TIF-2014.10.31 10-Q
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, 2014
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 Avenue, 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, 129,353,842 shares outstanding at the close of business on October 31, 2014.

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TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2014
 
 
Page
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
(a) Exhibits
 






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, 2014
 
January 31, 2014
 
October 31, 2013
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
349,301

 
$
345,778

 
$
521,200

Short-term investments
34,112

 
21,257

 
121

Accounts receivable, less allowances of $10,467, $10,337 and $10,456
177,290

 
188,814

 
165,862

Inventories, net
2,560,369

 
2,326,580

 
2,418,710

Deferred income taxes
104,708

 
101,012

 
78,020

Prepaid expenses and other current assets
284,597

 
244,947

 
178,589

Total current assets
3,510,377

 
3,228,388

 
3,362,502

Property, plant and equipment, net
888,103

 
855,095

 
836,062

Deferred income taxes
246,643

 
278,390

 
315,398

Other assets, net
351,866

 
390,478

 
365,539

 
$
4,996,989

 
$
4,752,351

 
$
4,879,501

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term borrowings
$
196,878

 
$
252,365

 
$
252,016

Accounts payable and accrued liabilities
344,292

 
342,090

 
309,798

Income taxes payable
25,657

 
31,976

 
16,190

Merchandise and other customer credits
67,709

 
70,309

 
66,110

Total current liabilities
634,536

 
696,740

 
644,114

Long-term debt
889,505

 
751,154

 
755,724

Pension/postretirement benefit obligations
284,371

 
268,112

 
348,561

Deferred gains on sale-leasebacks
71,340

 
81,865

 
85,464

Other long-term liabilities
208,547

 
220,512

 
223,684

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 129,354, 128,312 and 128,048
1,293

 
1,283

 
1,280

Additional paid-in capital
1,168,116

 
1,095,304

 
1,074,522

Retained earnings
1,807,966

 
1,682,398

 
1,829,591

Accumulated other comprehensive loss, net of tax
(83,103
)
 
(58,548
)
 
(96,177
)
Total Tiffany & Co. stockholders' equity
2,894,272

 
2,720,437

 
2,809,216

Non-controlling interests
14,418

 
13,531

 
12,738

Total stockholders' equity
2,908,690

 
2,733,968

 
2,821,954

 
$
4,996,989

 
$
4,752,351

 
$
4,879,501

See notes to condensed consolidated financial statements.


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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,
 
2014
 
2013
 
2014
 
2013
Net sales
$
959,589

 
$
911,478

 
$
2,964,651

 
$
2,732,846

Cost of sales
388,718

 
391,997

 
1,209,091

 
1,178,012

Gross profit
570,871

 
519,481

 
1,755,560

 
1,554,834

Selling, general and administrative expenses
402,380

 
365,863

 
1,168,755

 
1,083,172

Earnings from operations
168,491

 
153,618

 
586,805

 
471,662

Interest and other expenses, net
15,375

 
13,922

 
47,802

 
41,328

Loss on extinguishment of debt
93,779

 

 
93,779

 

Earnings from operations before income taxes
59,337

 
139,696

 
445,224

 
430,334

Provision for income taxes
21,069

 
45,086

 
157,227

 
145,366

Net earnings
$
38,268

 
$
94,610

 
$
287,997

 
$
284,968

Net earnings per share:
 
 
 
 
 
 
 
Basic
$
0.30

 
$
0.74

 
$
2.23

 
$
2.23

Diluted
$
0.29

 
$
0.73

 
$
2.22

 
$
2.21

Weighted-average number of common shares:
 
 
 
 
 
 
 
Basic
129,352

 
128,004

 
129,179

 
127,716

Diluted
129,978

 
128,974

 
129,894

 
128,729

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,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
38,268

 
$
94,610

 
$
287,997

 
$
284,968

Other comprehensive (loss) earnings, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(38,212
)
 
19,555

 
(26,016
)
 
(11,229
)
Unrealized (loss) gain on marketable securities
901

 
1,982

 
1,155

 
1,877

Unrealized loss on hedging instruments
(492
)
 
(1,409
)
 
(5,268
)
 
(1,599
)
Net unrealized gain on benefit plans
1,973

 
3,013

 
5,574

 
8,649

Total other comprehensive (loss) earnings,
net of tax
(35,830
)
 
23,141

 
(24,555
)
 
(2,302
)
Comprehensive earnings
$
2,438

 
$
117,751

 
$
263,442

 
$
282,666

See notes to condensed consolidated financial statements.


