TIF-2013.10.31-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  

FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 1-9494
TIFFANY & CO.
(Exact name of registrant as specified in its charter)
Delaware
 
13-3228013
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
727 Fifth Ave. New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (212) 755-8000
Former name, former address and former fiscal year, if changed since last report                     
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the 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
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: Common Stock, $.01 par value, 128,048,324 shares outstanding at the close of business on October 31, 2013.


Table of Contents

TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2013
 
 
 
PAGE
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
(a) Exhibits
 

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Table of Contents

PART I. Financial Information
Item 1. Financial Statements    
TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)
 
October 31,
2013
 
January 31,
2013
 
October 31,
2012
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
521,200

 
$
504,838

 
$
344,512

Accounts receivable, less allowances of $10,456, $9,710 and $8,796
165,862

 
173,998

 
160,604

Inventories, net
2,418,710

 
2,234,334

 
2,289,571

Deferred income taxes
78,020

 
79,508

 
106,744

Prepaid expenses and other current assets
178,710

 
158,911

 
181,375

Total current assets
3,362,502

 
3,151,589

 
3,082,806

Property, plant and equipment, net
836,062

 
818,838

 
800,225

Deferred income taxes
315,398

 
306,385

 
269,546

Other assets, net
365,539

 
354,038

 
297,418

 
$
4,879,501

 
$
4,630,850

 
$
4,449,995

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term borrowings
$
252,016

 
$
194,034

 
$
196,279

Accounts payable and accrued liabilities
309,798

 
295,424

 
284,189

Income taxes payable
16,190

 
30,487

 
17,958

Merchandise and other customer credits
66,110

 
66,647

 
65,996

Total current liabilities
644,114

 
586,592

 
564,422

Long-term debt
755,724

 
765,238

 
781,637

Pension/postretirement benefit obligations
348,561

 
361,246

 
322,033

Deferred gains on sale-leasebacks
85,464

 
96,724

 
108,962

Other long-term liabilities
223,684

 
209,732

 
205,720

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 128,048, 126,934 and 126,774
1,280

 
1,269

 
1,267

Additional paid-in capital
1,074,522

 
1,019,997

 
1,010,418

Retained earnings
1,829,591

 
1,671,341

 
1,532,358

Accumulated other comprehensive loss, net of tax
(96,177
)
 
(93,875
)
 
(89,320
)
Total Tiffany & Co. stockholders’ equity
2,809,216

 
2,598,732

 
2,454,723

Non-controlling interests
12,738

 
12,586

 
12,498

Total stockholders’ equity
2,821,954

 
2,611,318

 
2,467,221

 
$
4,879,501

 
$
4,630,850

 
$
4,449,995

See notes to condensed consolidated financial statements.


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Table of Contents

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

 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2013
 
2012
 
2013
 
2012
Net sales
$
911,478

 
$
852,741

 
$
2,732,846

 
$
2,558,480

Cost of sales
391,997

 
388,452

 
1,178,012

 
1,126,011

Gross profit
519,481

 
464,289

 
1,554,834

 
1,432,469

Selling, general and administrative expenses
365,863

 
346,994

 
1,083,172

 
1,025,609

Earnings from operations
153,618

 
117,295

 
471,662

 
406,860

Interest and other expenses, net
13,922

 
14,783

 
41,328

 
39,587

Earnings from operations before income taxes
139,696

 
102,512

 
430,334

 
367,273

Provision for income taxes
45,086

 
39,333

 
145,366

 
130,759

Net earnings
$
94,610

 
$
63,179

 
$
284,968

 
$
236,514

Net earnings per share:
 
 
 
 
 
 
 
Basic
$
0.74

 
$
0.50

 
$
2.23

 
$
1.87

Diluted
$
0.73

 
$
0.49

 
$
2.21

 
$
1.85

Weighted-average number of common shares:
 
 
 
 
 
 
 
Basic
128,004

 
126,737

 
127,716

 
126,697

Diluted
128,974

 
127,902

 
128,729

 
127,914

See notes to condensed consolidated financial statements.

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TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)
(in thousands)
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2013
 
2012
 
2013
 
2012
Net earnings
$
94,610

 
$
63,179

 
$
284,968

 
$
236,514

Other comprehensive earnings (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
19,555

 
15,338

 
(11,229
)
 
(4,942
)
Unrealized gain on marketable securities
1,982

 
647

 
1,877

 
1,363

Unrealized (loss) gain on hedging instruments
(1,409
)
 
5,518

 
(1,599
)
 
(8,095
)
Net unrealized gain on benefit plans
3,013

 
2,479

 
8,649

 
7,484

Total other comprehensive earnings (loss), net of tax
23,141

 
23,982

 
(2,302
)
 
(4,190
)
Comprehensive earnings
$
117,751

 
$
87,161

 
$
282,666

 
$
232,324

See notes to condensed consolidated financial statements.

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TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands)
 
 
Total
Stockholders’
Equity
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Common Stock
 
Additional
Paid-In
Capital
 
Non-
controlling
Interests
 
Shares
 
Amount
Balances, January 31, 2013
$
2,611,318

 
$
1,671,341

 
$
(93,875
)
 
126,934

 
$
1,269

 
$
1,019,997

 
$
12,586

Exercise of stock options and vesting of restricted stock units (“RSUs”)
18,687

 

 

 
1,114

 
11

 
18,676

 

Tax effect of exercise of stock options and vesting of RSUs
12,178

 

 

 

 

 
12,178

 

Share-based compensation expense
23,671

 

 

 

 

 
23,671

 

Cash dividends on Common Stock
(126,718
)
 
(126,718
)
 

 

 

 

 

Other comprehensive loss, net of tax
(2,302
)
 

 
(2,302
)
 

 

 

 

Net earnings
284,968

 
284,968

 

 

 

 

 

Non-controlling interests
152

 

 

 

 

 

 
152

Balances, October 31, 2013
$
2,821,954

 
$
1,829,591

 
$
(96,177
)
 
128,048

 
$
1,280

 
$
1,074,522

 
$
12,738

See notes to condensed consolidated financial statements.


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Table of Contents

TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Nine Months Ended 
 October 31,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net earnings
$
284,968

 
$
236,514

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization
131,921

 
120,158

Amortization of gain on sale-leasebacks
(7,110
)
 
(8,181
)
Excess tax benefits from share-based payment arrangements
(12,112
)
 
(10,847
)
Provision for inventories
26,638

 
28,346

Deferred income taxes
(15,446
)
 
(24,389
)
Provision for pension/postretirement benefits
36,753

 
34,486

Share-based compensation expense
23,435

 
22,618

Changes in assets and liabilities:
 
 
 
Accounts receivable
3,481

 
20,351

Inventories
(232,654
)
 
(250,222
)
Prepaid expenses and other current assets
(9,862
)
 
(16,319
)
Accounts payable and accrued liabilities
11,100

 
(31,009
)
Income taxes payable
(9,054
)
 
(61,936
)
Merchandise and other customer credits
(78
)
 
(406
)
Other, net
(26,848
)
 
(38,029
)
Net cash provided by operating activities
205,132

 
21,135

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of marketable securities and short-term investments
(945
)
 
