
2,354.4
|
|
|
2,267.2
|
|
Accumulated depreciation and amortization
|
(1,418.6
|
)
|
|
(1,367.7
|
)
|
|
$
|
935.8
|
|
|
$
|
899.5
|
|
The provision for depreciation and amortization for the years ended January 31,
2016
,
2015
and
2014
was
$196.3
million,
$182.8
million and
$171.5
million.
|
|
F.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILTIES
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
Accounts payable - trade
|
$
|
127.8
|
|
$
|
118.0
|
|
Accrued compensation and commissions
|
77.9
|
|
83.9
|
|
Accrued sales, withholding and other taxes
|
21.9
|
|
21.8
|
|
Other
|
101.5
|
|
94.3
|
|
|
$
|
329.1
|
|
$
|
318.0
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
Short-term borrowings:
|
|
|
Credit Facilities
|
$
|
76.6
|
|
$
|
92.5
|
|
Other credit facilities
|
145.0
|
|
141.5
|
|
|
$
|
221.6
|
|
$
|
234.0
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
Unsecured Senior Notes:
|
|
|
2010 1.72% Notes, due September 2016
a
, b
|
$
|
84.2
|
|
$
|
84.5
|
|
2012 4.40% Series B Notes, due July 2042
c
|
250.0
|
|
250.0
|
|
2014 3.80% Senior Notes, due October 2024
a, d
|
249.3
|
|
249.3
|
|
2014 4.90% Senior Notes, due October 2044
a, d
|
298.8
|
|
298.7
|
|
|
882.3
|
|
882.5
|
|
Less current portion of long-term debt
|
84.2
|
|
—
|
|
|
$
|
798.1
|
|
$
|
882.5
|
|
|
|
a
|
These agreements require lump sum repayments upon maturity.
|
|
|
b
|
These Notes were issued, at par, ¥
10.0
billion.
|
|
|
c
|
The agreements governing these Notes require repayments of $
50.0
million in aggregate every five years beginning in 2022.
|
|
|
d
|
These Notes were issued at a discount which will be amortized until the debt maturity.
|
Credit Facilities
In 2014, Tiffany & Co. entered into a four-year
$375.0
million and a five-year
$375.0
million multi-bank, multi-currency, committed unsecured revolving credit facility, including letter of credit subfacilities, (collectively, the "New Credit Facilities") resulting in a total borrowing capacity of
$750.0
million. The New Credit Facilities replaced the previously existing
$275.0
million three-year unsecured revolving credit facility and
$275.0
million five-year unsecured revolving credit facility, which were terminated and repaid concurrently with Tiffany & Co.'s entry into the New Credit Facilities. The New Credit Facilities are available for working capital and other corporate purposes. Borrowings under the New Credit Facilities will bear interest at a rate per annum equal to, at the option of the Company, (1)
LIBOR
(or other applicable reference rate) for the relevant currency plus an applicable margin based upon the Company's leverage ratio as defined under the New Credit Facilities, or (2) an alternate base rate equal to the highest of (i) the Federal Funds Rate plus
0.50%
, (ii) Bank of America, N.A.’s prime rate and (iii) one-month
LIBOR
plus
1%
, plus an applicable margin based upon the Company's leverage ratio as defined under the New Credit Facilities. The New Credit Facilities also require payment to the lenders of a facility fee on the amount of the lenders’ commitments under the credit facilities from time to time at rates based upon the Company's leverage ratio as defined under the New Credit Facilities. Voluntary prepayments of the loans and voluntary reductions of the unutilized portion of the commitments under the New Credit Facilities are permissible without penalty, subject to certain conditions pertaining to minimum notice and minimum reduction amounts.
At January 31,
2016
, there were
$76.6
million of borrowings outstanding,
$5.6
million of letters of credit issued but not outstanding and
$667.8
million available for borrowing under the New Credit Facilities. At
January 31, 2015
, there were
$92.5
million of borrowings outstanding,
$5.7
million of letters of credit issued but not outstanding and
$651.8
million available for borrowings. The weighted-average interest rate for borrowings outstanding was
1.54%
at January 31,
2016
and
1.49%
at
January 31, 2015
. The four-year credit facility will expire in October 2018. The five-year credit facility will expire in October 2019.
Other Credit Facilities
Tiffany-Shanghai Credit Agreement.
In 2013, Tiffany & Co.'s wholly-owned subsidiary, Tiffany & Co. (Shanghai) Commercial Company Limited ("Tiffany-Shanghai"), entered into a three-year multi-bank revolving credit agreement (the "Tiffany-Shanghai Credit Agreement"). The Tiffany-Shanghai Credit Agreement has an aggregate borrowing limit of RMB
930.0
million (
$141.4
million at January 31,
2016
). The Tiffany-Shanghai Credit Agreement is available for Tiffany-Shanghai's general working capital requirements, which included repayment of a portion of the indebtedness under Tiffany-Shanghai's existing bank loan facilities. The six lenders that are party to the Tiffany-Shanghai Credit Agreement will make loans, upon Tiffany-Shanghai's request, for periods of up to 12 months at the applicable interest rates as announced by the People's Bank of China. At
January 31, 2016
, there was
$99.3
million available to be borrowed under the Tiffany-Shanghai Credit Agreement, of which
$42.1
million was outstanding at a weighted-average interest rate of
4.72%
. At January 31,
2015
, there was
$111.3
million available to be borrowed, of which
$37.6
million was outstanding at a weighted-average interest rate of
6.00%
. The Tiffany-Shanghai Credit Agreement matures in July 2016. In connection with this agreement, the Company entered into a guaranty agreement by and between the Company and the facility agent under the Tiffany-Shanghai Credit Agreement (the "Guaranty").
Other.
The Company has various other revolving credit facilities, primarily in Japan and China. At
January 31,
2016
, the facilities totaled
$126.6
million, of which
$102.9
million was outstanding at a weighted-average interest rate of
3.16%
. At January 31,
2015
, the facilities totaled
$113.0
million, of which
$103.9
million was outstanding at a weighted-average interest rate of
3.90%
.
Senior Notes
In 2014, Tiffany & Co. issued
$250.0
million aggregate principal amount of
3.80%
Senior Notes due 2024 (the "2024 Notes") and
$300.0
million aggregate principal amount of
4.90%
Senior Notes due 2044 (the "2044 Notes" and, together with the 2024 Notes, the "Notes"). The Notes were issued at a discount with aggregate net proceeds of
$548.0
million (with an effective yield of
3.836%
for the 2024 Notes and an effective yield of
4.926%
for the 2044 Notes). Tiffany & Co. used the net proceeds from the issuance of the Notes to redeem all of the aggregate principal amount outstanding of its (i)
$100.0
million principal amount of
9.05%
Series A Senior Notes due December 23, 2015; (ii)
$125.0
million principal amount of
10.0%
Series A-2009 Senior Notes due February 13, 2017; (iii)
$50.0
million principal amount of
10.0%
Series A Senior Notes due April 9, 2018; and (iv)
$125.0
million principal amount of
10.0%
Series B-2009 Senior Notes due February 13, 2019 (collectively, the "Private Placement Notes") prior to maturity in accordance with the respective note purchase agreements governing each series of Private Placement Notes, which included provisions for make-whole payments in the event of early redemption. As a result of the redemptions, the Company recorded a loss on extinguishment of debt of
$93.8
million in 2014. The Company used the remaining net proceeds from the sale of the Notes for general corporate purposes. The Notes are Tiffany & Co.’s general unsecured obligations and rank equally in right of payment with all of Tiffany & Co.’s existing and any future unsecured senior debt and rank senior in right of payment to any of Tiffany & Co.’s future subordinated debt.
The 2024 Notes bear interest at a fixed rate of
3.80%
per annum and the 2044 Notes bear interest at a fixed rate of
4.90%
per annum, payable semi-annually in arrears on April 1 and October 1 of each year, commencing on April 1, 2015. Tiffany & Co. will make each interest payment to the holders of record of the Notes on the immediately preceding March 15 and September 15.
Tiffany & Co. has the option to redeem the Notes, in whole or in part, by providing no less than 30 nor more than 60 days' prior notice at a redemption price equal to the sum of (i) 100% of the principal amount of the Notes to be redeemed, plus (ii) accrued and unpaid interest, if any, on those Notes to the redemption date, plus (iii) a make-whole premium as of the redemption date, as defined in the indenture governing the Notes, as amended and supplemented in respect of each series of Notes (the "Indenture"). In addition, Tiffany & Co. has the option to redeem some or all of the 2024 Notes on or after July 1, 2024, at a redemption price equal to the sum of 100% of the principal amount of the 2024 Notes to be redeemed, together with accrued and unpaid interest, if any, on those 2024 Notes to the redemption date. Tiffany & Co. also has the option to redeem some or all of the 2044 Notes on or after April 1, 2044, at a redemption price equal to the sum of 100% of the principal amount of the 2044 Notes to be redeemed, together with accrued and unpaid interest, if any, on those 2044 Notes to the redemption date.
Upon the occurrence of a change of control triggering event (as defined in the Indenture), unless
Tiffany & Co. has exercised its right to redeem the Notes, each holder of Notes will have the right to require Tiffany & Co. to repurchase all or a portion of such holder’s Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
Debt Covenants
The agreements governing the New Credit Facilities include specific financial covenants, as well as other covenants that limit the ability of Tiffany & Co. to incur certain subsidiary indebtedness, incur liens, impose restrictions on subsidiary distributions and engage in mergers, consolidations and sales of all or substantially all of Tiffany & Co. and its subsidiaries’ assets, in addition to other requirements and “Events of Default” (as defined in the agreements governing the New Credit Facilities) customary to such borrowings.
The Tiffany-Shanghai Credit Agreement includes certain covenants that limit Tiffany-Shanghai's ability to pay certain dividends, make certain investments and incur certain indebtedness, and the Guaranty requires maintenance by Tiffany & Co. of specific financial covenants and ratios, in addition to other requirements and limitations customary to such borrowings.
The Indenture contains covenants that, among other things, limit the ability of Tiffany & Co. and its subsidiaries under certain circumstances to create liens and impose conditions on Tiffany & Co.’s ability to engage in mergers, consolidations and sales of all or substantially all of its or its subsidiaries’ assets. The Indenture also contains certain “Events of Default” (as defined in the Indenture) customary for indentures of this type. The Indenture does not contain any specific financial covenants.
The agreements governing the 2010
1.72%
Notes and the 2012
4.40%
Series B Notes require maintenance of specific financial covenants and ratios and limit certain changes to indebtedness of Tiffany & Co. and its subsidiaries and the general nature of the business, in addition to other requirements customary to such borrowings.
At January 31, 2016, the Company was in compliance with all debt covenants.