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Table of Contents

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, 2014
$
2,733,968

 
$
1,682,398

 
$
(58,548
)
 
128,312

 
$
1,283

 
$
1,095,304

 
$
13,531

Exercise of stock options and vesting of restricted stock units ("RSUs")
36,269

 

 

 
1,244

 
13

 
36,256

 

Tax effect of exercise of stock options and vesting of RSUs
13,959

 

 

 

 

 
13,959

 

Share-based compensation expense
21,569

 

 

 

 

 
21,569

 

Issuance of Common Stock under Employee Profit Sharing and Retirement Savings Plan
3,925

 

 

 
45

 

 
3,925

 

Purchase and retirement of Common Stock
(22,231
)
 
(20,412
)
 

 
(247
)
 
(3
)
 
(1,816
)
 

Cash dividends on Common Stock
(142,017
)
 
(142,017
)
 

 

 

 

 

Other comprehensive earnings, net of tax
(24,555
)
 

 
(24,555
)
 

 

 

 

Net earnings
287,997

 
287,997

 

 

 

 

 

Redemption of non-controlling interest

 

 

 

 

 
(1,081
)
 
1,081

Non-controlling interests
(194
)
 

 

 

 

 

 
(194
)
Balances, October 31, 2014
$
2,908,690

 
$
1,807,966

 
$
(83,103
)
 
129,354

 
$
1,293

 
$
1,168,116

 
$
14,418

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,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net earnings
   $
287,997

 
   $
284,968

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
144,699

 
131,921

Amortization of gain on sale-leasebacks
(7,042
)
 
(7,110
)
Excess tax benefits from share-based payment arrangements
(13,962
)
 
(12,112
)
Provision for inventories
21,397

 
26,638

Deferred income taxes
17,055

 
(15,446
)
Provision for pension/postretirement benefits
29,466

 
36,753

Share-based compensation expense
21,364

 
23,435

Changes in assets and liabilities:
 
 
 
Accounts receivable
8,258

 
3,481

Inventories
(286,765
)
 
(232,654
)
Prepaid expenses and other current assets
(38,684
)
 
(9,862
)
Accounts payable and accrued liabilities
(1,169
)
 
11,100

Income taxes payable
17,196

 
(9,054
)
Merchandise and other customer credits
(2,398
)
 
(78
)
Other, net
(19,633
)
 
(26,848
)
Net cash provided by operating activities
177,779

 
205,132

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of marketable securities and short-term investments
(36,445
)
 
(945
)
Proceeds from sales of marketable securities and short-term investments
21,729

 

Capital expenditures
(153,070
)
 
(148,520
)
Notes receivable funded

 
(3,050
)
Proceeds from notes receivable
11,621

 
837

Net cash used in investing activities
(156,165
)
 
(151,678
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
(Repayments of) proceeds from credit facility borrowings, net
(54,395
)
 
43,233

Other proceeds from credit facility borrowings
12,067

 
87,670

Other repayments of credit facility borrowings
(3,412
)
 
(68,751
)
Proceeds from the issuance of long-term debt
548,037

 

Repayments of long-term debt
(400,000
)
 

Payments for settlement of interest rate swaps

(4,180
)
 

Repurchase of Common Stock
(22,231
)
 

Proceeds from exercised stock options
42,267

 
18,687

Excess tax benefits from share-based payment arrangements
13,962

 
12,112

Cash dividends on Common Stock
(142,017
)
 
(126,718
)
Distribution to non-controlling interest
(1,910
)
 
(666
)
Financing fees
(7,937
)
 
(949
)
Net cash used in financing activities
(19,749
)
 
(35,382
)
Effect of exchange rate changes on cash and cash equivalents
1,658

 
(1,710
)
Net increase in cash and cash equivalents
3,523

 
16,362

Cash and cash equivalents at beginning of year
345,778

 
504,838

Cash and cash equivalents at end of nine months
   $
349,301

 
   $
521,200

See notes to condensed consolidated financial statements.