(13,164
)
Proceeds from sale of marketable securities and short-term investments

 
19,289

Capital expenditures
(148,520
)
 
(157,264
)
Notes receivable funded
(3,050
)
 
(1,000
)
Proceeds from notes receivable
837

 

Investment in leasehold rights

 
(35,605
)
Payment for acquisition

 
(25,000
)
Net cash used in investing activities
(151,678
)
 
(212,744
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from credit facility borrowings, net
43,233

 
57,340

Proceeds from other credit facility borrowings
87,670

 
26,972

Repayment of other credit facility borrowings
(68,751
)
 

Repayment of long-term debt

 
(60,000
)
Proceeds from issuance of long-term debt

 
250,000

Payment for settlement of interest rate swaps

 
(29,335
)
Repurchase of Common Stock

 
(54,107
)
Proceeds from exercise of stock options
18,687

 
8,751

Excess tax benefits from share-based payment arrangements
12,112

 
10,847

Cash dividends on Common Stock
(126,718
)
 
(117,934
)
Proceeds from non-controlling interest

 
12,750

Distribution to non-controlling interest
(666
)
 

Financing fees
(949
)
 
(1,199
)
Net cash (used in) provided by financing activities
(35,382
)
 
104,085

Effect of exchange rate changes on cash and cash equivalents
(1,710
)
 
(1,918
)
Net increase (decrease) in cash and cash equivalents
16,362

 
(89,442
)
Cash and cash equivalents at beginning of year
504,838

 
433,954

Cash and cash equivalents at end of nine months
$
521,200

 
$
344,512

See notes to condensed consolidated financial statements.

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Table of Contents

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

1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements include the accounts of Tiffany & Co. (also referred to as the Registrant) and its subsidiaries (the “Company”) in which a controlling interest is maintained. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities (VIEs), if the Company has the power to significantly direct the activities of a VIE, as well as the obligation to absorb significant losses of or the right to receive significant benefits from the VIE. Intercompany accounts, transactions and profits have been eliminated in consolidation. The interim statements are unaudited and, in the opinion of management, include all adjustments (which represent normal recurring adjustments) necessary to fairly state the Company’s financial position as of October 31, 2013 and 2012 and the results of its operations and cash flows for the interim periods presented. The condensed consolidated balance sheet data for January 31, 2013 is derived from the audited financial statements, which are included in the Company’s Annual Report on Form 10-K and should be read in connection with these financial statements. As permitted by the rules of the Securities and Exchange Commission, these financial statements do not include all disclosures required by generally accepted accounting principles.
The Company’s business is seasonal in nature, with the fourth quarter typically representing at least one-third of annual net sales and a higher percentage of annual net earnings. Therefore, the results of its operations for the three and nine months ended October 31, 2013 and 2012 are not necessarily indicative of the results of the entire fiscal year.

2.
NEW ACCOUNTING STANDARDS

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”, which requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward. If an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new guidance is effective for fiscal years beginning after December 15, 2013 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 effect on the Company’s financial position or earnings.

3.
RECEIVABLES AND FINANCING ARRANGEMENTS
Receivables. 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 October 31, 2013 and 2012, the carrying amount of the Credit Card Receivables (recorded in accounts receivable, net) was $51,623,000 and $52,717,000, of which 97% were considered current in both periods. The allowance for doubtful accounts for estimated losses associated with the Credit Card Receivables (approximately $1,000,000 at October 31, 2013 and $1,500,000 at October 31, 2012) was determined based on the factors discussed above. Finance charges on Credit Card accounts are not significant.

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Table of Contents

Financing Arrangements. The Company may, from time to time, provide financing to diamond mining and exploration companies in order to obtain rights to purchase the mine’s output. Management evaluates these and any other financing arrangements that may arise for potential impairment by reviewing the parties’ financial statements and projections and business, operational and other economic factors on a periodic basis. As of October 31, 2013 and 2012, the current portion of the carrying amount of financing arrangements including accrued interest was $14,765,000 and $12,426,000 and was recorded in prepaid expenses and other current assets. As of October 31, 2013 and 2012, the non-current portion of the carrying amount of financing arrangements including accrued interest was $59,179,000 and $46,808,000 and was included in other assets, net. The Company has not recorded any material impairment charges on such loans as of October 31, 2013 and 2012.

4.
INVENTORIES
(in thousands)
October 31,
2013
 
January 31,
2013
 
October 31,
2012
Finished goods
$
1,440,114

 
$
1,291,235

 
$
1,377,518

Raw materials
860,507

 
790,732

 
745,334

Work-in-process
118,089

 
152,367

 
166,719

Inventories, net
$
2,418,710

 
$
2,234,334

 
$
2,289,571


5.
INCOME TAXES
The effective income tax rates for the three and nine months ended October 31, 2013 were 32.3% and 33.8% versus 38.4% and 35.6% in the prior year. The lower effective income tax rate for the three and nine months ended October 31, 2013 is due to the one-time impact of favorable tax regulations as well as differences in the geographical mix of earnings. The higher effective income tax rate for the three months ended October 31, 2012 was primarily due to the true-up of the prior year's tax provision upon filing the 2011 tax returns.
During the nine months ended October 31, 2013, the change in the gross amount of unrecognized tax benefits and accrued interest and penalties was not significant.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. As a matter of course, various taxing authorities regularly audit the Company. The Company’s tax filings are currently being examined by a number of tax authorities in various jurisdictions. Ongoing audits where subsidiaries have a material presence include New York state (tax years 20082011), New York City (tax years 20092010), as well as an audit that is being conducted by the Internal Revenue Service (tax years 20062009). Tax years from 2006–present are open to examination in U.S. Federal and various state, local and foreign jurisdictions. The Company believes that its tax positions comply with applicable tax laws 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.

6.
EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the dilutive effect of the assumed exercise of stock options and unvested restricted stock units.

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The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted EPS computations:
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2013
 
2012
 
2013
 
2012
Net earnings for basic and diluted EPS
$
94,610

 
$
63,179

 
$
284,968

 
$
236,514

Weighted-average shares for basic EPS
128,004

 
126,737

 
127,716

 
126,697

Incremental shares based upon the assumed exercise of
   stock options and unvested restricted stock units
970

 
1,165

 
1,013

 
1,217

Weighted-average shares for diluted EPS
128,974

 
127,902

 
128,729

 
127,914

For the three months ended October 31, 2013 and 2012, there were 350,000 and 758,000 stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect. For the nine months ended October 31, 2013 and 2012, there were 509,000 and 843,000 stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect.

7.
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 criteria, it is designated as one of the following on the date it is entered into:
Fair Value Hedge – A hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. For fair value hedge transactions, both the effective and ineffective portions of the changes in the fair value of the derivative and changes in the fair value of the item being hedged are recorded in current earnings.
Cash Flow Hedge – A hedge of the exposure to variability in the cash flows of a recognized asset, liability or a forecasted transaction. For cash flow hedge transactions, the effective portion of the changes in fair value of derivatives are reported as other comprehensive income (“OCI”) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Amounts excluded from the effectiveness calculation and any ineffective portions of the change in fair value of the derivative are recognized in current earnings.
The Company formally documents the nature of and relationships between the hedging instruments and hedged items for a derivative to qualify as a hedge at inception and throughout the hedged period. The Company also documents its risk management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative financial instrument would be recognized in current earnings. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedge instrument and the item being hedged, both at inception and throughout the hedged period.
The Company does not use derivative financial instruments for trading or speculative purposes.

