Form 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission file no. 1-9494

 

 

 

LOGO

(Exact name of registrant as specified in its charter)

 

Delaware   13-3228013

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

727 Fifth Avenue, New York,

New York

  10022
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (212)755-8000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 par value per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer   x    Accelerated filer   ¨
Non-Accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of July 29, 2011, the aggregate market value of the registrant’s voting and non-voting stock held by non-affiliates of the registrant was approximately $9,713,269,057 using the closing sales price on this day of $79.59. See Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

As of March 20, 2012, the registrant had outstanding 126,379,085 shares of its common stock, $.01 par value per share.

 

 

DOCUMENTS INCORPORATED BY REFERENCE.

The following documents are incorporated by reference into this Annual Report on Form 10-K: Registrant’s Proxy Statement Dated April 5, 2012 (Part III).

 

 

 


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including documents incorporated herein by reference, contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the Registrant’s goals, plans and projections with respect to store openings, sales, retail prices, gross margin, expenses, effective tax rate, net earnings and net earnings per share, inventories, capital expenditures, cash flow and liquidity. In addition, management makes other forward-looking statements from time to time concerning objectives and expectations. One can identify these forward-looking statements by the fact that they use words such as “believes,” “intends,” “plans” and “expects” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on management’s current plans and involve inherent risks, uncertainties and assumptions that could cause actual outcomes to differ materially from current plans. The Registrant has included important factors in the cautionary statements included in this Annual Report, particularly under “Item 1A. Risk Factors,” that the Registrant believes could cause actual results to differ materially from any forward-looking statement.

Although the Registrant believes it has been prudent in its plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date this Annual Report on Form 10-K was first filed with the Securities and Exchange Commission. The Registrant undertakes no obligation to update any of the forward-looking information included in this document, whether as a result of new information, future events, changes in expectations or otherwise.

 

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PART I

 

Item 1. Business.

GENERAL HISTORY OF BUSINESS

The Registrant (also referred to as Tiffany & Co. or the “Company”) is the parent corporation of Tiffany and Company (“Tiffany”). Charles Lewis Tiffany founded Tiffany’s business in 1837. He incorporated Tiffany in New York in 1868. The Registrant acquired Tiffany in 1984 and completed the initial public offering of the Registrant’s Common Stock in 1987. The Registrant is a holding company and conducts all business through its subsidiary corporations. Through those subsidiaries, the Company sells jewelry and other items that it manufactures or has made by others to its specifications.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Registrant’s segment information for the fiscal years ended January 31, 2012, 2011 and 2010 is reported in “Item 8. Financial Statements and Supplementary Data – Note Q. Segment Information.”

NARRATIVE DESCRIPTION OF BUSINESS

All references to years relate to fiscal years that end on January 31 of the following calendar year.

MAINTENANCE OF THE TIFFANY & CO. BRAND

The TIFFANY & CO. brand (the “Brand”) is the single most important asset of Tiffany and, indirectly, of the Registrant. The strength of the Brand goes beyond trademark rights (see “TRADEMARKS” below) and is derived from consumer perceptions of the Brand. Management monitors the strength of the Brand through focus groups and survey research.

Management believes that consumers associate the Brand with high-quality gemstone jewelry, particularly diamond jewelry; excellent customer service; an elegant store and online environment; upscale store locations; “classic” product positioning; distinctive and high-quality packaging materials (most significantly, the TIFFANY & CO. blue box); and sophisticated style and romance. Tiffany’s business plan includes expenses to maintain the strength of the Brand, such as the following:

 

   

To provide excellent service, stores must be well staffed with knowledgeable professionals;

 

   

Elegant stores in the best “high street” and luxury mall locations are more expensive and difficult to secure and maintain, but reinforce the Brand’s luxury connotations through association with other luxury brands;

 

   

In-store display practices enable Tiffany to showcase fine jewelry in a manner consistent with the Brand’s positioning but require sufficient space;

 

   

The classic positioning of much of Tiffany’s product line supports the Brand, but limits the display space that can be allocated to new product introductions;

 

   

Tiffany’s packaging supports consumer expectations with respect to the Brand but is expensive;

 

   

A significant amount of advertising is required to both reinforce the Brand’s association with luxury, sophistication, style and romance, as well as to market specific products; and

 

 

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Maintaining its position within the high-end of the jewelry market requires Tiffany to invest significantly in diamond and gemstone inventory and to accept reduced overall gross margins; it also causes some consumers to view Tiffany as beyond their price range.

All of the foregoing require that management make tradeoffs between business initiatives that might generate incremental sales and profits and Brand maintenance objectives. This is a dynamic process. To the extent that management deems that product, advertising or distribution initiatives will unduly and negatively affect the strength of the Brand, such initiatives have been and will be curtailed or modified appropriately. At the same time, Brand maintenance suppositions are regularly questioned by management to determine if the tradeoff between sales and profit is truly worth the positive effect on the Brand. At times, management has determined, and will in the future determine, that the strength of the Brand warranted, or that it will permit, more aggressive and profitable distribution and marketing initiatives.

REPORTABLE SEGMENTS

Americas

In 2011, sales in the Americas were 50% of consolidated worldwide net sales, while sales in the U.S. represented 90% of net sales in the Americas.

Retail Sales. Retail sales are transacted in Company-operated TIFFANY & CO. stores in (number of stores at January 31, 2012 included in parentheses): the U.S. (87), Mexico (7), Canada (5) and Brazil (3). Included within these totals are six Company-operated stores located within various department stores.

Internet and Catalog Sales. Tiffany and its subsidiaries distribute a selection of their products in the U.S. and Canada through the websites at www.tiffany.com and www.tiffany.ca. Tiffany also distributes catalogs of selected merchandise to its proprietary list of customers in the U.S. and Canada and to mailing lists rented from third parties. SELECTIONS® catalogs are published four times per year, supplemented by other targeted catalogs.

Business-to-Business Sales. Business sales executives call on business clients, selling products drawn from the retail product line and items specially developed for the business market, including trophies and items designed for the particular customer. Most sales occur in the U.S. Price allowances are given to business account holders for certain purchases. Business customers have typically made purchases for gift giving, employee service and achievement recognition awards, customer incentives and other purposes. Products and services are marketed through a sales organization, through advertising in newspapers, business periodicals and through the publication of special catalogs. Business account holders may make purchases through the Company’s website at www.tiffany.com/business.

Wholesale Distribution. Selected TIFFANY & CO. merchandise is sold to independent distributors for resale in markets in the Central/South American, Caribbean and Canadian regions. Such sales represent less than 1% of consolidated worldwide net sales.

Asia-Pacific

In 2011, sales in Asia-Pacific represented 21% of consolidated worldwide net sales.

Retail Sales. Retail sales are transacted in Company-operated TIFFANY & CO. stores in (number of

 

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stores at January 31, 2012 included in parentheses): China (16), Korea (14), Hong Kong (8), Taiwan (7), Australia (5), Singapore (4), Macau (2) and Malaysia (2). Included within these totals are 21 Company-operated stores located within various department stores.

Internet Sales. The Company offers a selection of TIFFANY & CO. merchandise for purchase in Australia through its website at www.tiffany.com.au.

Wholesale Distribution. Selected TIFFANY & CO. merchandise is sold to independent distributors for resale in Asia-Pacific markets. Such sales represent less than 1% of consolidated worldwide net sales.

Japan

In 2011, sales in Japan represented 17% of consolidated worldwide net sales.

Retail Sales. The Registrant does business in Japan through its wholly-owned subsidiary, Tiffany & Co. Japan, Inc. (“Tiffany-Japan”), in 55 stores. Included within this total are 51 Tiffany-Japan-operated stores located within Japanese department stores, representing 79% of Tiffany-Japan’s net sales. There are four large department store groups in Japan. Tiffany-Japan operates TIFFANY & CO. stores in locations controlled by these groups as follows (number of locations at January 31, 2012 included in parentheses): Isetan Mitsukoshi (15), J. Front Retailing Co. (Daimaru and Matsuzakaya department stores) (10), Takashimaya (9) and Millennium Retailing Co. (Sogo and Seibu department stores) (3). Tiffany-Japan also operates 14 stores in department stores controlled by other Japanese companies.

Internet Sales. The Company offers a selection of TIFFANY & CO. merchandise for purchase in Japan through its website at www.tiffany.co.jp.

Business-to-Business Sales. Products drawn from the retail product line and items specially developed are sold to business customers.

Wholesale Distribution. Selected TIFFANY & CO. merchandise is sold to independent distributors for resale in Japan. Such sales represent less than 1% of consolidated worldwide net sales.

Europe

In 2011, sales in Europe represented 12% of consolidated worldwide net sales, while sales in the United Kingdom represented approximately half of European net sales.

Retail Sales. Retail sales are transacted in Company-operated TIFFANY & CO. stores in (number of stores at January 31, 2012 included in parentheses): the United Kingdom (10), Germany (6), Italy (5), France (3), Spain (2), Switzerland (2), Austria (1), Belgium (1), Ireland (1) and the Netherlands (1). Included within these totals are seven Company-operated stores located within various department stores.

Internet Sales. The Company offers a selection of TIFFANY & CO. merchandise for purchase in the United Kingdom, Austria, Belgium, France, Germany, Ireland, Italy, the Netherlands and Spain through its websites which are accessible through www.tiffany.com.

Wholesale Distribution. Selected TIFFANY & CO. merchandise is sold to independent distributors for resale in Europe. Such sales represent less than 1% of consolidated worldwide net sales.

 

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Other

Other consists of all non-reportable segments. Other consists primarily of wholesale sales of TIFFANY & CO. merchandise to independent distributors for resale in certain emerging markets primarily in the Middle East and Russia (“Emerging Markets”) and wholesale sales of diamonds. In addition, Other also includes earnings received from licensing agreements with Luxottica Group for the distribution of TIFFANY & CO. brand eyewear and with The Swatch Group Ltd. (the “Swatch Group”) for TIFFANY & CO. brand watches. The earnings received from these licensing agreements represented less than 1% of consolidated worldwide net sales in 2011, 2010 and 2009. See “Item 3. Legal Proceedings” for additional information.

Wholesale Sales of Diamonds. The Company regularly purchases parcels of rough diamonds for further processing, but not all rough diamonds so purchased are suitable for Tiffany’s needs. In addition, most, but not all, diamonds polished by the Company are suitable for Tiffany jewelry. The Company sells to third parties those diamonds that are found to be unsuitable for Tiffany’s needs. The Company’s objective from such sales is to recoup its original costs, thereby earning minimal, if any, gross margin on those transactions.

Iridesse, Inc. In the fourth quarter of 2008, management committed to a plan to close all IRIDESSE stores. All stores were closed in 2009. The results of IRIDESSE are reported as discontinued operations.

Expansion of Operations

Management regularly evaluates potential markets for new TIFFANY & CO. stores with a view to the demographics of the area to be served, consumer demand and the proximity of other luxury brands and existing TIFFANY & CO. locations. Management recognizes that oversaturation of any market could diminish the distinctive appeal of the Brand, but believes that there are a significant number of locations remaining in the Americas, Asia-Pacific (outside Japan) and Europe that meet the requirements of a TIFFANY & CO. location.

The following chart details the number of TIFFANY & CO. retail locations operated by the Registrant’s subsidiary companies since 2001:

 

September 30, September 30, September 30, September 30, September 30, September 30,
       Americas                             

Year:

     U.S.        Canada
& Latin
America
       Asia-
Pacific
       Japan        Europe        Total  

2001

       44           5           20           47           10           126   

2002

       47           5           20           48           11           131   

2003

       51           7           22           50           11           141   

2004

       55           7           24           53           12           151   

2005

       59           7           25           50           13           154   

2006

       64           9           28           52           14           167   

2007

       70           10           34           53           17           184   

2008

       76           10           39           57           24           206   

2009

       79           12           45           57           27           220   

2010

       84           12           52           56           29           233   

2011

       87           15           58           55           32           247   

 

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As part of its long-term strategy to expand its worldwide store base, management plans to add 24 (net) Company-operated stores in 2012 (nine in the Americas, seven in Asia-Pacific, three in Europe and commence operations of five stores in Emerging Markets).

As noted above, the Company currently operates e-commerce enabled websites in 13 countries. Sales transacted on those websites accounted for 6% of consolidated worldwide net sales in 2011, 2010 and 2009. The Company continually invests in enhancing these websites and intends to expand its e-commerce sites to additional countries in the future.

Products

The Company’s principal product category is jewelry, which represented 91%, 91% and 90% of the Registrant’s net sales in 2011, 2010 and 2009. Tiffany offers an extensive selection of TIFFANY & CO. brand jewelry at a wide range of prices. Designs are developed by employees, suppliers, independent designers and independent “named” designers (see “MATERIAL DESIGNER LICENSE” below).

The Company also sells timepieces, sterling silver goods (other than jewelry), china, crystal, stationery, fragrances, personal accessories and leather goods, which represented, in total, 8%, 8% and 9% of the Registrant’s net sales in 2011, 2010 and 2009. The Registrant’s remaining 1% of net sales were attributable to wholesale sales of diamonds and earnings received from third-party licensing agreements.

Sales by Reportable Segment of TIFFANY & CO. Jewelry by Category

 

September 30, September 30, September 30, September 30, September 30,
        % of total
Americas
Sales
    % of total
Asia-Pacific
Sales
    % of total
Japan
Sales
    % of total
Europe
Sales
    % of total
Reportable
Segment
Sales
 
2011             

Statement, fine & solitaire jewelry a

       16     23     12     14     16

Engagement jewelry & wedding bands b

       23     37     41     24     29

Silver & gold jewelry c

       33     28     16     46     30

Designer jewelry d

       16     11     23     12     15

2010

            

Statement, fine & solitaire jewelry a

       15     23     13     13     16

Engagement jewelry & wedding bands b

       21     35     42     25     28

Silver & gold jewelry c

       36     28     17     45     32

Designer jewelry d

       17     12     21     13     16

2009

            

Statement, fine & solitaire jewelry a

       14     21     11     13     14

Engagement jewelry & wedding bands b

       21     34     43     23     27

Silver & gold jewelry c

       38     30     19     47     34

Designer jewelry d

       16     12     20     14     16

 

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a) This category includes statement, fine and solitaire jewelry (other than engagement jewelry). Most jewelry in this category is constructed of platinum, although gold was used as the primary metal in approximately 5% of sales. Most items in this category contain diamonds, other gemstones or both. The average price of merchandise sold in 2011, 2010 and 2009 in this category was approximately $5,400, $4,400 and $4,200 for total reportable segments.

 

b) This category includes diamond engagement rings and wedding bands marketed to brides and grooms. Most jewelry in this category is constructed of platinum, although gold was used as the primary metal in approximately 5% of sales. Most sales in this category are of items containing diamonds. The average price of merchandise sold in 2011, 2010 and 2009 in this category was approximately $3,800, $3,400 and $3,200 for total reportable segments.

 

c) This category generally consists of non-gemstone, sterling silver (approximately 70% of the category in 2011) or gold jewelry, although small gemstones are used as accents in some pieces. This category does not include jewelry that bears a designer’s name. The average price of merchandise sold in 2011, 2010 and 2009 in this category was approximately $250, $220 and $210 for total reportable segments.

 

d) This category generally consists of platinum, gold and sterling silver jewelry, some of which contains diamonds, other gemstones or a combination of both diamonds and other gemstones. This category includes only items that bear the name of and are attributed to one of the Company’s “named” designers: Elsa Peretti, Paloma Picasso, Frank Gehry and Jean Schlumberger (refer to “MATERIAL DESIGNER LICENSE” below). The average price of merchandise sold in 2011, 2010 and 2009 in this category was approximately $520, $450 and $420 for total reportable segments.

Certain reclassifications within the jewelry categories have been made to the prior years’ amounts to conform to the current year category presentation.

ADVERTISING AND MARKETING

The Registrant regularly advertises, primarily in newspapers and magazines, and also increasingly through digital media, and periodically conducts product marketing events. In 2011, 2010 and 2009, the Registrant spent $234,050,000 (6.4% of net sales), $197,597,000 (6.4% of net sales) and $159,891,000 (5.9% of net sales) on worldwide advertising, which include costs for media, production, catalogs, Internet, visual merchandising (in-store and window displays), marketing events and other related items.

PUBLIC AND MEDIA RELATIONS

Public and media relations activities are significant to the Registrant’s business and are important in maintaining the Brand. The Company engages in a program of media activities and retail marketing events to maintain consumer awareness of the Brand and TIFFANY & CO. products. Each year, Tiffany publishes its well-known Blue Book which showcases jewelry and other merchandise.

Management believes that the Brand is also enhanced by a program of charity sponsorships, grants and merchandise donations. In addition, the Company makes donations to The Tiffany & Co. Foundation, a private foundation organized to support 501(c)(3) charitable organizations. The efforts of this Foundation are concentrated in environmental conservation, urban parks and support for the decorative arts.

 

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TRADEMARKS

The designations TIFFANY® and TIFFANY & CO.® are the principal trademarks of Tiffany, as well as serving as tradenames. Through its subsidiaries, the Company has obtained and is the proprietor of trademark registrations for TIFFANY and TIFFANY & CO., as well as the TIFFANY BLUE BOX® and the color TIFFANY BLUE® for a variety of product categories in the U.S. and in other countries.

Tiffany maintains a program to protect its trademarks and institutes legal action where necessary to prevent others either from registering or using marks which are considered to create a likelihood of confusion with the Company or its products.

Tiffany has been generally successful in such actions and management considers that its worldwide trademark rights in TIFFANY and TIFFANY & CO. are strong. However, use of the designation TIFFANY by third parties (often small companies) on unrelated goods or services, frequently transient in nature, may not come to the attention of Tiffany or may not rise to a level of concern warranting legal action.