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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, 2014 and 2013 and the results of its operations and cash flows for the interim periods presented. The condensed consolidated balance sheet data for January 31, 2014 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 approximately one-third of annual net sales and a higher percentage of annual net earnings. Therefore, the results of its operations for the three and nine months ended October 31, 2014 and 2013 are not necessarily indicative of the results of the entire fiscal year.

2.
NEW ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 – Revenue From Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. Generally Accepted Accounting Principles ("GAAP") and International Financial Reporting Standards. The core principle of the guidance is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This ASU is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2016 and early adoption is not permitted. Management is currently evaluating the impact of this ASU on the condensed consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12 – Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period which requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition, and to apply existing guidance as it relates to awards with performance conditions that affect vesting to account for such awards. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2015. This ASU is not expected to have a material impact on the condensed consolidated financial statements or disclosures.


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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, management's knowledge of the customer, economic and market conditions and historical write-off experiences.

For the receivables associated with Tiffany & Co. credit cards ("Credit Card Receivables"), management uses various indicators to determine whether to extend credit to customers and the amount of credit. Such indicators include reviewing prior experience with the customer, including sales and collection history, and using applicants' credit reports and scores provided by credit rating agencies. Credit Card Receivables require minimum balance payments. A Credit Card account is classified as overdue if a minimum balance payment has not been received within the allotted timeframe (generally 30 days), after which internal collection efforts commence. For all Credit Card Receivables recorded on the balance sheet, once all internal collection efforts have been exhausted and management has reviewed the account, the account balance is written off and may be sent for external collection or legal action. At October 31, 2014 and 2013, the carrying amount of the Credit Card Receivables (recorded in accounts receivable, net) was $54,908,000 and $51,623,000, 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, 2014 and 2013) was determined based on the factors discussed above. Finance charges earned on Credit Card accounts are not significant.

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. At October 31, 2014 and 2013, the current portion of the carrying amount of financing arrangements including accrued interest was $23,925,000 and $14,765,000 and was recorded in prepaid expenses and other current assets. At October 31, 2014 and 2013, the non-current portion of the carrying amount of financing arrangements including accrued interest was $39,838,000 and $59,179,000 and was included in other assets, net. The Company has not recorded any material impairment charges on such loans as of October 31, 2014 and 2013.

4.
INVENTORIES

(in thousands)
 
October 31,
2014

January 31,
2014

October 31,
2013
Finished goods
 
$
1,533,342

 
$
1,333,926

 
$
1,440,114

Raw materials
 
888,104

 
874,799

 
860,507

Work-in-process
 
138,923

 
117,855

 
118,089

Inventories, net
 
$
2,560,369

 
$
2,326,580

 
$
2,418,710


5.
INCOME TAXES

The effective income tax rate for the three and nine months ended October 31, 2014 was 35.5% and 35.3% versus 32.3% and 33.8% in the prior year. The effective income tax rate for the nine months ended October 31, 2014 includes an increase of 1.1 percentage points due to the one-time impact of changes in state tax legislation offset by the favorable impact of a valuation allowance release of 0.3 percentage point. The lower effective income tax rates for the three and nine months ended October 31, 2013 were due to the one-time impact of favorable tax regulations as well as differences in the geographical mix of earnings.

At October 31, 2014, the Company’s gross uncertain tax positions decreased by $20,247,000 from January 31, 2014 primarily as a result of the settlement of an audit conducted by the Internal Revenue

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Service ("IRS"). At October 31, 2014, gross accrued interest and penalties decreased by $4,203,000 from January 31, 2014, primarily due to the settlement of the IRS audit. These decreases were primarily a result of payments due to federal and state taxing authorities. The effect of this settlement on the Condensed Consolidated Statements of Earnings was not material for the nine months ended October 31, 2014.