In the event of any default of payment or performance obligations extending beyond applicable cure periods as set forth in the agreements governing the Company's applicable debt instruments, such agreements may be terminated or payment of the applicable debt may be accelerated. Further, each of the New Credit Facilities, the Tiffany-Shanghai Credit Agreement, the agreements governing the 2010 1.72% Notes and the 2012 4.40% Series B Notes, and certain other loan agreements contain cross default provisions permitting the
termination and acceleration of the loans, or acceleration of the notes, as the case may be, in the event that certain of the Company's other debt obligations are terminated or accelerated prior to their maturity.
Long-Term Debt Maturities
Aggregate maturities of long-term debt as of January 31,
2016
are as follows:
|
|
|
|
|
Years Ending January 31,
|
Amount
a
(in millions)
|
|
2017
|
$
|
84.2
|
|
2018
|
—
|
|
2019
|
—
|
|
2020
|
—
|
|
2021
|
—
|
|
Thereafter
|
800.0
|
|
|
$
|
884.2
|
|
|
|
a
|
Amounts exclude any unamortized discount or premium.
|
Letters of Credit
The Company has available letters of credit and financial guarantees of
$75.0
million of which
$26.6
million was outstanding at January 31,
2016
. Of those available letters of credit and financial guarantees,
$60.2
million expires within one year. These amounts do not include letters of credit issued under the Credit Facilities.
H. HEDGING INSTRUMENTS
Background Information
The Company uses derivative financial instruments, including interest rate swaps, forward contracts, put option 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 and precious metal prices.
Derivative Instruments Designated as Hedging Instruments.
If a derivative instrument meets certain hedge accounting criteria, it is recorded on the consolidated balance sheet at its fair value, as either an asset or a liability, with an offset to current or 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 are reported as other comprehensive income ("OCI") and are 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 consolidated balance sheet at their fair values, as either assets or liabilities, with an offset to current earnings.
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. As of
January 31, 2016
,
$21.1
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 (refer to "Note G - Debt"). The Company accounted for the forward-starting interest rate swaps as cash flow hedges. The Company settled the interest rate swap in 2014 and recorded an unrealized loss within accumulated other comprehensive loss. As of
January 31, 2016
,
$4.0
million remains recorded as an unrealized loss and is being amortized over the terms of the respective 2024 Notes or 2044 Notes to which the interest rate swaps related.
Foreign Exchange Forward Contracts
– The Company uses foreign exchange forward contracts to offset a portion of the foreign currency exchange risks associated with foreign currency-denominated liabilities, intercompany transactions and forecasted purchases of merchandise between entities with differing functional currencies. The Company assesses hedge effectiveness based on the total changes in the foreign exchange forward contracts' cash flows. These foreign exchange forward contracts are designated and accounted for as either cash flow hedges or economic hedges that are not designated as hedging instruments.
As of
January 31, 2016
, the notional amount of foreign exchange forward contracts accounted for as cash flow hedges was as follows:
|
|
|
|
|
|
|
|
(in millions)
|
|
Notional Amount
|
|
|
USD Equivalent
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
Japanese yen
|
¥
|
17,444.7
|
|
$
|
145.5
|
|
British pound
|
£
|
15.0
|
|
|
23.0
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
U.S. dollar
|
$
|
52.8
|
|
$
|
52.8
|
|
Euro
|
€
|
15.1
|
|
|
16.5
|
|
British pound
|
£
|
3.9
|
|
|
5.5
|
|
Japanese yen
|
¥
|
1,048.5
|
|
|
8.8
|
|
Hong Kong dollar
|
HK$
|
58.2
|
|
|
7.4
|
|
Mexican peso
|
₱
|
215.2
|
|
|
12.3
|
|
Singapore dollar
|
S$
|
28.6
|
|
|
19.9
|
|
Swiss franc
|
Fr.
|
22.2
|
|
|
22.1
|
|
The maximum term of the Company's outstanding foreign exchange forward contracts as of
January 31, 2016
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. In 2015, the Company increased the term over which it is hedging its exposure to volatility in precious metal prices, as well as the portion of expected future metals purchases hedged, which has increased the number of precious metal derivative instruments outstanding at the end of the period. As of January 31,
2016
, the maximum term over which the Company is hedging its exposure to the variability of future cash flows for all forecasted transactions is
24
months. As of
January 31, 2016
, there were precious metal derivative instruments outstanding for approximately
72,000
ounces of platinum,
1,440,000
ounces of silver and
50,000
ounces of gold.
Information on the location and amounts of derivative gains and losses in the consolidated financial statements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
|
2016
|
|
2015
|
(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
|
$
|
3.9
|
|
|
$
|
20.2
|
|
|
$
|
23.2
|
|
|
$
|
18.7
|
|
Precious metal collars
a
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Precious metal forward contracts
a
|
(26.3
|
)
|
|
(7.0
|
)
|
|
(4.4
|
)
|
|
(4.2
|
)
|
Forward-starting interest rate swaps
b
|
—
|
|
|
(1.5
|
)
|
|
(4.2
|
)
|
|
(1.5
|
)
|
|
$
|
(22.2
|
)
|
|
$
|
11.7
|
|
|
$
|
14.6
|
|
|
$
|
13.0
|
|
|
|
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 Interest expense and financing costs.
|
The gains and losses on derivatives not designated as hedging instruments were not significant in the year ended
January 31, 2016
. Such gains were
$10.5 million
in the year ended January 31,
2015
and were included in other expense (income), net. There was no material ineffectiveness related to the Company's hedging instruments for the periods ended
January 31, 2016
and
2015
. The Company expects approximately
$7.8
million of net pre-tax derivative losses included in accumulated other comprehensive income at
January 31, 2016
will be reclassified into earnings within the next 12 months. This amount will vary due to fluctuations in foreign currency exchange rates and precious metal prices.
For information regarding the location and amount of the derivative instruments in the Consolidated Balance Sheet, see "Note I - 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 (a credit rating of A-/A2 or better 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.
|
|
I.
|
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 and 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 and 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, 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. The Company's interest rate swaps were primarily valued using the 3-month LIBOR rate. For further information on the Company's hedging instruments and program, see "Note H - Hedging Instruments."
Financial assets and liabilities carried at fair value at
January 31, 2016
are classified in the table below in one of the three categories described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Estimated Fair Value
|
|
Total Fair
Value
|
(in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Marketable securities
a
|
$
|
31.8
|
|
|
$
|
31.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31.8
|
|
Time deposits
b
|
43.0
|
|
|
43.0
|
|
|
—
|
|
|
—
|
|
|
43.0
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Precious metal forward contracts
c
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
Precious metal collar contracts
c
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Foreign exchange forward contracts
c
|
1.6
|
|
|
—
|
|
|
1.6
|
|
|
—
|
|
|
1.6
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
c
|
1.3
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
|
1.3
|
|
Total financial assets
|
$
|
78.5
|
|
|
$
|
74.8
|
|
|
$
|
3.7
|
|
|
$
|
—
|
|
|
$
|
78.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Estimated Fair Value
|
|
Total Fair
Value
|
(in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Precious metal forward contracts
d
|
$
|
13.4
|
|
|
$
|
—
|
|
|
$
|
13.4
|
|
|
$
|
—
|
|
|
$
|
13.4
|
|
Foreign exchange forward contracts
d
|
2.4
|
|
|
—
|
|
|
2.4
|
|
|
—
|
|
|
2.4
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
d
|
1.4
|
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
1.4
|
|
Total financial liabilities
|
$
|
17.2
|
|
|
$
|
—
|
|
|
$
|
17.2
|
|
|
$
|
—
|
|
|
$
|
17.2
|
|
Financial assets and liabilities carried at fair value at
January 31, 2015
are classified in the table below in one of the three categories described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Estimated Fair Value
|
|
Total Fair
Value
|
(in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Marketable securities
a
|
$
|
53.5
|
|
|
$
|
53.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
53.5
|
|
Time deposits
b
|
1.5
|
|
|
1.5
|
|
|
—
|
|
|
—
|
|
|
1.5
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Precious metal forward contracts
c
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Foreign exchange forward contracts
c
|
15.1
|
|
|
—
|
|
|
15.1
|
|
|
—
|
|
|
15.1
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
c
|
7.1
|
|
|
—
|
|
|
7.1
|
|
|
—
|
|
|
7.1
|
|
Total financial assets
|
$
|
77.5
|
|
|
$
|
55.0
|
|
|
$
|
22.5
|
|
|
$
|
—
|
|
|
$
|
77.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Estimated Fair Value
|
|
Total Fair
Value
|
(in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Precious metal forward contracts
d
|
$
|
3.2
|
|
|
$
|
—
|
|
|
$
|
3.2
|
|
|
$
|
—
|
|
|
$
|
3.2
|
|
Foreign exchange forward contracts
d
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
d
|
2.0
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
Total financial liabilities
|
$
|
5.3
|
|
|
$
|
—
|
|
|
$
|
5.3
|
|
|
$
|
—
|
|
|
$
|
5.3
|
|
|
|
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 evaluated based on the maturity of the contract.
|
|
|
d
|
Included within Accounts payable and accrued liabilities or Other long-term liabilities evaluated based on the maturity of the contract.
|
The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates carrying value due to the short-term maturities of these assets and liabilities and as such is 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
$1.1 billion
and the corresponding fair value was approximately
$1.1
billion and
$1.2 billion
at
January 31, 2016
and
2015
.
J. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain office, distribution, retail and manufacturing facilities, land and equipment. Retail store leases may require the payment of minimum rentals and contingent rent based on a percentage of sales exceeding a stipulated amount. The lease agreements, which expire at various dates through 2062, are subject, in many cases, to renewal options and provide for the payment of taxes,
insurance and maintenance. Certain leases contain escalation clauses resulting from the pass-through of increases in operating costs, property taxes and the effect on costs from changes in consumer price indices.
Rent-free periods and other incentives granted under certain leases and scheduled rent increases are charged to rent expense on a straight-line basis over the related terms of such leases. Lease expense includes predetermined rent escalations (including escalations based on the Consumer Price Index or other indices) and is recorded on a straight-line basis over the term of the lease. Adjustments to indices are treated as contingent rent and recorded in the period that such adjustments are determined.
The Company entered into sale-leaseback arrangements for its Retail Service Center, a distribution and administrative office facility in New Jersey, in 2005 and for the TIFFANY & CO. stores in Tokyo's Ginza shopping district and on London's Old Bond Street in 2007. These sale-leaseback arrangements resulted in total deferred gains of
$144.5
million which are being amortized in SG&A expenses over periods that range from
15
to
20
years. As of January 31,
2016
,
$55.1 million
of these deferred gains remained to be amortized.
