TIFFANY & CO. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes. All references to years relate to fiscal years which ended onJanuary 31 of the following calendar year. ENTRY INTO MERGER AGREEMENT OnNovember 24, 2019 ,Tiffany & Co. (the "Registrant") entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Registrant, LVMH Moët Hennessy - Louis Vuitton SE, a societas Europaea (European company) organized under the laws ofFrance ("Parent"),Breakfast Holdings Acquisition Corp. , aDelaware corporation and an indirect wholly owned subsidiary of Parent ("Holding"), andBreakfast Acquisition Corp. , aDelaware corporation and a direct wholly owned subsidiary of Holding ("Merger Sub"). Pursuant to the Merger Agreement, Merger Sub will be merged with and into the Registrant (the "Merger"), with the Registrant continuing as the surviving company in the Merger and a wholly owned indirect subsidiary of Parent. For additional information related to the Merger Agreement, please refer to the Registrant's Definitive Proxy Statement on Schedule 14A filed with theU.S. Securities and Exchange Commission (the "SEC") onJanuary 6, 2020 and "Item 1. Business - Entry into Merger Agreement." KEY STRATEGIC PRIORITIES
The Company's key strategic priorities are to:
• Amplify an evolved brand message.
The Brand is the single most important asset of Tiffany and, indirectly, of the Company. Management intends to increasingly invest in and evolve marketing and public relations programs through a variety of media designed to build awareness of the Brand, its heritage and its products, as well as to enhance the Brand's association with quality and luxury by consumers.
• Renew the Company's product offerings and enhance in-store presentations.
The Company's product development strategy is to accelerate the introduction of new design collections, primarily in jewelry, but also in non-jewelry products, and/or expand certain existing collections annually, all of which are intended to appeal to existing and new customers. To ensure a superior shopping experience, the Company is focused on enhancing the design of its stores, as well as the creative visual presentation of its merchandise, to provide an engaging luxury experience in both its new and existing stores.
• Deliver an exciting omnichannel customer experience.
Management intends to continue to expand and optimize its global store base by evaluating potential markets for newTIFFANY & CO. stores, as well as through the renovation, relocation, or closing of existing stores. Management will also continue to pursue opportunities to grow sales through its e-commerce websites and utilize the websites to drive store traffic. In addition, the Company employs highly qualified sales and customer service professionals and is focused on developing effective omnichannel relationships with its customers.
• Strengthen the Company's competitive position and lead in key markets.
The global jewelry industry is competitively fragmented. While the Company
enjoys a strong reputation and large customer base, it encounters significant
competition in all product categories and geographies. By focusing on enhanced
marketing communications, product development and optimization of its store base
and digital capabilities, the Company's objective is to be an industry leader in
key markets.
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• Cultivate a more efficient operating model.
The Company is focused on improving its business operations through new systems, more effective processes and cost restraint, to drive margin growth. This includes realizing greater efficiencies in its product supply chain and other operations, and enhancing its global procurement capabilities. The Company has developed a substantial product supply infrastructure for the procurement and processing of diamonds and the manufacturing of jewelry. This infrastructure is intended to ensure adequate product supply and favorable product costs while adhering to the Company's quality and ethical standards.
• Inspire an aligned and agile organization to win.
The Company's success depends upon its people and their effective execution of the Company's strategic priorities. The Company's management strives to motivate and develop employees with the core competencies and adaptability needed to achieve its objectives.
By pursuing these key strategic priorities, management is committed to the following long-term financial objectives:
• To achieve sustainable sales growth.
Management's objective is to generate mid-single-digit percentage worldwide sales increases, primarily through comparable sales growth, as well as through modest store square footage growth.
• To increase retail productivity and profitability.
Management is focused on increasing the frequency of store and website visits and the percentage of store and website visitors who make a purchase, as well as optimizing utilization of store square footage, and growing sales, average price per unit sold and sales per square foot.
• To achieve improved operating margins, through both improved gross margins
and efficient expense management.
Management's long-term objective is to improve gross margins, including through controlling product input costs, realizing greater efficiencies in its product supply chain and adjusting retail prices when appropriate. Additionally, management is focused on efficient selling, general and administrative expense management, thereby generating sales leverage on fixed costs. These efforts are collectively intended to generate a higher rate of operating earnings growth relative to sales growth, and management targets an improvement in operating margin of 50 basis points per year over the long term.
• To improve inventory and other asset productivity and cash flow.
Management's long-term objective is to maintain inventory growth at a rate less than sales growth, with greater focus on efficiencies in product sourcing and manufacturing as well as optimizing store inventory levels, all of which is intended to contribute to improvements in cash flow and return on assets.
• To maintain a capital structure that provides financial strength and the
ability to invest in strategic initiatives.
2019 SUMMARY
• Worldwide net sales were approximately unchanged compared to the prior
year. Comparable sales decreased 1% from the prior year. On aconstant-exchange-rate basis (see "Non-GAAP Measures" below), worldwide
net sales increased 1% and comparable sales were approximately unchanged.
• The Company added a net of fiveTIFFANY & CO. stores (opening four inJapan , two in theAmericas , two inAsia-Pacific and one inEurope , while closing two stores in theAmericas , one store inAsia-Pacific and one store inJapan ) and relocated or renovated 18 existing stores. Gross retail square footage increased 3%, net.TIFFANY & CO. K-30
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• Earnings from operations as a percentage of net sales ("operating margin")
decreased 120 basis points, which included the impact of costs recorded in
2019 related to the proposed Merger, as described below under "Non-GAAP
Measures." Excluding these costs, operating margin decreased 80 basis
points due to a decrease in gross margin.
• The Company's effective income tax rate increased to 21.6% in 2019 from
21.1% in 2018.
• Net earnings decreased to
2019 from
earnings in 2019 included the impact of costs related to the proposed
Merger, as described below under "Non-GAAP Measures." Excluding these
costs, net earnings decreased to
share.
• Inventories, net did not change significantly from 2018.
• Cash flow from operating activities was
with
$350.3 million in 2019, compared with$249.7 million in 2018.