The Company conducts business globally and, as a result, is subject to taxation in the U.S. and various state and foreign jurisdictions. As a matter of course, tax authorities regularly audit the Company. The Company's tax filings are currently being examined by a number of tax authorities in several jurisdictions. Ongoing audits where subsidiaries have a material presence include New York City (tax years 20112012), as well as an audit that is being conducted by the IRS (tax years 20102012). Tax years from 2006–present are open to examination in U.S. Federal and various state, local and foreign jurisdictions. As part of these audits, the Company engages in discussions with the taxing authorities regarding tax positions. As of October 31, 2014, unrecognized tax benefits are not expected to change materially in the next 12 months. Future developments may result in a change in this assessment.

6.
EARNINGS PER SHARE

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

The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted EPS computations:
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net earnings for basic and diluted
EPS
 
$
38,268

 
$
94,610

 
$
287,997

 
$
284,968

Weighted-average shares for basic
EPS
 
129,352

 
128,004

 
129,179

 
127,716

Incremental shares based upon
the assumed exercise of stock options and unvested restricted stock units
 
626

 
970

 
715

 
1,013

Weighted-average shares for
diluted EPS
 
129,978

 
128,974

 
129,894

 
128,729


For the three months ended October 31, 2014 and 2013, there were 266,000 and 350,000 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, 2014 and 2013, there were 312,000 and 509,000 stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect.


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7.
DEBT
(in thousands)
October 31, 2014
January 31, 2014
October 31, 2013
Short-term borrowings:
 
 
 
Credit Facilities
$
58,125

$
119,212

$
118,840

Other credit facilities
138,753

133,153

133,176

 
$
196,878

$
252,365

$
252,016


Long-term debt:
 
 
 
Unsecured Senior Notes:
 
 
 
2008 9.05% Series A, due December 2015 a, b
$

$
103,804

$
104,264

2009 10.00% Series A, due April 2018 a

50,000

50,000

2009 10.00% Series A, due February 2017 a

125,000

125,000

2009 10.00% Series B, due February 2019 a

125,000

125,000

2010 1.72% Notes, due September 2016 c, d
91,460

97,350

101,460

2012 4.40% Series B Notes, due July 2042 e
250,000

250,000

250,000

2014 3.80% Senior Notes, due October 2024 c
249,261



2014 4.90% Senior Notes, due October 2044 c
298,784



 
$
889,505

$
751,154

$
755,724


a 
These notes were redeemed with the net proceeds from the offering of 2024 Notes and 2044 Notes during the three months ended October 31, 2014.
b 
These Notes were issued, at par, $100,000,000. In 2009, the Company entered into an interest rate swap to effectively convert this fixed rate obligation to a floating rate obligation. The Company terminated the interest rate swap in 2011 and recognized the remaining gain on the swap upon redemption of these Notes in the quarter ended October 31, 2014.
c 
These agreements require lump sum repayments upon maturity.
d 
These Notes were issued, at par, ¥10,000,000,000.
e 
The agreements governing these Notes require repayments of $50,000,000 in aggregate every five years beginning in 2022.

Credit Facilities. In October 2014, the Company entered into a four-year $375,000,000 and a five-year $375,000,000 multi-bank, multi-currency, committed unsecured revolving credit facility, including letter of credit subfacilities, (collectively, the "New Credit Facilities") resulting in a total borrowing capacity of $750,000,000. The New Credit Facilities replaced the previously existing $275,000,000 three-year unsecured revolving credit facility and $275,000,000 five-year unsecured revolving credit facility (collectively, the "Previously Existing Facilities"), which were terminated and repaid concurrently with the Company's entry into the New Credit Facilities. The New Credit Facilities are available for working capital and other corporate purposes. Borrowings under the New Credit Facilities will bear interest at a rate per annum equal to, at the option of the Company, (1) LIBOR (or other applicable reference rate) for the relevant currency plus an applicable margin based upon the Company's leverage ratio as defined under the New Credit Facilities, or (2) an alternate base rate equal to the highest of (i) the Federal Funds Rate plus 0.50%, (ii) Bank of America, N.A.’s prime rate and (iii) one-month LIBOR plus 1%, plus an applicable margin based upon the Company's leverage ratio as defined under the New Credit Facilities. The New Credit Facilities also require payment to the lenders of a facility fee on the amount of the lenders’ commitments under the credit facilities from time to time at rates based upon the Company's leverage ratio as defined under the New Credit Facilities. Voluntary prepayments of the loans and voluntary reductions of the unutilized portion of the commitments under the New Credit

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Facilities are permissible without penalty, subject to certain conditions pertaining to minimum notice and minimum reduction amounts.