Rent expense for the Company's operating leases consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Minimum rent for retail locations
|
$
|
172.2
|
|
$
|
158.2
|
|
$
|
146.1
|
|
Contingent rent based on sales
|
34.9
|
|
38.6
|
|
36.3
|
|
Office, distribution and manufacturing facilities and equipment
|
37.0
|
|
35.8
|
|
42.5
|
|
|
$
|
244.1
|
|
$
|
232.6
|
|
$
|
224.9
|
|
In addition, the Company operates certain TIFFANY & CO. stores within various department stores outside the U.S. and has agreements where the department store operators provide store facilities and other services. The Company pays the department store operators a percentage fee based on sales generated in these locations (recorded as commission expense within SG&A expenses) which totaled
$109.4
million,
$113.7
million and
$117.1
million in
2015
,
2014
and
2013
, and which are not included in the table above.
Aggregate annual minimum rental payments under non-cancelable operating leases are as follows:
|
|
|
|
|
Years Ending January 31,
|
Annual Minimum Rental Payments
a
(in millions)
|
|
2017
|
$
|
273.6
|
|
2018
|
244.7
|
|
2019
|
172.1
|
|
2020
|
156.3
|
|
2021
|
141.4
|
|
Thereafter
|
597.7
|
|
|
|
a
|
Operating lease obligations do not include obligations for property taxes, insurance and maintenance that are required by most lease agreements.
|
Diamond Sourcing Activities
The Company has agreements with various diamond producers to purchase defined portions of their mines' output at prevailing fair market prices. Under those agreements, management anticipates that it will purchase approximately
$100.0
million of rough diamonds in
2016
. Purchases beyond
2016
that are contingent upon mine production at then-prevailing fair market prices cannot be reasonably estimated. In addition, the Company also regularly purchases rough and polished diamonds from other suppliers, although it has no contractual obligations to do so.
In consideration of its diamond supply agreements, the Company has provided financing to certain suppliers of its rough diamonds. In March 2011, Laurelton Diamonds, Inc. ("Laurelton"), a wholly-owned subsidiary of the Company, as lender, entered into a
$50.0
million amortizing term loan facility agreement with Koidu, as borrower, and BSG Resources Limited, as a limited guarantor. Koidu operates a kimberlite diamond mine in Sierra Leone (the "Mine") from which Laurelton acquires diamonds. Koidu was required under the terms of the Loan to apply the proceeds of the Loan to capital expenditures necessary to increase the output of the Mine, among other purposes. As of July 31, 2011, the Loan was fully funded. In consideration of the Loan, Laurelton entered into a supply agreement, pursuant to which Laurelton is required to purchase at fair market value certain diamonds recovered from the Mine that meet Laurelton's quality standards. The assets of Koidu, including all equipment and rights in respect of the Mine, are subject to the security interest of a lender that is not affiliated with the Company. The Loan is partially secured by the diamonds, if any, that have been extracted from the Mine and that have not been sold to third parties. The Company has evaluated the variable interest entity consolidation requirements with respect to this transaction and has determined that it is not the primary beneficiary, as it does not have the power to direct any of the activities that most significantly impact Koidu's economic performance.
On March 29, 2013, the Company entered into an amendment relating to the Loan which deferred principal and interest payments due in 2013 to subsequent years, and, on March 31, 2014, the Company entered into a further amendment providing that the principal payments due in 2014 be paid on a monthly basis rather than on a semi-annual basis. On April 30, 2015, the Company entered into a further amendment (the "2015 Amendment"). Pursuant to the 2015 Amendment, once certain customary conditions relating to the addition of one of Koidu's affiliates as an obligor under the Loan were satisfied, the principal payment due on March 30, 2015 would be deferred until a date to be specified by the Company (which date may be upon at least 30 days' written notice to Koidu, or upon the occurrence of certain specified acceleration conditions). As of June 2015, all of the conditions had been satisfied and the deferral of the principal payment due on March 30, 2015 had become effective, subject to the acceleration conditions set forth in the 2015 Amendment, which include Koidu remaining current on its other payment obligations to the Company. The Loan, as amended, is required to be repaid in full by March 2017 through semi-annual payments. Under the 2015 Amendment, the interest rate on the Loan was increased and, as of April 1, 2015, interest will accrue at a rate per annum that is the greater of (i)
LIBOR
plus
3.5%
or (ii)
6.75%
. Koidu also agreed to pay, and subsequently paid, an additional
2%
per annum of interest on all deferred principal repayments.
At January 31, 2016, there was
$43.8 million
of principal outstanding under this Loan (see "Note B - Summary of Significant Accounting Policies"). In August 2015, Koidu requested that its interest payment due in July 2015 be deferred until a future date to be determined, and it advised the Company that it was likely to request a deferral of interest payments due in August and September of 2015. Based on these requests and other discussions with Koidu, in which Koidu had informed the Company that it was seeking additional sources of capital to fund ongoing operations of the mine, and with consideration given to the fact that Koidu did not respond to the Company's request for a proposed revised payment schedule for its obligations under the Loan, management believed that it was probable that the Company would be unable to collect all amounts due according to the contractual terms of the Loan, and recorded an impairment charge, and related valuation allowance, of
$9.6 million
in the second quarter of 2015. Additionally, the Company ceased accruing interest income on the outstanding Loan balance as of July 31, 2015.
As of January 31, 2016, Koidu has not made any of its interest payments due in July 2015 and thereafter, nor its principal payment due in September 2015. The missed payments constitute events of default under the Loan. Koidu has yet to provide a proposed revised payment schedule for its obligations under the Loan. In February 2016, the Company received the results from two separate and independent reviews of Koidu's operational plans, forecasts, and cash flow projections for the mine, which were commissioned by the Company and by Koidu's largest creditor, respectively. Based on these factors, ongoing discussions with Koidu, and consideration of the possible actions that all parties, including the Government of Sierra Leone and Koidu's largest creditor, may take under the circumstances, management believes that it is probable that the portion of the amounts due under the contractual terms of the Loan that the Company will be unable to collect will be greater than originally estimated, and recorded an impairment charge, and related valuation allowance, of
$28.3 million
in the fourth quarter of 2015. The carrying amount of the Company’s loan receivable from Koidu, net of the valuation allowance, is
$5.9 million
at January 31, 2016.
The Company intends to continue to participate in discussions with Koidu regarding operational plans, forecasts and cash flow projections for the mine, as well as revisions to the payment schedule for the Loan. The Company also intends to continue to participate in discussions with certain of Koidu's stakeholders, including its largest creditor and the Government of Sierra Leone. The outcome of these discussions, as well as any other developments, will inform management's ongoing evaluation of the collectability of the Loan and the accrual of interest income. It is possible that such ongoing evaluation may result in additional changes to management's assessment of collectability. While such changes in management's assessment would not have a material adverse effect on the Company's financial position or cash flows, it is possible that such a change in assessment could affect the Company's earnings in the period in which such a change were to occur.
The Company also provided financing of
$3.1
million during the year ended January 31,
2014
to a diamond mining and exploration company.
Contractual Cash Obligations and Contingent Funding Commitments
At January 31,
2016
, the Company's contractual cash obligations and contingent funding commitments were for inventory purchases of
$319.1 million
(which includes the
$100.0
million obligation discussed in Diamond Sourcing Activities above), as well as for other contractual obligations of
$91.7 million
(primarily for construction-in-progress, technology licensing and service contracts, advertising and media agreements and fixed royalty commitments).
Litigation
Arbitration Award.
On December 21, 2013, an award was issued (the "Arbitration Award") in favor of The Swatch Group Ltd. ("Swatch") and its wholly-owned subsidiary Tiffany Watch Co. ("Watch Company"; Swatch and Watch Company, together, the "Swatch Parties") in an arbitration proceeding (the "Arbitration") between the Registrant and its wholly-owned subsidiaries, Tiffany and Company and Tiffany (NJ) Inc. (the Registrant and such subsidiaries, together, the "Tiffany Parties") and the Swatch Parties.
The Arbitration was initiated in June 2011 by the Swatch Parties, who sought damages for alleged breach of agreements entered into by and among the Swatch Parties and the Tiffany Parties in December 2007 (the "Agreements"). The Agreements pertained to the development and commercialization of a watch business and, among other things, contained various licensing and governance provisions and approval requirements relating to business, marketing and branding plans and provisions allocating profits relating to sales of the watch business between the Swatch Parties and the Tiffany Parties.
In general terms, the Swatch Parties alleged that the Tiffany Parties breached the Agreements by obstructing and delaying development of Watch Company’s business and otherwise failing to proceed in good faith. The Swatch Parties sought damages based on alternate theories ranging from CHF
73.0
million
(or approximately
$72.0 million
at January 31,
2016
) (based on its alleged wasted investment) to CHF
3.8
billion (or approximately
$3.7 billion
at January 31,
2016
) (calculated based on alleged future lost profits of the Swatch Parties and their affiliates over the entire term of the Agreements).
The Registrant believes that the claims of the Swatch Parties are without merit. In the Arbitration, the Tiffany Parties defended against the Swatch Parties’ claims vigorously, disputing both the merits of the claims and the calculation of the alleged damages. The Tiffany Parties also asserted counterclaims for damages attributable to breach by the Swatch Parties, stemming from the Swatch Parties’ September 12, 2011 public issuance of a Notice of Termination purporting to terminate the Agreements due to alleged material breach by the Tiffany Parties, and for termination due to such breach. In general terms, the Tiffany Parties alleged that the Swatch Parties did not have grounds for termination, failed to meet the high standard for proving material breach set forth in the Agreements and failed to provide appropriate management, distribution, marketing and other resources for TIFFANY & CO. brand watches and to honor their contractual obligations to the Tiffany Parties regarding brand management. The Tiffany Parties’ counterclaims sought damages based on alternate theories ranging from CHF
120.0
million (or approximately
$118.0 million
at January 31,
2016
) (based on its wasted investment) to approximately CHF
540.0
million (or approximately
$533.0 million
at January 31,
2016
) (calculated based on alleged future lost profits of the Tiffany Parties).
The Arbitration hearing was held in October 2012 before a three-member arbitral panel convened in the Netherlands pursuant to the Arbitration Rules of the Netherlands Arbitration Institute (the "Rules"), and the Arbitration record was completed in February 2013.
Under the terms of the Arbitration Award, and at the request of the Swatch Parties and the Tiffany Parties, the Agreements were deemed terminated. The Arbitration Award stated that the effective date of termination was March 1, 2013. Pursuant to the Arbitration Award, the Tiffany Parties were ordered to pay 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.
Prior to the ruling of the arbitral panel, no accrual was established in the Company's consolidated financial statements because management did not believe the likelihood of an award of damages to the Swatch Parties was probable. As a result of the ruling, 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 31, 2014, the Tiffany Parties took action in the District Court of Amsterdam to annul the Arbitration Award. Generally, arbitration awards are final; however, Dutch law does provide for limited grounds on which arbitral awards may be set aside. The Tiffany Parties petitioned to annul the Arbitration Award on these statutory grounds. These grounds include, for example, that the arbitral tribunal violated its mandate by changing the express terms of the Agreements.