• The Company returned capital to shareholders by paying regular quarterly
dividends (which were increased 5% effective
or an annualized rate of
shares of its Common Stock for $163.4 million .
NOVEL CORONAVIRUS
As discussed under "Item 1A. Risk Factors," an outbreak of a novel strain of the
coronavirus, COVID-19, was recently identified in China and has subsequently
been recognized as a pandemic by the World Health Organization . This coronavirus
outbreak has severely restricted the level of economic activity around the
world. In response to this coronavirus outbreak the governments of many
countries, states, cities and other geographic regions have taken preventative
or protective actions, such as imposing restrictions on travel and business
operations and advising or requiring individuals to limit or forego their time
outside of their homes. Management expects that these actions could have a
negative impact on local and tourist spending around the world. Temporary
closures of businesses have been ordered and numerous other businesses have
temporarily closed voluntarily. Further, individuals' ability to travel has been
curtailed through mandated travel restrictions and may be further limited
through additional voluntary or mandated closures of travel-related businesses.
These actions have expanded significantly in the past several weeks and are
expected to continue to expand. Given the uncertainty regarding the spread of
this coronavirus, the related financial impact cannot be reasonably estimated at
this time, although the aforementioned actions and related impacts are expected
to continue and may also significantly affect the Company's business in other
geographic areas in which the coronavirus has spread and may continue to spread.
The Company intends to continue to execute on its strategic plans and
operational initiatives during the coronavirus outbreak. However, the
uncertainties associated with the protective and preventative measures being put
in place or recommended by both governmental entities and other businesses,
among other uncertainties, may result in delays or modifications to these plans
and initiatives.
As a result, this coronavirus outbreak has had a significant effect on the
Company's sales results to date in fiscal 2020 and is expected to continue to
have a significant effect on its financial results during the current fiscal
year. For example, from January 24 through March 19, 2020 , management estimates
that this coronavirus outbreak contributed to the loss of approximately 30 out
of 54 retail trading days (accounting for the effect of individual store
closures as well as reductions in store operating hours) across all of the
Company's stores in the Chinese Mainland. In addition, as of March 19, 2020 , the
Company has temporarily closed all of its stores in the United States and
Canada , and has temporarily closed nearly all of its stores across Europe and
the United Kingdom . The Company has also experienced significantly reduced
customer traffic from January 24 through March 19 in its stores that have been
open during such period, which management believes has resulted in part from a
reduction in tourism as well as restrictions on travel and limitations affecting
individuals' ability to spend time in public areas, with attendant sales
declines to date in fiscal 2020 in those stores.
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RESULTS OF OPERATIONS
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations" in the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 2019 for a comparative
discussion of the Company's operating results and financial condition for its
fiscal years ended January 31, 2019 and 2018.
Non-GAAP Measures
The Company reports information in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP"). Internally, management also monitors and
measures its performance using certain sales and earnings measures that include
or exclude amounts, or are subject to adjustments that have the effect of
including or excluding amounts, from the most directly comparable GAAP measure
("non-GAAP financial measures"). The Company presents such non-GAAP financial
measures in reporting its financial results to provide investors with useful
supplemental information that will allow them to evaluate the Company's
operating results using the same measures that management uses to monitor and
measure its performance. The Company's management does not, nor does it suggest
that investors should, consider non-GAAP financial measures in isolation from,
or as a substitute for, financial information prepared in accordance with GAAP.
These non-GAAP financial measures presented here may not be comparable to
similarly-titled measures used by other companies.
Net Sales . The Company's reported net sales reflect either a translation-related
benefit from strengthening foreign currencies or a detriment from a
strengthening U.S. dollar. Internally, management monitors and measures its
sales performance on a non-GAAP basis that eliminates the positive or negative
effects that result from translating sales made outside the U.S. into U.S.
dollars ("constant-exchange-rate basis"). Sales on a constant-exchange-rate
basis are calculated by taking the current year's sales in local currencies and
translating them into U.S. dollars using the prior year's foreign currency
exchange rates. Management believes this constant-exchange-rate basis provides a
useful supplemental basis for the assessment of sales performance and of
comparability between reporting periods. The following table reconciles the
sales percentage increases (decreases) from the GAAP to the non-GAAP basis
versus the previous year.
2019 2018
Constant- Constant-
GAAP Translation Exchange- GAAP Translation Exchange-
Reported Effect Rate Basis Reported Effect Rate Basis
Net Sales:
Worldwide - % (1 )% 1 % 7 % 1 % 6 %
Americas (2 ) - (2 ) 5 - 5
Asia-Pacific 2 (3 ) 5 13 - 13
Japan 1 1 - 8 2 6
Europe (1 ) (3 ) 2 3 1 2
Other (2 ) - (2 ) (20 ) - (20 )
Comparable Sales:
Worldwide (1 )% (1 )% - % 4 % - % 4 %
Americas (2 ) - (2 ) 5 - 5
Asia-Pacific (1 ) (4 ) 3 5 - 5
Japan - 1 (1 ) 7 2 5
Europe (1 ) (3 ) 2 (2 ) 1 (3 )
Other (9 ) - (9 ) (15 ) - (15 )
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2019 2018
Constant- Constant-
GAAP Translation Exchange- GAAP Translation Exchange-
Reported Effect Rate Basis Reported Effect Rate Basis
Jewelry sales by
product category:
Jewelry collections 2 % (1 )% 3 % 11 % - % 11 %
Engagement jewelry (2 ) (2 ) - 4 - 4
Designer jewelry (6 ) (1 ) (5 ) (1 ) - (1 )
Statements of Earnings. Internally, management monitors and measures its
earnings performance excluding certain items listed below. Management believes
excluding such items provides a useful supplemental basis for the assessment of
the Company's results relative to the corresponding period in the prior year.