Tiffany actively pursues those who produce or sell counterfeit TIFFANY & CO. goods through civil action and cooperation with criminal law enforcement agencies. However, counterfeit TIFFANY & CO. goods remain available in many markets because it is not possible or cost-effective to fully address the problem. The cost of enforcement is expected to continue to rise. In recent years, there has been an increase in the availability of counterfeit goods, predominantly silver jewelry, in various markets by street vendors and small retailers and on the Internet. As Internet counterfeiting continues to become increasingly prolific, Tiffany has responded by engaging investigators and counsel to monitor the Internet and take various actions, including initiating civil proceedings against infringers and litigating through the Internet’s Uniform Dispute Resolution Policy, to stop infringing activity.

Despite the general fame of the TIFFANY and TIFFANY & CO. name and mark for the Company’s products and services, Tiffany is not the sole person entitled to use the name TIFFANY in every category in every country of the world; third parties have registered the name TIFFANY in the U.S. in the food services category, and in a number of foreign countries in respect of certain product categories (including, in a few countries, the categories of food, cosmetics, jewelry, clothing and tobacco products) under circumstances where Tiffany’s rights were not sufficiently clear under local law, and/or where management concluded that Tiffany’s foreseeable business interests did not warrant the expense of litigation.

MATERIAL DESIGNER LICENSE

Tiffany has been the sole licensee for jewelry designed by Elsa Peretti and bearing her trademark since 1974. The designs of Ms. Peretti accounted for 10% of the Company’s net sales in 2011, 2010 and 2009. Ms. Peretti, age 71, retains ownership of copyrights for her designs and of her trademarks and exercises approval rights with respect to important aspects of the promotion, display, manufacture and merchandising of her designs. Tiffany is required by contract to devote a portion of its advertising budget to the promotion of her products and she is paid a royalty by Tiffany for jewelry and other items designed by her and sold under her name. A written agreement exists between Ms. Peretti and Tiffany, but it may be terminated by either party following six months notice to the other party. No arrangement is currently in place to continue the sale of designs following the death or disability of Ms. Peretti. Tiffany is the sole retail source for merchandise designed by Ms. Peretti worldwide; however, she has reserved by contract the right

 

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to appoint other distributors in markets outside the U.S., Canada, Japan, Singapore, Australia, Italy, the United Kingdom, Switzerland and Germany. The Registrant’s operating results would be adversely affected were it to cease to be a licensee of Ms. Peretti or should its degree of exclusivity in respect of her designs be diminished.

MERCHANDISE PURCHASING, MANUFACTURING AND RAW MATERIALS

Tiffany produces jewelry and silver goods in New York, Rhode Island and Kentucky, and silver hollowware in New Jersey. Other subsidiaries of the Company process, cut and polish diamonds at facilities outside the U.S. In total, those manufacturing facilities produce approximately 60% of Tiffany merchandise sold. The balance, including almost all non-jewelry items, is purchased from third parties.

The Company may increase the percentage of internally-manufactured jewelry in the future, but it is not expected that Tiffany will ever manufacture all of its needs. Factors considered by management in its decision to outsource manufacturing include product quality, gross margin, access to or mastery of various jewelry-making skills and technology, support for alternative capacity and the cost of capital investments.

Purchases of Polished Gemstones and Precious Metals. Gemstones and precious metals used in making Tiffany’s jewelry are purchased from a variety of sources. Most purchases are from suppliers with which Tiffany enjoys long-standing relationships.

The Company generally enters into purchase orders for fixed quantities with nearly all of its polished gemstone and precious metals vendors. These relationships may be terminated at any time by the Company without penalty; such termination would not discharge the Company’s obligations under unfulfilled purchase orders placed prior to the termination.

The Company purchases precious metals for use in its U.S. internal manufacturing operations and for use in the manufacture of Tiffany merchandise by certain third-party vendors. While Tiffany may supply precious metals to those vendors, the finished goods made by such vendors may not exclusively contain Tiffany-purchased precious metals. Additionally, not all precious metals used by third-party vendors or in Tiffany’s own manufacturing operations are sourced from a single mine or refinery. In recent years, there has been substantial volatility in the prices of precious metals.

Products containing one or more diamonds of varying sizes, including diamonds used as accents, side-stones and center-stones, accounted for approximately 55%, 52% and 48% of Tiffany’s net sales in 2011, 2010 and 2009. Products containing one or more diamonds of one carat or larger accounted for 14%, 12% and 11% of net sales in each of those years.

Tiffany purchases polished diamonds principally from five key vendors. Were trade relations between Tiffany and one or more of these vendors to be disrupted, the Company’s sales could be adversely affected in the short term until alternative supply arrangements could be established. In 2008 and early 2009, the economic environment led to a reduction of retail and wholesale demand, and rough diamond prices and wholesale polished prices both declined accordingly. In the second half of 2009, and throughout 2010 and 2011, a resumption of growth in industry-wide demand for rough and polished wholesale diamonds resulted in prices rising accordingly.

Some, but not all, of Tiffany’s suppliers are Diamond Trading Company (“DTC”) sightholders (see “The DTC” below), and it is estimated that a significant portion of the diamonds that Tiffany has

 

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purchased have had their source with the DTC. The Company is a DTC sightholder for rough diamonds through its Antwerp operations and joint ventures (see below).

Except as noted above, Tiffany believes that there are numerous alternative sources for gemstones and precious metals and that the loss of any single supplier would not have a material adverse effect on its operations.

Purchases and Processing of Rough Diamonds. Of the world’s largest diamond producing countries, the vast majority of diamonds purchased by Tiffany originate from Botswana, Canada, Namibia, South Africa, Sierra Leone, Russia and Australia. The Company has established diamond processing operations that purchase, sort, cut and/or polish rough diamonds for use by Tiffany. The Company has such operations in Belgium, South Africa, Botswana, Namibia, Mauritius and Vietnam. Operations in South Africa, Botswana and Namibia are conducted through joint venture companies in which third parties own minority interests. Tiffany maintains a relationship and has an arrangement with a single mine operator in each of these three southern African countries, although the Company may choose to supplement its current operations with alternative mine operators from time to time. The Company’s operations in South Africa, Botswana and Namibia allow it to access rough diamond allocations reserved for local manufacturers.

Tiffany’s purchases of conflict-free rough (see “Conflict Diamonds” below) and polished fine white diamonds, in the color ranges D through I and in sizes above 0.18 carats represent a significant portion of the world’s supply of fine white diamonds in those color and size ranges. Management does not foresee a shortage of diamonds in those color and size ranges in the short term but believes that rising demand will eventually create such a shortage unless new mines are developed.

In recent years, approximately 50%—60% of the polished diamonds acquired by Tiffany for use in jewelry have been produced from rough diamonds purchased by the Company. The balance of Tiffany’s needs for polished diamonds have been purchased from third parties (see above). Through purchasing rough diamonds, it is the Company’s intention to supply Tiffany’s needs for diamonds to as great an extent as possible.

In order to acquire rough diamonds, the Company must purchase mixed assortments of rough diamonds. It is thus necessary to purchase some rough diamonds that cannot be cut to meet Tiffany’s quality standards and that must be sold to third parties; such sales are reported in the Other non-reportable segment. To make such sales, the Company charges a market price and is, therefore, unable to earn any significant profit above its original cost. Sales of rough diamonds in the Other non-reportable segment have had and will continue to have the effect of reducing the Company’s overall gross margins.

The Company will, from time to time, secure supplies of diamonds by agreeing to purchase a defined portion of a mine’s output at the current market prices. Under such arrangements, management anticipates that it will purchase approximately $200,000,000 of rough diamonds in 2012. The Company will also purchase rough diamonds from other suppliers, although there are no contractual obligations to do so.

The DTC. The supply and price of rough and polished diamonds in the principal world markets have been and continue to be influenced by the DTC, an affiliate of the De Beers Group. Although the market share of the DTC has diminished, the DTC continues to supply a significant portion of the world market for rough, gem-quality diamonds. The DTC’s historical ability to control worldwide production has been significantly diminished due to its lower levels of production,

 

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changing policies in diamond-producing countries and revised contractual arrangements with third-party mine operators.

The DTC continues to exert influence on the demand for polished diamonds through the requirements it imposes on those (“sightholders”) who purchase rough diamonds from the DTC.

Worldwide Availability and Price of Diamonds. The availability and price of diamonds to the DTC, Tiffany and Tiffany’s suppliers are dependent on a number of factors, including global consumer demand, the political situation in diamond-producing countries, the opening of new mines and the continuance of the prevailing supply and marketing arrangements for rough diamonds. As a consequence of changes in the DTC sightholder system and increased demand in the retail diamond trade, diamond prices increased significantly in the years leading up to 2008. During 2008 and early 2009, as global demand for rough diamonds waned due to economic conditions, diamond prices decreased but have increased again from the latter part of 2009 through 2011.

Sustained interruption in the supply of rough diamonds, an overabundance of supply or a substantial change in the marketing arrangements described above could adversely affect Tiffany and the retail jewelry industry as a whole. Changes in the marketing and advertising policies of the DTC and its direct purchasers could affect consumer demand for diamonds.

Conflict Diamonds. Media attention has been drawn to the issue of “conflict” or “blood” diamonds. These terms are used to refer to diamonds extracted from war-torn geographic regions and sold by rebel forces to fund insurrection. Allegations have also been made that trading in such diamonds supports terrorist activities. It is not considered possible to distinguish conflict diamonds from diamonds produced in other regions once they have been polished. Therefore, concerned participants in the diamond trade, including Tiffany and nongovernment organizations, such as the Responsible Jewellery Council of which Tiffany is a member, seek to exclude such diamonds, which represent a small fraction of the world’s supply, from legitimate trade through an international system of certification and legislation known as the Kimberley Process Certification Scheme. All rough diamonds the Company buys must be accompanied by a Kimberley Process certificate and all subsequent trades of rough and polished diamonds must conform to a system of warranties that references the aforesaid scheme. It is not expected that such efforts will substantially affect the supply of diamonds. Concerns over human rights abuses in Zimbabwe underscore that the aforementioned system does not control diamonds produced in state-sanctioned mines under poor working conditions. Tiffany has informed its vendors that the Company does not intend to purchase Zimbabwean-produced diamonds.

Manufactured Diamonds. Manufactured diamonds are produced in small quantities. Although significant questions remain as to the ability of producers to produce manufactured diamonds economically within a full range of sizes and natural diamond colors, and as to consumer acceptance of manufactured diamonds, manufactured diamonds may someday become a larger factor in the market. Should manufactured diamonds be offered in significant quantities, the supply of and price for natural diamonds may be affected. Tiffany does not sell manufactured diamonds.

Finished Jewelry. Finished jewelry is purchased from approximately 70 manufacturers, most of which have long-standing relationships with Tiffany. However, Tiffany does not enter into long-term supply arrangements with its finished goods vendors. Tiffany does enter into written blanket purchase order agreements with nearly all of its finished goods vendors. These relationships may be terminated at any time by Tiffany without penalty; such termination would not discharge Tiffany’s obligations under unfulfilled purchase orders placed prior to termination. The blanket purchase order agreements establish non-price terms by which Tiffany may purchase and by which vendors may sell finished goods to Tiffany. These terms include payment terms, shipping

 

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procedures, product quality requirements, merchandise specifications and vendor social responsibility requirements. Tiffany actively seeks alternative sources for its top-selling jewelry items to mitigate any potential disruptions in supply. However, due to the craftsmanship involved in a small number of designs, Tiffany may have difficulty finding readily available alternative suppliers for those jewelry designs in the short term.

Watches. Prior to 2007, the Company acquired TIFFANY & CO. brand watches from various Swiss manufacturers. In 2007, the Company entered into a 20-year license and distribution agreement with the Swatch Group for the manufacture and distribution of TIFFANY & CO. brand watches. Under the agreement, the Swatch Group incorporated a new watchmaking company in Switzerland for the design, engineering, manufacturing, marketing, distribution and service of TIFFANY & CO. brand watches. This watchmaking company is wholly-owned and controlled by the Swatch Group but is authorized by Tiffany to use certain trademarks owned by Tiffany and operate under the TIFFANY & CO. name as Tiffany Watch Co., Ltd. The distribution of TIFFANY & CO. watches is made through the Swatch Group distribution network via the Swatch Group’s affiliates, the Swatch Group’s retail facilities and third-party distributors and resulted in royalty revenue that was less than 1% of consolidated worldwide net sales in 2011 and 2010. Watches sold in TIFFANY & CO. stores constituted 1% of consolidated worldwide net sales in 2011, 2010 and 2009. See “Item 3. Legal Proceedings” for additional information.

COMPETITION

The global jewelry industry is competitively fragmented. The Company encounters significant competition in all product lines. Some competitors specialize in just one area in which the Company is active. Many competitors have established worldwide, national or local reputations for style, quality, expertise and customer service similar to the Company and compete on the basis of that reputation. Other jewelers and retailers compete primarily through advertised price promotion. The Company competes on the basis of the Brand’s reputation for high-quality products, customer service and distinctive merchandise and does not engage in price promotional advertising.

Competition for engagement jewelry sales is particularly and increasingly intense. The Company’s retail price for diamond jewelry reflects the rarity of the stones it offers and the rigid parameters it exercises with respect to the cut, clarity and other diamond quality factors which increase the beauty of the diamonds, but which also increase the Company’s cost. The Company competes in this market by stressing quality.

SEASONALITY

As a jeweler and specialty retailer, the Company’s business is seasonal in nature, with the fourth quarter typically representing at least one-third of annual net sales and approximately one-half of annual net earnings. Management expects such seasonality to continue.

EMPLOYEES

As of January 31, 2012, the Registrant’s subsidiary corporations employed an aggregate of approximately 9,800 full-time and part-time persons. Of those employees, approximately 5,300 are employed in the United States.

 

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AVAILABLE INFORMATION

The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. The public may read and copy these materials at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding Tiffany & Co. and other companies that file materials with the SEC electronically. Copies of the Company’s annual reports on Form 10-K, Forms 10-Q and Forms 8-K, may be obtained, free of charge, on the Company’s website at http://investor.tiffany.com/financials.cfm.

 

Item 1A. Risk Factors.

As is the case for any retailer, the Registrant’s success in achieving its objectives and expectations is dependent upon general economic conditions, competitive conditions and consumer attitudes. However, certain factors are specific to the Registrant and/or the markets in which it operates. The following “risk factors” are specific to the Registrant; these risk factors affect the likelihood that the Registrant will achieve the financial objectives and expectations communicated by management:

(i) Risk: that challenging global economic conditions and related low levels of consumer confidence over a prolonged period of time could adversely affect the Registrant’s sales.

As a retailer of goods which are discretionary purchases, the Registrant’s sales results are particularly sensitive to changes in economic conditions and consumer confidence. Consumer confidence is affected by general business conditions; changes in the market value of securities and real estate; inflation; interest rates and the availability of consumer credit; tax rates; and expectations of future economic conditions and employment prospects.

Consumer spending for discretionary goods generally declines during times of falling consumer confidence, which negatively affects the Registrant’s earnings because of its cost base and inventory investment.

Many of the Registrant’s competitors may react to any declines in consumer confidence by reducing retail prices and promoting such reductions; such reductions and/or inventory liquidations can have a short-term adverse effect on the Registrant’s sales, especially given the Registrant’s policy of not engaging in price promotional activity.

The Registrant has invested in and operates a significant number of stores in the greater China region and anticipates significant further expansion. Should the Chinese economy experience an economic slowdown, the sales and profitability of stores in the greater China region as well as stores in other markets that serve Chinese tourists could be affected.

Uncertainty surrounding the current global economic environment makes it more difficult for the Registrant to forecast operating results. The Registrant’s forecasts employ the use of estimates and assumptions. Actual results could differ from forecasts, and those differences could be material.

 

 

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(ii) Risk: that sales will decline or remain flat in the Registrant’s fourth fiscal quarter, which includes the Holiday selling season.

The Registrant’s business is seasonal in nature, with the fourth quarter typically representing at least one-third of annual net sales and approximately one-half of annual net earnings. Poor sales results during the Registrant’s fourth quarter will have a material adverse effect on the Registrant’s sales and profits and will result in higher inventories.

(iii) Risk: that regional instability and conflict will disrupt tourist travel and local consumer spending.

Unsettled regional and global conflicts or crises such as military actions, terrorist activities, natural disasters, government regulations or other conditions creating disruptions or disincentives to, or changes in the pattern, practice or frequency of tourist travel to the various regions and local consumer spending where the Registrant operates retail stores could adversely affect the Registrant’s sales and profits.

(iv) Risk: that changes in the Registrant’s product or geographic sales mix could affect the Registrant’s profitability.

The Registrant sells an extensive selection of jewelry and other merchandise at a wide range of retail price points that yield different gross profit margins. Additionally, the Registrant’s geographical regions achieve different operating profit margins due to a variety of factors including product mix, store size and occupancy costs, labor costs, retail pricing and fixed versus variable expenses. If the Registrant’s sales were to shift toward products or geographic regions that are significantly different than the Registrant’s plans, it could have an effect, either positively or negatively, on the Registrant’s expected profitability.

 

(v) Risk: that weakening foreign currencies may negatively affect the Registrant’s sales and profitability.

The Registrant operates retail stores in various countries outside of the U.S. and, as a result, is exposed to market risk from fluctuations in foreign currency exchange rates. In 2011, sales in countries outside of the U.S. in aggregate represented more than half of the Registrant’s net sales and earnings from operations, of which Japan represented 17% of the Registrant’s net sales and 26% of the Registrant’s earnings from operations. In order to maintain its worldwide relative pricing structure, a substantial weakening of foreign currencies against the U.S. dollar would require the Registrant to raise its retail prices or reduce its profit margins in various locations outside of the U.S. Consumers in those markets may not accept significant price increases on the Registrant’s goods; thus, there is a risk that a substantial weakening of foreign currencies will result in reduced sales and profitability.