Types of Derivative Instruments

Interest Rate Swaps – In the six months ended July 31, 2012, the Company entered into forward-starting interest rate swaps to hedge the impact of interest rate volatility on future interest payments associated with the anticipated incurrence of additional long-term debt which was incurred in July 2012. The Company accounted for the forward-

10


starting interest rate swaps as cash flow hedges. The Company settled the interest rate swaps in the three months ended July 31, 2012 and paid $29,335,000.
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 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.
As of October 31, 2013, the notional amount of foreign exchange forward contracts accounted for as cash flow hedges was $162,035,000 and the notional amount of foreign exchange forward contracts accounted for as undesignated hedges was $29,193,000. The term of all outstanding foreign exchange forward and put option contracts as of October 31, 2013 ranged from less than one month to 12 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 either a combination of call and put option contracts in net-zero-cost collar arrangements (“precious metal collars”) or forward contracts. For precious metal collars, if the price of the precious metal at the time of the expiration of the precious metal collar is within the call and put price, the precious metal collar expires at no cost to the Company. The Company accounts for its precious metal collars and forward contracts as cash flow hedges. The Company assesses hedge effectiveness based on the total changes in the precious metal collars and forward contracts’ cash flows. 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 October 31, 2013, there were approximately 17,400 ounces of platinum and 411,000 ounces of silver precious metal derivative instruments outstanding.
Information on the location and amounts of derivative gains and losses in the condensed consolidated financial statements is as follows:
 
 
Three Months Ended October 31,
 
2013
 
2012
(in thousands)
Pre-Tax Gain
(Loss) Recognized
in OCI (Effective
Portion)
 
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
 
Pre-Tax Gain (Loss) 
Recognized
in OCI
(Effective Portion)
 
Loss Reclassified
from Accumulated
OCI into Earnings
(Effective Portion)
Derivatives in Cash Flow Hedging
   Relationships:
 
 
 
 
 
 
 
Foreign exchange forward contracts a 
$
1,084

 
$
5,642

 
$
2,513

 
$
(589
)
Put option contracts a 
(6
)
 
669

 
(47
)
 

Precious metal forward contracts a 
1,743

 
(1,105
)
 
3,192

 
(2,153
)
Forward-starting interest rate swaps b

 
(381
)
 

 
(399
)
 
$
2,821

 
$
4,825

 
$
5,658

 
$
(3,141
)

11


 
Nine Months Ended October 31,
 
2013
 
2012
(in thousands)
Pre-Tax Gain
(Loss) Recognized
in OCI (Effective
Portion)
 
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
 
Pre-Tax Gain
(Loss) Recognized
in OCI
(Effective Portion)
 
Loss Reclassified
from Accumulated
OCI into Earnings
(Effective Portion)
Derivatives in Cash Flow Hedging
   Relationships:
 
 
 
 
 
 
 
Foreign exchange forward contracts a 
$
10,451

 
$
10,710

 
$
6,774

 
$
(4,902
)
Put option contracts a 
1,264

 
1,599

 
(456
)
 
(129
)
Precious metal forward contracts a 
(5,656
)
 
(3,038
)
 
(4,520
)
 
(5,292
)
Forward-starting interest rate swaps b

 
(1,157
)
 
(26,511
)
 
(533
)
 
$
6,059

 
$
8,114

 
$
(24,713
)
 
$
(10,856
)
 
a 
The gain or loss recognized in earnings is included within Cost of sales.
b 
The gain or loss recognized in earnings is included within Interest and other expenses, net.
The gains and losses on derivatives not designated as hedging instruments were not significant in the three and nine months ended October 31, 2013 and 2012. There was no material ineffectiveness related to the Company’s hedging instruments for the periods ended October 31, 2013 and 2012. The Company expects approximately $15,459,000 of net pre-tax derivative gains included in accumulated other comprehensive income at October 31, 2013 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 Condensed Consolidated Balance Sheet, refer to “Note 8. 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.

8.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. U.S. GAAP prescribes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities. 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 marketable securities, time deposits and derivative instruments. The Company’s interest rate swaps were primarily valued using the 3-month LIBOR rate. The Company’s put 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 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 7. Hedging Instruments.”

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Table of Contents

Financial assets and liabilities carried at fair value at October 31, 2013 are classified in the table below in one of the three categories described above: 
 
Carrying
Value
 
Estimated Fair Value
 
Total Fair
Value
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Marketable securities a
$
52,201

 
$
52,201

 
$

 
$

 
$
52,201

Derivatives designated as hedging
   instruments:
 
 
 
 
 
 
 
 
 
Precious metal forward contracts b
952

 

 
952

 

 
952

Foreign exchange forward contracts b
8,590

 

 
8,590

 

 
8,590

Derivatives not designated as hedging
   instruments:
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts b
353

 

 
353

 

 
353

Total financial assets
$
62,096

 
$
52,201

 
$
9,895

 
$

 
$
62,096

 
Carrying
Value
 
Estimated Fair Value
 
Total Fair
Value
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Derivatives designated as hedging
   instruments:
 
 
 
 
 
 
 
 
 
Precious metal forward contracts c
$
824

 
$

 
$
824

 
$

 
$
824

Foreign exchange forward contracts c
490

 

 
490

 

 
490

Derivatives not designated as hedging
   instruments:
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts c
27

 

 
27

 

 
27

Total financial liabilities
$
1,341

 
$

 
$
1,341

 
$

 
$
1,341


Financial assets and liabilities carried at fair value at October 31, 2012 are classified in the table below in one of the three categories described above:
 
 
Carrying
Value
 
Estimated Fair Value
 
Total Fair
Value
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Marketable securities a
$
42,399

 
$
42,399

 
$

 
$

 
$
42,399

Time deposits b
1,362

 
1,362

 

 

 
1,362

Derivatives designated as hedging
   instruments:
 
 
 
 
 
 
 
 
 
Precious metal forward contracts b
783

 

 
783

 

 
783

Put option contracts b
95

 

 
95

 

 
95

Foreign exchange forward contracts b
2,762

 

 
2,762

 

 
2,762

Derivatives not designated as hedging
   instruments:
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts b
55

 

 
55

 

 
55

Total financial assets
$
47,456

 
$
43,761

 
$
3,695

 
$

 
$
47,456


13

Table of Contents

 
Carrying
Value
 
Estimated Fair Value
 
Total Fair
Value
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Derivatives designated as hedging
   instruments:
 
 
 
 
 
 
 
 
 
Precious metal forward contracts c
$
1,144

 
$

 
$
1,144

 
$

 
$
1,144

Foreign exchange forward contracts c
12

 

 
12

 

 
12

Derivatives not designated as hedging
   instruments:
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts c
824

 

 
824

 

 
824

Total financial liabilities
$
1,980

 
$

 
$
1,980

 
$

 
$
1,980


a 
Included within Other assets, net.
b 
Included within Prepaid expenses and other current assets.
c 
Included within Accounts payable and accrued liabilities.
The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates carrying value due to the short-term maturities of these assets and liabilities and would be measured using Level 1 inputs. The fair value of debt with variable interest rates approximates carrying value and is measured using Level 2 inputs. The fair value of debt with fixed interest rates was determined using the quoted market prices of debt instruments with similar terms and maturities, which are considered Level 2 inputs. The total carrying value of short-term borrowings and long-term debt was $1,007,740,000 and $977,916,000 and the corresponding fair value was approximately $1,100,000,000 at both October 31, 2013 and 2012.