At October 31, 2014, there were $58,125,000 of borrowings outstanding, $6,171,000 letters of credit issued but not outstanding and $685,704,000 available for borrowing under the New Credit Facilities. The weighted-average interest rate under the New Credit Facilities was 1.71% at October 31, 2014. The weighted-average interest rate under the Previously Existing Facilities was 2.35% and 2.12% at January 31, 2014 and October 31, 2013, respectively. The four-year credit facility will expire in October 2018. The five-year credit facility will expire in October 2019.

Senior Notes. In September 2014, the Company issued $250,000,000 aggregate principal amount of 3.80% Senior Notes due 2024 (the "2024 Notes") and $300,000,000 aggregate principal amount of 4.90% Senior Notes due 2044 (the "2044 Notes" and, together with the 2024 Notes, the "Notes") in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Notes were issued at a discount with aggregate net proceeds of $548,037,000 (with an effective yield of 3.836% for the 2024 Notes and an effective yield of 4.926% for the 2044 Notes). The Company used the net proceeds from the issuance of the Notes to redeem all of the aggregate principal amount of its (i) $100,000,000 principal amount of 9.05% Series A Senior Notes due December 23, 2015; (ii) $125,000,000 principal amount of 10.0% Series A-2009 Senior Notes due February 13, 2017; (iii) $50,000,000 principal amount of 10.0% Series A Senior Notes due April 9, 2018; and (iv) $125,000,000 principal amount of 10.0% Series B-2009 Senior Notes due February 13, 2019 (collectively, the "Private Placement Notes") prior to maturity in accordance with the respective note purchase agreements governing each series of Private Placement Notes, which included provisions for make-whole payments in the event of early redemption. As a result of the redemptions, the Company recorded a loss on extinguishment of debt of $93,779,000 in the three months ended October 31, 2014. The Company is using the remaining net proceeds from the sale of the Notes for general corporate purposes. The Notes are the Company’s general unsecured obligations and rank equally in right of payment with all of the Company’s existing and any future unsecured senior debt and rank senior in right of payment to any of the Company’s future subordinated debt.

The 2024 Notes bear interest at a fixed rate of 3.80% per annum and the 2044 Notes bear interest at a fixed rate of 4.90% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, commencing on April 1, 2015. The Company will make each interest payment to the holders of record of the Notes on the immediately preceding March 15 and September 15.

The Company has the option to redeem the Notes, in whole or in part, by providing no less than 30 nor more than 60 days' prior notice at a redemption price equal to the sum of (i) 100% of the principal amount of the Notes to be redeemed, plus (ii) accrued and unpaid interest, if any, on those Notes to the redemption date, plus (iii) a make-whole premium as of the redemption date, as defined in the indenture governing the Notes, as amended and supplemented in respect of each series of Notes (the "Indenture"). In addition, the Company has the option to redeem some or all of the 2024 Notes on or after July 1, 2024, at a redemption price equal to the sum of 100% of the principal amount of the 2024 Notes to be redeemed, together with accrued and unpaid interest, if any, on those 2024 Notes to the redemption date. The Company also has the option to redeem some or all of the 2044 Notes on or after April 1, 2044, at a redemption price equal to the sum of 100% of the principal amount of the 2044 Notes to be redeemed, together with accrued and unpaid interest, if any, on those 2044 Notes to the redemption date.

Upon the occurrence of a change of control triggering event (as defined in the Indenture), unless the Company has exercised its right to redeem the Notes, each holder of Notes will have the right to require the Company to repurchase all or a portion of such holder’s Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase.

Debt Covenants

The agreements governing the New Credit Facilities include specific financial covenants, as well as other covenants that limit the ability of the Company to incur certain subsidiary indebtedness, incur liens, impose restrictions on subsidiary distributions and engage in mergers, consolidations and sales of all or

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substantially all of its and its subsidiaries’ assets, in addition to other requirements and “Events of Default” (as defined in the agreements governing the New Credit Facilities) customary to such borrowings.