The results of the operations of the Registrant’s international subsidiaries are exposed to foreign exchange rate fluctuations as the financial results of the applicable subsidiaries are translated from the local currency into U.S. dollars during the process of financial statement consolidation. If the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions will decrease consolidated net sales and profitability.

In addition, a weakening in foreign currency exchange rates may create disincentives to, or changes in the pattern, practice or frequency of tourist travel to the various regions where the Registrant operates retail stores which could adversely affect the Registrant’s net sales and profitability.

 

 

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(vi) Risk: that volatile global economic conditions may have a material adverse effect on the Registrant’s liquidity and capital resources.

The global economy and the credit and equity markets have undergone significant disruption in recent years. Any prolonged economic weakness could have an adverse effect on the Registrant’s cost of borrowing, could diminish its ability to service or maintain existing financing and could make it more difficult for the Registrant to obtain additional financing or to refinance existing long-term obligations.

Any significant deterioration in the stock market could negatively affect the valuation of pension plan assets and result in increased minimum funding requirements.

(vii) Risk: that the Registrant will be unable to continue to offer merchandise designed by Elsa Peretti.

Merchandise designed by Ms. Peretti accounted for 10% of 2011 net sales. Tiffany has an exclusive long-standing license arrangement with Ms. Peretti to sell her designs and use her trademarks; this arrangement is subject to royalty payments as well as other requirements. This license may be terminated by Tiffany or Ms. Peretti on six months notice, even in the case where no default has occurred. Also, no agreement has been made for the continued sale of the designs or use of the trademarks ELSA PERETTI following the death or disability of Ms. Peretti, who is now 71 years of age. Loss of this license would have a material adverse effect on the Registrant’s business through lost sales and profits.

(viii) Risk: that changes in costs of diamonds and precious metals or reduced supply availability may adversely affect the Registrant’s ability to produce and sell products at desired profit margins.

Most of the Registrant’s jewelry and non-jewelry offerings are made with diamonds, gemstones and/or precious metals. Presently, the Registrant purchases a significant portion of the world’s rough and polished white diamonds that meet the Registrant’s quality standards. Acquiring diamonds is difficult because of supply limitations and Tiffany may not be able to maintain a comprehensive selection of diamonds in each retail location due to the broad assortment of sizes, colors, clarity grades and cuts demanded by customers. A significant change in the costs or supply of these commodities could adversely affect the Registrant’s business, which is vulnerable to the risks inherent in the trade for such commodities. A substantial increase or decrease in the cost or supply of raw materials and/or high-quality rough and polished diamonds within the quality grades, colors and sizes that customers demand could affect, negatively or positively, customer demand, sales and gross profit margins.

If trade relationships between the Registrant and one or more of its significant vendors were disrupted, the Registrant’s sales could be adversely affected in the short-term until alternative supply arrangements could be established.

(ix) Risk: that the Registrant will be unable to lease sufficient space for its retail stores in prime locations.

The Registrant, positioned as a luxury goods retailer, has established its retail presence in choice store locations. If the Registrant cannot secure and retain locations on suitable terms in prime and desired luxury shopping locations, its expansion plans, sales and profits will be jeopardized.

 

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In Japan, many of the retail locations are within department stores. TIFFANY & CO. stores located in department stores in Japan represented 79% of net sales in Japan and 13% of consolidated net sales in 2011. In recent years, the Japanese department store industry has, in general, suffered declining sales and there is a risk that such financial difficulties will force further consolidations or store closings. Should one or more Japanese department store operators elect or be required to close one or more stores now housing a TIFFANY & CO. store, the Registrant’s sales and profits would be reduced while alternative premises were being obtained. The Registrant’s commercial relationships with department stores in Japan, and their abilities to continue as leading department store operators, have been and will continue to be substantial factors affecting the Registrant’s business in Japan.

(x) Risk: that the value of the TIFFANY & CO. trademark will decline due to the sale of counterfeit merchandise by infringers.

The TIFFANY & CO. trademark is an asset which is essential to the competitiveness and success of the Registrant’s business and the Registrant takes appropriate action to protect it. Tiffany actively pursues those who produce or sell counterfeit TIFFANY & CO. goods through civil action and cooperation with criminal law enforcement agencies. However, the Registrant’s enforcement actions have not stopped the imitation and counterfeit of the Registrant’s merchandise or the infringement of the trademark, and counterfeit TIFFANY & CO. goods remain available in many markets. In recent years, there has been an increase in the availability of counterfeit goods, predominantly silver jewelry, in various markets by street vendors and small retailers, as well as on the Internet. The continued sale of counterfeit merchandise could have an adverse effect on the TIFFANY & CO. brand by undermining Tiffany’s reputation for quality goods and making such goods appear less desirable to consumers of luxury goods. Damage to the Brand would result in lost sales and profits.

(xi) Risk: that the Registrant’s business is dependent upon the distinctive appeal of the TIFFANY & CO. brand.

The TIFFANY & CO. brand’s association with quality, luxury and exclusivity is integral to the success of the Registrant’s business. The Registrant’s expansion plans for retail and direct selling operations and merchandise development, production and management support the Brand’s appeal. Consequently, poor maintenance, promotion and positioning of the TIFFANY & CO. brand, as well as market over-saturation, may adversely affect the business by diminishing the distinctive appeal of the TIFFANY & CO. brand and tarnishing its image. This would result in lower sales and profits.

(xii) Risk: that a significant privacy breach of the Registrant’s information systems could affect the Registrant’s business.

The protection of customer, employee and company data is important to the Registrant. The Registrant’s customers expect that their personal information will be adequately protected. In addition, the regulatory environment surrounding information security and privacy is becoming increasingly demanding, with evolving requirements in the various jurisdictions in which the Registrant’s subsidiaries do business. A significant breach of customer, employee or company data could damage the Registrant’s reputation, brand and relationship with customers and could result in lost sales, fines and lawsuits.

 

 

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(xiii) Risk: that the loss, or a prolonged disruption in the operation, of the Registrant’s centralized distribution centers could adversely affect the Registrant’s business and operations.

The Registrant maintains two separate distribution centers in close proximity to one another in New Jersey. Both are dedicated to warehousing merchandise, store replenishment and processing direct-to-customer orders. Although the Registrant believes that it has appropriate contingency plans, unforeseen disruptions impacting one or both locations for a prolonged period of time may result in delays in the delivery of merchandise to stores or in fulfilling customer orders.

 

Item 1B. Unresolved Staff Comments.

NONE

 

Item 2. Properties.

The Registrant leases its various store premises (other than the New York Flagship store) under arrangements that generally range from three to 10 years. The following table provides information on the number of locations and square footage of Company-operated TIFFANY & CO. stores as of January 31, 2012:

 

September 30, September 30, September 30, September 30,
       Total Stores        Total Gross
Retail Square
Footage
       Gross Retail
Square
Footage Range
       Average Gross
Retail Square
Footage
 

Americas:

                   

New York Flagship

       1           45,500           45,500           45,500   

Other stores

       101           615,200           1,000 – 17,600           6,100   

Asia-Pacific

       58           150,600           700 – 12,800           2,600   

Japan:

                   

Tokyo Ginza

       1           12,000           12,000           12,000   

Other stores

       54           131,600           600 – 7,500           2,400   

Europe:

                   

London Old Bond Street

       1           22,400           22,400           22,400   

Other stores

       31           89,400           600 – 7,100           2,900   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

       247           1,066,700           600 – 45,500           4,300   
    

 

 

      

 

 

      

 

 

      

 

 

 

In the Americas, Tiffany’s U.S. stores over the years have evolved toward smaller-sized formats, as a result of more effective use of space, visual merchandising, and inventory replenishment. New stores opened in 2011 ranged from 2,900 – 3,500 gross square feet, and management currently expects that new U.S. stores to be opened in 2012 and beyond will likely be in that approximate size range. In addition, management currently does not anticipate any meaningful change in future store sizes or formats for locations outside the U.S.

NEW YORK FLAGSHIP STORE

The Company owns the building housing the New York Flagship store at 727 Fifth Avenue, which was designed to be a retail store for Tiffany and is well located for this function. Currently, approximately 45,500 gross square feet of this 124,000 square foot building are devoted to retail

 

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sales, with the balance devoted to administrative offices, certain product services, jewelry manufacturing and storage. Tiffany’s New York Flagship store is the focal point for marketing and public relations efforts. Retail sales in the New York Flagship store represented 8%, 8% and 9% of consolidated worldwide net sales in 2011, 2010 and 2009.

TOKYO GINZA STORE

The Company leases 12,000 gross square feet of a multi-tenant building housing the TIFFANY & CO. store in Tokyo’s Ginza shopping district. The 25-year lease expires in 2032; however, the Company has options to terminate the lease in 2022 and 2027 without penalty.

LONDON OLD BOND STREET STORE

The Company leases a 22,400 gross square feet store on London’s Old Bond Street. The 15-year lease expires in 2022, and has two 10-year renewal options.

RETAIL SERVICE CENTER

The Company’s Retail Service Center (“RSC”), located in Parsippany, New Jersey, comprises approximately 370,000 square feet. Approximately half of the building is devoted to office and computer operations and half to warehousing, shipping, receiving, light manufacturing, merchandise processing and other distribution functions. The RSC receives merchandise and replenishes retail stores. Tiffany has a 20-year lease which expires in 2025 and has two 10-year renewal options. The Registrant believes that the RSC has been properly designed to handle worldwide distribution functions and that it is suitable for that purpose.

CUSTOMER FULFILLMENT CENTER

The Company owns the Customer Fulfillment Center (“CFC”) in Whippany, New Jersey and leases the land on which the facility resides. The CFC is approximately 266,000 square feet and is primarily used for warehousing merchandise and processing direct-to-customer orders. The lease expires in 2032 and the Company has the right to renew the lease for an additional 20-year term.

MANUFACTURING FACILITIES

Tiffany owns and operates jewelry manufacturing facilities in Cumberland, Rhode Island, Mount Vernon, New York and Lexington, Kentucky and leases a manufacturing facility in Pelham, New York. The lease expires in 2023. The facilities total approximately 194,600 square feet.

The Company leases facilities in Belgium, South Africa and Mauritius and owns the facilities in Botswana, Namibia and Vietnam that sort, cut and/or polish rough diamonds for use by Tiffany. In addition, the land on which the Namibia and Vietnam facilities reside is leased. These facilities total approximately 144,000 square feet and the lease expiration dates range from 2012 to 2051.

 

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Item 3. Legal Proceedings.

On June 24, 2011, The Swatch Group Ltd. (“Swatch”) and its wholly-owned subsidiary Tiffany Watch Co. (“Watch Company”; Swatch and Watch Company, together, the “Swatch Parties”), initiated an arbitration proceeding against the Registrant and its wholly-owned subsidiaries Tiffany and Company and Tiffany (NJ) Inc. (the Registrant and such subsidiaries, together, the “Tiffany Parties”) seeking damages for alleged contractual breach of agreements entered into by and among the Swatch Parties and the Tiffany Parties that came into effect in December of 2007 (the “License and Distribution Agreements”). The License and Distribution Agreements pertain 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.

The Swatch Parties and the Tiffany Parties have agreed that all claims and counterclaims between and among them under the License and Distribution Agreements will be determined through a confidential arbitration (the “Arbitration”). The Arbitration is pending before a three-member arbitral panel convened pursuant to the Arbitration Rules of the Netherlands Arbitration Institute in the Netherlands.

On September 12, 2011, the Swatch Parties publicly issued a Notice of Termination purporting to terminate the License and Distribution Agreements due to alleged material breach by the Tiffany Parties.

On December 23, 2011, the Swatch Parties filed a Statement of Claim in the Arbitration providing additional detail with regard to the allegations by the Swatch Parties and setting forth their damage claims. In general terms, the Swatch Parties allege that the Tiffany Parties have breached the License and Development Agreements by obstructing and delaying development of Watch Company’s business. The Swatch Parties seek damages based on alternate theories ranging from CHF 73,000,000 (or approximately $79,000,000 at January 31, 2012) (based on its alleged wasted investment) to CHF 3,800,000,000 (or approximately $4,100,000,000 at January 31, 2012) (calculated based on alleged future lost profits of the Swatch Parties and their affiliates).

The Registrant believes the claim is without merit and intends to defend vigorously the Arbitration and (together with the remaining Tiffany Parties) has filed a Statement of Defense and Counterclaim on March 9, 2012. As detailed in the filing, the Tiffany Parties dispute both the merits of the Swatch Parties’ claims and the calculation of the alleged damages. The Tiffany Parties have also asserted counterclaims for damages attributable to breach by the Swatch Parties and for termination due to such breach. In general terms, the Tiffany Parties allege that the Swatch Parties have 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 seek damages based on alternate theories ranging from CHF 120,000,000 (or approximately $131,000,000 at January 31, 2012) (based on its wasted investment) to approximately CHF 540,000,000 (or approximately $588,000,000 at January 31, 2012) (calculated based on future lost profits of the Tiffany Parties).

The arbitration hearing is currently expected in October 2012.

Management has not included any accrual in the consolidated financial statements for the year ended January 31, 2012 related to the Arbitration as a result of its assessment that an award of damages to the Swatch Parties in the Arbitration is not probable. If the Swatch Parties’ claims were accepted on their merits, the damages award cannot be reasonably estimated at this time

 

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but could have a material adverse effect on the Registrant’s consolidated financial statements or liquidity.

If, as requested by both parties, the Arbitration tribunal determines that the License and Distribution Agreements were properly terminated by one or other party, the Tiffany Parties will need to find a new manufacturer for TIFFANY & CO. brand watches and the Swatch Parties will no longer be responsible for distributing such watches to third-party distributors. Royalties payable to the Tiffany Parties by Watch Company under the License and Distribution Agreements have not been significant in any year. Watches manufactured by Watch Company and sold in TIFFANY & CO. stores constituted 1% of net sales in 2011, 2010 and 2009.

In addition, the Registrant and Tiffany are from time to time involved in routine litigation incidental to the conduct of Tiffany’s business, including proceedings to protect its trademark rights, litigation with parties claiming infringement of patents and other intellectual property rights by Tiffany, litigation instituted by persons alleged to have been injured upon premises within the Registrant’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 Tiffany’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 Registrant believes that litigation currently pending to which it or Tiffany is a party or to which its properties are subject will be resolved without any material adverse effect on the Registrant’s financial position, earnings or cash flows.

 

Item 4. Mine Safety Disclosures.

Not Applicable.

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Registrant’s Common Stock is traded on the New York Stock Exchange. In consolidated trading, the high and low selling prices per share for shares of such Common Stock for 2011 were:

 

September 30, September 30,
       High        Low  

First Quarter

     $ 69.72         $ 54.58   

Second Quarter

     $ 84.49         $ 66.48   

Third Quarter

     $ 80.99         $ 56.21   

Fourth Quarter

     $ 79.00         $ 58.61   

On March 20, 2012, the high and low selling prices quoted on such exchange were $74.20 and $71.87. On March 20, 2012, there were 14,449 holders of record of the Registrant’s Common Stock.

In consolidated trading, the high and low selling prices per share for shares of such Common Stock for 2010 were:

 

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September 30, September 30,
       High        Low  

First Quarter

     $ 52.19         $ 38.89   

Second Quarter

     $ 49.74         $ 35.81   

Third Quarter

     $ 53.00         $ 39.43   

Fourth Quarter

     $ 65.76         $ 52.96   

It is the Registrant’s policy to pay a quarterly dividend on the Registrant’s Common Stock, subject to declaration by the Registrant’s Board of Directors. On January 21, 2010, the Registrant announced an 18% increase in its regular quarterly dividend rate to a new rate of $0.20 per share of Common Stock which was paid on April 12, 2010. On May 20, 2010, the Registrant announced a 25% increase in its regular quarterly dividend rate to a new rate of $0.25 per share of Common Stock which was paid on July 12, 2010, October 11, 2010 and January 10, 2011.

In 2011, a dividend of $0.25 per share of Common Stock was paid on April 11, 2011. On May 19, 2011, the Registrant announced a 16% increase in its regular quarterly dividend rate to a new rate of $0.29 per share of Common Stock which was paid on July 11, 2011, October 11, 2011 and January 10, 2012.

In calculating the aggregate market value of the voting stock held by non-affiliates of the Registrant shown on the cover page of this Annual Report on Form 10-K, 6,139,699 shares of the Registrant’s Common Stock beneficially owned by the executive officers and directors of the Registrant (exclusive of shares which may be acquired on exercise of employee stock options) were excluded, on the assumption that certain of those persons could be considered “affiliates” under the provisions of Rule 405 promulgated under the Securities Act of 1933.

The following table contains the Company’s repurchases of equity securities in the fourth quarter of 2011:

Issuer Purchases of Equity Securities

 

September 30, September 30, September 30, September 30,

Period

     (a) Total Number of
Shares (or Units)
Purchased
       (b) Average
Price Paid per
Share (or Unit)
       (c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
       (d) Maximum Number
(or Approximate  Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
 

November 1, 2011 to November 30, 2011

       112,844         $ 75.64           112,844         $ 244,670,000   

December 1, 2011 to December 31, 2011

       351,626         $ 65.30           351,626         $ 221,710,000   

January 1, 2012 to January 31, 2012

       60,422         $ 63.04           60,422         $ 217,901,000   

TOTAL

       524,892         $ 67.26           524,892         $ 217,901,000   

In January 2011, the Company’s Board of Directors approved a new stock repurchase program (“2011 Program”) and terminated the previously existing program. The 2011 Program authorizes the Company to repurchase up to $400,000,000 of its Common Stock through open market or private transactions. The 2011 Program expires on January 31, 2013.