A three-judge panel presided over the annulment hearing on January 19, 2015, and, on March 4, 2015, issued a decision in favor of the Tiffany Parties. Under this decision, the Arbitration Award is set aside. However, the Swatch Parties have taken action in the Dutch courts to appeal the District Court's decision, and the Arbitration Award may ultimately be upheld by the courts of the Netherlands. Registrant’s management expects that the annulment action will not be ultimately resolved until at the earliest, Registrant's fiscal year ending January 31, 2017.
If the Arbitration Award is finally annulled, management anticipates that the claims and counterclaims that formed the basis of the Arbitration, and potentially additional claims and counterclaims, will be litigated in court proceedings between and among the Swatch Parties and the Tiffany Parties. The identity
and location of the courts that would hear such actions have not been determined at this time. Management also anticipates that the Tiffany Parties would seek the return of the amounts paid by them under the Arbitration Award in court proceedings.
In any litigation regarding the claims and counterclaims that formed the basis of the arbitration, issues of liability and damages will be pled and determined without regard to the findings of the arbitral panel. As such, it is possible that the court could find that the Swatch Parties were in material breach of their obligations under the Agreements, that the Tiffany Parties were in material breach of their obligations under the Agreements or that neither the Swatch Parties nor the Tiffany Parties were in material breach. If the Swatch Parties’ claims of liability were accepted by the court, the damages award cannot be reasonably estimated at this time, but could exceed the Arbitration Damages and could have a material adverse effect on the Registrant’s consolidated financial statements or liquidity.
Although the District Court has issued a decision in favor of the Tiffany Parties, an amount will only be recorded for any return of amounts paid under the Arbitration Award when the District’s Court decision is final (i.e., after all rights of appeal have been exhausted) and return of these amounts is deemed probable and collection is reasonably assured. As such, the Company has not recorded any amounts in its consolidated financial statements related to the District Court’s decision.
Additionally, management has not established any accrual in the Company's consolidated financial statements for the year ended January 31, 2016 related to the annulment process or any potential subsequent litigation because it does not believe that the final annulment of the Arbitration Award and a subsequent award of damages exceeding the Arbitration Damages is probable.
Royalties payable to the Tiffany Parties by Watch Company under the Agreements were not significant in any year and watches manufactured by Watch Company and sold in TIFFANY & CO. stores constituted 1% of worldwide net sales in 2013. In April 2015, management introduced new TIFFANY & CO. brand watches, which have been designed, produced, marketed and distributed through certain of the Company's Swiss subsidiaries.
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 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.
Environmental Matter
In 2005, the US 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.
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 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 just the lower eight miles of the River, which is supported by a Focused Feasibility Study (the "FFS"). The FFS evaluated three remediation options for the lower eight miles, 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 its decision on a remediation plan for the lower eight miles of the River. The identified remediation plan 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. However, concurrent with issuing its Record of Decision, the EPA noted that it plans to begin discussions with the parties responsible for the contamination to seek their performance of, or payment for, the remediation work for the lower eight miles of the River. The EPA further noted that it expects the design of the necessary remediation activities, which is estimated to take three to four years, to be outlined in a legally binding document. The remediation is expected to follow the design process, and the EPA has estimated that remediation would take another six years to complete.
With respect to remediation of the lower eight miles of the River, until the EPA reaches an agreement, if any, with any potentially responsible party or parties to fund the design and remediation work (or pursues legal or administrative action to require any potentially responsible party or parties to perform, or pay for, the design and remediation work), it cannot be determined which potentially responsible party or parties will be responsible for such design and remediation, or how the estimated
$1.38 billion
cost identified in the Record of Decision will be allocated among any potentially responsible parties. Further, 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.
As such, the Company's obligations, if any, beyond those already recorded for the 2007 AOC and the Mile 10.9 AOC cannot be determined at this time, and the Company has therefore not recorded any additional liability related to this matter. 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
companies in the CPG 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, the Company does not expect that its ultimate liability, if any, related to these matters will be material to its financial position. It is, however, possible that, when the uncertainties discussed above are resolved, any resulting liability could be material to its results of operations or cash flows in the period in which such uncertainties are resolved.
Other
In the fourth quarter of 2015 and the first quarter of 2013, the Company implemented specific cost-reduction initiatives and recorded
$8.8 million
and
$9.4 million
, respectively, of expense within SG&A expenses. These unrelated cost-reduction initiatives included severance related to staffing reductions and subleasing of certain office space for which only a portion of the Company's future rent obligations will be recovered.
The Company's Chairman of the Board was a member of the Board of Directors of The Bank of New York Mellon through April 14, 2015. The Bank of New York Mellon serves as the Company's trustee for its Senior Notes due in 2024 and 2044, participates as a co-syndication agent and lender for its New Credit Facilities, provides other general banking services and serves as the trustee and an investment manager for the Company's pension plan. Fees paid to the bank for services rendered and interest on debt amounted to
$0.7
million,
$1.3
million and
$1.6
million in
2015
,
2014
and
2013
.
L. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2016
|
|
|
2015
|
|
Accumulated other comprehensive (loss) earnings, net of tax:
|
|
|
|
Foreign currency translation adjustments
|
$
|
(135.3
|
)
|
|
$
|
(76.3
|
)
|
Unrealized (loss) gain on marketable securities
|
(1.0
|
)
|
|
1.9
|
|
Deferred hedging loss
|
(26.8
|
)
|
|
(5.4
|
)
|
Net unrealized loss on benefit plans
|
(115.0
|
)
|
|
(210.7
|
)
|
|
$
|
(278.1
|
)
|
|
$
|
(290.5
|
)
|
Additions to and reclassifications out of accumulated other comprehensive earnings (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(
in millions
)
|
2016
|
|
2015
|
|
2014
|
|
Foreign currency translation adjustments
|
$
|
(59.9
|
)
|
$
|
(101.9
|
)
|
$
|
(31.7
|
)
|
Income tax benefit
|
0.9
|
|
8.8
|
|
4.5
|
|
Foreign currency adjustments, net of tax
|
(59.0
|
)
|
(93.1
|
)
|
(27.2
|
)
|
Unrealized (loss) gain on marketable securities
|
(4.1
|
)
|
(0.9
|
)
|
1.2
|
|
Reclassification for gain included in net earnings
a
|
(0.4
|
)
|
—
|
|
—
|
|
Income tax benefit (expense)
|
1.6
|
|
0.1
|
|
(0.4
|
)
|
Unrealized (loss) gain on marketable securities, net of tax
|
(2.9
|
)
|
(0.8
|
)
|
0.8
|
|
Unrealized (loss) gain on hedging instruments
|
(22.2
|
)
|
14.6
|
|
8.7
|
|
Reclassification adjustment for gain included in
net earnings
b
|
(11.7
|
)
|
(13.0
|
)
|
(14.0
|
)
|
Income tax benefit (expense)
|
12.5
|
|
(0.4
|
)
|
1.9
|
|
Unrealized (loss) gain on hedging instruments, net of tax
|
(21.4
|
)
|
1.2
|
|
(3.4
|
)
|
Prior service cost
|
—
|
|
(0.5
|
)
|
—
|
|
Net actuarial gain (loss)
|
122.5
|
|
(234.6
|
)
|
86.3
|
|
Amortization of net loss included in net earnings
c
|
30.4
|
|
13.1
|
|
19.2
|
|
Amortization of prior service (credit) cost included in
net earnings
c
|
(0.6
|
)
|
(0.4
|
)
|
0.3
|
|
Income tax (expense) benefit
|
(56.6
|
)
|
83.2
|
|
(40.7
|
)
|
Net unrealized gain (loss) on benefit plans, net of tax
|
95.7
|
|
(139.2
|
)
|
65.1
|
|
Total other comprehensive earnings (loss), net of tax
|
$
|
12.4
|
|
$
|
(231.9
|
)
|
$
|
35.3
|
|
|
|
a
|
These losses are reclassified into Other expense (income), net.
|
|
|
b
|
These gains are reclassified into Interest expense and financing costs and Cost of sales (see "Note H - Hedging Instruments" for additional details).
|
|
|
c
|
These accumulated other comprehensive income components are included in the computation of net periodic pension costs (see "Note N - Employee Benefit Plans" for additional details).
|
Stock Repurchase Program
In January 2011, the Company's Board of Directors approved a stock repurchase program ("2011 Program") and terminated a previously-existing program. The 2011 Program authorized the Company to repurchase up to
$400.0
million of its Common Stock through open market or private transactions. The timing of repurchases and the actual number of shares to be repurchased depended on a variety of discretionary factors such as stock price, cash-flow forecasts and other market conditions. The Company suspended share repurchases during the second quarter of 2012. In January 2013, the Board of Directors extended the expiration date of the 2011 Program to January 31, 2014. The 2011 Program expired on January 31, 2014 with
$163.8
million of unused capacity.
In March 2014, the Company's Board of Directors approved a share repurchase program ("2014 Program") which authorized the Company to repurchase up to
$300.0
million of its Common Stock through open market transactions. The program had an expiration date of March 31, 2017, but was terminated in January 2016 in connection with the authorization of a new program with increased
repurchase capacity (as described in more detail below). Approximately
$58.6
million remained available for repurchase under the 2014 Program at the time of its termination.
In January 2016, the Company's Board of Directors approved a new share repurchase program ("2016 Program") which authorizes the Company to repurchase up to
$500.0
million of its Common Stock through open market transactions, block trades or privately negotiated transactions and terminated the 2014 Program. Purchases under the 2014 Program were, and purchases under the 2016 Program have been, executed under a written plan for trading securities as specified under Rule 10b5-1 promulgated under the Securities and Exchange Act of 1934, as amended, the terms of which are within the Company's discretion, subject to applicable securities laws, and are based on market conditions and the Company's liquidity needs. The 2016 Program will expire on January 31, 2019. Approximately
$494.0
million remained available for repurchase under the 2016 Program at
January 31, 2016
.
The Company's share repurchase activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions, except per share amounts)
|
2016
|
|
2015
|
|
2014
|
|
Cost of repurchases
|
$
|
220.4
|
|
$
|
27.0
|
|
$
|
—
|
|
Shares repurchased and retired
|
2.8
|
|
0.3
|
|
—
|
|
Average cost per share
|
$
|
78.40
|
|
$
|
89.91
|
|
$
|
—
|
|
Cash Dividends
The Company's Board of Directors declared quarterly dividends which, on an annual basis, totaled
$1.58
,
$1.48
and
$1.34
per share of Common Stock in
2015
,
2014
and
2013
.
On
February 18, 2016
, the Company's Board of Directors declared a quarterly dividend of
$0.40
per share of Common Stock. This dividend will be paid on
April 11, 2016
to stockholders of record on
March 21, 2016
.