The Indenture governing the Notes contains covenants that, among other things, limit the ability of the Company and its subsidiaries under certain circumstances to create liens and impose conditions on the Company’s ability to engage in mergers, consolidations and sales of all or substantially all of its or its subsidiaries’ assets. The Indenture also contains certain “Events of Default” (as defined in the Indenture) customary for indentures of this type. The Indenture does not contain any specific financial covenants.

At October 31, 2014, the Company was in compliance with all debt covenants.

8.
HEDGING INSTRUMENTS

Background Information

The Company uses derivative financial instruments, including interest rate swaps, forward contracts and put option contracts to mitigate a portion of 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 2012, the Company entered into forward-starting interest rate swaps to hedge the impact of interest rate volatility on future interest payments associated with the anticipated incurrence of $250,000,000 of additional debt which was incurred in July 2012. The Company accounted for the forward-starting interest rate swaps as cash flow hedges.


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In the three months ended October 31, 2014, the Company entered into forward-starting interest rate swaps to hedge the impact of interest rate volatility on future interest payments associated with the anticipated incurrence of additional debt which was incurred in September 2014 (refer to "Note 7. Debt"). The Company accounts for the forward-starting interest rate swaps as cash flow hedges. The Company settled the interest rate swap in the three months ended October 31, 2014 and recorded an unrealized loss within accumulated other comprehensive loss, which is being amortized over the terms of the respective 2024 Notes or 2044 Notes to which the interest rate swaps related.

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 exposures, 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 foreign exchange forward and 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, 2014, the notional amount of foreign exchange forward contracts accounted for as cash flow hedges was $162,497,000 and the notional amount of foreign exchange forward contracts accounted for as undesignated hedges was $152,889,000. The term of all outstanding foreign exchange forward contracts as of October 31, 2014 ranged from less than one month to 12 months.

Precious Metal Forward Contracts – The Company periodically hedges a portion of its forecasted purchases of precious metals for use in its internal manufacturing operations through the use of forward contracts in order to minimize the effect of volatility in precious metal prices. The Company accounts for its precious metal forward contracts as cash flow hedges. The Company assesses hedge effectiveness based on the total changes in the precious metal forward contracts' cash flows. As of October 31, 2014, there were precious metal forward contracts outstanding for approximately 13,200 ounces of platinum and 443,700 ounces of silver. The maximum term of these outstanding precious metal forward contracts is 12 months.

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,
 
 
2014
 
2013
(in thousands)
 
Pre-Tax Gain (Loss) Recognized
in OCI 
(Effective
Portion)
 
Pre-Tax Gain (Loss)
Reclassified 
from
Accumulated 
OCI into 
Earnings
(Effective 
Portion)
 
Pre-Tax Gain
(Loss) 
Recognized
in OCI 
(Effective
Portion)
 
Pre-Tax Gain (Loss)
Reclassified 
from
Accumulated 
OCI into 
Earnings
(Effective 
Portion)
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts a
 
$
9,939

 
$
3,025

 
$
1,084

 
$
5,642

Put option contracts a
 

 

 
(6
)
 
669

Precious metal forward contracts a
 
(5,093
)
 
(706
)
 
1,743

 
(1,105
)
Forward-starting interest rate swaps b
 
(4,177
)
 
(379
)
 

 
(381
)
 
 
$
669

 
$
1,940

 
$
2,821

 
$
4,825


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Nine Months Ended October 31,
 
 
2014
 
2013
(in thousands)
 
Pre-Tax Gain (Loss)
Recognized
in OCI 
(Effective
Portion)
 
Pre-Tax Gain (Loss)
Reclassified 
from
Accumulated 
OCI into 
Earnings
(Effective 
Portion)
 
Pre-Tax Gain
(Loss) 
Recognized
in OCI 
(Effective
Portion)
 
Pre-Tax Gain (Loss)
Reclassified 
from
Accumulated 
OCI into 
Earnings
(Effective 
Portion)
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts a
 
$
10,386

 
$
15,872

 
$
10,451

 
$
10,710

Put option contracts a
 

 

 
1,264

 
1,599

Precious metal forward contracts a
 
(3,285
)
 
(3,446
)
 
(5,656
)
 
(3,038
)
Forward-starting interest rate swaps b
 
(4,177
)
 
(1,121
)
 

 
(1,157
)
 
 
$
2,924

 
$
11,305

 
$
6,059

 
$
8,114

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 periods ended October 31, 2014 and 2013. There was no material ineffectiveness related to the Company's hedging instruments for the periods ended October 31, 2014 and 2013. The Company expects approximately $5,600,000 of net pre-tax derivative gains included in accumulated other comprehensive income at October 31, 2014 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, see "Note 9. Fair Value of Financial Instruments."