The following tables reconcile certain GAAP amounts to non-GAAP amounts:
(in millions, except per share Charges related to the
amounts) GAAP proposed Merger a Non-GAAP
Year Ended January 31, 2020
Gross Profit $ 2,761.9 $ 1.0 $ 2,762.9
As a % of sales 62.4 % 0.1 % 62.5 %
Selling, general & administrative 2,029.3 (20.2 ) 2,009.1
expenses
As a % of sales 45.9 % (0.5 )% 45.4 %
Earnings from operations 732.6 $ 21.2 753.8
As a % of sales 16.6 % 0.4 % 17.0 %
Provision for income taxes 149.2 $ 4.1 153.3
Effective income tax rate 21.6 % (0.1 ) 21.5 %
Net earnings 541.1 17.1 558.2
Diluted earnings per share 4.45 0.14 4.59
a Costs recorded in 2019 related to the proposed Merger. See "Item 8. Financial
Statements and Supplementary Data - Note B. Entry into Merger Agreement" for
additional information. Free Cash Flow. Internally, management monitors its cash flow on a non-GAAP basis. Free cash flow is calculated by deducting capital expenditures from net cash provided by operating activities. The ability to generate free cash flow demonstrates how much cash the Company has available for discretionary and non-discretionary purposes after deduction of capital expenditures. The Company's operations require regular capital expenditures for the opening, renovation and expansion of stores and distribution and manufacturing facilities as well as ongoing investments in information technology. Management believes this provides a useful supplemental basis for assessing the Company's operating cash flows. The following table reconciles GAAP net cash provided by operating activities to non-GAAP free cash flow: (in millions) 2019 2018
2017
Net cash provided by operating activities a
(320.6 ) (282.1 ) (239.3 )
Free cash flow $ 350.3 $ 249.7 $ 692.9
a See "Liquidity and Capital Resources" below for further information on the
Company's cash flows.
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Comparable Sales
Comparable sales include sales transacted in Company-operated stores open for
more than 12 months. Sales from e-commerce sites are included in comparable
sales for those sites that have been operating for more than 12 months. Sales
for relocated stores are included in comparable sales if the relocation occurs
within the same geographical market. In all markets, the results of a store in
which the square footage has been expanded or reduced remain in the comparable
sales base.
Net Sales The Company generates sales through its retail, Internet, wholesale, business-to-business and catalog channels (see "Item 1. Business - Reportable Segments").
Net sales by segment were as follows:
2019 vs 2018 vs
2018 2017
% of % of % of % %
Total Total Total Change Change
Net Net Net in Net in Net
(in millions) 2019 Sales 2018 Sales 2017 Sales Sales Sales
Americas $ 1,924.0 43 % $ 1,960.3 44 % $ 1,870.9 45 % (2 )% 5 %
Asia-Pacific 1,258.2 28 1,239.0 28 1,095.0 26 2 13
Japan 649.8 15 643.0 15 596.3 14 1 8
Europe 498.3 11 504.4 11 489.0 12 (1 ) 3
Other 93.7 2 95.4 2 118.6 3 (2 ) (20 )
$ 4,424.0 $ 4,442.1 $ 4,169.8 - % 7 %
In 2019, jewelry sales represented 92% of worldwide net sales. Jewelry sales by product category were as follows: (in millions) 2019 2018 $ Change % Change Jewelry collections$ 2,420.2 $ 2,374.3 $ 45.9 2 % Engagement jewelry 1,139.5 1,157.4 (17.9 ) (2 ) Designer jewelry 514.1 544.5 (30.4 ) (6 )
The increase in net sales in the Jewelry collections category was driven primarily by the Tiffany T collection and High jewelry, partially offset by softness in other collections, while net sales in the Engagement jewelry and Designer jewelry categories reflected decreases across the categories.
Changes in net sales by reportable segment were as follows:
Wholesale/
(in millions) Comparable Sales Non-comparable Sales Other
Total
Americas $ (39.4 ) $ 3.4 $ (0.3 ) $ (36.3 )
Asia-Pacific (5.7 ) 0.6 24.3 19.2
Japan 2.4 4.7 (0.3 ) 6.8
Europe (6.9 ) 2.3 (1.5 ) (6.1 )
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In 2019, jewelry sales represented 89%, 98%, 93% and 96% of total net sales in theAmericas ,Asia-Pacific ,Japan andEurope , respectively. Changes in jewelry sales relative to the prior year were as follows: Average Price per Unit Sold Impact of Currency Number of As Reported Translation Units Sold Change in Jewelry Sales Americas 10 % - % (12 )% Asia-Pacific 8 (3 ) (7 ) Japan 3 1 (4 ) Europe 10 (3 ) (10 ) Management believes the changes in average price per jewelry unit sold and the number of jewelry units sold include the effect of the Company's strategy of increasing average price per unit sold by growing sales of High jewelry and other gold and diamond jewelry within the Jewelry collections category at a faster rate than sales within the Engagement jewelry category and silver jewelry within the Jewelry collections category.
Management attributed the increase in the average price per jewelry unit sold to a shift in sales mix to gold jewelry and High jewelry within the Jewelry collections category. The decrease in the number of jewelry units sold reflected decreases in all product categories.Asia-Pacific . In 2019, total net sales increased$19.2 million , or 2%, which included comparable sales decreasing$5.7 million , or 1%. Total sales growth reflected increased wholesale sales and business sales. Additionally, total sales growth reflected double-digit sales growth in the Chinese Mainland, which was partially offset by a decrease in net sales inHong Kong of 30%, which management attributed to significant disruptions that began earlier in 2019. Sales performance was mixed in other markets in the region. Management attributed these sales results to higher spending by local customers, partially offset by lower spending by foreign tourists. On a constant-exchange-rate basis, total net sales increased 5% and comparable sales increased 3%. Management attributed the increase in the average price per jewelry unit sold to a shift in sales mix to High jewelry and gold jewelry within the Jewelry collections category. The decrease in the number of jewelry units sold reflected decreases in all product categories.Japan . In 2019, total net sales increased$6.8 million , or 1%, and comparable sales were largely unchanged from the prior year. On a constant-exchange-rate basis, total net sales were largely unchanged and comparable sales decreased 1%. Management attributed the increase in the average price per jewelry unit sold to a shift in sales mix to gold jewelry within the Jewelry collections category and to Engagement jewelry. The decrease in the number of jewelry units sold primarily reflected a decrease in the Jewelry collections and Designer jewelry categories, partly offset by an increase in the Engagement jewelry category.Europe . In 2019, total net sales decreased$6.1 million , or 1%, which included comparable sales decreasing$6.9 million , or 1%. Management attributed the decrease in total net sales to the effect of foreign currency translation. On a constant-exchange-rate basis, total net sales and comparable sales increased 2%. Management attributed these sales results to modest changes in spending by local customers and foreign tourists. Management attributed the increase in the average price per jewelry unit sold to a shift in sales mix to gold jewelry within the Jewelry collections category. The decrease in the number of jewelry units sold reflected decreases in the Jewelry collections and Designer jewelry categories.TIFFANY & CO. K-35
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Other. In 2019, total net sales decreased
Store Data. In 2019, the Company increased gross retail square footage by 3%, net, through store openings, closings and relocations. The Company opened 9 stores and closed four: opening four inJapan , two inAsia-Pacific (inChina ), two in theAmericas (in theU.S. ), and one inEurope (in theU.K. ), while closing two stores in theAmericas (one each in theU.S. andLatin America ), one store inAsia-Pacific (inChina ) and one store inJapan . In addition, the Company relocated or renovated 18 existing stores.