M. STOCK COMPENSATION PLANS
The Company has two stock compensation plans under which awards may be made: the Employee Incentive Plan and the Directors Equity Compensation Plan, both of which were approved by the stockholders. No award may be made under the Employee Incentive Plan after May 22, 2024 or under the Directors Equity Compensation Plan after May 15, 2018.
Under the Employee Incentive Plan, the maximum number of common shares authorized for issuance was
8.7
million. Awards may be made to employees of the Company or its related companies in the form of stock options, stock appreciation rights, shares of stock (or rights to receive shares of stock) and cash. Awards made in the form of non-qualified stock options, tax-qualified incentive stock options or stock appreciation rights have a maximum term of
10
years from the grant date and may not be granted for an exercise price below fair market value.
The Company has granted time-vesting restricted stock units ("RSUs"), performance-based restricted stock units ("PSUs") and stock options under the Employee Incentive Plan. Stock options vest primarily in increments of
25%
per year over
four
years. RSUs and PSUs issued to the executive officers vest primarily at the end of a
three
-year period. RSUs issued to other management employees vest primarily in increments of
25%
per year over a
four
-year period. Vesting of all PSUs is contingent on the Company's performance against pre-set objectives established by the Compensation Committee of the Company's Board of Directors. The PSUs and RSUs require no payment from the employee. PSU and RSU payouts
will be in shares of Company stock at vesting. Compensation expense is recognized using the fair market value at the date of grant and recorded ratably over the vesting period. However, PSU compensation expense may be adjusted over the vesting period based on interim estimates of performance against the pre-set objectives. Award holders are not entitled to receive dividends on unvested stock options, PSUs or RSUs.
Under the Directors Equity Compensation Plan, the maximum number of shares of Common Stock authorized for issuance was
1.0
million (subject to adjustment); awards may be made to non-employee directors of the Company in the form of stock options or shares of stock but may not exceed
25
thousand (subject to adjustment) shares per non-employee director in any fiscal year. Awards of shares (or rights to receive shares) reduce the above authorized amount by
1.58
shares for every share delivered pursuant to such an award. Awards made in the form of stock options may have a maximum term of
10
years from the grant date and may not be granted for an exercise price below fair market value unless the director has agreed to forego all or a portion of his or her annual cash retainer or other fees for service as a director in exchange for below-market exercise price options. Director options vest immediately. Director RSUs vest over a
one
-year period.
The Company uses newly-issued shares to satisfy stock option exercises and the vesting of PSUs and RSUs.
The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model and compensation expense is recognized ratably over the vesting period. The valuation model uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company's stock. The Company uses historical data to estimate the expected term of the option that represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the grant date.
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Dividend yield
|
1.9
|
%
|
1.3
|
%
|
1.2
|
%
|
Expected volatility
|
28.1
|
%
|
30.2
|
%
|
39.6
|
%
|
Risk-free interest rate
|
1.5
|
%
|
1.5
|
%
|
1.4
|
%
|
Expected term in years
|
5
|
|
5
|
|
5
|
|
A summary of the option activity for the Company's stock option plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(in millions)
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term in Years
|
Aggregate
Intrinsic
Value
(in millions)
|
|
Outstanding at January 31, 2015
|
1.7
|
|
$
|
68.76
|
|
7.38
|
$
|
32.3
|
|
Granted
|
0.7
|
|
64.58
|
|
|
|
Exercised
|
(0.1
|
)
|
38.19
|
|
|
|
Forfeited/canceled
|
(0.2
|
)
|
76.61
|
|
|
|
Outstanding at January 31, 2016
|
2.1
|
|
$
|
67.59
|
|
7.02
|
$
|
7.9
|
|
Exercisable at January 31, 2016
|
1.1
|
|
$
|
62.78
|
|
4.74
|
$
|
7.3
|
|
The weighted-average grant-date fair value of options granted for the years ended January 31,
2016
,
2015
and
2014
was
$14.42
,
$22.25
and
$29.11
. The total intrinsic value (market value on date of exercise less grant price) of options exercised during the years ended January 31,
2016
,
2015
and
2014
was
$2.4
million,
$44.1
million and
$39.5
million.
A summary of the activity for the Company's RSUs is presented below:
|
|
|
|
|
|
|
|
Number of Shares
(in millions)
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Non-vested at January 31, 2015
|
0.6
|
|
$
|
75.46
|
|
Granted
|
0.3
|
|
80.44
|
|
Vested
|
(0.3
|
)
|
84.73
|
|
Forfeited
|
(0.1
|
)
|
78.44
|
|
Non-vested at January 31, 2016
|
0.5
|
|
$
|
79.02
|
|
A summary of the activity for the Company's PSUs is presented below:
|
|
|
|
|
|
|
|
Number of Shares
(in millions)
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Non-vested at January 31, 2015
|
0.7
|
|
$
|
70.80
|
|
Granted
|
0.3
|
|
58.09
|
|
Vested
|
(0.1
|
)
|
57.06
|
|
Forfeited/canceled
|
(0.2
|
)
|
61.96
|
|
Non-vested at January 31, 2016
|
0.7
|
|
$
|
70.56
|
|
The weighted-average grant-date fair value of RSUs granted for the years ended January 31,
2015
and
2014
was
$90.68
and
$68.66
. The weighted-average grant-date fair value of PSUs granted for the years ended January 31,
2015
and
2014
was
$82.88
and
$83.73
.
As of January 31,
2016
, there was
$65.6
million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Employee Incentive Plan and Directors Equity Compensation Plan. The expense is expected to be recognized over a weighted-average period of
2.6
years. The total fair value of RSUs vested during the years ended January 31,
2016
,
2015
and
2014
was
$18.0
million,
$27.7
million and
$26.5
million. The total fair value of PSUs vested during the years ended January 31,
2016
,
2015
and
2014
was
$4.1
million,
$8.1
million and
$10.2
million.
Total compensation cost for stock-based compensation awards recognized in income and the related income tax benefit was
$24.5
million and
$7.9
million for the year ended
January 31, 2016
,
$26.5
million and
$8.9
million for the year ended January 31,
2015
and
$32.2
million and
$11.4
million for the year ended January 31,
2014
. Total stock-based compensation cost capitalized in inventory was not significant.
|
|
N.
|
EMPLOYEE BENEFIT PLANS
|
Pensions and Other Postretirement Benefits
The Company maintains the following pension plans: a noncontributory defined benefit pension plan qualified in accordance with the Internal Revenue Service Code ("Qualified Plan") covering substantially all U.S. employees hired before January 1, 2006, a non-qualified unfunded retirement income plan
("Excess Plan") covering certain U.S. employees hired before January 1, 2006 and affected by Internal Revenue Service Code compensation limits, a non-qualified unfunded Supplemental Retirement Income Plan ("SRIP") covering certain executive officers of the Company hired before January 1, 2006 and noncontributory defined benefit pension plans in certain of its international locations ("Other Plans").
Qualified Plan benefits are based on (i) average compensation in the highest paid
five years of the last 10 years
of employment ("average final compensation") and (ii) the number of years of service. Participants with at least
10 years
of service who retire after attaining age 55 may receive reduced retirement benefits. Participants who have at least five years of service when their employment with the Company terminates may also receive certain benefits. 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 2015 and none is required in 2016 to meet the minimum funding requirements of the Employee Retirement Income Security Act. The Company periodically evaluates whether to make discretionary cash contributions to the Qualified Plan, did not make such contributions in 2015 and currently does not anticipate making such contributions in 2016. 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.
The Qualified Plan, Excess Plan and SRIP exclude all employees hired on or after January 1, 2006. Instead, employees hired on or after January 1, 2006 are eligible to receive a defined contribution retirement benefit under the Employee Profit Sharing and Retirement Savings ("EPSRS") Plan (see "Employee Profit Sharing and Retirement Savings Plan" below). Employees hired before January 1, 2006 continue to be eligible for and accrue benefits under the Qualified Plan.
The Excess Plan uses the same retirement benefit formula set forth in the Qualified Plan, but includes earnings that are excluded under the Qualified Plan due to Internal Revenue Service Code qualified pension plan limitations. Benefits payable under the Qualified Plan offset benefits payable under the Excess Plan. Employees vested under the Qualified Plan are vested under the Excess Plan; however, benefits under the Excess Plan are subject to forfeiture if employment is terminated for cause and, for those who leave the Company prior to age 65, if they fail to execute and adhere to noncompetition and confidentiality covenants. The Excess Plan allows participants with at least
10 years
of service who retire after attaining age 55 to receive reduced retirement benefits.
The SRIP supplements the Qualified Plan, Excess Plan and Social Security by providing additional payments upon a participant's retirement. SRIP benefits are determined by a percentage of average final compensation; this percentage increases as specified service plateaus are achieved. Benefits payable under the Qualified Plan, Excess Plan and Social Security offset benefits payable under the SRIP. Under the SRIP, benefits vest when a participant both (i) attains age 55 while employed by the Company and (ii) has provided at least
10 years
of service. In certain limited circumstances, early vesting can occur due to a change in control. Benefits under the SRIP are forfeited if benefits under the Excess Plan are forfeited.
Benefits for the Other Plans are typically based on monthly eligible compensation and the number of years of service. Benefits are typically payable in a lump sum upon retirement, termination, resignation or death if the participant has completed the requisite service period.
The Company accounts for pension expense using the projected unit credit actuarial method for financial reporting purposes. The actuarial present value of the benefit obligation is calculated based on the expected date of separation or retirement of the Company's eligible employees.
The Company provides certain health-care and life insurance benefits ("Other Postretirement Benefits") for certain retired employees and accrues the cost of providing these benefits throughout the employees' active service period until they attain full eligibility for those benefits. Substantially all of the Company's
U.S. full-time employees, hired on or before March 31, 2012, may become eligible for these benefits if they reach normal or early retirement age while working for the Company. The cost of providing postretirement health-care benefits is shared by the retiree and the Company, with retiree contributions evaluated annually and adjusted in order to maintain the Company/retiree cost-sharing target ratio. The life insurance benefits are noncontributory. The Company's employee and retiree health-care benefits are administered by an insurance company, and premiums on life insurance are based on prior years' claims experience.