Concentration of Credit Risk

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

9.
FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. U.S. GAAP prescribes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities. 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.

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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 foreign exchange forward contracts, as well as its put option contracts, are primarily valued using the appropriate foreign exchange spot rates. The Company's precious metal forward contracts are primarily valued using the relevant precious metal spot rate. For further information on the Company's hedging instruments and program, see "Note 8. Hedging Instruments."

Financial assets and liabilities carried at fair value at October 31, 2014 are classified in the table below in one of the three categories described above: 
 
 
 
 
Estimated Fair Value
 
 
(in thousands)
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Marketable securities a
 
$
54,667

 
$
54,667

 
$

 
$

 
$
54,667

Time deposits b
 
34,112

 
34,112

 

 

 
34,112

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts c
 
9,261

 

 
9,261

 

 
9,261

Total financial assets
 
$
98,040

 
$
88,779

 
$
9,261

 
$

 
$
98,040

 
 
 
 
Estimated Fair Value
 
 
(in thousands)
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Precious metal forward contracts d
 
$
3,679

 
$

 
$
3,679

 
$

 
$
3,679

Total financial liabilities
 
$
3,679

 
$

 
$
3,679

 
$

 
$
3,679


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:
 
 
 
 
Estimated Fair Value
 
 
(in thousands)
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Marketable securities a
 
$
52,201

 
$
52,201

 
$

 
$

 
$
52,201

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

 

 
952

 

 
952

Foreign exchange forward contracts c
 
8,590

 

 
8,590

 

 
8,590

Total financial assets
 
$
61,743

 
$
52,201

 
$
9,542

 
$

 
$
61,743


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

 
$

 
$
824

 
$

 
$
824

Foreign exchange forward contracts d
 
490

 

 
490

 

 
490

Total financial liabilities
 
$
1,314

 
$

 
$
1,314

 
$

 
$
1,314

aIncluded within Other assets, net.
bIncluded within Short-term investments.
cIncluded within Prepaid expenses and other current assets.
dIncluded within Accounts payable and accrued liabilities.

The fair value of derivatives not designated as hedging instruments was not significant in the periods ended October 31, 2014 and 2013. 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 $1,086,383,000 and $1,007,740,000 and the corresponding fair value was approximately $1,100,000,000 at both October 31, 2014 and 2013.

10.
COMMITMENTS AND CONTINGENCIES

Arbitration Award. On December 21, 2013, an award (the "Arbitration Award") was issued in favor of The Swatch Group Ltd. ("Swatch") and its wholly-owned subsidiary Tiffany Watch Co. ("Watch Company"; Swatch and Watch Company, together, the "Swatch Parties") in an arbitration proceeding (the "Arbitration") between the Registrant and its wholly-owned subsidiaries, Tiffany and Company and Tiffany (NJ) Inc. (the Registrant and such subsidiaries, together, the "Tiffany Parties") and the Swatch Parties.

The Arbitration was initiated in June 2011 by the Swatch Parties, who sought damages for alleged breach of agreements entered into by and among the Swatch Parties and the Tiffany Parties in December 2007 (the "Agreements"), and the hearing was held in October 2012 before a three-member arbitral panel convened in the Netherlands pursuant to the Arbitration Rules of the Netherlands Arbitration Institute. The Agreements pertained to the development and commercialization of a watch business and, among other things, contained various licensing and governance provisions and approval requirements relating to business, marketing and branding plans and provisions allocating profits relating to sales of the watch business between the Swatch Parties and the Tiffany Parties.