Sales per gross square foot generated by all company-operated stores were
approximately
Excluded from the store counts and sales per gross square foot amounts above are pop-up stores (stores with lease terms of 24 months or less).
Gross Margin
(in millions) 2019 2018 2017
As reported:
Gross profit $ 2,761.9 $ 2,811.0 $ 2,610.7
Gross profit as a percentage of net sales 62.4 % 63.3 % 62.6 %
On a Non-GAAP basis*:
Gross profit $ 2,762.9 Gross profit as a percentage of net sales 62.5 %
*See "Non-GAAP Measures" above for additional information.
Gross margin (gross profit as a percentage of net sales) decreased 90 basis points in 2019, partly reflecting a shift in sales mix toward higher price point jewelry, as well as sales deleverage on operating expenses. Additionally, the prior year period included the impact of an$8.5 million charge recorded in the third quarter of 2018 related to the bankruptcy filing of a metal refiner to which the Company entrusted precious scrap metal. Management periodically reviews and adjusts its retail prices when appropriate to address product input cost increases, specific market conditions and changes in foreign currencies/U.S. dollar relationships. Its long-term strategy is to continue that approach, although significant increases in product input costs or weakening foreign currencies can affect gross margin negatively over the short-term until management makes necessary price adjustments. Among the market conditions that management considers are consumer demand for the product category involved, which may be influenced by consumer confidence and competitive pricing conditions. Management uses derivative instruments to mitigate certain foreign exchange and precious metal price exposures (see "Item 8. Financial Statements and Supplementary Data - Note I. Hedging Instruments"). Management adjusted retail prices in both 2019 and 2018 across most geographic regions and product categories, some of which were intended to mitigate the impact of foreign currency fluctuations.TIFFANY & CO. K-36
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Selling, General and Administrative Expenses
(in millions) 2019 2018 2017
As reported:
SG&A expenses $ 2,029.3 $ 2,020.7 $ 1,801.3
SG&A expenses as a percentage of net
sales ("SG&A expense ratio") 45.9 % 45.5 % 43.2 %
On a Non-GAAP basis*:
SG&A expenses $ 2,009.1
SG&A expense ratio 45.4 %
*See "Non-GAAP Measures" above for additional information.
SG&A expenses did not change significantly in 2019, which included certain costs related to the proposed Merger (see "Non-GAAP Measures" for further details). In addition to those costs, SG&A expenses in 2019 reflected decreased labor and incentive compensation costs, decreased marketing costs and decreased professional services costs, largely offset by increased store occupancy and depreciation expenses.
Excluding the 2019 items noted in "Non-GAAP Measures", SG&A expenses in 2019
decreased
There was no significant effect on SG&A expense changes from foreign currency
translation. SG&A expenses as a percentage of net sales increased 40 basis
points compared to 2018. SG&A expenses as a percentage of net sales decreased 10
basis points when excluding the aforementioned costs related to the proposed
Merger (see "Non-GAAP Measures").
The Company's SG&A expenses are largely fixed or controllable in nature
(including, but not limited to, marketing costs, employees' salaries and
benefits, fixed store rent and depreciation expenses), with the total of such
costs representing approximately 80 - 85% of total SG&A expenses, and the
remainder comprised of variable items (including, but not limited to, variable
store rent, sales commissions and fees paid to credit card companies).
Earnings from Operations
(in millions) 2019 2018 2017
As reported:
Earnings from operations
16.6 % 17.8 % 19.4 %
On a Non-GAAP basis*:
Earnings from operations $ 753.8
Operating margin 17.0 %
*See "Non-GAAP Measures" above for additional information.
Earnings from operations decreased$57.7 million , or 7%, in 2019 and operating margin decreased 120 basis points, which included the impact of costs related to the proposed Merger (see "Non-GAAP Measures"), as well as a decrease in gross margin. Excluding these costs, operating margin decreased 80 basis points.TIFFANY & CO. K-37
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Results by segment were as follows:
% of Net % of Net % of Net
(in millions) 2019 Sales 2018 Sales 2017 Sales
Earnings from operations*:
Americas $ 382.2 19.9 % $ 386.7 19.7 % $ 399.0 21.3 %
Asia-Pacific 254.3 20.2 311.5 25.1 287.7 26.3
Japan 229.7 35.4 237.2 36.9 209.3 35.1
Europe 83.1 16.7 86.2 17.1 90.4 18.5
Other 11.3 12.1 (6.4 ) (6.7 ) 3.6 3.0
960.6 1,015.2 990.0
Unallocated
corporate
expenses (206.8 ) (4.7 )% (224.9 ) (5.1 )% (180.6 ) (4.3 )%
Earnings from
operations before
other operating
expenses 753.8 17.0 % 790.3 17.8 % 809.4 19.4 %
Other operating
expenses (21.2 ) - -
Earnings from
operations $ 732.6 16.6 % $ 790.3 17.8 % $ 809.4 19.4 %
* Percentages represent earnings from operations as a percentage of each
segment's net sales.