9.
DEBT

In July 2013, Tiffany & Co.’s wholly-owned subsidiary, Tiffany & Co. (Shanghai) Commercial Company Limited (“Tiffany-Shanghai”), entered into a three-year multi-bank revolving credit agreement (the “Credit Agreement”). The Credit Agreement has an aggregate borrowing limit of RMB 930,000,000 ($152,594,000 at October 31, 2013). The Credit Agreement is available for Tiffany-Shanghai’s general working capital requirements, which included repayment of a portion of the indebtedness under Tiffany-Shanghai’s existing bank loan facilities. The Credit Agreement contains affirmative and negative covenants usual and customary for facilities of this size and purpose. The six lenders party to the Credit Agreement will make loans, upon Tiffany-Shanghai’s request, for periods of up to 12 months at the applicable interest rates as announced by the People's Bank of China. There was $57,428,000 outstanding and $95,166,000 available to be borrowed under the Credit Agreement at October 31, 2013. The interest rate applicable to the outstanding borrowings at October 31, 2013 was 6.0%. The Credit Agreement matures in July 2016.
Under all of the Company’s revolving credit facilities (including the Credit Agreement discussed above), there were $252,016,000 of borrowings outstanding, $4,003,000 letters of credit issued but not outstanding and $566,852,000 available for borrowing at October 31, 2013. The weighted-average interest rate for the amount outstanding at October 31, 2013 was 3.26%.


10.
COMMITMENTS AND CONTINGENCIES
Leases. In April 2010, Tiffany and Company (“Tiffany”), the Company’s principal operating subsidiary, committed to a plan to consolidate and relocate its New York headquarters staff to a single leased location in New York City from three separate locations leased in midtown Manhattan. The move occurred in June 2011. Tiffany subleased most of those previously occupied properties through the end of their lease terms which run through 2015, but has recovered only a portion of its rent obligations due to market conditions.

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Table of Contents

The Company recorded accrued exit charges of $30,884,000 during the second quarter of 2011 within other long-term liabilities associated with the relocation. The following is a reconciliation of the accrued exit charges:
 
(in thousands)
 
Balance at January 31, 2013
$
16,164

Cash payments, net of estimated sublease income
(1,518
)
Interest accretion
108

Balance at April 30, 2013
14,754

Cash payments, net of estimated sublease income
(1,518
)
Interest accretion
98

Balance at July 31, 2013
13,334

Cash payments, net of estimated sublease income
(1,518
)
Interest accretion
89

Balance at October 31, 2013
$
11,905


Diamond sourcing activities. In March 2011, Laurelton Diamonds, Inc. (“Laurelton”), a wholly-owned subsidiary of the Company, as lender, entered into a $50,000,000 amortizing term loan facility agreement (the “Loan”) with Koidu Limited (previously Koidu Holdings S.A.) (“Koidu”), as borrower, and BSG Resources Limited, as a limited guarantor. Koidu operates a kimberlite diamond mine in Sierra Leone (the “Mine”) from which Laurelton now acquires diamonds. On March 29, 2013, the Company entered into an amendment relating to the Loan, deferring principal and interest payments due in 2013 to subsequent years. The Loan, as amended, is required to be repaid in full by March 2017 through semi-annual payments scheduled to begin in March 2014.
Litigation. 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 breach of agreements entered into by and among the Swatch Parties and the Tiffany Parties that came into effect in December 2007 (the “Agreements”). The 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.
All claims and counterclaims between and among the Swatch Parties and the Tiffany Parties under the Agreements will be determined through a confidential arbitration (the “Arbitration”). The Arbitration is pending before a three member arbitral panel (the “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 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 Agreements by obstructing and delaying development of Watch Company’s business and otherwise failing to proceed in good faith. The Swatch Parties seek damages based on alternate theories ranging from CHF 73,000,000 (or approximately $81,000,000 at October 31, 2013) (based on alleged wasted investment) to CHF 3,800,000,000 (or approximately $4,200,000,000 at October 31, 2013) (calculated based on alleged future lost profits of the Swatch Parties and their affiliates over the entire term of the Agreements).
The Registrant believes that the claims of the Swatch Parties are without merit and has defended vigorously and (together with the other Tiffany Parties) filed a Statement of Defense and Counterclaim on March 9, 2012. As detailed in the filing, the Tiffany Parties disputed both the merits of the Swatch Parties’ claims and the calculation of the alleged damages. The Tiffany Parties 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 did not have grounds for termination, failed to meet the high standard for proving material breach set forth in the Agreements and failed to provide appropriate management, distribution, marketing and other resources for

15

Table of Contents

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 $133,000,000 at October 31, 2013) (based on wasted investment) to approximately CHF 540,000,000 (or approximately $600,000,000 at October 31, 2013) (calculated based on future lost profits of the Tiffany Parties).
Management has not included any accrual in the condensed consolidated financial statements 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 but could have a material adverse effect on the Registrant’s consolidated financial statements or liquidity.
The arbitration hearing was held in October 2012. At the hearing, witnesses were examined and the Panel ordered additional briefs and submissions to complete the record. The record was completed in mid-February 2013, and the Panel will issue its decision at an undetermined future date. In their submissions to the Panel, the Swatch Parties and the Tiffany Parties requested that the Panel determine that the Agreements should be terminated and asked, should the Panel find neither the Swatch Parties nor the Tiffany Parties to be in material breach of their respective obligations under the Agreements, that the Panel nonetheless determine that the Agreements be deemed terminated as of October 1, 2013. Upon termination of the Agreements, the Swatch Parties will no longer be responsible for the manufacture and distribution, through third party retailers, of TIFFANY & CO. brand watches. Royalties payable to the Tiffany Parties by Watch Company under the Agreements have not been significant in any year. Watches manufactured by Watch Company and sold in TIFFANY & CO. stores constituted 1% of worldwide net sales in 2012, 2011 and 2010.

During the third quarter ended October 31, 2013, the Registrant and certain of its subsidiaries received numerous communications from the Swatch Parties indicating that the Swatch Parties view the Agreements as having been terminated as of October 1, 2013, and the Registrant and its subsidiaries are proceeding on that basis with plans to design, produce, market and distribute TIFFANY & CO. brand watches through alternative arrangements.
Other. In the three months ended April 30, 2013, the Company implemented specific cost reduction initiatives and recorded $9,379,000 of expense within selling, general and administrative expenses. These cost reduction initiatives included severance related to staffing reductions (all of which was paid by the end of the third quarter of 2013) and subleasing of certain office space for which only a portion of the Company’s future rent obligations will be recovered.