Obligations and Funded Status
The following tables provide a reconciliation of benefit obligations, plan assets and funded status of the pension and other postretirement benefit plans as of the measurement date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
(in millions)
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
Change in benefit obligation:
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
841.7
|
|
$
|
615.9
|
|
|
$
|
92.9
|
|
$
|
54.7
|
|
Service cost
|
22.6
|
|
16.8
|
|
|
4.2
|
|
2.4
|
|
Interest cost
|
30.6
|
|
28.3
|
|
|
3.2
|
|
2.6
|
|
Participants' contributions
|
—
|
|
—
|
|
|
1.3
|
|
1.5
|
|
Amendments
|
—
|
|
0.8
|
|
|
—
|
|
—
|
|
MMA retiree drug subsidy
|
—
|
|
—
|
|
|
0.2
|
|
0.1
|
|
Actuarial (gain) loss
|
(128.8
|
)
|
202.3
|
|
|
(20.4
|
)
|
34.9
|
|
Benefits paid
|
(23.1
|
)
|
(20.2
|
)
|
|
(3.0
|
)
|
(3.3
|
)
|
Curtailments
|
(0.2
|
)
|
—
|
|
|
—
|
|
—
|
|
Translation
|
(0.2
|
)
|
(2.2
|
)
|
|
—
|
|
—
|
|
Benefit obligation at end of year
|
742.6
|
|
841.7
|
|
|
78.4
|
|
92.9
|
|
Change in plan assets:
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
406.0
|
|
397.4
|
|
|
—
|
|
—
|
|
Actual return on plan assets
|
(2.2
|
)
|
26.0
|
|
|
—
|
|
—
|
|
Employer contribution
|
5.1
|
|
2.8
|
|
|
1.5
|
|
1.7
|
|
Participants' contributions
|
—
|
|
—
|
|
|
1.3
|
|
1.5
|
|
MMA retiree drug subsidy
|
—
|
|
—
|
|
|
0.2
|
|
0.1
|
|
Benefits paid
|
(23.1
|
)
|
(20.2
|
)
|
|
(3.0
|
)
|
(3.3
|
)
|
Fair value of plan assets at end of year
|
385.8
|
|
406.0
|
|
|
—
|
|
—
|
|
Funded status at end of year
|
$
|
(356.8
|
)
|
$
|
(435.7
|
)
|
|
$
|
(78.4
|
)
|
$
|
(92.9
|
)
|
Actuarial gains in 2015 reflect increases in the discount rates for all plans. Actuarial losses in 2014 reflect decreases in the discount rates for all plans, and for the U.S. plans, also reflect the impact of adopting updated mortality assumptions issued by the Society of Actuaries in October 2014.
The following tables provide additional information regarding the Company's pension plans' projected benefit obligations and assets (included in pension benefits in the table above) and accumulated benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2016
|
|
(in millions)
|
Qualified
|
|
Excess/SRIP
|
|
Other
|
|
Total
|
|
Projected benefit obligation
|
$
|
620.8
|
|
$
|
105.5
|
|
$
|
16.3
|
|
$
|
742.6
|
|
Fair value of plan assets
|
385.8
|
|
—
|
|
—
|
|
385.8
|
|
Funded status
|
$
|
(235.0
|
)
|
$
|
(105.5
|
)
|
$
|
(16.3
|
)
|
$
|
(356.8
|
)
|
Accumulated benefit obligation
|
$
|
556.8
|
|
$
|
92.1
|
|
$
|
13.5
|
|
$
|
662.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2015
|
|
(in millions)
|
Qualified
|
|
Excess/SRIP
|
|
Other
|
|
Total
|
|
Projected benefit obligation
|
$
|
693.3
|
|
$
|
133.1
|
|
$
|
15.3
|
|
$
|
841.7
|
|
Fair value of plan assets
|
406.0
|
|
—
|
|
—
|
|
406.0
|
|
Funded status
|
$
|
(287.3
|
)
|
$
|
(133.1
|
)
|
$
|
(15.3
|
)
|
$
|
(435.7
|
)
|
Accumulated benefit obligation
|
$
|
620.6
|
|
$
|
97.4
|
|
$
|
12.6
|
|
$
|
730.6
|
|
At January 31,
2016
, the Company had a current liability of
$7.1
million and a non-current liability of
$428.1
million for pension and other postretirement benefits. At January 31,
2015
, the Company had a current liability of
$4.3
million and a non-current liability of
$524.2
million for pension and other postretirement benefits.
Amounts recognized in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
(in millions)
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
Net actuarial loss
|
$
|
180.1
|
|
$
|
311.2
|
|
|
$
|
10.4
|
|
$
|
32.4
|
|
Prior service cost (credit)
|
0.8
|
|
0.9
|
|
|
(3.0
|
)
|
(3.7
|
)
|
Total before tax
|
$
|
180.9
|
|
$
|
312.1
|
|
|
$
|
7.4
|
|
$
|
28.7
|
|
The estimated pre-tax amount that will be amortized from accumulated other comprehensive loss into net periodic benefit cost within the next 12 months is as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
Net actuarial loss
|
$
|
15.5
|
|
|
$
|
0.2
|
|
Prior service credit
|
—
|
|
|
(0.7
|
)
|
|
$
|
15.5
|
|
|
$
|
(0.5
|
)
|
Components of Net Periodic Benefit Cost and
Other Amounts Recognized in Other Comprehensive Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
|
2016
|
|
2015
|
|
2014
|
|
Service cost
|
$
|
22.6
|
|
$
|
16.8
|
|
$
|
19.1
|
|
|
$
|
4.2
|
|
$
|
2.4
|
|
$
|
2.8
|
|
Interest cost
|
30.6
|
|
28.3
|
|
27.0
|
|
|
3.2
|
|
2.6
|
|
2.8
|
|
Expected return on plan assets
|
(24.7
|
)
|
(23.6
|
)
|
(22.2
|
)
|
|
—
|
|
—
|
|
—
|
|
Curtailments
|
0.2
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
0.3
|
|
1.0
|
|
|
(0.7
|
)
|
(0.7
|
)
|
(0.7
|
)
|
Amortization of net loss
|
28.9
|
|
13.1
|
|
19.0
|
|
|
1.5
|
|
—
|
|
0.2
|
|
Net periodic benefit cost
|
57.6
|
|
34.9
|
|
43.9
|
|
|
8.2
|
|
4.3
|
|
5.1
|
|
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
(102.1
|
)
|
199.8
|
|
(71.2
|
)
|
|
(20.4
|
)
|
34.8
|
|
(15.1
|
)
|
Recognized actuarial loss
|
(28.9
|
)
|
(13.1
|
)
|
(19.0
|
)
|
|
(1.5
|
)
|
—
|
|
(0.2
|
)
|
Prior service cost
|
—
|
|
0.5
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Recognized prior service (cost) credit
|
(0.1
|
)
|
(0.3
|
)
|
(1.0
|
)
|
|
0.7
|
|
0.7
|
|
0.7
|
|
Total recognized in other comprehensive earnings
|
(131.1
|
)
|
186.9
|
|
(91.2
|
)
|
|
(21.2
|
)
|
35.5
|
|
(14.6
|
)
|
Total recognized in net periodic benefit cost and other comprehensive earnings
|
$
|
(73.5
|
)
|
$
|
221.8
|
|
$
|
(47.3
|
)
|
|
$
|
(13.0
|
)
|
$
|
39.8
|
|
$
|
(9.5
|
)
|
Assumptions
Weighted-average assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
January 31,
|
|
|
2016
|
|
2015
|
|
Discount rate:
|
|
|
Qualified Plan
|
4.50
|
%
|
3.75
|
%
|
Excess Plan/SRIP
|
4.25
|
%
|
3.75
|
%
|
Other Plans
|
1.05
|
%
|
1.12
|
%
|
Other Postretirement Benefits
|
4.50
|
%
|
3.50
|
%
|
Rate of increase in compensation:
|
|
|
Qualified Plan
|
3.00
|
%
|
2.75
|
%
|
Excess Plan
|
4.25
|
%
|
4.25
|
%
|
SRIP
|
6.50
|
%
|
7.25
|
%
|
Other Plans
|
1.18
|
%
|
1.22
|
%
|
Weighted-average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Discount rate:
|
|
|
|
Qualified Plan
|
3.75
|
%
|
4.75
|
%
|
4.50
|
%
|
Excess Plan/SRIP
|
3.75
|
%
|
5.00
|
%
|
4.50
|
%
|
Other Plans
|
1.71
|
%
|
1.81
|
%
|
1.25
|
%
|
Other Postretirement Benefits
|
3.50
|
%
|
5.00
|
%
|
4.50
|
%
|
Expected return on plan assets
|
7.50
|
%
|
7.50
|
%
|
7.50
|
%
|
Rate of increase in compensation:
|
|
|
|
Qualified Plan
|
2.75
|
%
|
2.75
|
%
|
2.75
|
%
|
Excess Plan
|
4.25
|
%
|
4.25
|
%
|
4.25
|
%
|
SRIP
|
7.25
|
%
|
7.25
|
%
|
7.25
|
%
|
Other Plans
|
1.56
|
%
|
1.33
|
%
|
1.00
|
%
|
The expected long-term rate of return on Qualified Plan assets is selected by taking into account the average rate of return expected on the funds invested or to be invested to provide for benefits included in the projected benefit obligation. More specifically, consideration is given to the expected rates of return (including reinvestment asset return rates) based upon the plan's current asset mix, investment strategy and the historical performance of plan assets.
For postretirement benefit measurement purposes, a
7.25%
annual rate of increase in the per capita cost of covered health care was assumed for
2016
. This rate was assumed to decrease gradually to
4.75%
by 2023 and remain at that level thereafter.
Assumed health-care cost trend rates affect amounts reported for the Company's postretirement health-care benefits plan. A one-percentage-point increase in the assumed health-care cost trend rate would increase the Company's accumulated postretirement benefit obligation by approximately
$3.9
million for the year ended January 31,
2016
. Decreasing the assumed health-care cost trend rate by one-percentage point would decrease the Company's accumulated postretirement benefit obligation by approximately
$2.8
million for the year ended January 31,
2016
. A one-percentage-point change in the assumed health-care cost trend rate would not have a significant effect on the Company's aggregate service and interest cost components of the
2015
postretirement expense.
Plan Assets
The Company's investment objectives, related to the Qualified Plan's assets, are the preservation of principal and balancing the management of interest rate risk associated with the duration of the plan's liabilities with the achievement of a reasonable rate of return over time. The Qualified Plan's assets are allocated based on an expectation that equity securities will outperform debt securities over the long term, but that as the plan's funded status (assets relative to liabilities) increases, the amount of assets allocated to fixed income securities which match the interest rate risk profile of the plan's liabilities will increase. The Company's target asset allocations based on its funded status as of January 31, 2016 is as follows: approximately
50%
in equity securities; approximately
35%
in fixed income securities; and approximately
15%
in other securities. The Company attempts to mitigate investment risk by rebalancing asset allocation periodically.