On a segment basis, the ratio of earnings from operations to each segment's net sales in 2019 compared with 2018 was as follows: •Americas - the ratio increased 20 basis points due to a decrease in the
SG&A expense ratio, primarily resulting from decreased labor and
incentive compensation costs and decreased marketing spending, largely
offset by a decrease in gross margin;
• Asia-Pacific - the ratio decreased 490 basis points due to sales
deleverage on operating expenses largely attributed to business
disruptions in
growing at a higher rate than net sales, and a decrease in gross
margin;
• Japan - the ratio decreased 150 basis points primarily due to sales
deleverage on operating expenses; and
•
margin, largely offset by a decrease in the SG&A expense ratio
attributable to a decrease in marketing spending.
Unallocated corporate expenses include 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. Unallocated corporate expenses decreased by $18.1
million , or 8%, in 2019, due to decreased labor and incentive compensation
costs. Additionally, the prior year period included the impact of an $8.5
million charge recorded in the third quarter of 2018 related to the bankruptcy
filing of a metal refiner to which the Company entrusted precious scrap metal.
The 2019 amount included in other operating expenses in the table above reflects
$21.2 million for costs incurred related to the proposed Merger (see "Item 8.
Financial Statements and Supplementary Data - Note B. Entry into Merger
Agreement").
Interest Expense and Financing Costs
Interest expense and financing costs decreased $1.2 million , or 3%, in 2019.
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Other Expense, Net
Other expense, net includes the non-service cost components of net periodic
benefit cost, interest income and gains/losses on investment activities and
foreign currency transactions. Other expense, net decreased
Provision for Income Taxes
The effective income tax rate was 21.6% in 2019 compared with 21.1% in 2018.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs have been, and are expected to remain, primarily a
function of its ongoing, seasonal and expansion-related working capital
requirements and capital expenditure needs. Over the long term, the Company
manages its cash and capital structure to maintain a strong financial position
that provides flexibility to pursue strategic priorities. Management regularly
assesses its working capital needs, capital expenditure requirements, debt
service, dividend payouts and future investments. Management believes that cash
on hand, internally generated cash flows and the funds available under its
revolving credit facilities are sufficient to support the Company's liquidity
and capital requirements for the foreseeable future.
At January 31, 2020 , the Company's cash and cash equivalents totaled $874.7
million , of which approximately 30% was held in locations outside the U.S. where
the Company has determined to maintain its assertion to indefinitely reinvest
undistributed earnings to support its continued expansion and investments in
such foreign locations. To the extent the Company were to repatriate such funds,
it may incur withholding taxes, state income taxes and the tax expense or
benefit associated with foreign currency gains or losses. The Company believes
it has sufficient sources of cash in the U.S. to fund its U.S. operations
without the need to repatriate those funds held outside the U.S. See "Item 8.
Financial Statements and Supplementary Data - Note P. Income Taxes" for
additional information. In addition, the Company had Short-term investments of
$22.7 million at January 31, 2020 .
The following table summarizes cash flows from operating, investing and financing activities: (in millions)
2019 2018 2017
Net cash provided by (used in): Operating activities$ 670.9 $ 531.8 $ 932.2 Investing activities (279.3 ) (29.9 ) (481.1 ) Financing activities (307.9 ) (674.3 ) (421.1 ) Effect of exchange rate changes on cash and cash equivalents (1.6 ) (5.7 )
12.7
Net increase (decrease) in cash and cash equivalents$ 82.1 $ (178.1 ) $ 42.7 Operating Activities The Company had net cash inflows from operating activities of$670.9 million in 2019 and$531.8 million in 2018. The increase in 2019 compared to 2018 primarily reflected decreases in inventory purchases, partly offset by a decrease in earnings. Working Capital. Working capital (current assets less current liabilities) decreased to$2.9 billion atJanuary 31, 2020 from$3.0 billion atJanuary 31, 2019 . The decrease in 2019 compared with 2018 included an increase in current liabilities (which reflects the adoption of ASC 842 - Leases in the current period, which established the Current portion of operating lease liabilities on the Consolidated Balance Sheet). Accounts receivable, net atJanuary 31, 2020 decreased 2% fromJanuary 31, 2019 . Currency translation had no significant effect on the change compared to the prior year.
Inventories, net at
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Accounts payable and accrued liabilities atJanuary 31, 2020 were 5% higher than atJanuary 31, 2019 , which primarily reflected an increase in accounts payable for store-related expenditures and professional services. Investing Activities The Company had net cash outflows from investing activities of$279.3 million in 2019 and$29.9 million in 2018. The increase in net cash outflows in 2019 compared to 2018 was driven by net cash flows resulting from purchases and sales of marketable securities and short-term investments and an increase in capital expenditures in 2019.Marketable Securities and Short-Term Investments. The Company invests a portion of its cash in marketable securities and short-term investments. The Company had$37.0 million of net sales of marketable securities and short-term investments during 2019, compared with$240.0 million in 2018. Capital Expenditures. Capital expenditures are typically related to the opening, renovation and/or relocation of stores (which represented approximately 55% and 60% of capital expenditures in 2019 and 2018, respectively), as well as distribution and manufacturing facilities and ongoing investments in information technology. Capital expenditures were$320.6 million in 2019 and$282.1 million in 2018, representing 7% and 6% of worldwide net sales in 2019 and 2018, respectively. The Company's New York Flagship store closed inJanuary 2020 , at which time the Company began its complete renovation and temporarily moved its operations to the "Tiffany Flagship Next Door" at6 East 57th Street . The renovation of the New York Flagship store is expected to lower diluted earnings per share by approximately$0.10 -$0.12 in fiscal years 2020 and 2021, due to the incremental costs associated with the adjacent space, and is expected to be completed in the fourth quarter of 2021. Financing Activities
The Company had net cash outflows from financing activities of
Borrowings. The Company had net proceeds from (repayments of) borrowings as follows: (in millions)
2019 2018 2017
Short-term borrowings: Proceeds from (repayments of) credit facility borrowings, net$ 1.5 $ (18.4 ) $ (67.8 ) Proceeds from other credit facility borrowings 133.1 49.3
39.2