11.
STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive (Loss) Earnings
 
(in thousands)
October 31,
2013
 
January 31,
2013
 
October 31,
2012
Accumulated other comprehensive (loss) earnings,
net of tax:
 
 
 
 
 
Foreign currency translation adjustments
$
32,835

 
$
44,064

 
$
44,267

Deferred hedging loss
(4,806
)
 
(3,207
)
 
(16,824
)
Unrealized gain on marketable securities
3,726

 
1,849

 
1,493

Net unrealized loss on benefit plans
(127,932
)
 
(136,581
)
 
(118,256
)
 
$
(96,177
)
 
$
(93,875
)
 
$
(89,320
)











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Table of Contents


Additions to and reclassifications out of accumulated other comprehensive earnings are as follows:
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2013
 
2012
 
2013
 
2012
Foreign currency translation adjustments
$
19,706

 
$
15,029

 
$
(13,646
)
 
$
(6,324
)
Income tax (expense) benefit
(151
)
 
309

 
2,417

 
1,382

Foreign currency adjustments, net of tax
19,555

 
15,338

 
(11,229
)
 
(4,942
)
Unrealized gain on marketable securities
2,595

 
989

 
2,785

 
2,091

Reclassification adjustment for loss included in net earnings a

 
6

 

 
6

Income tax expense
(613
)
 
(348
)
 
(908
)
 
(734
)
Unrealized gain on marketable securities, net of tax
1,982

 
647

 
1,877

 
1,363

Unrealized gain (loss) on hedging instruments
2,821

 
5,658

 
6,059

 
(24,713
)
Reclassification adjustment for (gain) loss included in net earnings b
(4,825
)
 
3,141

 
(8,114
)
 
10,904

Income tax benefit (expense)
595

 
(3,281
)
 
456

 
5,714

Unrealized (loss) gain on hedging instruments, net of tax
(1,409
)
 
5,518

 
(1,599
)
 
(8,095
)
Amortization of net loss included in net earnings c
4,806

 
3,956

 
14,417

 
11,949

Amortization of prior service cost included in net earnings c
78

 
89

 
234

 
267

Income tax expense
(1,871
)
 
(1,566
)
 
(6,002
)
 
(4,732
)
Net unrealized gain on benefit plans, net of tax
3,013

 
2,479

 
8,649

 
7,484

Total other comprehensive earnings (loss), net of tax
$
23,141

 
$
23,982

 
$
(2,302
)
 
$
(4,190
)
 
a
These losses are reclassified into Interest and other expenses, net.
b 
These (gains) losses are reclassified into Interest and other expenses and Cost of sales, net (see Note 7. Hedging Instruments for additional details).
c 
These accumulated other comprehensive income components are included in the computation of net periodic pension costs (see Note 12. Employee Benefit Plans for additional details).

The Company's Board of Directors declared quarterly dividends which totaled $0.34 and $0.32 per share of Common Stock in the three months ended October 31, 2013 and 2012 and $1.00 and $0.93 per share of Common Stock in the nine months ended October 31, 2013 and 2012.


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Table of Contents

12.
EMPLOYEE BENEFIT PLANS
The Company maintains several pension and retirement plans, and also provides certain health-care and life insurance benefits.
Net periodic pension and other postretirement benefit expense included the following components:
 
 
Three Months Ended October 31,
 
Pension Benefits
 
Other
Postretirement Benefits
(in thousands)
2013
 
2012
 
2013
 
2012
Net Periodic Benefit Cost:
 
 
 
 
 
 
 
Service cost
$
4,783

 
$
4,528

 
$
698

 
$
596

Interest cost
6,752

 
6,701

 
691

 
710

Expected return on plan assets
(5,560
)
 
(5,104
)
 

 

Amortization of prior service cost
243

 
254

 
(165
)
 
(165
)
Amortization of net loss
4,753

 
3,949

 
53

 
7

Net expense
$
10,971

 
$
10,328

 
$
1,277

 
$
1,148

 
Nine Months Ended October 31,
 
Pension Benefits
 
Other
Postretirement Benefits
(in thousands)
2013
 
2012
 
2013
 
2012
Net Periodic Benefit Cost:
 
 
 
 
 
 
 
Service cost
$
14,360

 
$
13,566

 
$
2,094

 
$
1,787

Interest cost
20,256

 
20,099

 
2,072

 
2,130

Expected return on plan assets
(16,680
)
 
(15,312
)
 

 

Amortization of prior service cost
729

 
762

 
(495
)
 
(495
)
Amortization of net loss
14,258

 
11,927

 
159

 
22

Net expense
$
32,923

 
$
31,042

 
$
3,830

 
$
3,444


13.
SEGMENT INFORMATION
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 of retail sales in five TIFFANY & CO. stores in the United Arab Emirates which were converted from independently-operated to Company-operated stores in July 2012, and wholesale sales of TIFFANY & CO. merchandise to independent distributors for resale in certain emerging markets (primarily in the Middle East and Russia). In addition, Other includes wholesale sales of diamonds obtained through bulk purchases that were subsequently deemed not suitable for the Company’s needs as well as earnings received from third-party licensing agreements.

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Table of Contents

Certain information relating to the Company’s segments is set forth below:
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
(in thousands)
2013
 
2012
 
2013
 
2012
Net sales:
 
 
 
 
 
 
 
Americas
$
416,748

 
$
400,113

 
$
1,268,301

 
$
1,219,776

Asia-Pacific
238,412

 
187,685

 
670,164

 
556,893

Japan
128,300

 
146,723

 
409,222

 
447,175

Europe
104,488

 
97,644

 
308,721

 
285,765

Total reportable segments
887,948

 
832,165

 
2,656,408

 
2,509,609

Other
23,530

 
20,576

 
76,438

 
48,871

 
$
911,478

 
$
852,741

 
$
2,732,846

 
$
2,558,480

Earnings (losses) from operations*:
 
 
 
 
 
 
 
Americas
$
61,662

 
$
51,890

 
$
208,355

 
$
191,697

Asia-Pacific
59,975

 
36,589

 
165,316

 
122,675

Japan
46,528

 
42,732

 
148,182

 
135,558

Europe
17,672

 
16,119

 
54,288

 
53,371

Total reportable segments
185,837

 
147,330

 
576,141

 
503,301

Other
(1,722
)
 
586

 
(2,066
)
 
(3,353
)
 
$
184,115

 
$
147,916

 
$
574,075

 
$
499,948


* Represents earnings (losses) from operations before unallocated corporate expenses, other operating expense and interest and other expenses, net.
The following table sets forth a reconciliation of the segments’ earnings from operations to the Company’s consolidated earnings from operations before income taxes:
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
(in thousands)
2013
 
2012
 
2013
 
2012
Earnings from operations for segments
$
184,115

 
$
147,916

 
$
574,075

 
$
499,948

Unallocated corporate expenses
(30,497
)
 
(30,621
)
 
(93,034
)
 
(93,088
)
Interest and other expenses, net
(13,922
)
 
(14,783
)
 
(41,328
)
 
(39,587
)
Other operating expense

 

 
(9,379
)
 

Earnings from operations before income taxes
$
139,696

 
$
102,512

 
$
430,334

 
$
367,273

Unallocated corporate expenses includes certain costs related to administrative support functions which the Company does not allocate to its segments. Such unallocated costs include those for centralized information technology, finance, legal and human resources departments.
Other operating expense in the nine months ended October 31, 2013 represents expenses related to specific cost reduction initiatives. See “Note 10. Commitments and Contingencies.”
 