 

TIFFANY & CO.

K - 22


Item 6. Selected Financial Data.

The following table sets forth selected financial data, certain of which have been derived from the Company’s consolidated financial statements for fiscal years 2007-2011:

 

September 30, September 30, September 30, September 30, September 30,

(in thousands, except per share amounts,
percentages, ratios, retail locations and employees)

     2011     2010     2009     2008     2007  

EARNINGS DATA

            

Net sales

     $ 3,642,937      $ 3,085,290      $ 2,709,704      $ 2,848,859      $ 2,927,751   

Gross profit

       2,151,154        1,822,278        1,530,219        1,646,442        1,651,501   

Selling, general & administrative expenses

       1,442,728        1,227,497        1,089,727        1,153,944        1,169,108   

Net earnings from continuing operations

       439,190        368,403        265,676        232,155        369,999   

Net earnings

       439,190        368,403        264,823        220,022        323,478   

Net earnings from continuing operations per diluted share

       3.40        2.87        2.12        1.84        2.68   

Net earnings per diluted share

       3.40        2.87        2.11        1.74        2.34   

Weighted-average number of diluted common shares

       129,083        128,406        125,383        126,410        138,140   

BALANCE SHEET AND CASH FLOW DATA

            

Total assets

     $ 4,158,992      $ 3,735,669      $ 3,488,360      $ 3,102,283      $ 3,000,904   

Cash and cash equivalents

       433,954        681,591        785,702        160,445        246,654   

Inventories, net

       2,073,212        1,625,302        1,427,855        1,601,236        1,372,397   

Short-term borrowings and long-term debt (including current portion)

       712,147        688,240        754,049        708,804        453,137   

Stockholders’ equity

       2,348,905        2,177,475        1,883,239        1,588,371        1,716,115   

Working capital

       2,262,998        2,204,632        1,845,393        1,446,812        1,337,454   

Cash flows from operating activities

       210,606        298,925        687,199        142,270        406,055   

Capital expenditures

       239,443        127,002        75,403        154,409        184,266   

Stockholders’ equity per share

       18.54        17.15        14.91        12.83        13.54   

Cash dividends paid per share

       1.12        0.95        0.68        0.66        0.52   

RATIO ANALYSIS AND OTHER DATA

            

As a percentage of net sales:

            

Gross profit

       59.0     59.1     56.5     57.8     56.4

Selling, general & administrative expenses

       39.6     39.8     40.2     40.5     39.9

Net earnings from continuing operations

       12.1     11.9     9.8     8.1     12.6

Net earnings

       12.1     11.9     9.8     7.7     11.0

Capital expenditures

       6.6     4.1     2.8     5.4     6.3

Return on average assets

       11.1     10.2     8.0     7.2     11.0

Return on average stockholders’ equity

       19.4     18.1     15.3     13.3     18.1

Total debt-to-equity ratio

       30.3     31.6     40.0     44.6     26.4

Dividends as a percentage of net earnings

       32.5     32.7     31.9     37.4     21.6

Company-operated TIFFANY & CO. stores

       247        233        220        206        184   

Number of employees

       9,800        9,200        8,400        9,000        8,800   

All references to years relate to fiscal years that end on January 31 of the following calendar year.

 

TIFFANY & CO.

K - 23


NOTES TO SELECTED FINANCIAL DATA

Financial information for 2011 includes $42,719,000 of net pre-tax expense ($25,994,000 net after-tax expense, or $0.20 per diluted share after tax) associated with the relocation of the New York headquarters staff to a single location. This expense is primarily related to the fair value of the remaining non-cancelable lease obligations reduced by the estimated sublease rental income as well as the acceleration of the useful lives of certain property and equipment, incremental rent during the transition period and lease termination payments.

Financial information for 2010 includes the following amounts, totaling $17,635,000 of net pre-tax expense ($7,672,000 net after-tax expense, or $0.06 per diluted share after tax):

 

   

$17,635,000 pre-tax expense associated with the relocation of the New York headquarters staff to a single location. This expense is primarily related to the acceleration of the useful lives of certain property and equipment and incremental rent during the transition period; and

 

   

$3,096,000 net income tax benefit primarily due to a change in the tax status of certain subsidiaries associated with the acquisition in 2009 of additional equity interests in diamond sourcing and polishing operations.

Financial information for 2009 includes the following amounts, totaling $442,000 of net pre-tax income ($10,456,000 net after-tax income, or $0.08 per diluted share after tax):

 

   

$4,000,000 pre-tax expense related to the termination of a third-party management agreement;

 

   

$4,442,000 pre-tax income in connection with the assignment to an unrelated third party of the Tahera Diamond Corporation (“Tahera”) note receivable previously impaired in 2007; and

 

   

$11,220,000 income tax benefit associated with the settlement of certain tax audits and the expiration of statutory periods.

Financial information for 2008 includes the following amounts, totaling $121,143,000 of net pre-tax expense ($74,241,000 net after-tax expense, or $0.59 per diluted share after tax):

 

   

$97,839,000 pre-tax expense related to staffing reductions;

 

   

$12,373,000 pre-tax impairment charge related to an investment in a mining and exploration company operating in Sierra Leone;

 

   

$7,549,000 pre-tax charge due to the closing of IRIDESSE stores, included within discontinued operations; and

 

   

$3,382,000 pre-tax charge for the closing of a diamond polishing facility in Yellowknife, Northwest Territories.

Financial information for 2007 includes the following amounts, totaling $41,934,000 of net pre-tax expense ($12,667,000 net after-tax expense, or $0.09 per diluted share after tax):

 

   

$105,051,000 pre-tax gain related to the sale of the land and multi-tenant building housing a TIFFANY & CO. store in Tokyo’s Ginza shopping district;

 

   

$10,000,000 pre-tax contribution to The Tiffany & Co. Foundation funded with the proceeds from the Tokyo store transaction;

 

   

$54,260,000 pre-tax expense due to the sale of Little Switzerland, Inc., included within discontinued operations;

 

   

$47,981,000 pre-tax impairment charge on the note receivable from Tahera;

 

   

$19,212,000 pre-tax charge related to management’s decision to discontinue certain watch models as a result of the Company entering into an agreement with The Swatch Group, Ltd.; and

 

   

$15,532,000 pre-tax charge due to impairment losses associated with the Company’s IRIDESSE stores, included within discontinued operations.

 

TIFFANY & CO.

K - 24


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 that end on January 31 of the following calendar year.

KEY STRATEGIES

The Company’s key strategies are:

 

   

To selectively expand its global distribution without compromising the value of the TIFFANY & CO. trademark (the “Brand”).

Management employs a multi-channel distribution strategy. Management intends to expand distribution by adding stores in both new and existing markets, and by launching e-commerce websites in new markets. Management recognizes that over-saturation of any market could diminish the distinctive appeal of the Brand, but believes that there are a significant number of potential worldwide locations remaining that meet the requirements of the Brand.

 

   

To enhance customer awareness.

The Brand is the single most important asset of the Company. Management will continue to invest in marketing and public relations programs designed to increase new and existing customer awareness of the Brand and its message, and will continue to monitor the strength of the Brand through market research.

 

   

To increase store productivity.

The Company is committed to growing sales per square foot by increasing consumer traffic, and the percentage of store visitors who make a purchase, through targeted advertising, ongoing sales training and customer-focused initiatives. In addition, in recent years, the Company has opened smaller size stores in the United States which are more comparable to many non-U.S. stores and which have contributed to higher store productivity.

 

   

To achieve improved operating margins.

Management’s long-term objective is to improve operating margin through greater efficiencies in product sourcing, manufacturing and distribution as well as by controlling selling, general and administrative expenses and enhancing productivity so that sales growth can generate a higher rate of earnings growth.

 

   

To maintain an active product development program.

The Company continues to invest in product development in order to introduce new design collections and expand existing lines.

 

TIFFANY & CO.

K - 25


   

To maintain substantial control over product supply through direct diamond sourcing and internal jewelry manufacturing.

The Company’s diamond processing operations purchase, sort, cut and/or polish rough diamonds for use in Company merchandise. The Company will continue to seek additional sources of diamonds which, combined with its internal manufacturing operations, are intended to secure adequate product supplies and favorable costs.

 

   

To provide superior customer service.

Maintaining the strength of the Brand requires that the Company make superior customer service a top priority, which it achieves by employing highly qualified sales and customer service professionals and enhancing ongoing training programs.

2011 SUMMARY

 

   

Worldwide net sales increased 18% to $3,642,937,000, due to growth in all reportable segments. Following a higher-than-expected 24% increase in worldwide net sales in the first nine months of the year, sales increased 8% in the fourth quarter due to decelerated rates of sales growth in most regions. On a constant-exchange-rate basis (see “Non-GAAP Measures” below), worldwide net sales in 2011 increased 15% and comparable store sales increased 13%.

 

   

The Company added a net of 14 TIFFANY & CO. stores (six in the Americas, six in Asia-Pacific, three in Europe and a net reduction of one in Japan).

 

   

Operating margin increased 0.1 percentage point. However, the Company recorded charges (primarily within selling, general and administrative expenses) of $42,719,000 in 2011 and $17,635,000 during the prior year associated with Tiffany’s relocation of its New York headquarters staff to a single location (see “Item 8. Financial Statements and Supplementary Data – Note K. Commitments and Contingencies”). Excluding those charges, operating margin increased 0.8 percentage point in 2011.

 

   

Net earnings increased 19% to $439,190,000, or $3.40 per diluted share. Excluding nonrecurring items in 2011 and 2010 (see “Item 6. Selected Financial Data – Notes to Selected Financial Data” for a listing of those items) net earnings increased 24% to $465,184,000, or $3.60 per diluted share.

 

   

Consistent with the Company’s strategy to maintain substantial control over its diamond supply through direct diamond sourcing, a subsidiary of the Company entered into a $50,000,000 amortizing term loan facility agreement with Koidu Holdings S.A. and in return was granted the right to purchase diamonds meeting the Company’s quality standards recovered from their kimberlite diamond mine in Sierra Leone (see “Item 8. Financial Statements and Supplementary Data – Note K. Commitments and Contingencies”).

 

   

In May 2011, the Board of Directors approved a 16% increase in the quarterly dividend on the Company’s Common Stock increasing the annual dividend rate to $1.16 per share.

 

TIFFANY & CO.

K - 26


NON-GAAP MEASURES

The Company’s reported sales reflect either a translation-related benefit from strengthening foreign currencies or a detriment from a strengthening U.S. dollar.

The Company reports information in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). Internally, management monitors 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”). Management believes this constant-exchange-rate basis provides a more representative assessment of sales performance and provides better comparability between reporting periods.

The Company’s management does not, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. The Company presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate the Company’s operating results. The following table reconciles sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous years:

 

September 30, September 30, September 30, September 30, September 30, September 30,
       2011     2010  
       GAAP
Reported
    Translation
Effect
    Constant-
Exchange-
Rate Basis
    GAAP
Reported
    Translation
Effect
    Constant-
Exchange-
Rate Basis
 

Net Sales:

              

Worldwide

       18     3     15     14     2     12

Americas

       15        1        14        12        1        11   

Asia-Pacific

       36        5        31        29        6        23   

Japan

       13        10        3        7        8        (1

Europe

       17        5        12        18        (5     23   

Comparable Store Sales:

              

Worldwide

       16     3     13     10     2     8

Americas

       13        —          13        9        1        8   

Asia-Pacific

       31        4        27        19        5        14   

Japan

       13        9        4        4        8        (4

Europe

       10        4        6        13        (5     18   

 

TIFFANY & CO.

K - 27


RESULTS OF OPERATIONS

Net Sales

Net sales by segment were as follows:

 

September 30, September 30, September 30, September 30, September 30,

(in thousands)

     2011        2010        2009        2011 vs. 2010
% Change
    2010 vs. 2009
% Change
 

Americas

     $ 1,805,783         $ 1,574,571         $ 1,410,845           15     12

Asia-Pacific

       748,214           549,197           426,296           36        29   

Japan

       616,505           546,537           512,989           13        7   

Europe

       421,141           360,831           306,321           17        18   

Other

       51,294           54,154           53,253           (5     2   
    

 

 

      

 

 

      

 

 

      

 

 

   

 

 

 
     $ 3,642,937         $ 3,085,290         $ 2,709,704           18     14
    

 

 

      

 

 

      

 

 

      

 

 

   

 

 

 

Comparable Store Sales. Reference will be made to comparable store sales below. Comparable store sales include only sales transacted in Company-operated stores. A store’s sales are included in comparable store sales when the store has been open for more than 12 months. In markets other than Japan, sales for relocated stores are included in comparable store sales if the relocation occurs within the same geographic market. In Japan, sales for a new store are not included if the store was relocated from one department store to another or from a department store to a free-standing location. In all markets, the results of a store in which the square footage has been expanded or reduced remain in the comparable store base.

Americas. Americas includes sales in TIFFANY & CO. stores in the United States, Canada and Latin America, as well as sales of TIFFANY & CO. products in certain of those markets through business-to-business, Internet, catalog and wholesale operations. Americas represented 50%, 51% and 52% of worldwide net sales in 2011, 2010 and 2009, of which the New York Flagship store represented 8%, 8% and 9% of worldwide net sales.

In 2011, total sales in the Americas increased $231,212,000, or 15%, primarily due to an increase in the average price per unit sold. There was an increase in sales in all jewelry product categories with notable increases at the higher price points. Comparable store sales increased $175,179,000, or 13%, consisting of increases in both New York Flagship store sales of 20% and comparable branch store sales of 12%. Non-comparable store sales grew $47,743,000. On a constant-exchange-rate basis, sales in the Americas increased 14%, and comparable store sales increased 13%. Combined Internet and catalog sales in the Americas increased $10,752,000, or 6%, due to an increase in the average sales per order.

In 2010, total sales in the Americas increased $163,726,000, or 12%, primarily due to an increase in the average price per unit sold. Comparable store sales increased $102,802,000, or 9%, consisting of increases in both comparable branch store sales of 9% and New York Flagship store sales of 6%. Non-comparable store sales grew $32,800,000. On a constant-exchange-rate basis, sales in the Americas increased 11%, and comparable store sales increased 8%. Combined Internet and catalog sales in the Americas increased $14,142,000, or 8%, due to an increase in the average sales per order.

Asia-Pacific. Asia-Pacific includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations. Asia-Pacific represented 21%, 18% and 16% of worldwide net sales in 2011, 2010 and 2009.

 

TIFFANY & CO.

K - 28


In 2011, total sales in Asia-Pacific increased $199,017,000, or 36%, due to similar increases in the average price per unit sold and in the number of units sold. There was sales and unit growth in all jewelry product categories. Comparable store sales increased $162,989,000, or 31%, and non-comparable store sales increased $23,830,000. On a constant-exchange-rate basis, Asia-Pacific sales increased 31% and comparable store sales increased 27% due to geographically broad-based sales growth in most markets, especially in the greater China region.

In 2010, total sales in Asia-Pacific increased $122,901,000, or 29%, primarily due to an increase in the average price per unit sold. This increase included a comparable store sales increase of $77,353,000, or 19%, and non-comparable store sales growth of $40,722,000. On a constant-exchange-rate basis, Asia-Pacific sales increased 23% and comparable store sales increased 14% due to geographically broad-based sales growth in most markets, especially in the greater China region.

Japan. Japan includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products through business-to-business, Internet and wholesale operations. Japan represented 17%, 18% and 19% of worldwide net sales in 2011, 2010 and 2009.

In 2011, total sales in Japan increased $69,968,000, or 13%, due to an increase in the average price per unit sold, which was partly offset by a decline in the number of units sold. Sales growth was strong in both the designer jewelry and engagement jewelry & wedding bands categories. Comparable store sales increased $67,717,000, or 13%. On a constant-exchange-rate basis, Japan sales increased 3%, and comparable store sales increased 4%.

In 2010, total sales in Japan increased $33,548,000, or 7%, due to an increase in the average price per unit sold, which was partly offset by a decline in the number of units sold. Comparable store sales increased $17,913,000, or 4%, and other non-retail store sales increased $11,599,000. On a constant-exchange-rate basis, Japan sales decreased 1%, and comparable store sales decreased 4%.

Europe. Europe includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations. Europe represented 12%, 12% and 11% of worldwide net sales in 2011, 2010 and 2009. The United Kingdom (“U.K.”) represents approximately half of European sales.

In 2011, total sales in Europe increased $60,310,000, or 17%, due to similar increases in the number of units sold and in the average price per unit sold. There was sales and unit growth in all jewelry product categories with notable increases in the silver & gold category. Comparable store sales increased $33,021,000, or 10%, and non-comparable store sales increased $20,274,000. On a constant-exchange-rate basis, sales in Europe increased 12% and comparable store sales increased 6% reflecting relatively stronger sales growth in Continental Europe than in the U.K.

In 2010, total sales in Europe increased $54,510,000, or 18%, primarily due to an increase in the number of units sold. This included increased comparable store sales of $34,581,000, or 13%, and non-comparable store sales growth of $19,779,000. On a constant-exchange-rate basis, sales increased 23% and comparable store sales increased 18% due to geographically broad-based sales growth.

Store Data. In 2011, the Company added a net of 14 stores: six in the Americas (three in the U.S., two in Canada and one in Brazil), six in Asia-Pacific (three in Korea, two in China and one in Taiwan), three in Europe (one each in Germany, Italy and Switzerland) and a net reduction of one in Japan.

 

TIFFANY & CO.

K - 29


In 2010, the Company added a net of 13 stores: five in the Americas (all in the U.S.), seven in Asia-Pacific (four in China and one each in Korea, Singapore and Taiwan), two in Europe (Spain and the U.K.) and a net reduction of one in Japan.