Repayments of other credit facility borrowings (96.1 ) (32.0 ) (96.1 ) Net proceeds from (repayments of) total borrowings$ 38.5 $ (1.1 ) $ (124.7 ) Credit Facilities. OnOctober 25, 2018 , the Registrant, along with certain of its subsidiaries designated as borrowers thereunder, entered into a five-year multi-bank, multi-currency committed unsecured revolving credit facility, including a letter of credit subfacility, consisting of basic commitments in an amount up to$750.0 million (which commitments may be increased, subject to certain conditions and limitations, at the request of the Registrant) (the "Credit Facility"). The Credit Facility replaced the Registrant's previously existing$375.0 million four-year unsecured revolving credit facility and$375.0 million five-year unsecured revolving credit facility, which were each terminated and repaid in connection with the Registrant's entry into the Credit Facility. The Credit Facility matures in 2023, provided that such maturity may be extended for one or two additional one-year periods at any time with the consent of the applicable lenders, as further described in the agreement governing such facility. Commercial Paper. InAugust 2017 , the Registrant and one of its wholly owned subsidiaries established a commercial paper program (the "Commercial Paper Program") for the issuance of commercial paper in the form of short-term promissory notes in an aggregate principal amount not to exceed$750.0 million . Borrowings under the Commercial Paper Program may be used for general corporate purposes. The aggregate amount of borrowings that the Company is currently authorized to have outstanding under the Commercial Paper Program and the Registrant's TIFFANY & CO. K-40
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Credit Facility is$750.0 million . The Registrant guarantees the obligations of its wholly owned subsidiary under the Commercial Paper Program. Maturities of commercial paper notes may vary, but cannot exceed 397 days from the date of issuance. Notes issued under the Commercial Paper Program rank equally with the Registrant's present and future unsecured and unsubordinated indebtedness. Other Credit Facilities. Tiffany-Shanghai Credit Agreement. InJune 2019 , the Registrant's indirect, wholly owned subsidiary,Tiffany & Co. (Shanghai )Commercial Company Limited ("Tiffany-Shanghai"), entered into a three-year multi-bank revolving credit agreement (the "Tiffany-Shanghai Credit Agreement"). The Tiffany-Shanghai Credit Agreement has an aggregate borrowing limit ofRMB 408.0 million ($59.0 million atJanuary 31, 2020 ), which may be increased to the RMB equivalent of$100.0 million , subject to certain conditions and limitations, at the request of Tiffany-Shanghai. The Tiffany-Shanghai Credit Agreement, which matures inJuly 2022 , was made available to refinance amounts outstanding under Tiffany-Shanghai's previously existingRMB 990.0 million three-year multi-bank revolving credit agreement (the "2016 Agreement"), which expired pursuant to its terms onJuly 11, 2019 , as well as for Tiffany-Shanghai's ongoing general working capital requirements. The participating lenders make loans, upon Tiffany-Shanghai's request, for periods of up to 12 months at the applicable interest rates equal to 95% of the applicable rate as announced by thePeople's Bank of China (provided, that if such announced rate is below zero, the applicable interest rate shall be deemed to be zero). InJune 2019 , in connection with the Tiffany-Shanghai Credit Agreement, the Registrant entered into a Guaranty Agreement by and between the Registrant and the facility agent under the Tiffany-Shanghai Credit Agreement (the "Guaranty"). AtJanuary 31, 2020 , there was$33.0 million available to be borrowed under the Tiffany-Shanghai Credit Agreement and$26.0 million was outstanding. The weighted-average interest rate for borrowings outstanding under all of the Company's credit facilities was 4.7% atJanuary 31, 2020 and 3.7% atJanuary 31, 2019 .
The ratio of total debt (short-term borrowings and long-term debt) to
stockholders' equity was 31% at
At
Once consummated, the proposed Merger may result in certain of the Company's outstanding indebtedness becoming due, and the Company will need to comply with certain covenants of the agreements governing its outstanding indebtedness relating to the proposed Merger. Under the terms of the Merger Agreement, if reasonably requested by Parent, the Company must use its commercially reasonable efforts to, among other things, take actions required to facilitate repayment of the Company's outstanding indebtedness. For additional information regarding all of the Company's credit facilities, senior note issuances and other outstanding indebtedness, including the impact of the proposed Merger on the covenants in respect thereof, see "Item 8. Financial Statements and Supplementary Data - Note H. Debt." Share Repurchases. InMay 2018 , the Registrant's Board of Directors approved a new share repurchase program (the "2018 Program"). The 2018 Program, which became effectiveJune 1, 2018 and expires onJanuary 31, 2022 , authorizes the Company to repurchase up to$1.0 billion of its Common Stock through open market transactions, including through Rule 10b5-1 plans and one or more accelerated share repurchase ("ASR") or other structured repurchase transactions, and/or privately negotiated transactions. As ofJanuary 31, 2020 ,$471.6 million remained available under the 2018 Program; however, pursuant to the terms of the Merger Agreement, and subject to certain limited exceptions, the Company may not repurchase its Common Stock other than in connection with the forfeiture provisions of Company equity awards or the cashless exercise or tax withholding provisions of such Company equity awards, in each case, granted under the Company's stock-based compensation plans. Accordingly, the Company does not expect to repurchase any shares of its Common Stock in connection with the 2018 Program prior to the consummation of the proposed Merger or earlier termination of the Merger Agreement. During 2018, the Company entered into ASR agreements with two third-party financial institutions to repurchase an aggregate of$250.0 million of its Common Stock. The ASR agreements were entered into under the 2018 Program. Pursuant to the ASR agreements, the Company made an aggregate payment of$250.0 million from available cash on hand in exchange for an initial delivery of 1,529,286 shares of its Common Stock. Final settlement of the ASR agreements was completed inJuly 2018 , pursuant to which the Company received an additional 353,112 shares of its Common Stock. In total, 1,882,398 shares of the Company's Common Stock were repurchased under these ASR agreements at an average cost per share of$132.81 over the term of the agreements.TIFFANY & CO. K-41
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The Company's share repurchase activity was as follows:
(in millions, except per share amounts) 2019 2018 2017 Cost of repurchases
$ 163.4 $ 421.4 $ 99.2 Shares repurchased and retired 1.8 3.5 1.0 Average cost per share$ 91.15 $ 121.28 $ 94.86
Proceeds from exercised stock options. The Company's proceeds from exercised
stock options were
Dividends. The cash dividend on the Company's Common Stock was increased once in each of 2019 and 2018. The Company's Board of Directors declared quarterly dividends which totaled$2.29 and$2.15 per common share in 2019 and 2018, respectively, with cash dividends paid of$276.3 million and$263.8 million in those respective years. The dividend payout ratio (dividends as a percentage of net earnings) was 51% and 45% in 2019 and 2018, respectively. Dividends as a percentage of adjusted net earnings (see "Non-GAAP Measures") were 49% in 2019. Contractual Cash Obligations and Commercial Commitments The following is a summary of the Company's contractual cash obligations atJanuary 31, 2020 : (in millions) Total 2020 2021-2022 2023-2024 Thereafter Recorded contractual obligations: Operating leases a$ 1,403.6 $ 245.1 $ 466.3 $ 323.7 $ 368.5 Short-term borrowings 147.9 147.9 - - - Long-term debt b 891.9 - 50.0 250.0 591.9 Unrecorded contractual obligations: Inventory purchase obligations c 229.8 229.8 - - - Interest on debt d 557.4 35.9 70.7 67.4 383.4 Other contractual obligations e 152.1 97.3 44.9 6.2 3.7$ 3,382.7 $ 756.0 $ 631.9 $ 647.3 $ 1,347.5
a) Includes the minimum rental commitments under non-cancelable operating leases
primarily for retail stores, offices, warehouses and distribution facilities
(includes imputed interest of
operating lease liabilities on the Consolidated Balance Sheet as of January
31, 2020). See "Item 8. Financial Statements and Supplementary Data - Note K.