14.
SUBSEQUENT EVENT
On November 21, 2013, the Company’s Board of Directors approved a quarterly dividend of $0.34 per share of Common Stock. This dividend will be paid on January 10, 2014 to stockholders of record on December 20, 2013.

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Table of Contents

PART I. Financial Information
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW
Tiffany & Co. is a holding company that operates through its subsidiary companies (the “Company”). Tiffany & Co.’s principal subsidiary, Tiffany and Company (“Tiffany”), is a jeweler and specialty retailer whose principal merchandise offering is jewelry. The Company also sells timepieces, leather goods, sterling silverware, china, crystal, stationery, fragrances and accessories. Through Tiffany 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 120 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 68 TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations;
Japan includes sales in 54 TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products through business-to-business, Internet and wholesale operations;
Europe includes sales in 36 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 of retail sales in five TIFFANY & CO. stores in the United Arab Emirates (“U.A.E.”) which were converted from independently-operated to Company-operated stores in July 2012, and wholesale sales of TIFFANY & CO. merchandise to independent distributors for resale in certain emerging markets (primarily in the Middle East and Russia). In addition, Other includes wholesale sales of diamonds obtained through bulk purchases that were subsequently deemed not suitable for the Company’s needs as well as earnings received from third-party licensing agreements.
All references to years relate to fiscal years ended or ending on January 31 of the following calendar year.

HIGHLIGHTS
Worldwide net sales increased 7% to $911,478,000 in the three months (“third quarter”) ended October 31, 2013 and 7% in the nine months (“year-to-date”) ended October 31, 2013 to $2,732,846,000. On a constant-exchange-rate basis (see “Non-GAAP Measures” below), worldwide net sales increased 11% in both the third quarter and in the year-to-date due to sales growth in all regions, and comparable store sales increased 7% in both the third quarter and in the year-to-date.
Earnings from operations increased 31% in the third quarter and 16% in the year-to-date due to improvements in gross margin and ongoing well-controlled expenses in both periods.
Net earnings increased 50% to $94,610,000, or $0.73 per diluted share in the third quarter. Net earnings increased 20% to $284,968,000, or $2.21 per diluted share in the year-to-date. Excluding expenses related to specific cost reduction initiatives (see “Non-GAAP Measures” below), net earnings increased 23% in the year-to-date.
The Company opened eight (net) stores in the year-to-date (of a planned 14 (net) stores for the full year): five stores in the Americas, two (net) stores in Asia Pacific, two stores in Europe and closed one store in Japan.

RESULTS OF OPERATIONS

Non-GAAP Measures
The Company reports information in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The Company’s management does not, nor does it suggest that investors should, consider non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. 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.

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Net Sales. The Company’s reported net sales reflect either a translation-related benefit from strengthening foreign currencies or a detriment from a strengthening U.S. dollar. Internally, management monitors 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 following table reconciles sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous year:
 
 
Third Quarter 2013 vs. 2012
 
Year-to-date 2013 vs. 2012
 
GAAP 
Reported
 
Translation
Effect
 
Constant-
Exchange-
Rate Basis
 
GAAP 
Reported
 
Translation
Effect
 
Constant-
Exchange-
Rate Basis
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
7
 %
 
(4
)%
 
11
%
 
7
 %
 
(4
)%
 
11
%
Americas
4
 %
 
(1
)%
 
5
%
 
4
 %
 
 %
 
4
%
Asia-Pacific
27
 %
 
(2
)%
 
29
%
 
20
 %
 
(1
)%
 
21
%
Japan
(13
)%
 
(22
)%
 
9
%
 
(8
)%
 
(20
)%
 
12
%
Europe
7
 %
 
3
 %
 
4
%
 
8
 %
 
1
 %
 
7
%
Other
14
 %
 
 %
 
14
%
 
56
 %
 
 %
 
56
%
Comparable Store Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
3
 %
 
(4
)%
 
7
%
 
3
 %
 
(4
)%
 
7
%
Americas
1
 %
 
 %
 
1
%
 
1
 %
 
 %
 
1
%
Asia-Pacific
20
 %
 
(2
)%
 
22
%
 
14
 %
 
(1
)%
 
15
%
Japan
(16
)%
 
(21
)%
 
5
%
 
(9
)%
 
(20
)%
 
11
%
Europe
4
 %
 
2
 %
 
2
%
 
6
 %
 
1
 %
 
5
%
Other *
1
 %
 
 %
 
1
%
 
1
 %
 
 %
 
1
%
* Represents sales in five TIFFANY & CO. stores in the U.A.E., which were converted from independently-operated to Company-operated in July 2012, and became comparable in the third quarter of 2013.
Statement of Earnings. Internally, management monitors its earnings performance excluding specific cost reduction initiatives. Management believes excluding such items presents the Company’s results on a more comparable basis to the corresponding period in the prior year, thereby providing investors with an additional perspective to analyze the results of operations of the Company. The following table reconciles GAAP amounts to non-GAAP amounts:
 
(in thousands)
GAAP
 
Cost reduction initiatives  a
(decrease)/increase
 
Non-GAAP
Nine months ended October 31, 2013
 
 
 
 
 
Selling, general and administrative expenses (“SG&A”)
$
1,083,172

 
$
(9,379
)
 
$
1,073,793

Earnings from operations
471,662

 
9,379

 
481,041

Net earnings
284,968

 
5,785

 
290,753

 
a
In the nine months ended October 31, 2013, the Company implemented specific cost reduction initiatives which included severance related to staffing reductions and subleasing of certain office space for which only a portion of the Company’s future rent obligations will be recovered.
Comparable Store Sales
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 geographical 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.

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Net Sales
Net sales by segment were as follows: 
 
Third Quarter
 
Year-to-date
(in thousands)
2013
 
2012
 
Increase/ (Decrease)
 
2013
 
2012
 
Increase/ (Decrease)
Americas
$
416,748

 
$
400,113

 
4
 %
 
$
1,268,301

 
$
1,219,776

 
4
 %
Asia-Pacific
238,412

 
187,685

 
27
 %
 
670,164

 
556,893

 
20
 %
Japan
128,300

 
146,723

 
(13
)%
 
409,222

 
447,175

 
(8
)%
Europe
104,488

 
97,644

 
7
 %
 
308,721

 
285,765

 
8
 %
Other
23,530

 
20,576

 
14
 %
 
76,438

 
48,871

 
56
 %
 
$
911,478

 
$
852,741

 
7
 %
 
$
2,732,846

 
$
2,558,480

 
7
 %

Americas. Total sales in the Americas increased $16,635,000, or 4%, in the third quarter due to an increase in the average price per jewelry unit sold and a slight increase in the number of jewelry units sold. Comparable store sales rose $2,107,000, or 1%, from the prior year with stronger growth in New York flagship store sales that benefited primarily from increased sales to foreign tourists. Non-comparable store sales grew $10,689,000. There was no meaningful effect from translation on sales in the Americas.