The fair value of the Qualified Plan's assets at January 31,
2016
and
2015
by asset category is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
Fair Value Measurements
Using Inputs Considered as*
|
(in millions)
|
January 31, 2016
|
Level 1
|
Level 2
|
Level 3
|
Equity securities:
|
|
|
|
|
Common/collective trusts
a
|
115.9
|
|
—
|
|
115.9
|
|
—
|
|
U.S. equity securities
|
45.6
|
|
45.6
|
|
—
|
|
—
|
|
Mutual fund
|
27.4
|
|
27.4
|
|
—
|
|
—
|
|
Fixed income securities:
|
|
|
|
|
Government bonds
|
62.3
|
|
61.3
|
|
1.0
|
|
—
|
|
Corporate bonds
|
87.7
|
|
—
|
|
87.7
|
|
—
|
|
Other types of investments:
|
|
|
|
|
Cash and cash equivalents
|
2.5
|
|
2.5
|
|
—
|
|
—
|
|
Mutual funds
|
25.6
|
|
25.6
|
|
—
|
|
—
|
|
Limited partnerships
|
18.8
|
|
—
|
|
—
|
|
18.8
|
|
|
$
|
385.8
|
|
$
|
162.4
|
|
$
|
204.6
|
|
$
|
18.8
|
|
|
|
|
|
|
|
Fair Value at
|
Fair Value Measurements
Using Inputs Considered as*
|
(in millions)
|
January 31, 2015
|
Level 1
|
Level 2
|
Level 3
|
Equity securities:
|
|
|
|
|
Common/collective trusts
a
|
$
|
288.4
|
|
$
|
—
|
|
$
|
288.4
|
|
$
|
—
|
|
Fixed income securities:
|
|
|
|
|
Government bonds
|
27.7
|
|
23.6
|
|
4.1
|
|
—
|
|
Corporate bonds
|
33.9
|
|
—
|
|
33.9
|
|
—
|
|
Mortgage obligations
|
37.0
|
|
—
|
|
37.0
|
|
—
|
|
Other types of investments:
|
|
|
|
|
Limited partnerships
|
19.0
|
|
—
|
|
—
|
|
19.0
|
|
|
$
|
406.0
|
|
$
|
23.6
|
|
$
|
363.4
|
|
$
|
19.0
|
|
|
|
*
|
See "Note I - Fair Value of Financial Instruments" for a description of the levels of inputs.
|
|
|
a
|
Common/collective trusts include investments in U.S. and international large, middle and small capitalization equities.
|
The changes in fair value of the Qualified Plan's Level 3 assets is as follows:
|
|
|
|
|
(in millions)
|
Limited partnerships
|
|
January 31, 2014
|
$
|
14.4
|
|
Unrealized gain, net
|
1.4
|
|
Realized gain, net
|
0.6
|
|
Purchases
|
5.6
|
|
Settlements
|
(3.0
|
)
|
January 31, 2015
|
19.0
|
|
Unrealized gain, net
|
1.2
|
|
Realized gain, net
|
0.1
|
|
Purchases
|
3.7
|
|
Settlements
|
(5.2
|
)
|
January 31, 2016
|
$
|
18.8
|
|
Valuation Techniques
Investments in common/collective trusts and mutual funds are stated at estimated fair value which represents the net asset value of shares held by the Qualified Plan as reported by the investment advisor. The net asset value is based on the value of the underlying assets owned by the fund, minus its liabilities and then divided by the number of shares outstanding. Investments in limited partnerships are valued at estimated fair value based on financial information received from the investment advisor and/or general partner.
Securities traded on the national securities exchange (certain government bonds) are valued at the last reported sales price or closing price on the last business day of the fiscal year. Investments traded in the over-the-counter market and listed securities for which no sales were reported (certain government bonds, corporate bonds and mortgage obligations) are valued at the last reported bid price. Certain fixed income investments are held in separately managed accounts and those investments are valued using the underlying securities in the accounts.
Benefit Payments
The Company expects the following future benefit payments to be paid:
|
|
|
|
|
|
|
|
Years Ending January 31,
|
Pension Benefits
(in millions)
|
|
Other Postretirement Benefits
(in millions)
|
|
2017
|
$
|
24.4
|
|
$
|
1.7
|
|
2018
|
24.9
|
|
1.8
|
|
2019
|
26.6
|
|
1.9
|
|
2020
|
27.3
|
|
2.0
|
|
2021
|
28.9
|
|
2.1
|
|
2022-2026
|
166.4
|
|
12.9
|
|
Employee Profit Sharing and Retirement Savings ("EPSRS") Plan
The Company maintains an EPSRS Plan that covers substantially all U.S.-based employees. Under the profit-sharing feature of the EPSRS Plan, the Company made contributions, in the form of newly-issued
Company Common Stock through 2014, to the employees' accounts based on the achievement of certain targeted earnings objectives established by, or as otherwise determined by, the Company's Board of Directors. Beginning in 2015, these contributions were made in cash. The Company recorded no expense in
2015
and recorded expense of
$3.1
million in
2014
and
$3.9
million in
2013
. Under the retirement savings feature of the EPSRS Plan, employees who meet certain eligibility requirements may participate by contributing up to
50%
of their annual compensation, not to exceed Internal Revenue Service limits, and the Company may provide a matching cash contribution of
50%
of each participant's contributions, with a maximum matching contribution of
3%
of each participant's total compensation. The Company recorded expense of
$7.3
million,
$7.7
million and
$7.1
million in
2015
,
2014
and
2013
. Contributions to both features of the EPSRS Plan are made in the following year.
Under the profit-sharing feature of the EPSRS Plan, for contributions made in the Company's stock, the Company's stock contribution is required to be maintained in such stock until the employee has two or more years of service, at which time the employee may diversify his or her Company stock account into other investment options provided under the plan. For contributions made in cash, the contribution is allocated within the participant's account based on their investment elections under the EPSRS Plan. If the participant has made no election, the contribution will be invested in the appropriate default target fund as determined by each participant's date of birth. Under the retirement savings portion of the EPSRS Plan, the employees have the ability to elect to invest a portion of their contribution and the related matching contribution in Company stock. At January 31,
2016
, investments in Company stock represented
21%
of total EPSRS Plan assets.
The EPSRS Plan provides a defined contribution retirement benefit ("DCRB") to eligible employees hired on or after January 1, 2006. Under the DCRB, the Company makes contributions each year to each employee's account at a rate based upon age and years of service. These contributions are deposited into individual accounts in each employee's name to be invested in a manner similar to the retirement savings portion of the EPSRS Plan. The Company recorded expense of
$3.2
million,
$4.6
million and
$3.6
million in
2015
,
2014
and
2013
.
Deferred Compensation Plan
The Company has a non-qualified deferred compensation plan for directors, executives and certain management employees, whereby eligible participants may defer a portion of their compensation for payment at specified future dates, upon retirement, death or termination of employment. This plan also provides for an excess defined contribution retirement benefit ("Excess DC benefit") for certain eligible executives and management employees, hired on or after January 1, 2006. The Excess DC benefit is credited to the eligible employee's account, based on the compensation paid to the employee in excess of the IRS limits for contribution under the DCRB Plan. Under the plan, the deferred compensation is adjusted to reflect performance, whether positive or negative, of selected investment options chosen by each participant during the deferral period. The amounts accrued under the plans were
$24.9
million and
$27.1
million at January 31,
2016
and
2015
, and are reflected in other long-term liabilities. The Company does not promise or guarantee any rate of return on amounts deferred.
O. INCOME TAXES
Earnings from operations before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
United States
|
$
|
502.5
|
|
$
|
484.5
|
|
$
|
65.2
|
|
Foreign
|
207.4
|
|
253.0
|
|
189.7
|
|
|
$
|
709.9
|
|
$
|
737.5
|
|
$
|
254.9
|
|
The settlement of the Arbitration Award, as discussed in "Note J - Commitments and Contingencies", resulted in a significant change in the composition of geographical earnings from operations for the year ended January 31, 2014. This change resulted in a lower effective tax rate for the year ended January 31, 2014 because of lower tax rates on foreign earnings.
Components of the provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Current:
|
|
|
|
Federal
|
$
|
175.8
|
|
$
|
130.9
|
|
$
|
39.0
|
|
State
|
22.3
|
|
18.2
|
|
9.9
|
|
Foreign
|
49.8
|
|
66.5
|
|
52.5
|
|
|
247.9
|
|
215.6
|
|
101.4
|
|
Deferred:
|
|
|
|
Federal
|
(15.4
|
)
|
25.2
|
|
(28.6
|
)
|
State
|
3.9
|
|
13.2
|
|
(2.3
|
)
|
Foreign
|
9.6
|
|
(0.7
|
)
|
3.0
|
|
|
(1.9
|
)
|
37.7
|
|
(27.9
|
)
|
|
$
|
246.0
|
|
$
|
253.3
|
|
$
|
73.5
|
|
Reconciliations of the provision for income taxes at the statutory Federal income tax rate to the Company's effective income tax rate were as follows:
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Statutory Federal income tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State income taxes, net of Federal benefit
|
2.4
|
|
2.8
|
|
2.0
|
|
Foreign losses with no tax benefit
|
—
|
|
0.7
|
|
1.3
|
|
Undistributed foreign earnings
|
(2.5
|
)
|
(4.2
|
)
|
(7.8
|
)
|
Net change in uncertain tax positions
|
0.5
|
|
0.3
|
|
0.5
|
|
Domestic manufacturing deduction
|
(1.3
|
)
|
(1.3
|
)
|
(2.5
|
)
|
Other
|
0.6
|
|
1.1
|
|
0.3
|
|
|
34.7
|
%
|
34.4
|
%
|
28.8
|
%
|
The Company has the intent to indefinitely reinvest any undistributed earnings of all foreign subsidiaries. As of January 31,
2016
and
2015
, the Company has not provided deferred taxes on approximately
$685.0
million and
$612.0
million of undistributed earnings. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. U.S. Federal income taxes of approximately
$118.0
million and
$107.0
million would be incurred if these earnings were distributed.
Deferred tax assets (liabilities) consisted of the following:
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
Deferred tax assets:
|
|
|
Pension/postretirement benefits
|
$
|
166.7
|
|
$
|
203.0
|
|
Accrued expenses
|
34.3
|
|
36.4
|
|
Share-based compensation
|
18.3
|
|
17.3
|
|
Depreciation
|
6.6
|
|
14.4
|
|
Amortization
|
11.4
|
|
11.4
|
|
Foreign and state net operating losses
|
23.5
|
|
22.9
|
|
Sale-leaseback
|
30.4
|
|
36.3
|
|
Inventory
|
50.9
|
|
72.7
|
|
Financial hedging instruments
|
19.7
|
|
14.1
|
|
Unearned income
|
11.3
|
|
11.2
|
|
Other
|
53.6
|
|
37.1
|
|
|
426.7
|
|
476.8
|
|
Valuation allowance
|
(19.5
|
)
|
(16.2
|
)
|
|
407.2
|
|
460.6
|
|
Deferred tax liabilities:
|
|
|
Foreign tax credit
|
(25.1
|
)
|
(34.8
|
)
|
Net deferred tax asset
|
$
|
382.1
|
|
$
|
425.8
|
|
The Company has recorded a valuation allowance against certain deferred tax assets related to foreign net operating loss carryforwards where management has determined it is more likely than not that deferred tax assets will not be realized in the future. The overall valuation allowance relates to tax loss carryforwards and temporary differences for which no benefit is expected to be realized. Tax loss carryforwards of approximately
$84.0
million exist in certain foreign jurisdictions. Whereas some of these tax loss carryforwards do not have an expiration date, others expire at various times from 2018 through 2026.