Sales per gross square foot generated by all stores were approximately $3,000 in 2011, $2,600 in 2010 and $2,400 in 2009.

Other. Other consists of all non-reportable segments. Other consists primarily of wholesale sales of TIFFANY & CO. merchandise to independent distributors for resale in certain emerging markets (primarily in the Middle East and Russia) and wholesale sales of diamonds obtained through bulk purchases that were subsequently deemed not suitable for the Company’s needs. In addition, Other includes earnings received from third-party licensing agreements.

In 2011, Other sales decreased $2,860,000, or 5% due to lower wholesale sales of diamonds partly offset by higher sales of TIFFANY & CO. merchandise to independent distributors in emerging markets. In 2010, Other sales increased $901,000, or 2%, as increased wholesale sales of TIFFANY & CO. merchandise to independent distributors was mostly offset by lower wholesale sales of diamonds.

Gross Margin

 

September 30, September 30, September 30,
       2011     2010     2009  

Gross profit as a percentage of net sales

       59.0     59.1     56.5

Gross margin (gross profit as a percentage of net sales) decreased by 0.1 percentage point in 2011 primarily due to higher product costs and changes in product mix toward higher-priced jewelry that achieves a lower gross margin partly offset by sales leverage on fixed costs. Gross margin increased by 2.6 percentage points in 2010 driven primarily by the recapture of higher product costs through retail price increases, as well as manufacturing efficiencies.

Management periodically reviews and adjusts its retail prices when appropriate to address product cost increases, specific market conditions and longer-term changes in foreign currencies/U.S. dollar relationships. Among the market conditions that the Company addresses are consumer demand for the product category involved, which may be influenced by consumer confidence, and competitive pricing conditions. The Company uses derivative instruments to mitigate foreign exchange and precious metal price exposures (see “Item 8. Financial Statements and Supplementary Data – Note I. Hedging Instruments”). In 2011 and 2010 the Company increased retail prices to address higher product costs and its strategy is to continue that approach as appropriate in the future.

Selling, General and Administrative (“SG&A”) Expenses

 

September 30, September 30, September 30,
       2011     2010     2009  

SG&A expenses as a percentage of net sales

       39.6     39.8     40.2

SG&A expenses increased $215,231,000, or 18%, in 2011 and $137,770,000, or 13%, in 2010. SG&A expenses in those years are not comparable due to several nonrecurring charges.

SG&A expenses in 2011 and 2010 included $42,506,000 and $16,625,000 of expenses associated with Tiffany and Company’s (“Tiffany”) relocation of its New York headquarters staff to a single location (see “Item 8. Financial Statements and Supplementary Data – Note K. Commitments and Contingencies”).

 

TIFFANY & CO.

K - 30


SG&A expenses in 2009 included $442,000 of income (net) from the following nonrecurring items:

 

   

$4,442,000 of income received in connection with the assignment of the Tahera Diamond Corporation (“Tahera”) commitments and liens to an unrelated third party (see “Item 8. Financial Statements and Supplementary Data – Note K. Commitments and Contingencies”); and

 

   

$4,000,000 charge to terminate a third-party management agreement (see “Item 8. Financial Statements and Supplementary Data – Note C. Acquisitions and Dispositions”).

Excluding the nonrecurring items noted above, SG&A expenses in 2011, 2010 and 2009 would have been $1,400,222,000, $1,210,872,000 and $1,090,169,000. The increase of $189,350,000, or 16%, in 2011 was largely due to increased labor and benefits costs of $57,672,000, increased depreciation and store occupancy expenses of $56,657,000 due to new and existing stores, and increased marketing expenses of $36,453,000. The increase of $120,703,000, or 11%, in 2010 was largely due to increased marketing expenses of $37,706,000, increased labor and benefits costs of $30,323,000 and increased depreciation and store occupancy expenses of $28,704,000 due to new and existing stores. Excluding the nonrecurring items noted above, SG&A expenses as a percentage of net sales would have been 38.4%, 39.2% and 40.2% in 2011, 2010 and 2009.

The Company’s SG&A expenses are largely fixed in nature. The improvement in SG&A expenses excluding nonrecurring items as a percentage of net sales in 2011 reflected the leverage effect from increased sales. Variable costs (which include items such as variable store rent, sales commissions and fees paid to credit card companies) represent approximately one-fifth of total SG&A expenses.

Earnings from Continuing Operations

 

September 30, September 30, September 30, September 30, September 30, September 30,

(in thousands)

     2011      % of
Sales*
    2010      % of
Sales*
    2009      % of
Sales*
 

Earnings (losses) from continuing operations:

                 

Americas

     $ 387,951         21.5   $ 340,331         21.6   $ 263,470         18.7

Asia-Pacific

       205,711         27.5        133,448         24.3        100,690         23.6   

Japan

       184,767         30.0        162,800         29.8        139,519         27.2   

Europe

       105,728         25.1        88,309         24.5        60,102         19.6   

Other

       (5,247      (10.2     3,358         6.2        (8,767      (16.5
    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
       878,910           728,246           555,014      

Unallocated corporate expenses

       (127,765      (3.5 )%      (115,830      (3.8 )%      (114,964      (4.2 )% 

Other operating income

       —             —             4,442      

Other operating expense

       (42,719        (17,635        (4,000   
    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Earnings from continuing operations

     $ 708,426         19.4   $ 594,781         19.3   $ 440,492         16.3
    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

* Percentages represent earnings (losses) from continuing operations as a percentage of each segment’s net sales.

Earnings from continuing operations increased 19% in 2011. On a segment basis, the ratio of earnings (losses) from continuing operations to each segment’s net sales in 2011 compared with 2010 was as follows:

 

   

Americas – the ratio decreased 0.1 percentage point primarily due to a decline in gross margin that was offset by the leveraging of operating expenses;

 

 

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Asia-Pacific – the ratio increased 3.2 percentage points primarily due to the leveraging of operating expenses as well as a decrease in marketing expenses resulting from a major marketing and public relations event that was held in Beijing, China in 2010;

 

   

Japan – the ratio increased 0.2 percentage point primarily due to an improvement in gross margin partly offset by increased operating expenses;

 

   

Europe – the ratio increased 0.6 percentage point primarily due to an improvement in gross margin partly offset by increased operating expenses; and

 

   

Other – the operating loss is primarily attributable to a valuation adjustment related to the write-down of wholesale diamond inventory deemed not suitable for the Company’s needs as well as increased spending in the latter part of 2011 for the development of the emerging markets region.

Earnings from continuing operations increased 35% in 2010. On a segment basis, the ratio of earnings (losses) from continuing operations to each segment’s net sales in 2010 compared with 2009 was as follows:

 

   

Americas – the ratio increased 2.9 percentage points primarily due to an increase in gross margin, as well as the leveraging of operating expenses;

 

   

Asia-Pacific – the ratio increased 0.7 percentage point due to an increase in gross margin, which was partly offset by an increase in marketing expenses associated with a major marketing and public relations event held in Beijing, China;

 

   

Japan – the ratio increased 2.6 percentage points primarily due to an increase in gross margin, which was partly offset by an increase in marketing expenses;

 

   

Europe – the ratio increased 4.9 percentage points primarily due to the leveraging of operating expenses, as well as an increase in gross margin; and

 

   

Other – the ratio improved 22.7 percentage points. The prior period operating loss included a valuation adjustment related to the write-down of wholesale diamond inventory deemed not suitable for the Company’s needs.

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 increased in 2011 and 2010 but decreased as a percentage of sales.

Other operating income in 2009 represents $4,442,000 of income received in connection with the assignment of the Tahera commitments and liens to an unrelated third party (see “Item 8. Financial Statements and Supplementary Data – Note K. Commitments and Contingencies”).

Other operating expense in 2011 and 2010 represents $42,719,000 and $17,635,000 related to Tiffany’s relocation of its New York headquarters staff to a single location (see “Item 8. Financial Statements and Supplementary Data – Note K. Commitments and Contingencies”). Other operating expense in 2009 represents $4,000,000 paid to terminate a third-party management agreement (see “Item 8. Financial Statements and Supplementary Data – Note C. Acquisitions and Dispositions”).

 

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Interest Expense and Financing Costs

Interest expense and financing costs decreased $5,761,000, or 11%, in 2011 primarily due to lower interest rates related to maturing debt that was replaced with new lower-rate borrowings. Interest expense and financing costs decreased $706,000 in 2010.

Other Income, Net

Other income, net includes interest income, gains/losses on investment activities and foreign currency transactions. Other income, net decreased $1,889,000 in 2011 and increased $2,465,000 in 2010 primarily due to changes in foreign currency gains/losses.

Provision for Income Taxes

The effective income tax rate was 34.0% in 2011, compared with 32.7% in 2010 and 31.9% in 2009. The tax rate for 2010 included a net income tax benefit of $3,096,000 primarily due to a change in the tax status of certain subsidiaries associated with the acquisition in 2009 of additional equity interests in diamond sourcing and polishing operations. The lower tax rate in 2009 was primarily due to favorable reserve adjustments of $11,220,000 during the year associated with the settlement of certain tax audits and the expiration of statutory periods.

Net Loss from Discontinued Operations

In the fourth quarter of 2008, management committed to a plan to close all IRIDESSE stores. All stores were closed in 2009. The results of the IRIDESSE business have been recorded in discontinued operations. The pre-tax net loss from discontinued operations related to that business was $6,103,000 in 2009 (see “Item 8. Financial Statements and Supplementary Data – Note C. Acquisitions and Dispositions”).

The Company sold Little Switzerland, Inc. in 2007. In 2009, the Company received additional proceeds of $3,650,000 and recorded a pre-tax gain of $3,289,000 in settlement of post-closing adjustments (see “Item 8. Financial Statements and Supplementary Data – Note C. Acquisitions and Dispositions”).

2012 Outlook

Management’s outlook is based on the following assumptions, which may or may not prove valid, and which should be read in conjunction with “Item 1A. Risk Factors” on page K-14:

 

   

A worldwide net sales increase of approximately 10% for the full year, primarily driven by sales growth in Asia-Pacific and the Americas.

 

   

The opening of 24 (net) Company-operated stores (nine in the Americas, seven in Asia-Pacific, three in Europe and commencing operation of five stores in emerging markets).

 

   

Operating margin approximately equal to 2011 (when excluding nonrecurring items recorded in 2011), with an improved ratio of SG&A expenses to net sales offset by a decline in gross margin.

 

   

Interest and other expenses, net approximately equal to 2011.

 

   

An effective income tax rate of approximately 34% – 35%.

 

 

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Net earnings per diluted share of $3.95 – $4.05, representing a 16% – 19% increase over 2011, or a 10% – 13% increase when excluding the $0.20 of nonrecurring items in 2011, with most of the year-over-year growth occurring in the latter part of the year.

 

   

An increase in net inventories of approximately 15%.

 

   

Capital expenditures of approximately $240,000,000.

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 initiatives. Management regularly assesses its working capital needs, capital expenditure requirements, debt service, dividend payouts, share repurchases 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. From time to time, the Company may access the debt and capital markets to fund strategic opportunities and for general corporate purposes.

As of January 31, 2012, the Company’s cash and cash equivalents totaled $433,954,000, of which approximately half was held in locations outside the U.S. where the Company has the intention to indefinitely reinvest any undistributed earnings. Such cash balances are not available to fund U.S. cash requirements unless the Company were to decide to repatriate such funds. The Company intends to use these funds to support its continued expansion and investments outside of the U.S. The Company has sufficient sources of cash in the U.S. to fund its U.S. operations without the need to repatriate any of those funds held outside the U.S.

The following table summarizes cash flows from operating, investing and financing activities:

 

September 30, September 30, September 30,

(in thousands)

     2011      2010      2009  

Net cash provided by (used in):

          

Operating activities

     $ 210,606       $ 298,925       $ 687,199   

Investing activities

       (242,583      (186,612      (80,893

Financing activities

       (213,817      (224,799      10,538   

Effect of exchange rates on cash and cash equivalents

       (1,843      8,375         14,300   

Net cash used in discontinued operations

       —           —           (5,887
    

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     $ (247,637    $ (104,111    $ 625,257   
    

 

 

    

 

 

    

 

 

 

Operating Activities

The Company had net cash inflows from operating activities of $210,606,000 in 2011, $298,925,000 in 2010 and $687,199,000 in 2009. The decrease in 2011 from 2010 primarily resulted from an increase in inventories partly offset by increased net earnings and adjustments for noncash items. The decrease in 2010 from 2009 primarily resulted from an increase in inventories.

 

 

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Working Capital. Working capital (current assets less current liabilities) and the corresponding current ratio (current assets divided by current liabilities) were $2,262,998,000 and 4.6 at January 31, 2012, compared with $2,204,632,000 and 5.6 at January 31, 2011.

Accounts receivable, less allowances, at January 31, 2012 were 1% lower than January 31, 2011, reflecting a decline in receivables from independent wholesale distributors. On a 12-month rolling basis, accounts receivable turnover was 20 times in 2011 and 18 times in 2010.

Inventories, net at January 31, 2012 were 28% higher than January 31, 2011 with finished goods inventories increasing 16% and combined raw material and work-in-process inventories increasing 46%. The overall increase resulted from store openings, product introductions and expanded assortments, and higher product and raw material acquisition costs. In addition, the increase in raw material and work-in-process inventories reflected further vertical integration of the Company’s diamond supply chain.

Investing Activities

The Company had net cash outflows from investing activities of $242,583,000 in 2011, $186,612,000 in 2010 and $80,893,000 in 2009. The increased outflow in 2011 was primarily due to higher capital expenditures and notes receivable funded which was partly offset by net proceeds received from the sale of marketable securities and short-term investments. The increased outflow in 2010 was primarily due to higher capital expenditures and purchases of marketable securities and short-term investments.

Capital Expenditures. Capital expenditures are typically related to the opening, renovation and expansion of stores, distribution and manufacturing facilities and ongoing investments in new systems. Capital expenditures were $239,443,000 in 2011, $127,002,000 in 2010 and $75,403,000 in 2009, representing 7%, 4% and 3% of net sales in those respective years. The increase in 2011 was primarily due to the relocation of the New York headquarters and an increased number of store renovations. The increase in 2010 followed a moderated rate of store openings and other cost containment in 2009.

Marketable Securities and Short-Term Investments. The Company invests a portion of its cash in marketable securities and short-term investments. The Company had net proceeds received from the sale of marketable securities and short term investments of $55,139,000 during 2011 and net purchases of investments in marketable securities and short-term investments of $59,610,000 and $13,433,000 during 2010 and 2009.

Notes Receivable Funded. The Company may, from time to time, extend loans to diamond mining and exploration companies in order to obtain rights to purchase the mine’s output. In 2011, the Company loaned $56,605,000 to various companies of which $50,000,000 was provided to Koidu Holdings S.A. (see “Item 8. Financial Statements and Supplementary Data – Note K. Commitments and Contingencies”).

Financing Activities

The Company had net cash outflows from financing activities of $213,817,000 in 2011 and $224,799,000 in 2010 and a net cash inflow of $10,538,000 in 2009. Year-over-year changes in cash flows from financing activities are largely driven by share repurchase activity, borrowings and cash dividends on common stock.

Dividends. The cash dividend on the Company’s Common Stock was increased once in 2011, twice in 2010 and did not change in 2009. The Company’s Board of Directors declared quarterly

 

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dividends which, on an annual basis, totaled $1.12, $0.95 and $0.68 per common share in 2011, 2010 and 2009. Cash dividends paid were $142,840,000, $120,390,000 and $84,579,000 in 2011, 2010 and 2009. The dividend payout ratio (dividends as a percentage of net earnings) was 33%, 33% and 32% in 2011, 2010 and 2009.

Share Repurchases. In January 2008, the Company’s Board of Directors amended the existing share repurchase program to extend the expiration date of the program to January 2011 and to authorize the repurchase of up to an additional $500,000,000 of the Company’s Common Stock. In January 2011, the Company’s Board of Directors approved a new stock repurchase program (“2011 Program”) and terminated the previously existing program. The 2011 Program authorizes the Company to repurchase up to $400,000,000 of its Common Stock through open market or private transactions. The 2011 Program expires on January 31, 2013. The timing of repurchases and the actual number of shares to be repurchased depend on a variety of discretionary factors such as stock price, cash-flow forecasts and other market conditions.

The Company’s share repurchase activity was as follows:

 

September 30, September 30, September 30,

(in thousands, except per share amounts)

     2011        2010        2009  

Cost of repurchases

     $ 174,118         $ 80,786         $ 467   

Shares repurchased and retired

       2,629           1,843           11   

Average cost per share

     $ 66.23         $ 43.83         $ 41.72   

The Company suspended share repurchases during the third quarter of 2008 in order to conserve cash. In January 2010, the Company resumed repurchasing its shares of Common Stock on the open market. At January 31, 2012, there remained $217,901,000 of authorization for future repurchases under the 2011 Program. At least annually, the Company’s Board of Directors reviews its policies with respect to dividends and share repurchases with a view to actual and projected earnings, cash flows and capital requirements.