Total sales in the Americas increased $48,525,000, or 4%, in the year-to-date due to an increase in the average price per jewelry unit sold partly offset by fewer jewelry units sold. Comparable store sales increased $11,878,000, or 1%, with stronger growth in the New York flagship store that, in part, benefited from purchases by customers who attended Tiffany’s Blue Book event in the first quarter of 2013 and increased sales to foreign tourists. Non-comparable store sales grew $35,164,000. There was no effect from translation on year-to-date sales in the Americas.

Asia-Pacific. Total sales in Asia-Pacific increased $50,727,000, or 27%, in the third quarter due to an increase in the average price per jewelry unit sold and in the number of jewelry units sold. Comparable store sales increased $35,823,000, or 20%, due to strong sales growth throughout the region, and non-comparable store sales grew $10,223,000. On a constant-exchange rate basis, Asia-Pacific sales increased 29% and comparable store sales increased 22%.

Total sales in Asia-Pacific increased $113,271,000, or 20%, in the year-to-date due to an increase in the number of jewelry units sold and in the average price per jewelry unit sold. Comparable store sales increased $72,752,000, or 14%, due to strong sales growth throughout the region. Non-comparable store sales grew $30,384,000. There was no meaningful effect from translation on year-to-date sales in Asia-Pacific.

Japan. Total sales in Japan decreased $18,423,000, or 13%, in the third quarter and comparable store sales decreased $21,735,000, or 16%, due to currency translation. On a constant-exchange-rate basis, Japan sales increased 9% largely due to an increase in the average price per jewelry unit sold as well as an increase in the number of jewelry units sold and comparable store sales increased 5%.

Total sales in Japan decreased $37,953,000, or 8%, in the year-to-date and comparable store sales decreased $37,588,000, or 9%, due to currency translation. On a constant-exchange-rate basis, Japan sales increased 12% entirely due to an increase in the average price per jewelry unit sold and comparable store sales increased 11%.

Europe. Total sales in Europe increased $6,844,000, or 7%, in the third quarter due to an increase in the average price per jewelry unit sold and in the number of jewelry units sold. Comparable store sales increased $3,928,000, or 4%, and non-comparable store sales increased $1,928,000. On a constant-exchange rate basis, sales increased 4% and comparable store sales increased 2% reflecting stronger growth in the United Kingdom.

Total sales in Europe increased $22,956,000, or 8%, in the year-to-date due to an increase in the average price per jewelry unit sold and in the number of jewelry units sold. Comparable store sales increased $14,782,000, or 6%, reflecting growth in the United Kingdom and most of continental Europe and non-comparable store sales increased $6,011,000. There was no meaningful effect from translation on year-to-date sales in Europe.

Other. Other sales increased $2,954,000, or 14%, in the third quarter primarily due to higher wholesale sales of rough diamonds. Other sales increased $27,567,000, or 56%, in the year-to-date primarily due to the conversion of five independently-operated stores in the Middle East to Company-operated stores in July 2012.

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Table of Contents


Product Category Information. In the third quarter, worldwide net sales increased $58,737,000, or 7%, primarily driven by an increase of $37,979,000, or 24%, in the statement, fine & solitaire jewelry category and $23,485,000, or 10%, in the silver, gold & RUBEDO® metal jewelry category.

In the year-to-date, worldwide net sales increased $174,366,000, or 7%, primarily driven by increases of $124,642,000, or 28%, in the statement, fine & solitaire jewelry category and $47,805,000, or 6%, in the engagement jewelry & wedding bands category.

Store Data. Management currently expects to add 14 (net) Company-operated TIFFANY & CO. stores in 2013, increasing the store base by 5%, including 6 stores in the Americas, 7 stores in Asia-Pacific and 3 stores in Europe while closing one store in Asia-Pacific and one store in Japan. The following table shows locations which have already been opened or closed, or where plans have been finalized:
 
Location
Actual Openings
(Closings)
Year-to-Date 2013
 
Expected Openings
2013
Americas:
 
 
 
Villahermosa, Mexico
Second Quarter
 
 
Curitiba, Brazil
Third Quarter
 
 
Paramus – Garden State Plaza, New Jersey
Third Quarter
 
 
Cleveland, Ohio
Third Quarter
 
 
West Edmonton, Canada
Third Quarter
 
 
New Orleans, Louisiana
 
 
Fourth Quarter
Asia-Pacific:
 
 
 
Taichung – Sogo, Taiwan
(First Quarter)
 
 
Xi’an Zhongda – China
First Quarter
 
 
Causeway Bay – Times Square, Hong Kong
Second Quarter
 
 
Jinan – Guihe Plaza, China
Third Quarter
 
 
Chengdu – IFC Mall, China
 
 
Fourth Quarter
Japan:
 
 
 
Tokyo – Ginza Matsuzakaya
(Second Quarter)
 
 
Europe:
 
 
 
Verona, Italy
Second Quarter
 
 
Stuttgart, Germany
Third Quarter
 
 
Gross Margin
 
 
Third Quarter
 
Year-to-date
 
2013
 
2012
 
2013
 
2012
Gross profit as a percentage of net sales
57.0
%
 
54.4
%
 
56.9
%
 
56.0
%
Gross margin (gross profit as a percentage of net sales) increased by 2.6 percentage points in the third quarter and by 0.9 percentage point in the year-to-date primarily benefiting from reduced product cost pressures and price increases taken in the first half of 2013. A shift in sales mix toward higher-priced, lower margin products continued to offset a portion of these benefits.
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. Its strategy is to continue that approach, when appropriate, in the future. 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 1. Notes to Condensed Consolidated Financial Statements – Note 7. Hedging Instruments”). The Company increased prices in the first half of 2013 across all geographic regions and product categories as previous retail price increases were not sufficient to offset commodity cost pressures experienced in recent years.


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Table of Contents

Selling, General and Administrative Expenses
 
 
Third Quarter
 
Year-to-date
 
2013
 
2012
 
2013
 
2012
SG&A expenses as a percentage of net sales
40.1
%
 
40.7
%
 
39.6
%
 
40.1
%
SG&A expenses increased $18,869,000, or 5%, in the third quarter primarily due to increased labor and benefits costs of $9,315,000 and increased store occupancy and depreciation expenses of $8,324,000 related to new and existing stores. In the third quarter, changes in foreign currency exchange rates had the effect of decreasing SG&A expenses by 3% as compared to the prior year. SG&A expenses as a percentage of net sales decreased 0.6 percentage point.
SG&A expenses increased $57,563,000, or 6%, in the year-to-date. The Company had recorded expenses of $9,379,000 in the first quarter of 2013 associated with specific cost reduction initiatives (see “Non-GAAP Measures.”) Excluding these charges, SG&A expenses increased $48,184,000, or 5%, primarily due to increased store occupancy and depreciation expenses of $28,606,000 related to new and existing stores, increased labor and benefits costs of $12,843,000 and increased marketing expenses of $5,808,000. In the year-to-date, changes in foreign currency exchange rates had the effect of decreasing SG&A expenses by 3% as compared to the prior year. SG&A expenses as a percentage of net sales decreased 0.5 percentage point and would have decreased 0.8 percentage point, when excluding the expenses associated with specific cost reduction initiatives noted above.