Leases" for a discussion of the Company's operating leases.
b) Amounts exclude any unamortized discount or premium.
c) The Company will, from time to time, enter into arrangements to purchase
rough diamonds that contain minimum purchase obligations. Inventory purchase
obligations associated with these agreements have been estimated at
approximately
Purchases beyond 2020 that are contingent upon mine production have been
excluded as they cannot be reasonably estimated.
d) Excludes interest payments on amounts outstanding under available lines ofcredit, as the outstanding amounts fluctuate based on the Company's working
capital needs.
e) Consists primarily of technology licensing and service contracts, fixed
royalty commitments, construction-in-progress and packaging supplies.
The summary above does not include the following items:
• Cash contributions to the Company's pension plan and cash payments for
other postretirement obligations. The Company funds its
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
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accruals. To the extent that these requirements are fully covered by assets in the Qualified Plan (as defined under "Item 8. Financial Statements and Supplementary Data - Note O. Employee Benefit Plans"), the Company may elect not to make any contribution in a particular year. No cash contribution was required in 2019 and none is required in 2020 to meet the minimum funding requirements of the Employee Retirement Income Security Act. However, the Company periodically evaluates whether to make discretionary cash contributions to the Qualified Plan and made voluntary cash contributions of$30.0 million in 2019 and$11.8 million in 2018. The Company does not currently expect to make any contributions to the Qualified Plan in 2020. • Unrecognized tax benefits of$19.7 million and accrued interest and penalties of$2.9 million atJanuary 31, 2020 . The final outcome of tax uncertainties is dependent upon various matters including tax
examinations, interpretation of the applicable tax laws or expiration of
statutes of limitations. The Company believes that its tax positions
comply with applicable tax law and that it has adequately provided for
these matters. However, the examinations may result in proposed
assessments where the ultimate resolution may result in the Company owing
additional taxes.
The following is a summary of the Company's outstanding borrowings and available
capacity under its credit facilities at
Total Borrowings Letters of Credit Available
(in millions) Capacity Outstanding Issued Capacity
Five-year revolving credit
facility a, b $ 750.0 $ 13.8 $ 3.6 $ 732.6
Other credit facilities c 247.9 134.1 - 113.8
$ 997.9 $ 147.9 $ 3.6 $ 846.4
a) Matures in 2023.
b) The aggregate amount of borrowings that the Company is currently authorized
to have outstanding under the Commercial Paper Program and the Credit
Facility is
outstanding under the Commercial Paper Program.
c) Maturities through 2022. In addition, the Company has other available letters of credit and financial guarantees of$73.7 million , of which$48.5 million was outstanding atJanuary 31, 2020 . Of those available letters of credit and financial guarantees,$46.5 million expires within one year. Seasonality As a jeweler and specialty retailer, the Company's business is seasonal in nature, with the fourth quarter typically representing approximately one-third of annual net sales and a higher percentage of annual net earnings. Management expects such seasonality to continue. Critical Accounting Estimates The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from those estimates and the differences could be material. Periodically, the Company reviews all significant estimates and assumptions affecting the financial statements and records any necessary adjustments. The development and selection of critical accounting estimates and the related disclosures below have been reviewed with the Audit Committee of the Company's Board of Directors. The following critical accounting policies that rely on assumptions and estimates were used in the preparation of the Company's consolidated financial statements. Inventory. The Company writes down its inventory for discontinued and slow-moving products. This write-down is equal to the difference between the cost of inventory and its net realizable value, and is based on assumptions about future demand and market conditions. Net realizable value is the estimated selling prices in the ordinary course ofTIFFANY & CO. K-43
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business, less reasonably predictable costs of completion, disposal and transportation. The Company has not made any material changes in the accounting methodology used to establish its reserve for discontinued and slow-moving products during the past three years. AtJanuary 31, 2020 , a 10% change in the reserve for discontinued and slow-moving products would have resulted in a change of$8.1 million in inventory and cost of sales. Property, plant and equipment and intangible assets and key money. The Company reviews its property, plant and equipment and intangible assets and key money 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 these assets is evaluated by comparing the carrying value of the asset with estimated future undiscounted cash flows. If the comparisons indicate that the value of the asset is not recoverable, an impairment loss is calculated as the difference between the carrying value and the fair value of the asset and the loss is recognized during that period. The Company did not record any significant impairment charges in 2019 or 2018.Goodwill . The Company performs its annual impairment evaluation of goodwill during the fourth quarter of its fiscal year, or when circumstances otherwise indicate an evaluation should be performed. A qualitative assessment is first performed for each reporting unit to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value. If it is concluded that this is the case, a quantitative evaluation is performed and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value during that period. The 2019 and 2018 evaluations resulted in no impairment charges. Income taxes. The Company is subject to income taxes inU.S. federal and state, as well as foreign, jurisdictions. The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company's global operations. Significant judgments, interpretations and estimates are required in determining consolidated income tax expense. The Company's income tax expense, deferred tax assets and liabilities and reserves for uncertain tax positions reflect management's best assessment of estimated current and future taxes to be paid. Foreign and domestic tax authorities periodically audit the Company's income tax returns. These audits often examine and test the factual and legal basis for positions the Company has taken in its tax filings with respect to its tax liabilities, including the timing and amount of income and deductions and the allocation of income among various tax jurisdictions ("tax filing positions"). Management believes that its tax filing positions are reasonable and legally supportable. However, in specific cases, various tax authorities may take a contrary position. 