The following table reconciles the unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Unrecognized tax benefits at beginning of year
|
$
|
8.3
|
|
$
|
27.6
|
|
$
|
28.2
|
|
Gross increases – tax positions in prior period
|
1.0
|
|
1.0
|
|
0.3
|
|
Gross decreases – tax positions in prior period
|
(0.4
|
)
|
(5.4
|
)
|
(0.4
|
)
|
Gross increases – tax positions in current period
|
1.4
|
|
0.1
|
|
0.1
|
|
Settlements
|
—
|
|
(14.8
|
)
|
(0.3
|
)
|
Lapse of statute of limitations
|
(0.1
|
)
|
(0.2
|
)
|
(0.3
|
)
|
Unrecognized tax benefits at end of year
|
$
|
10.2
|
|
$
|
8.3
|
|
$
|
27.6
|
|
Included in the balance of unrecognized tax benefits at January 31,
2016
,
2015
and
2014
are
$9.1
million,
$5.3
million and
$18.7
million of tax benefits that, if recognized, would affect the effective income tax rate.
The Company recognizes interest expense and penalties related to unrecognized tax benefits within the provision for income taxes. During the years ended January 31,
2016
,
2015
and
2014
, the Company recognized approximately
$1.7
million,
$1.8
million and
$1.9
million of expense associated with interest and penalties. Accrued interest and penalties are included within accounts payable and accrued liabilities and other long-term liabilities, and were
$7.8
million and
$6.0
million at January 31,
2016
and
2015
.
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
–
2013
) and New York State (tax years
2012
–
2014
), as well as an audit that is being conducted by the IRS (tax years
2010
–
2012
). 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. At January 31,
2016
, total unrecognized tax benefits were
$10.2
million of which approximately
$9.1
million, if recognized, would affect the effective income tax rate. Management believes it is reasonably possible that a majority of the total gross amount provided for unrecognized tax benefits will decrease in the next 12 months. Future developments may result in a change in this assessment.
P. SEGMENT INFORMATION
The Company's products are primarily sold in TIFFANY & CO. retail locations around the world. Net sales by geographic area are presented by attributing revenues from external customers on the basis of the country in which the merchandise is sold.
In deciding how to allocate resources and assess performance, the Company's Chief Operating Decision Maker regularly evaluates the performance of its reportable segments on the basis of net sales and earnings from operations, after the elimination of inter-segment sales and transfers. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Certain information relating to the Company's segments is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net sales:
|
|
|
|
|
|
Americas
|
$
|
1,947.0
|
|
|
$
|
2,033.5
|
|
|
$
|
1,926.9
|
|
Asia-Pacific
|
1,003.1
|
|
|
1,025.2
|
|
|
944.7
|
|
Japan
|
541.3
|
|
|
554.3
|
|
|
578.6
|
|
Europe
|
505.7
|
|
|
513.3
|
|
|
476.2
|
|
Total reportable segments
|
3,997.1
|
|
|
4,126.3
|
|
|
3,926.4
|
|
Other
|
107.8
|
|
|
123.6
|
|
|
104.7
|
|
|
$
|
4,104.9
|
|
|
$
|
4,249.9
|
|
|
$
|
4,031.1
|
|
Earnings (losses) from operations*:
|
|
|
|
|
|
Americas
|
$
|
390.8
|
|
|
$
|
435.5
|
|
|
$
|
374.3
|
|
Asia-Pacific
|
264.4
|
|
|
281.6
|
|
|
244.1
|
|
Japan
|
199.9
|
|
|
196.0
|
|
|
215.6
|
|
Europe
|
97.4
|
|
|
110.5
|
|
|
102.4
|
|
Total reportable segments
|
952.5
|
|
|
1,023.6
|
|
|
936.4
|
|
Other
|
6.4
|
|
|
4.9
|
|
|
(1.8
|
)
|
|
$
|
958.9
|
|
|
$
|
1,028.5
|
|
|
$
|
934.6
|
|
|
|
*
|
Represents earnings (losses) from operations before (i) unallocated corporate expenses, (ii) interest expense, financing costs and other expense (income), net, (iii) loss on extinguishment of debt, and (iv) other operating expenses.
|
The Company's Chief Operating Decision Maker does not evaluate the performance of the Company's assets on a segment basis for internal management reporting and, therefore, such information is not presented.
The following table sets forth a reconciliation of the segments' earnings from operations to the Company's consolidated earnings from operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2016
|
|
|
2015
|
|
|
2014
|
|
Earnings from operations for segments
|
$
|
958.9
|
|
|
$
|
1,028.5
|
|
|
$
|
934.6
|
|
Unallocated corporate expenses
|
(152.1
|
)
|
|
(137.1
|
)
|
|
(140.7
|
)
|
Interest expense, financing costs and other expense (income), net
|
(50.2
|
)
|
|
(60.1
|
)
|
|
(49.4
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
(93.8
|
)
|
|
—
|
|
Other operating expense
|
(46.7
|
)
|
|
—
|
|
|
(489.6
|
)
|
Earnings from operations before income taxes
|
$
|
709.9
|
|
|
$
|
737.5
|
|
|
$
|
254.9
|
|
Unallocated corporate expenses includes certain costs related to administrative support functions which the Company does not allocate to its segments. Such unallocated costs include those for centralized information technology, finance, legal and human resources departments.
Other operating expense in the year ended January 31, 2016 represents impairment charges related to a financing arrangement with Koidu and expenses related to specific cost-reduction initiatives. See "Note J - Commitments and Contingencies" for additional details.
Loss on extinguishment of debt in the year ended January 31, 2015 was related to the redemption of
$400.0
million in aggregate principal amount of the Private Placement Notes prior to their scheduled maturities. See "Note G - Debt" for additional details.
Other operating expense in the year ended January 31, 2014 was related to specific cost-reduction initiatives and the Arbitration Award. See "Note J - Commitments and Contingencies" for additional details.
Sales to unaffiliated customers and long-lived assets by geographic areas were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Net sales:
|
|
|
|
United States
|
$
|
1,795.5
|
|
$
|
1,870.8
|
|
$
|
1,770.7
|
|
Japan
|
541.3
|
|
554.3
|
|
578.6
|
|
Other countries
|
1,768.1
|
|
1,824.8
|
|
1,681.8
|
|
|
$
|
4,104.9
|
|
$
|
4,249.9
|
|
$
|
4,031.1
|
|
Long-lived assets:
|
|
|
|
United States
|
$
|
706.9
|
|
$
|
680.1
|
|
$
|
632.9
|
|
Japan
|
20.6
|
|
24.4
|
|
21.6
|
|
Other countries
|
256.7
|
|
239.2
|
|
241.9
|
|
|
$
|
984.2
|
|
$
|
943.7
|
|
$
|
896.4
|
|
Classes of Similar Products
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Net sales:
|
|
|
|
Statement, fine & solitaire jewelry
|
$
|
910.8
|
|
$
|
930.2
|
|
$
|
916.8
|
|
Engagement jewelry & wedding bands
|
1,170.2
|
|
1,245.1
|
|
1,182.2
|
|
Fashion jewelry
|
1,716.1
|
|
1,755.2
|
|
1,618.2
|
|
All other
|
307.8
|
|
319.4
|
|
313.9
|
|
|
$
|
4,104.9
|
|
$
|
4,249.9
|
|
$
|
4,031.1
|
|
Q. QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Quarters Ended*
|
|
(in millions, except per share amounts)
|
April 30
|
|
July 31
a
|
|
October 31
|
|
January 31
b
|
|
Net sales
|
$
|
962.4
|
|
$
|
990.5
|
|
$
|
938.2
|
|
$
|
1,213.6
|
|
Gross profit
|
569.0
|
|
593.0
|
|
564.5
|
|
764.8
|
|
Earnings from operations
|
170.0
|
|
172.8
|
|
156.4
|
|
260.9
|
|
Net earnings
|
104.9
|
|
104.9
|
|
91.0
|
|
163.2
|
|
Net earnings per share:
|
|
|
|
|
Basic
|
$
|
0.81
|
|
$
|
0.81
|
|
$
|
0.71
|
|
$
|
1.28
|
|
Diluted
|
$
|
0.81
|
|
$
|
0.81
|
|
$
|
0.70
|
|
$
|
1.28
|
|
|
|
a
|
On a pre-tax basis, includes a charge of
$9.6 million
for the quarter ended July 31, 2015, which reduced net earnings per diluted share by
$0.05
, associated with an impairment charge related to a financing arrangement with Koidu Limited (see "Note B - Summary of Significant Accounting Policies" and "Note J - Commitments and Contingencies").
|
|
|
b
|
On a pre-tax basis, includes charges for the quarter ended January 31, 2016 of:
|
|
|
i.
|
$28.3 million
, which reduced net earnings per diluted share by
$0.14
, associated with an impairment charge related to a financing arrangement with Koidu Limited (see "Note B - Summary of Significant Accounting Policies" and "Note J - Commitments and Contingencies"); and
|
|
|
ii.
|
$8.8 million
, which reduced net earnings per diluted share by
$0.04
, associated with severance related to staffing reductions and subleasing of certain office space for which only a portion of the Company's future rent obligations will be recovered (see "Note J - Commitments and Contingencies").
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Quarters Ended*
|
|
(in millions, except per share amounts)
|
April 30
|
|
July 31
|
|
October 31
c
|
|
January 31
|
|
Net sales
|
$
|
1,012.1
|
|
$
|
992.9
|
|
$
|
959.6
|
|
$
|
1,285.3
|
|
Gross profit
|
589.5
|
|
595.2
|
|
570.9
|
|
781.6
|
|
Earnings from operations
|
209.8
|
|
208.5
|
|
168.5
|
|
304.6
|
|
Net earnings
|
125.6
|
|
124.1
|
|
38.3
|
|
196.2
|
|
Net earnings per share:
|
|
|
|
|
Basic
|
$
|
0.97
|
|
$
|
0.96
|
|
$
|
0.30
|
|
$
|
1.52
|
|
Diluted
|
$
|
0.97
|
|
$
|
0.96
|
|
$
|
0.29
|
|
$
|
1.51
|
|
|
|
c
|
On a pre-tax basis, includes a charge of
$93.8
million for the quarter ended October 31, which reduced net earnings per diluted share by
$0.47
, associated with the redemption of
$400.0
million in aggregate principal amount of the Private Placement Notes prior to their scheduled maturities (see "Note G - Debt").
|
|
|
*
|
The sum of quarterly amounts may not agree with full year amounts due to rounding.
|
Basic and diluted earnings per share are computed independently for each quarter presented. Accordingly, the sum of the quarterly earnings per share may not agree with the calculated full year earnings per share.