Earnings from Operations
 
(in thousands)
Third
Quarter
2013
 
% of Net
Sales
 
Third
Quarter
2012
 
% of Net
Sales
Earnings (losses) from operations*:
 
 
 
 
 
 
 
Americas
$
61,662

 
14.8
 %
 
$
51,890

 
13.0
 %
Asia-Pacific
59,975

 
25.2
 %
 
36,589

 
19.5
 %
Japan
46,528

 
36.3
 %
 
42,732

 
29.1
 %
Europe
17,672

 
16.9
 %
 
16,119

 
16.5
 %
Other
(1,722
)
 
(7.3
)%
 
586

 
2.8
 %
 
184,115

 
 
 
147,916

 
 
Unallocated corporate expenses
(30,497
)
 
(3.3
)%
 
(30,621
)
 
(3.6
)%
Earnings from operations
$
153,618

 
16.9
 %
 
$
117,295

 
13.8
 %
 
*
Percentages represent earnings (losses) from operations as a percentage of each segment’s net sales.
Earnings from operations increased 31% in the third quarter. On a segment basis, the ratio of earnings (losses) from operations to each segment’s net sales in the third quarter of 2013 compared with 2012 was as follows:
Americas – the ratio increased 1.8 percentage points due to an improvement in gross margin partly offset by increased operating expenses;
Asia-Pacific – the ratio increased 5.7 percentage points primarily due to the sales leveraging of operating expenses as well as an improvement in gross margin;
Japan – the ratio increased 7.2 percentage points primarily due to an improvement in gross margin (which includes a benefit from the Company's ongoing program to utilize forward contracts for a portion of forecasted merchandise purchases) as well as sales leveraging of operating expenses;
Europe – the ratio increased 0.4 percentage point due to an improvement in gross margin mostly offset by increased store-related operating expenses; and
Other – operating earnings declined as the earnings generated by retail operations and wholesale sales in certain emerging markets were more than offset by a valuation adjustment related to the write-down of wholesale diamond inventory deemed not suitable for the Company's needs.

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Table of Contents

(in thousands)
Year-to-date
2013
 
% of Net
Sales
 
Year-to-date
2012
 
% of Net
Sales
Earnings (losses) from operations*:
 
 
 
 
 
 
 
Americas
$
208,355

 
16.4
 %
 
$
191,697

 
15.7
 %
Asia-Pacific
165,316

 
24.7
 %
 
122,675

 
22.0
 %
Japan
148,182

 
36.2
 %
 
135,558

 
30.3
 %
Europe
54,288

 
17.6
 %
 
53,371

 
18.7
 %
Other
(2,066
)
 
(2.7
)%
 
(3,353
)
 
(6.9
)%
 
574,075

 
 
 
499,948

 
 
Unallocated corporate expenses
(93,034
)
 
(3.4
)%
 
(93,088
)
 
(3.6
)%
Other operating expense
(9,379
)
 
 
 

 
 
Earnings from operations
$
471,662

 
17.3
 %
 
$
406,860

 
15.9
 %

*
Percentages represent earnings (losses) from operations as a percentage of each segment’s net sales.
Earnings from operations increased 16% in the year-to-date. On a segment basis, the ratio of earnings (losses) from operations to each segment’s net sales in the year-to-date of 2013 compared with 2012 was as follows:
Americas – the ratio increased 0.7 percentage point entirely due to an improvement in gross margin;
Asia-Pacific – the ratio increased 2.7 percentage points due to the sales leveraging of operating expenses and an improvement in gross margin;
Japan – the ratio increased 5.9 percentage points primarily due to an improvement in gross margin (which includes a benefit from the Company's ongoing program to utilize forward contracts for a portion of forecasted merchandise purchases) as well as sales leveraging of operating expenses;
Europe – the ratio decreased 1.1 percentage points primarily due to increased store-related operating expenses partly offset by an improvement in gross margin; and
Other – the ratio improved 4.2 percentage points primarily due to earnings generated by retail operations and wholesale sales in certain emerging markets which were partly offset by 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 as a percentage of sales improved in the third quarter and year-to-date of 2013.
Other operating expense in the year-to-date of 2013 represents expenses related to specific cost reduction initiatives. See “Note 10. Commitments and Contingencies.”
Interest and Other Expenses, net
Interest and other expenses, net decreased $861,000, or 6%, in the third quarter and increased $1,741,000, or 4%, in the year-to-date.
Provision for Income Taxes
The effective income tax rates for the three and nine months ended October 31, 2013 were 32.3% and 33.8% versus 38.4% and 35.6% in the prior year. The lower effective income tax rate for the three and nine months ended October 31, 2013 is due to the one-time impact of favorable tax regulations as well as differences in the geographical mix of earnings. The higher effective income tax rate for the three months ended October 31, 2012 was primarily due to the true-up of the prior year's tax provision upon filing the 2011 tax returns.

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Table of Contents


2013 Outlook
Management expects net earnings in a range of $3.65–$3.75 per diluted share, compared with $3.50–$3.60 per diluted share in its previous outlook and $3.25 per diluted share in 2012. This is based on the following assumptions, which are approximate and may or may not prove valid, and which should be read in conjunction with risk factors disclosed in Part I, Item 1A in the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2013 as well as in "Part II. Item 1A Risk Factors" on page 32:
Worldwide net sales increasing by a mid-single-digit percentage in U.S. dollars (a high-single-digit percentage increase on a constant-exchange-rate basis).
The opening of 14 (net) Company-operated stores including 6 in the Americas, 7 in Asia-Pacific, 3 in Europe and closing one each in Japan and Asia-Pacific.
Operating earnings increasing at a higher rate than sales growth due to improvements in both the gross margin and the SG&A expense ratio.
Interest and other expenses, net of $58,000,000.
An effective income tax rate of 34% – 35%.
This forecast excludes $0.05 per diluted share of expenses tied to specific cost reduction initiatives that were recorded in the first quarter.
An increase in net inventories of 5%, capital expenditures of $225,000,000 (versus $220,000,000 in 2012) and free cash flow (cash flow from operating activities less capital expenditures) of $300,000,000 (versus $109,000,000 in 2012).

New Accounting Standards
See “Item 1. Notes to Condensed Consolidated Financial Statements - Note 2. New Accounting Standards.”

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, the funds available under its revolving credit facilities and the ability to access the debt and capital markets are sufficient to support the Company’s liquidity and capital requirements for the foreseeable future.
The following table summarizes cash flows from operating, investing and financing activities:
 
 
Year-to-date
(in thousands)
2013
 
2012
Net cash provided by (used in):
 
 
 
Operating activities
$
205,132

 
$
21,135

Investing activities
(151,678
)
 
(212,744
)
Financing activities
(35,382
)
 
104,085

Effect of exchange rates on cash and cash equivalents
(1,710
)
 
(1,918
)
Net increase (decrease) in cash and cash equivalents
$
16,362