Recent Borrowings. The Company had net repayments of or net proceeds from short-term and long-term borrowings as follows:

 

September 30, September 30, September 30,

(in thousands)

     2011      2010      2009  

Short-term borrowings:

          

Proceeds from (repayment of) credit facility borrowings, net

     $ 13,548       $ 9,170       $ (126,811

Proceeds from other credit facilities

       61,020         —           —     

Repayments of other credit facilities

       (4,517      —           —     

Repayments of other short-term borrowings

       —           —           (93,000
    

 

 

    

 

 

    

 

 

 

Net proceeds from (repayments of) short-term borrowings

       70,051         9,170         (219,811
    

 

 

    

 

 

    

 

 

 

Long-term borrowings:

          

Proceeds from issuance

       —           118,430         300,000   

Repayments

       (58,915      (218,845      (40,000
    

 

 

    

 

 

    

 

 

 

Net (repayments of) proceeds from long-term borrowings

       (58,915      (100,415      260,000   
    

 

 

    

 

 

    

 

 

 

Net proceeds from (repayments of) total borrowings

     $ 11,136       $ (91,245    $ 40,189   
    

 

 

    

 

 

    

 

 

 

 

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In December 2011, the Company entered into a three-year $200,000,000 revolving credit facility and a five-year $200,000,000 revolving credit facility (the “Credit Facilities”). Under the Credit Facilities, borrowings may be made from 10 participating banks at interest rates based upon either (i) local currency borrowing rates or (ii) the Federal Funds Rate plus 0.5%, whichever is higher, plus a margin based on the Company’s leverage ratio. The Credit Facilities replaced the Company’s previous $400,000,000 multi-bank revolving credit facility. Borrowings were at interest rates based upon local currency borrowing rates plus a margin based on the Company’s leverage ratio.

In May 2011, the Company entered into a ¥4,000,000,000 ($49,240,000 at issuance) one-year uncommitted credit facility. Borrowings may be made on one-, three- or 12-month terms bearing interest at the LIBOR rate plus 0.25%, subject to bank approval.

In total, there was $112,973,000 outstanding and $389,159,000 available under all revolving credit facilities at January 31, 2012. The weighted-average interest rate for the outstanding amount at January 31, 2012 was 1.47%.

In 2010 and 2009, proceeds from long-term debt issuances and other short-term borrowings were used to refinance existing indebtedness and for general corporate purposes. Long-term debt issued in 2010 has a maturity date of 2016 at an interest rate of 1.72%. Long-term debt issued in 2009 has maturity dates that range from 2017 to 2019 at interest rates of 10.00%. See “Item 8. Financial Statements and Supplementary Data – Note H. Debt” for additional details.

The ratio of total debt (short-term borrowings, current portion of long-term debt and long-term debt) to stockholders’ equity was 30% and 32% at January 31, 2012 and 2011.

At January 31, 2012, the Company was in compliance with all debt covenants.

Purchase of Non-controlling Interests. In October 2009, the Company acquired all non-controlling interests in two majority-owned entities that indirectly engage through majority-owned subsidiaries in diamond sourcing and polishing operations in South Africa and Botswana, respectively, for total consideration of $18,000,000, of which $11,000,000 was paid in 2009 and the remaining $7,000,000 was paid during 2010.

Contractual Cash Obligations and Commercial Commitments

The following is a summary of the Company’s contractual cash obligations at January 31, 2012:

 

September 30, September 30, September 30, September 30, September 30,

(in thousands)

     Total        2012        2013-2014        2015-2016        Thereafter  

Unrecorded contractual obligations:

                        

Operating leases

     $ 1,425,498         $ 181,477         $ 320,026         $ 240,635         $ 683,360   

Inventory purchase obligations a

       441,760           383,317           58,443           —             —     

Interest on debt b

       229,382           43,142           82,609           71,784           31,847   

Other contractual obligations c

       41,458           35,205           5,147           1,106           —     

Recorded contractual obligations:

                        

Short-term borrowings

       112,973           112,973           —             —             —     

Long-term debt

       599,174           60,822           —             238,352           300,000   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 
     $ 2,850,245         $ 816,936         $ 466,225         $ 551,877         $ 1,015,207   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

a) The Company will, from time to time, secure supplies of diamonds by agreeing to purchase a defined portion of a mine’s output. Inventory purchase obligations associated with these agreements have been estimated for 2012 and included in this table. Purchases beyond 2012 that are contingent upon mine production have been excluded as they cannot be reasonably estimated.

 

 

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b) Excludes interest payments on amounts outstanding under available lines of credit, as the outstanding amounts fluctuate based on the Company’s working capital needs.

 

c) Consists primarily of 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 plans to contribute approximately $35,000,000 to the pension plan in 2012. However, this expectation is subject to change if actual asset performance is different than the assumed long-term rate of return on pension plan assets. In addition, the Company estimates cash payments for postretirement health-care and life insurance benefit obligations to be $2,461,000 in 2012.

 

   

Unrecognized tax benefits at January 31, 2012 of $25,509,000 and accrued interest and penalties of $7,228,000. 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 audits may result in proposed assessments where the ultimate resolution may result in the Company owing additional taxes. Management anticipates that it is reasonably possible that the total gross amount of unrecognized tax benefits will decrease by approximately $20,000,000 in the next 12 months, a portion of which may affect the effective tax rate; however, management does not currently anticipate a significant effect on net earnings. Future developments may result in a change in this assessment.

The following is a summary of the Company’s outstanding borrowings and available capacity under its credit facilities at January 31, 2012:

 

September 30, September 30, September 30,

(in thousands)

     Total
Capacity
       Borrowings
Outstanding
       Available
Capacity
 

Three-year revolving credit facility a

     $ 200,000         $ 3,380         $ 196,620   

Five-year revolving credit facility b

       200,000           25,824           174,176   

Other credit facilities

       102,132           83,769           18,363   
    

 

 

      

 

 

      

 

 

 
     $ 502,132         $ 112,973         $ 389,159   
    

 

 

      

 

 

      

 

 

 

 

a 

This facility matures in December 2014. The Company can request to increase the capacity up to $275,000,000.

 

b 

This facility matures in December 2016. The Company can request to increase the capacity up to $275,000,000.

In addition, the Company had letters of credit and financial guarantees of $27,880,000 at January 31, 2012, of which $17,849,000 expire within one year.

Seasonality

As a jeweler and specialty retailer, the Company’s business is seasonal in nature, with the fourth quarter typically representing at least one-third of annual net sales and approximately one-half 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 in the United States of America. These principles require

 

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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 estimated market value, and is based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs might be required. 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. At January 31, 2012, a 10% change in the reserve for discontinued and slow-moving products would have resulted in a change of $5,394,000 in inventory and cost of sales. The Company’s inventories are valued using the average cost method. Fluctuation in inventory levels, along with raw material costs, could affect the carrying value of the Company’s inventory.

Long-lived assets. The Company’s long-lived assets are primarily property, plant and equipment. The Company reviews its long-lived assets 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 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 material impairment charges in 2011, 2010 or 2009.

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. The evaluation, based upon discounted cash flows, requires management to estimate future cash flows, growth rates and economic and market conditions. The 2011, 2010 and 2009 evaluations resulted in no impairment charges.

Income taxes. The Company is subject to income taxes in both the U.S. and 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 and estimates are required in determining the 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 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 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-

 

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than-not recognition threshold for 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.

In evaluating the Company’s ability 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.

Employee benefit plans. The Company maintains several pension and retirement plans, as well as provides certain postretirement health-care 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 health-care costs would require the Company to revise key assumptions and could result in a higher or lower charge to earnings.

The Company used discount rates of 6.00% to determine its 2011 pension expense for all U.S. plans and 6.25% to determine its 2011 postretirement expense. Holding all other assumptions constant, a 0.5% increase in the discount rate would have decreased 2011 pension and postretirement expenses by $3,820,000 and $302,000. A decrease of 0.5% in the discount rate would have increased the 2011 pension and postretirement expenses by $4,227,000 and $537,000. 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 of 7.50% to determine its 2011 pension expense. Holding all other assumptions constant, a 0.5% change in the long-term rate of return would have changed the 2011 pension expense by $1,248,000. 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, 8.50% (for pre-age 65 retirees) and 7.00% (for post-age 65 retirees) annual rates of increase in the per capita cost of covered health care were assumed for 2012. The rates were assumed to decrease gradually to 4.75% by 2020 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 aggregate service and interest cost components of the 2011 postretirement expense.

NEW ACCOUNTING STANDARDS

See “Item 8. Financial Statements and Supplementary Data – Note B. Summary of Significant Accounting Policies”.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet arrangements.

 

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to market risk from fluctuations in foreign currency exchange rates, precious metal prices and interest rates, which could affect its consolidated financial position, earnings and cash flows. The Company manages its exposure to market risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company uses derivative financial instruments as risk management tools and not for trading or speculative purposes, and does not maintain such instruments that may expose the Company to significant market risk.

Foreign Currency Risk

The Company uses foreign exchange forward contracts or put option contracts to offset 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 fair value of foreign exchange forward contracts and put option contracts is sensitive to changes in foreign exchange rates. Gains or losses on foreign exchange forward contracts substantially offset losses or gains on the liabilities and transactions being hedged. For put option contracts, if the market exchange rate at the time of the put option contract’s expiration is stronger than the contracted exchange rate, the Company allows the put option contract to expire, limiting its loss to the cost of the put option contract. There were no outstanding put option contracts as of January 31, 2012. The term of all outstanding foreign exchange forward contracts as of January 31, 2012 ranged from less than one month to 13 months. At January 31, 2012 and 2011, the fair value of the Company’s outstanding foreign exchange forward contracts were net liabilities of $3,545,000 and $1,626,000. At January 31, 2012, a 10% depreciation in the hedged foreign exchange rates from the prevailing market rates would have resulted in a liability with a fair value of approximately $18,000,000.

Precious Metal Price Risk

The Company periodically hedges a portion of its forecasted purchases of precious metals for use in its internal manufacturing operations in order to minimize the effect of volatility in precious metals 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 maximum term over which the Company is hedging its exposure to the variability of future cash flows for all forecasted transactions is 12 months. At January 31, 2012 and 2011, the fair value of the Company’s outstanding precious metal derivative instruments was a net liability of $313,000 and an asset of $753,000. At January 31, 2012, a 10% depreciation in precious metal prices from the prevailing market rates would have resulted in a liability with a fair value of approximately $7,500,000.

Interest Rate Risk

The Company uses interest rate swaps to convert certain fixed rate debt obligations to floating rate obligations. Additionally, since the fair value of the Company’s fixed rate long-term debt is sensitive to interest rate changes, the interest rate swaps serve as hedges to changes in the fair value of these debt instruments. The Company hedges its exposure to changes in interest rates over the remaining maturities of the debt agreements being hedged. At January 31, 2012 and 2011, the fair value of the outstanding interest rate swaps were assets of $406,000 and $6,155,000. A 100 basis point increase in interest rates at January 31, 2012 would have resulted in a fair value of the interest rate swaps of approximately $300,000.

 

TIFFANY & CO.

K - 41


Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Tiffany & Co.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, of stockholders’ equity and comprehensive earnings, and of cash flows present fairly, in all material respects, the financial position of Tiffany & Co. and its subsidiaries (the “Company”) at January 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting, appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

New York, New York

March 28, 2012

 

TIFFANY & CO.

K - 42


CONSOLIDATED BALANCE SHEETS

 

September 30, September 30,
       January 31,  

(in thousands, except per share amounts)

     2012      2011  

ASSETS

       

Current assets:

       

Cash and cash equivalents

     $ 433,954       $ 681,591   

Short-term investments

       8,236         59,280   

Accounts receivable, less allowances of $11,772 and $11,783

       184,085         185,969   

Inventories, net

       2,073,212         1,625,302   

Deferred income taxes

       83,124         41,826   

Prepaid expenses and other current assets

       107,064         90,577   
    

 

 

    

 

 

 

Total current assets

       2,889,675         2,684,545   

Property, plant and equipment, net

       767,174         665,588   

Deferred income taxes

       271,156         202,902   

Other assets, net

       230,987         182,634   
    

 

 

    

 

 

 
     $ 4,158,992       $ 3,735,669   
    

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

       

Current liabilities:

       

Short-term borrowings

     $ 112,973       $ 38,891   

Current portion of long-term debt

       60,822         60,855   

Accounts payable and accrued liabilities

       328,962         258,611   

Income taxes payable

       60,977         55,691   

Merchandise and other customer credits

       62,943         65,865   
    

 

 

    

 

 

 

Total current liabilities

       626,677         479,913   

Long-term debt

       538,352         588,494   

Pension/postretirement benefit obligations

       338,564         217,435   

Deferred gains on sale-leasebacks

       119,692         124,980   

Other long-term liabilities

       186,802         147,372   

Commitments and contingencies

       

Stockholders’ equity:

       

Preferred Stock, $0.01 par value; authorized 2,000 shares, none issued and outstanding

       —           —     

Common Stock, $0.01 par value; authorized 240,000 shares, issued and outstanding 126,676 and 126,969

       1,267         1,269   

Additional paid-in capital

       970,215         863,967   

Retained earnings

       1,462,553         1,324,804   

Accumulated other comprehensive loss, net of tax

       (85,130      (12,565
    

 

 

    

 

 

 

Total stockholders’ equity

       2,348,905         2,177,475   
    

 

 

    

 

 

 
     $ 4,158,992       $ 3,735,669   
    

 

 

    

 

 

 

See notes to consolidated financial statements.

 

TIFFANY & CO.

K - 43


CONSOLIDATED STATEMENTS OF EARNINGS

 

September 30, September 30, September 30,
       Years Ended January 31,  

(in thousands, except per share amounts)

     2012        2011        2010  

Net sales

     $ 3,642,937         $ 3,085,290         $ 2,709,704   

Cost of sales

       1,491,783           1,263,012           1,179,485   
    

 

 

      

 

 

      

 

 

 

Gross profit

       2,151,154           1,822,278           1,530,219   

Selling, general and administrative expenses

       1,442,728           1,227,497           1,089,727   
    

 

 

      

 

 

      

 

 

 

Earnings from continuing operations

       708,426           594,781           440,492   

Interest expense and financing costs

       48,574           54,335           55,041   

Other income, net

       5,099           6,988           4,523   
    

 

 

      

 

 

      

 

 

 

Earnings from continuing operations before income taxes

       664,951           547,434           389,974   

Provision for income taxes

       225,761           179,031           124,298   
    

 

 

      

 

 

      

 

 

 

Net earnings from continuing operations

       439,190           368,403           265,676   

Net loss from discontinued operations

       —             —             (853
    

 

 

      

 

 

      

 

 

 

Net earnings

     $ 439,190         $ 368,403         $ 264,823   
    

 

 

      

 

 

      

 

 

 

Earnings per share:

              

Basic

              

Net earnings from continuing operations

     $ 3.45         $ 2.91         $ 2.14   

Net loss from discontinued operations

       —             —             (0.01
    

 

 

      

 

 

      

 

 

 

Net earnings

     $ 3.45         $ 2.91         $ 2.13   
    

 

 

      

 

 

      

 

 

 

Diluted

              

Net earnings from continuing operations

     $ 3.40         $ 2.87         $ 2.12   

Net loss from discontinued operations

       —             —             (0.01
    

 

 

      

 

 

      

 

 

 

Net earnings

     $ 3.40         $ 2.87         $ 2.11   
    

 

 

      

 

 

      

 

 

 

Weighted-average number of common shares:

              

Basic

       127,397           126,600           124,345   

Diluted

       129,083           128,406           125,383   

See notes to consolidated financial statements.

 

TIFFANY & CO.

K - 44


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE EARNINGS

 

Sept Sept Sept Sept Sept Sept

(in thousands)

     Total
Stockholders’
Equity
     Retained
Earnings
     Accumulated
Other
Comprehensive
Gain (Loss)
     Common Stock      Additional
Paid-In Capital
 
              Shares      Amount     

Balances January 31, 2009

     $ 1,588,371       $ 971,299       $ (71,433      123,844       $ 1,238       $ 687,267   

Exercise of stock options and vesting of restricted stock units (“RSUs”)

       71,485         —           —           2,493         25         71,460   

Tax effect of exercise of stock options and vesting of RSUs

       1,896         —           —           —           —           1,896   

Share-based compensation expense

       23,995         —           —           —           —           23,995   

Purchase and retirement of Common Stock

       (467      (434      —           (11      —           (33

Purchase of non-controlling interests

       (20,453      —           —           —           —           (20,453

Cash dividends on Common Stock

       (84,579      (84,579      —           —           —           —     

Deferred hedging gain, net of tax

       6,377         —           6,377         —           —           —     

Unrealized gain on marketable securities, net of tax

       4,241         —           4,241         —           —           —     

Foreign currency translation adjustments, net of tax

       42,750         —           42,750         —           —           —     

Net unrealized loss on benefit plans, net of tax

       (15,200      —           (15,200      —           —           —     

Net earnings

       264,823         264,823         —           —           —           —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances, January 31, 2010

       1,883,239         1,151,109         (33,265      126,326         1,263         764,132   

Exercise of stock options and vesting of RSUs

       65,683         —           —           2,382         23         65,660   

Tax effect of exercise of stock options and vesting of RSUs

       9,811         —           —           —           —           9,811   

Share-based compensation expense

       25,815         —           —           —           —           25,815   

Issuance of Common Stock under Employee Profit Sharing and Retirement Savings (“EPSRS”) Plan

       5,000         —           —           104         1         4,999   

Purchase and retirement of Common Stock

       (80,786      (74,318      —           (1,843      (18      (6,450

Cash dividends on Common Stock

       (120,390      (120,390      —           —           —           —     

Deferred hedging gain, net of tax

       1,415         —           1,415         —           —           —     

Unrealized gain on marketable securities, net of tax

       2,041         —           2,041         —           —           —     

Foreign currency translation adjustments, net of tax

       24,903         —           24,903         —           —           —     

Net unrealized loss on benefit plans, net of tax

       (7,659      —           (7,659      —           —           —     

Net earnings

       368,403         368,403         —           —           —           —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances, January 31, 2011

       2,177,475         1,324,804         (12,565      126,969         1,269         863,967   

Exercise of stock options and vesting of RSUs

       65,566         —           —           2,272         23         65,543   

Tax effect of exercise of stock options and vesting of RSUs

       20,944         —           —           —           —           20,944   

Share-based compensation expense

       30,753         —           —           —           —           30,753   

Issuance of Common Stock under EPSRS Plan

       4,500         —           —           64         1         4,499   

Purchase and retirement of Common Stock

       (174,118      (158,601      —           (2,629      (26      (15,491

Cash dividends on Common Stock

       (142,840      (142,840      —           —           —           —     

Deferred hedging loss, net of tax

       (7,537      —           (7,537      —           —           —     

Unrealized loss on marketable securities, net of tax

       (12      —           (12      —           —           —     

Foreign currency translation adjustments, net of tax

       7,794         —           7,794         —           —           —     

Net unrealized loss on benefit plans, net of tax

       (72,810      —           (72,810      —           —           —     

Net earnings

       439,190         439,190         —           —           —           —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances, January 31, 2012

     $ 2,348,905       $ 1,462,553       $ (85,130      126,676       $ 1,267       $ 970,215   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Sept Sept Sept
       Years Ended January 31,  
       2012      2011      2010  

Comprehensive earnings are as follows:

          

Net earnings

     $ 439,190       $ 368,403       $ 264,823   

Other comprehensive gain (loss), net of tax:

          

Deferred hedging (loss) gain, net of tax (benefit) expense of ($4,513), $1,031 and $3,388

       (7,537      1,415         6,377   

Foreign currency translation adjustments, net of tax expense of $2,204, $2,264 and $716

       7,794         24,903         42,750   

Unrealized (loss) gain on marketable securities, net of tax (benefit) expense of ($7), $1,094, and $2,302

       (12      2,041         4,241   

Net unrealized loss on benefit plans, net of tax benefit of ($45,556), ($3,706) and ($10,525)

       (72,810      (7,659      (15,200
    

 

 

    

 

 

    

 

 

 

Comprehensive earnings

     $ 366,625       $ 389,103       $ 302,991   
    

 

 

    

 

 

    

 

 

 

See notes to consolidated financial statements.