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 tax benefits related to the income tax positions taken or expected to be taken. Earnings could be affected to the extent the Company prevails in matters for which reserves have been established or is required to pay amounts in excess of established reserves. AtJanuary 31, 2020 , total unrecognized tax benefits were$19.7 million . As ofJanuary 31, 2020 , unrecognized tax benefits are not expected to change materially in the next 12 months. Future developments may result in a change in this assessment. In evaluating the Company's likelihood to recover its deferred tax assets within the jurisdiction from which they arise, management considers all available evidence. The Company records valuation allowances when management determines it is more likely than not that deferred tax assets will not be realized in the future. Following the enactment of theU.S. Tax Cuts and Jobs Act (the "2017 Tax Act") onDecember 22, 2017 , theSEC issuedSAB 118 to address the application ofU.S. GAAP in situations when a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. Specifically,SAB 118 provided a measurement period for companies to evaluate the impacts of the 2017 Tax Act on their financial statements. This measurement period began in the reporting period that included the enactment date and ended when an entity obtained, prepared and analyzed the information that was needed in order to complete the accounting requirements, but could not exceed one year. The Company adopted the provisions ofSAB 118 with respect to the impact of the 2017 Tax Act on its 2017 consolidated financial statements. Consistent withSAB 118, the Company calculated and recorded reasonable estimates in its 2017 consolidated financial statements for the impact of the one-time transition tax via a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits (the "Transition Tax") and the remeasurement of its deferred tax assets and deferred tax liabilities. The Company also adopted the provisions ofSAB 118 as it related to the assertion of the indefinite reinvestment of foreign earnings and profits. The charges recorded during the fourth quarter of 2017TIFFANY & CO. K-44
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associated with the Transition Tax and the remeasurement of the Company's deferred tax assets and deferred tax liabilities, as a result of applying the 2017 Tax Act, represented provisional amounts for which the Company's analysis was incomplete but reasonable estimates could be determined. Further, the impact of the 2017 Tax Act on the Company's assertion to indefinitely reinvest foreign earnings and profits was incomplete, as the Company continued to analyze the relevant provisions of the 2017 Tax Act and related accounting guidance.
During 2018, as permitted by
As a result of completing these analyses, during 2018, the Company: (i) recorded tax benefits totaling$12.6 million to adjust the provisional estimate recorded in 2017 to remeasure the Company's deferred tax assets and liabilities; (ii) recorded tax benefits totaling$3.3 million to adjust the provisional estimate recorded in 2017 for the Transition Tax; and (iii) determined to maintain its assertion to indefinitely reinvest undistributed foreign earnings and profits.
For additional information, see "Item 8. Financial Statements and Supplementary Data - Note P. Income Taxes."
Employee benefit plans. The Company maintains several pension and retirement plans and provides certain postretirement healthcare and life insurance benefits for retired employees. The Company makes certain assumptions that affect the underlying estimates related to pension and other postretirement costs. Significant changes in interest rates, the market value of securities and projected healthcare costs would require the Company to revise key assumptions and could result in a higher or lower charge to earnings. The Company used a discount rate of 4.25% to determine 2019 expense for itsU.S. Qualified Plan, 4.50% for its postretirement plans and 4.25% for its Excess Plan/SRIP (as defined under "Item 8. Financial Statements and Supplementary Data - Note O. Employee Benefit Plans"). Holding all other assumptions constant, a 0.5% increase in the discount rates would have decreased 2019 pension and postretirement expenses by$6.3 million and$0.8 million , respectively. A decrease of 0.5% in the discount rates would have increased the 2019 pension and postretirement expenses by$7.1 million and$0.4 million , respectively. The discount rate is subject to change each year, consistent with changes in the yield on applicable high-quality, long-term corporate bonds. Management selects a discount rate at which pension and postretirement benefits could be effectively settled based on (i) an analysis of expected benefit payments attributable to current employment service and (ii) appropriate yields related to such cash flows. The Company used an expected long-term rate of return on pension plan assets of 7.00% to determine its 2019 pension expense. Holding all other assumptions constant, a 0.5% change in the long-term rate of return would have changed the 2019 pension expense by$2.5 million . The expected long-term rate of return on pension 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 the benefits included in the projected benefit obligation. More specifically, consideration is given to the expected rates of return (including reinvestment asset return rates) based upon the plan's current asset mix, investment strategy and the historical performance of plan assets. For postretirement benefit measurement purposes, a 6.50% annual rate of increase in the per capita cost of covered health care was assumed for 2020. The rate was assumed to decrease gradually to 4.75% by 2023 and remain at that level thereafter. A one-percentage-point change in the assumed health-care cost trend rate would not have a significant effect on the Company's accumulated postretirement benefit obligation for the year endedJanuary 31, 2020 or aggregate service and interest cost components of the 2019 postretirement expense. NEW ACCOUNTING STANDARDS
See "Item 8. Financial Statements and Supplementary Data - Note C. Summary of Significant Accounting Policies."
OFF-BALANCE SHEET ARRANGEMENTSThe Company does not have any off-balance sheet arrangements.
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