 

TIFFANY & CO.

K - 45


CONSOLIDATED STATEMENTS OF CASH FLOWS

 

September 30, September 30, September 30,
       Years Ended January 31,  

(in thousands)

     2012      2011      2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net earnings

     $ 439,190       $ 368,403       $ 264,823   

Loss from discontinued operations, net of tax

       —           —           853   
    

 

 

    

 

 

    

 

 

 

Net earnings from continuing operations

       439,190         368,403         265,676   

Adjustments to reconcile net earnings from continuing operations to net cash provided by (used in) operating activities:

          

Depreciation and amortization

       145,934         147,870         139,419   

Lease exit charge

       30,884         —           —     

Amortization of gain on sale-leasebacks

       (10,976      (10,203      (9,802

Excess tax benefits from share-based payment arrangements

       (18,771      (9,124      (1,349

Provision for inventories

       30,665         25,608         31,599   

Deferred income taxes

       (50,768      (60,332      (14,839

Provision for pension/postretirement benefits

       33,568         26,993         24,088   

Share-based compensation expense

       30,447         25,436         23,538   

Changes in assets and liabilities:

          

Accounts receivable

       5,495         (22,563      13,897   

Inventories

       (459,416      (187,773      163,955   

Prepaid expenses and other current assets

       (5,893      (7,408      60,323   

Other assets, net

       (11,482      4,603         (13,557

Accounts payable and accrued liabilities

       39,862         21,439         4,369   

Income taxes payable

       17,551         501         29,066   

Merchandise and other customer credits

       (2,988      (999      (1,713

Other long-term liabilities

       (2,696      (23,526      (27,471
    

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

       210,606         298,925         687,199   
    

 

 

    

 

 

    

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Purchases of marketable securities and short-term investments

       (40,912      (61,556      (14,187

Proceeds from sale of marketable securities and short-term investments

       96,051         1,946         754   

Proceeds from sale of assets, net

       —           —           3,650   

Capital expenditures

       (239,443      (127,002      (75,403

Notes receivable funded

       (56,605      —           —     

Other

       (1,674      —           4,293   
    

 

 

    

 

 

    

 

 

 

Net cash used in investing activities

       (242,583      (186,612      (80,893
    

 

 

    

 

 

    

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Proceeds from (repayment of) credit facility borrowings, net

       13,548         9,170         (126,811

Proceeds from other credit facility borrowings

       61,020         —           —     

Repayments of other credit facility borrowings

       (4,517      —           —     

Repayments of short-term borrowings

       —           —           (93,000

Repayment of long-term debt

       (58,915      (218,845      (40,000

Proceeds from issuance of long-term debt

       —           118,430         300,000   

Net proceeds received from termination of interest rate swap

       9,527         —           —     

Repurchase of Common Stock

       (174,118      (80,786      (467

Proceeds from exercise of stock options

       65,566         65,683         71,485   

Excess tax benefits from share-based payment arrangements

       18,771         9,124         1,349   

Cash dividends on Common Stock

       (142,840      (120,390      (84,579

Purchase of non-controlling interests

       —           (7,000      (11,000

Financing fees

       (1,859      (185      (6,439
    

 

 

    

 

 

    

 

 

 

Net cash (used in) provided by financing activities

       (213,817      (224,799      10,538   
    

 

 

    

 

 

    

 

 

 

Effect of exchange rate changes on cash and cash equivalents

       (1,843      8,375         14,300   
    

 

 

    

 

 

    

 

 

 

CASH FLOWS FROM DISCONTINUED OPERATIONS:

          

Operating activities

       —           —           (5,887
    

 

 

    

 

 

    

 

 

 

Net cash used in discontinued operations

       —           —           (5,887
    

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

       (247,637      (104,111      625,257   

Cash and cash equivalents at beginning of year

       681,591         785,702         160,445   
    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of year

     $ 433,954       $ 681,591       $ 785,702   
    

 

 

    

 

 

    

 

 

 

See notes to consolidated financial statements.

 

TIFFANY & CO.

K - 46


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. NATURE OF BUSINESS

Tiffany & Co. (the “Company”) is a holding company that operates through its subsidiary companies. The Company’s principal subsidiary, Tiffany and Company (“Tiffany”), is a jeweler and specialty retailer whose principal merchandise offering is jewelry. The Company also sells timepieces, sterling silverware, china, crystal, stationery, fragrances and accessories. Through Tiffany and Company and other subsidiaries, the Company is engaged in product design, manufacturing and retailing activities.

The Company’s reportable segments are as follows:

 

   

Americas includes sales in TIFFANY & CO. stores in the United States, Canada and Latin America, as well as sales of TIFFANY & CO. products in certain markets through business-to-business, Internet, catalog and wholesale operations;

 

   

Asia-Pacific includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations;

 

   

Japan includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products through business-to-business, Internet and wholesale operations;

 

   

Europe includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations; and

 

   

Other consists of all non-reportable segments. Other consists primarily of wholesale sales of TIFFANY & CO. merchandise to independent distributors for resale in certain emerging markets (primarily in the Middle East and Russia) and wholesale sales of diamonds obtained through bulk purchases that were subsequently deemed not suitable for the Company’s needs. In addition, Other includes earnings received from third-party licensing agreements.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 the Company 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.

 

TIFFANY & CO.

K - 47


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. The most significant assumptions are employed in estimates used in determining inventory, long-lived assets, goodwill, tax assets and tax liabilities and pension and postretirement benefits (including the actuarial assumptions). 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 amounts invested in any one institution.

Short-term Investments

Short-term investments are classified as available-for-sale and are carried at fair value. At January 31, 2012, the Company’s available-for-sale investments consist entirely of time deposits. At the time of purchase, management determines the appropriate classification of these investments and re-evaluates such designation as of each balance sheet date.

Receivables and Finance Charges

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, the Company’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”), the Company 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. Credit Card Receivables require minimum balance payments. The Company classifies a Credit Card account 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 accounts receivable 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, 2012 and 2011, the carrying amount of the Credit Card Receivables (recorded in accounts receivable, net in the Company’s consolidated balance sheet) was $58,784,000 and $56,926,000, of which 97% was considered current in those same periods. The allowance for doubtful accounts for estimated losses associated with the Credit Card Receivables (approximately $2,000,000 at both January 31, 2012 and 2011) was determined based on the factors discussed above. Finance charges on Credit Card accounts are not significant.

 

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The Company may, from time to time, extend loans to diamond mining and exploration companies in order to obtain rights to purchase the mine’s output. Management evaluates these and any other loans that may arise for potential impairment by reviewing the parties’ financial statements and projections and other economic factors on a periodic basis. The carrying amount of loans receivable outstanding including accrued interest (primarily included within other assets, net on the Company’s consolidated balance sheet) was $58,212,000 as of January 31, 2012. The Company has not recorded any material impairment charges on such loans as of January 31, 2012.

Inventories

Inventories are valued at the lower of cost or market using the average cost 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:

 

 

September 30,

Buildings

       39 years   

Building Improvements

       10 years   

Machinery and Equipment

       5-15 years   

Office Equipment

       3-10 years   

Furniture and Fixtures

       2-10 years   

Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. 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 2011, 2010 or 2009.

Intangible Assets

Intangible assets are recorded at cost and are amortized on a straight-line basis over their estimated useful lives which range from six to 15 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). Intangible assets amounted to $7,549,000 and $8,566,000, net of accumulated amortization of $8,253,000 and $7,237,000 at January 31, 2012 and 2011, and consist primarily of product rights and trademarks. Amortization of intangible assets for the years ended January 31, 2012, 2011 and 2010 was $1,016,000, $1,016,000 and $976,000. Amortization expense is estimated to be $1,016,000 in each of the next three years, $891,000 in the fourth year and $850,000 in the fifth year.

Goodwill

Goodwill represents the excess of cost over fair value of net assets acquired. 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. This evaluation, based on discounted cash flows, requires management to estimate future cash flows, growth rates and

 

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economic and market conditions. If the evaluation indicates that goodwill is not recoverable, an impairment loss is calculated and recognized during that period. At January 31, 2012 and 2011, goodwill, included in other assets, net, consisted of the following by segment:

 

 

September 30, September 30, September 30, September 30, September 30,

(in thousands)

     Americas      Asia-Pacific      Japan      Europe      Total  

Balance, January 31, 2010

     $ 12,513       $ 300       $ 1,183       $ 1,128       $ 15,124   

Translation

       (31      (5      (19      (5      (60
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, January 31, 2011

       12,482         295         1,164         1,123         15,064   

Translation

       (60      (8      (32      (8      (108
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, January 31, 2012

     $ 12,422       $ 287       $ 1,132       $ 1,115       $ 14,956   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 2011, 2010 or 2009.

Hedging Instruments

The Company uses derivative financial instruments to mitigate 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 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 on the consolidated balance sheet, 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 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 $1,904,000 and $1,860,000 of gross unrealized gains and $1,699,000 and $1,635,000 of gross unrealized losses within accumulated other comprehensive loss as of January 31, 2012 and 2011.

 

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The following table summarizes activity in other comprehensive earnings related to marketable securities:

 

September 30, September 30,
       January 31,  

(in thousands)

     2012      2011  

Change in fair value of investments, net of tax

     $ (41    $ 2,054   

Adjustment for net losses (gains) realized and included in net earnings, net of tax

       29         (13
    

 

 

    

 

 

 

Change in unrealized gain on marketable securities

     $ (12    $ 2,041   
    

 

 

    

 

 

 

The amount reclassified from other comprehensive earnings was determined on the basis of specific identification.

The Company’s marketable securities 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, 2012, 2011 or 2010.

Merchandise and Other Customer Credits

Merchandise and other customer credits represent outstanding credits issued to customers for returned merchandise. It also includes outstanding gift cards sold to customers. All such outstanding items may be tendered for future merchandise purchases. 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. A gift card liability is established when the gift card is sold. 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 (approximately three to five years), 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.

 

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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 its services and use of its 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 related to the purchase of merchandise from third parties, the cost to internally manufacture merchandise (metal, gemstones, labor and overhead), 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 and Marketing Costs

Advertising and marketing costs, which include media, production, catalogs, Internet, marketing events, visual merchandising costs (in-store and window displays) and other related costs, totaled $234,050,000, $197,597,000 and $159,891,000 in 2011, 2010 and 2009, representing 6.4%, 6.4% and 5.9% of net sales in those periods. Media and production costs for print and digital advertising are expensed as incurred, while catalog costs are expensed upon mailing.

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

 

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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. The Company recorded a net (loss) gain resulting from foreign currency transactions of ($54,000), $2,413,000 and ($1,628,000) in 2011, 2010 and 2009 within other income, net.

Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with U.S. GAAP, 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

Basic earnings per share (“EPS”) is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the dilutive effect of the assumed exercise of stock options and unvested restricted stock units.

The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted EPS computations:

 

September 30, September 30, September 30,
       Years Ended January 31,  

(in thousands)

     2012        2011        2010  

Net earnings for basic and diluted EPS

     $ 439,190         $ 368,403         $ 264,823   
    

 

 

      

 

 

      

 

 

 

Weighted-average shares for basic EPS

       127,397           126,600           124,345   

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

       1,686           1,806           1,038   
    

 

 

      

 

 

      

 

 

 

Weighted-average shares for diluted EPS

       129,083           128,406           125,383   
    

 

 

      

 

 

      

 

 

 

 

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For the years ended January 31, 2012, 2011 and 2010, there were 401,000, 371,000 and 4,844,000 stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect.

New Accounting Standards

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income”, which allows an entity the option to present components of net income and other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The new guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2011 and will not have an impact on the Company’s financial position or earnings.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Testing Goodwill for Impairment”, which allows an entity to use a qualitative approach to test goodwill for impairment. The new guidance permits an entity to first perform a qualitative assessment 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, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The new guidance is effective for fiscal years beginning after December 15, 2011 and earlier adoption is permitted. The Company is currently evaluating the impact of the new guidance; however, management does not believe it will have a material impact on the Company’s financial position or earnings.

C. ACQUISITIONS AND DISPOSITIONS

In 2009, the Company acquired all non-controlling interests in two majority-owned entities that indirectly engage through majority-owned subsidiaries in diamond sourcing and polishing operations in South Africa and Botswana, respectively. Of the total consideration of $18,000,000, $11,000,000 was paid in 2009 and the remaining $7,000,000 was paid in 2010. This acquisition was accounted for as an equity transaction since the Company maintained control of the two entities prior to the acquisition. Therefore, the Company recorded a decrease to additional paid-in capital of $20,453,000 in 2009 related to this transaction. In addition, the Company paid $4,000,000 in 2009 to terminate a third-party management agreement. Management determined that this transaction was separate from the acquisition of the remaining non-controlling interests; accordingly, the termination fee was recorded within SG&A expenses.

In the fourth quarter of 2008, management concluded that it would no longer invest in its IRIDESSE business due to its ongoing operating losses and insufficient near-term growth prospects, especially in the economic environment at the time the decision was made. Therefore, management committed to a plan to close IRIDESSE locations in 2009 as the Company reached agreements with landlords and sold its inventory. All IRIDESSE stores have been closed. These amounts have been recorded as discontinued operations for all periods presented.

 

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Summarized statement of earnings data for IRIDESSE is as follows:

 

September 30,

(in thousands)

     Year Ended
January 31, 2010
 

Net sales

     $ 13,232   
    

 

 

 

Loss before income taxes

     $ (6,103

Benefit from income taxes

       3,192   
    

 

 

 

Net loss from discontinued operations

     $ (2,911
    

 

 

 

The Company sold Little Switzerland, Inc. in 2007. In 2009, the Company received additional proceeds of $3,650,000 and recorded a pre-tax gain within discontinued operations of $3,289,000 ($2,058,000 net of tax) in settlement of post-closing adjustments.

D. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid during the year for:

 

September 30, September 30, September 30,
       Years Ended January 31,  

(in thousands)

     2012        2011        2010  

Interest, net of interest capitalization

     $ 44,799         $ 47,107         $ 35,392   
    

 

 

      

 

 

      

 

 

 

Income taxes

     $ 250,620         $ 237,829         $ 74,690   
    

 

 

      

 

 

      

 

 

 

Supplemental noncash investing and financing activities:

 

September 30, September 30, September 30,
       Years Ended January 31,  

(in thousands)

     2012        2011        2010  

Issuance of Common Stock under the Employee Profit Sharing and Retirement Savings Plan

     $ 4,500         $ 5,000         $ —     
    

 

 

      

 

 

      

 

 

 

E. INVENTORIES

 

 

September 30, September 30,
       January 31,  

(in thousands)

     2012        2011  

Finished goods

     $ 1,145,680         $ 988,085   

Raw materials

       784,040           534,879   

Work-in-process

       143,492           102,338   
    

 

 

      

 

 

 
     $ 2,073,212         $ 1,625,302   
    

 

 

      

 

 

 

 

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F. PROPERTY, PLANT AND EQUIPMENT

 

 

September 30, September 30,
       January 31,  

(in thousands)

     2012      2011  

Land

     $ 42,735       $ 42,383   

Buildings

       113,731         104,487   

Leasehold and building improvements

       833,740         757,633   

Office equipment

       416,003         388,224   

Furniture and fixtures

       211,043         194,945   

Machinery and equipment

       123,407         110,367   

Construction-in-progress

       17,652         19,603   
    

 

 

    

 

 

 
       1,758,311         1,617,642   

Accumulated depreciation and amortization

       (991,137      (952,054
    

 

 

    

 

 

 
     $ 767,174       $ 665,588   
    

 

 

    

 

 

 

The provision for depreciation and amortization for the years ended January 31, 2012, 2011 and 2010 was $149,109,000, $149,403,000 and $137,705,000.

G. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

 

September 30, September 30,
       January 31,  

(in thousands)

     2012        2011  

Accounts payable – trade

     $ 113,149         $ 91,313   

Accrued compensation and commissions

       74,792           60,474   

Accrued sales, withholding and other taxes

       20,274           15,414   

Other

       120,747           91,410   
    

 

 

      

 

 

 
     $ 328,962         $ 258,611   
    

 

 

      

 

 

 

 

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H. DEBT

 

 

September 30, September 30,
       January 31,  

(in thousands)

     2012        2011  

Short-term borrowings:

         

Credit Facilities

     $ 29,204         $ 14,888   

Other credit facilities

       83,769           24,003   
    

 

 

      

 

 

 
     $ 112,973         $ 38,891   
    

 

 

      

 

 

 

Long-term debt:

         

Senior Notes:

         

2002 6.56% Series D, due 2012

     $ 60,822         $ 62,531   

2008 9.05% Series A, due 2015

       107,272           104,252   

2009 10.00% Series A, due 2018

       50,000           50,000   

2009 10.00% Series A, due 2017

       125,000           125,000   

2009 10.00% Series B, due 2019

       125,000           125,000   

2010 1.72% Notes, due 2016

       131,080           121,711   

4.50% yen loan, due 2011

       —             60,855   
    

 

 

      

 

 

 
       599,174           649,349   

Less current portion of long-term debt

       60,822           60,855   
    

 

 

      

 

 

 
     $ 538,352         $ 588,494   
    

 

 

      

 

 

 

Credit Facilities

In December 2011, the Company entered into a three-year $200,000,000 and a five-year $200,000,000 multi-bank, multi-currency, committed unsecured revolving credit facilities (the “Credit Facilities”). The Company can request to increase the commitment under each Credit Facility up to $275,000,000. The Credit Facilities replaced a $400,000,000 multi-bank, multi-currency, committed unsecured revolving credit facility. The Credit Facilities are available for working capital and other corporate purposes and include specific financial covenants and ratios and limit certain payments, investments and indebtedness, in addition to other requirements customary to such borrowings. Under the Credit Facilities, borrowings may be made from 10 participating banks and are at interest rates based upon either (i) local currency borrowing rates or (ii) the Federal Funds Rate plus 0.5%, whichever is higher, plus a margin based on the Company’s leverage ratio. There was $370,796,000 available to be borrowed under the Credit Facilities at January 31, 2012. The weighted-average interest rate was 1.62% and 2.83% at January 31, 2012 and 2011. The three-year credit facility will expire in December 2014. The five-year credit facility will expire in December 2016.

Other Credit Facilities

In May 2011, the Company entered into a ¥4,000,000,000 ($52,432,000 at January 31, 2012) one-year uncommitted credit facility. Borrowings may be made on one-, three- or 12-month terms bearing interest at the LIBOR rate plus 0.25%, subject to bank approval. As of January 31, 2012, the Company had borrowed the full amount under the facility. The weighted-average interest rate was 0.45% at January 31, 2012.

The Company had various other revolving credit facilities. At January 31, 2012, the facilities totaled $49,700,000, of which $31,337,000 was outstanding at a weighted-average interest rate of 3.06%.

 

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At January 31, 2011, the facilities totaled $46,000,000, of which $24,003,000 was outstanding at a weighted-average interest rate of 3.21%.

2002 6.56% Series D Senior Notes

In 2002, the Company, in a private transaction with various institutional lenders, issued, at par, $60,000,000 of 6.56% Series D Senior Notes due July 2012 with lump sum repayments upon maturity. The proceeds of the issuance were used by the Company for general corporate purposes, working capital and to repay previously-issued Senior Notes. The note purchase agreement is unsecured, requires maintenance of specific financial covenants and ratios and limits certain changes to indebtedness and the general nature of the business, in addition to other requirements customary to such borrowings. In 2009, the Company entered into an interest rate swap to effectively convert this fixed rate obligation to a floating rate obligation (see “Note I. Hedging Instruments”).

2008 9.05% Series A Senior Notes

In 2008, the Company, in a private transaction with various institutional lenders, issued, at par, $100,000,000 principal amount 9.05% Series A Senior Notes due December 2015. The proceeds of the issuance were used to refinance existing indebtedness and for general corporate purposes. The note purchase agreement is unsecured, requires lump sum repayments upon maturity, and contains covenants that require maintenance of certain debt/equity and interest-coverage ratios, in addition to other requirements customary to such borrowings. In 2009, the Company entered into an interest rate swap to effectively convert this fixed rate obligation to a floating rate obligation. In 2011, the interest rate swap was terminated (see “Note I. Hedging Instruments”).

2009 10.00% Series A Senior Notes

In 2009, the Company, in a private transaction with various institutional lenders, issued, at par, $50,000,000 of 10.00% Series A Senior Notes due April 2018. The proceeds from the issuance were available to refinance existing indebtedness and for general corporate purposes. The agreement requires lump sum repayments upon maturity and includes specific financial covenants and ratios and limits certain payments, investments and indebtedness, in addition to other requirements customary to such borrowings. The note purchase agreement contains provisions for an uncommitted shelf facility by which the Company may issue, through April 2012, up to an additional $100,000,000 of Senior Notes for up to a 12-year term at a fixed interest rate based on the U.S. Treasury rates at the time of borrowing plus an applicable credit spread.

2009 10.00% Series A Senior Notes and 10.00% Series B Senior Notes

In 2009, the Company, in a private transaction, issued, at par, $125,000,000 of 10.00% Series A Senior Notes due February 2017 and $125,000,000 of 10.00% Series B Senior Notes due February 2019. The proceeds from these issuances were available to refinance existing indebtedness and for general corporate purposes. The agreement requires lump sum repayments upon maturity and includes specific financial covenants and ratios and limits certain payments, investments and indebtedness, in addition to other requirements customary to such borrowings.

2010 1.72% Senior Notes

In 2010, the Company, in a private transaction, issued, at par, ¥10,000,000,000 ($131,080,000 at January 31, 2012) of 1.72% Senior Notes due September 2016. The proceeds were used to repay a portion of debt that came due in September 2010. The agreement requires lump sum repayments upon maturity and includes specific financial covenants and ratios and limits certain

 

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payments, investments and indebtedness, in addition to other requirements customary to such borrowings.

1996 4.50% Yen Loan

The Company had a ¥5,000,000,000, 15-year term loan due April 2011, bearing interest at a rate of 4.50%. In April 2011, the Company used cash on hand and credit facility borrowings to repay the full amount outstanding ($58,915,000 at payment date).

Debt Covenants

As of January 31, 2012, 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 under the provisions of any one of the Credit Facilities, Senior Notes and other loan agreements, such agreements may be terminated or payment of the notes accelerated. Further, each of the Credit Facilities, Senior Notes and certain other loan agreements contain cross default provisions permitting the termination of the loans, or acceleration of the notes, as the case may be, in the event that any of the Company’s other debt obligations are terminated or accelerated prior to the expressed maturity.

Long-Term Debt Maturities

Aggregate maturities of long-term debt as of January 31, 2012 are as follows:

 

September 30,

Years Ending January 31,

     Amount
(in thousands)
 

2013

     $ 60,822   

2014

       —     

2015

       —     

2016

       107,272   

2017

       131,080   

Thereafter

       300,000   
    

 

 

 
     $ 599,174   
    

 

 

 

Letters of Credit

The Company had letters of credit and financial guarantees of $27,880,000 outstanding at January 31, 2012.

I. 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 its exposures to changes in interest rates, foreign currency and precious metal prices. Derivative instruments are recorded on the consolidated balance sheet at their fair values, as either assets or liabilities, with an offset to current or comprehensive earnings, depending on whether the derivative is designated as part of an effective hedge transaction and, if it is, the type of hedge transaction. If a derivative instrument meets certain hedge accounting

 

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criteria, the derivative instrument is designated as one of the following on the date the derivative 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 specifically 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.

The Company does not use derivative financial instruments for trading or speculative purposes.

Types of Derivative Instruments

Interest Rate Swaps – In 2009, the Company entered into interest rate swaps to convert its fixed rate 2002 Series D and 2008 Series A obligations to floating rate obligations. Since the fair value of the Company’s fixed rate long-term debt is sensitive to interest rate changes, the interest rate swaps serve as a hedge to changes in the fair value of these debt instruments. The Company hedges its exposure to changes in interest rates over the remaining maturities of the debt being hedged. The Company accounts for the interest rate swaps as fair value hedges. During 2011, the Company terminated the interest rate swap used to convert the 2008 Series A fixed obligation to a floating rate obligation for net proceeds of $9,527,000. The difference between the fair value and the cost basis of the debt at the time of the termination will be recognized within interest expense and financing costs on the consolidated statement of earnings through December 2015, the maturity date of the debt. As of January 31, 2012, the notional amount of interest rate swaps outstanding was $60,000,000.

Foreign Exchange Forward and Put Option Contracts – The Company uses foreign exchange forward contracts or put option contracts to offset the foreign currency exchange risks associated with foreign currency-denominated liabilities, intercompany transactions and forecasted purchases of merchandise between entities with differing functional currencies. For put option contracts, if the market exchange rate at the time of the put option contract’s expiration is stronger than the contracted exchange rate, the Company allows the put option contract to expire, limiting its loss to the cost of the put option contract. The Company assesses hedge effectiveness based on the

 

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total changes in the put option contracts’ cash flows. These foreign exchange forward contracts and put option contracts are designated and accounted for as either cash flow hedges or economic hedges that are not designated as hedging instruments.

In 2010, the Company de-designated all of its outstanding put option contracts (none of which were outstanding at January 31, 2012) and entered into offsetting call option contracts. These put and call option contracts were accounted for as undesignated hedges. Any gains or losses on these de-designated put option contracts were substantially offset by losses or gains on the call option contracts.

As of January 31, 2012, the notional amount of foreign exchange forward contracts accounted for as cash flow hedges was $135,100,000 and the notional amount of foreign exchange forward contracts accounted for as undesignated hedges was $17,469,000. The term of all outstanding foreign exchange forward contracts as of January 31, 2012 ranged from less than one month to 13 months.

Precious Metal Collars & 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 minimize the effect of volatility in precious metal prices. The Company may use 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. The maximum term over which the Company is hedging its exposure to the variability of future cash flows for all forecasted transactions is 12 months. As of January 31, 2012, there were approximately 29,700 ounces of platinum and 742,600 ounces of silver precious metal derivative instruments outstanding.

Information on the location and amounts of derivative gains and losses in the consolidated financial statements is as follows:

 

September 30, September 30, September 30, September 30,
       Years Ended January 31,  
       2012      2011  

(in thousands)

     Pre-Tax Gain
Recognized in
Earnings on
Derivatives
       Pre-Tax Loss
Recognized in
Earnings on

Hedged Item
     Pre-Tax Gain
Recognized in
Earnings on
Derivatives
       Pre-Tax Loss
Recognized in
Earnings on

Hedged Item
 

Derivatives in Fair Value Hedging Relationships:

                 

Interest rate swaps a

     $ 3,341         $ (2,832    $ 4,159         $ (3,655

 

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September 30, September 30, September 30, September 30,
       Years Ended January 31,  
       2012      2011  

(in thousands)

     Pre-Tax Loss
Recognized
in OCI
(Effective Portion)
     (Loss) Gain
Reclassified from
Accumulated OCI
to Earnings

(Effective Portion)
     Pre-Tax (Loss)  Gain
Recognized
in OCI
(Effective Portion)
     (Loss) Gain
Reclassified from
Accumulated OCI
to Earnings

(Effective Portion)
 

Derivatives in Cash Flow Hedging Relationships:

             

Foreign exchange forward contracts c

     $ (12,624    $ (6,974    $ (2,596    $ (885

Put option contracts c

       (69      (2,101      (2,236      (2,711

Precious metal collars c

       —           607         824         (1,036

Precious metal forward contracts c

       (5,258      2,567         3,550         1,728   
    

 

 

    

 

 

    

 

 

    

 

 

 
     $ (17,951    $ (5,901    $ (458    $ (2,904
    

 

 

    

 

 

    

 

 

    

 

 

 

 

September 30, September 30,
       Pre-Tax (Loss) Gain Recognized
in  Earnings on Derivatives
 
       Years Ended January 31,  

(in thousands)

     2012      2011  

Derivatives Not Designated as Hedging Instruments:

       

Foreign exchange forward contracts b, d

     $ 4       $ (918

Call option contracts c

       92         413   

Put option contracts c

       (92      (454
    

 

 

    

 

 

 
     $ 4       $ (959
    

 

 

    

 

 

 
a 

The gain or loss recognized in earnings is included within Interest expense and financing costs on the Company’s Consolidated Statement of Earnings.

b 

The gain or loss recognized in earnings is included within Other income, net on the Company’s Consolidated Statement of Earnings.

c 

The gain or loss recognized in earnings is included within Cost of Sales on the Company’s Consolidated Statement of Earnings.

d 

Gains or losses on the undesignated foreign exchange forward contracts substantially offset foreign exchange losses or gains on the liabilities and transactions being hedged.

Hedging activity affected accumulated other comprehensive loss, net of tax, as follows:

 

September 30, September 30,
       Years Ended January 31,  

(in thousands)

     2012      2011  

Balance at beginning of period

     $ (1,192    $ (2,607

Losses transferred to earnings, net of tax

       3,948         1,921   

Change in fair value, net of tax

       (11,485      (506
    

 

 

    

 

 

 
     $ (8,729    $ (1,192
    

 

 

    

 

 

 

 

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There was no material ineffectiveness related to the Company’s hedging instruments for the periods ended January 31, 2012 and 2011. The Company expects approximately $12,444,000 of net pre-tax derivative losses included in accumulated other comprehensive income at January 31, 2012 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 J. Fair Value of Financial Instruments.”

Concentration of Credit Risk

A number of major international financial institutions are counterparties to the Company’s derivative financial instruments. The Company enters into derivative financial instrument agreements only with counterparties meeting certain credit standards (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.

J. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value

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 or most advantageous 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. Level 1 inputs are considered to carry the most weight within the fair value hierarchy due to the low levels of judgment required in determining fair values.

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. Level 3 inputs are considered to carry the least weight within the fair value hierarchy due to substantial levels of judgment required in determining fair values.

The Company uses the market approach to measure fair value for its mutual funds, time deposits and derivative instruments. The Company’s interest rate swaps are primarily valued using the 3-month LIBOR rate. The Company’s put and call option contracts, as well as its foreign exchange forward contracts, are primarily valued using the appropriate foreign exchange spot rates. The Company’s precious metal collars and forward contracts are primarily valued using the relevant precious metal spot rate. For further information on the Company’s hedging instruments and program, see “Note I. Hedging Instruments.”

 

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Financial assets and liabilities carried at fair value at January 31, 2012 are classified in the table below in one of the three categories described above:

 

September 30, September 30, September 30, September 30, September 30,
                Estimated Fair Value           

(in thousands)

     Carrying
Value
       Level 1        Level 2        Level 3        Total Fair
Value
 

Mutual funds a

     $ 39,542         $ 39,542         $ —           $ —           $ 39,542   

Time deposits b

       8,236           8,236           —             —             8,236   

Derivatives designated as hedging instruments:

                        

Interest rate swaps a

       406           —             406           —             406   

Precious metal forward contracts c

       2,758           —             2,758           —             2,758   

Foreign exchange forward contracts c

       70           —             70           —             70   

Derivatives not designated as hedging instruments:

                        

Foreign exchange forward contracts c

       240           —             240           —             240   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total financial assets

     $ 51,252         $ 47,778         $ 3,474         $ —           $ 51,252   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

September 30, September 30, September 30, September 30, September 30,
                Estimated Fair Value           

(in thousands)

     Carrying
Value
       Level 1        Level 2        Level 3        Total Fair
Value
 

Derivatives designated as hedging instruments:

                        

Foreign exchange forward contracts d

     $ 3,855         $ —           $ 3,855         $ —           $ 3,855   

Precious metal forward contracts d

       3,071           —             3,071           —             3,071   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total financial liabilities

     $ 6,926         $ —           $ 6,926         $ —           $ 6,926   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

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Financial assets and liabilities carried at fair value at January 31, 2011 are classified in the table below in one of the three categories described above:

 

September 30, September 30, September 30, September 30, September 30,
                Estimated Fair Value           

(in thousands)

     Carrying
Value
       Level 1        Level 2        Level 3        Total Fair
Value
 

Mutual funds a

     $ 43,887         $ 43,887         $ —           $ —           $ 43,887   

Time deposits b

       59,280           59,280           —             —             59,280   

Derivatives designated as hedging instruments:

                        

Interest rate swaps a

       6,155           —             6,155           —             6,155   

Precious metal forward contracts c

       753           —             753           —             753   

Foreign exchange forward contracts c

       374           —             374           —             374   

Derivatives not designated as hedging instruments:

                        

Put option contracts c

       93           —             93           —             93   

Foreign exchange forward contracts c

       205           —             205           —             205   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total financial assets

     $ 110,747         $ 103,167         $ 7,580         $ —           $ 110,747   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

September 30, September 30, September 30, September 30, September 30,
                Estimated Fair Value           

(in thousands)

     Carrying
Value
       Level 1        Level 2        Level 3        Total Fair
Value
 

Derivatives designated as hedging instruments:

                        

Foreign exchange forward contracts d

     $ 2,064         $ —           $ 2,064         $ —           $ 2,064   

Derivatives not designated as hedging instruments:

                        

Call option contracts d

       92           —             92           —             92   

Foreign exchange forward contracts d

       141           —             141           —             141   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total financial liabilities

     $ 2,297         $ —           $ 2,297         $ —           $ 2,297   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

a 

Included within Other assets, net on the Company’s Consolidated Balance Sheet.

 

b 

Included within Short-term investments on the Company’s Consolidated Balance Sheet.