In general terms, the Swatch Parties alleged that the Tiffany Parties breached the Agreements by obstructing and delaying development of Watch Company’s business and otherwise failing to proceed in good faith. The Swatch Parties sought damages based on alternate theories ranging from CHF 73,000,000 (or approximately $76,000,000 at October 31, 2014) (based on its alleged wasted investment) to CHF 3,800,000,000 (or approximately $4,000,000,000 at October 31, 2014) (calculated based on alleged future lost profits of the Swatch Parties and their affiliates over the entire term of the Agreements).

In the Arbitration, the Tiffany Parties defended against the Swatch Parties’ claims vigorously, disputing both the merits of the claims and the calculation of the alleged damages. The Tiffany Parties also asserted counterclaims for damages attributable to breach by the Swatch Parties, stemming from the Swatch Parties’ September 12, 2011 public issuance of a Notice of Termination purporting to terminate the Agreements due to alleged material breach by the Tiffany Parties, and for termination due to such breach. In general terms, the Tiffany Parties alleged that the Swatch Parties did not have grounds for termination, failed to meet the high standard for proving material breach set forth in the Agreements and failed to provide appropriate management, distribution, marketing and other resources for TIFFANY &

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CO. brand watches and to honor their contractual obligations to the Tiffany Parties regarding brand management. The Tiffany Parties’ counterclaims sought damages based on alternate theories ranging from CHF 120,000,000 (or approximately $126,000,000 at October 31, 2014) (based on its wasted investment) to approximately CHF 540,000,000 (or approximately $565,000,000 at October 31, 2014) (calculated based on alleged future lost profits of the Tiffany Parties).

Under the terms of the Arbitration Award, and at the request of the Swatch Parties and the Tiffany Parties, the Agreements were deemed terminated as of March 1, 2013. Pursuant to the Arbitration Award, the Tiffany Parties were ordered to pay the Swatch Parties damages of CHF 402,737,000 (the "Arbitration Damages"), as well as interest from June 30, 2012 to the date of payment, two-thirds of the cost of the Arbitration and two-thirds of the Swatch Parties' legal fees, expenses and costs. These amounts were paid in full in January 2014, and, in the fourth quarter of 2013, the Company recorded a charge of $480,211,000 which was classified as Arbitration award expense in the consolidated statement of earnings for the fiscal year ended January 31, 2014.

On March 31, 2014, the Tiffany Parties took action in the courts of the Netherlands to annul the Arbitration Award. Generally, arbitration awards are final; however, Dutch law does provide for limited grounds on which arbitral awards may be set aside. The Tiffany Parties have petitioned to annul the Arbitration Award on these statutory grounds. These grounds include, for example, that the arbitral tribunal violated its mandate by changing the express terms of the Agreements.

Management expects that the annulment action will not be ultimately resolved for at least 18 months; however, if the Arbitration Award is finally annulled, management anticipates that the claims and counterclaims that formed the basis of the Arbitration, and potentially additional claims and counterclaims, will be litigated in court proceedings between and among the Swatch Parties and the Tiffany Parties. The identity and location of the courts that would hear such actions cannot be determined at this time.

In any such litigation, issues of liability and damages will be pled and determined without regard to the findings of the arbitral panel. As such, it is possible that the court could find that the Swatch Parties were in material breach of their obligations under the Agreements, that the Tiffany Parties were in material breach of their obligations under the Agreements or that neither the Swatch Parties nor the Tiffany Parties were in material breach. If the Swatch Parties’ claims of liability were accepted by the court, the damages award cannot be reasonably estimated at this time, but could exceed the Arbitration Damages and could have a material adverse effect on the Company’s consolidated financial statements or liquidity.

Management has not established any accrual in the Company's condensed consolidated financial statements as of October 31, 2014 related to the annulment process or any potential subsequent litigation because it does not believe that an annulment of the Arbitration Award and the subsequent award of damages exceeding the Arbitration Damages is probable.

The Company is proceeding with plans to design, produce, market and distribute TIFFANY & CO. brand watches through a Swiss subsidiary. The effective development and growth of this watch business requires additional resources and involves risks and uncertainties.

Other Litigation Matters. The Company is from time to time involved in routine litigation incidental to the conduct of its business, including proceedings to protect its trademark rights, litigation with parties claiming infringement of patents and other intellectual property rights by the Company, litigation instituted by persons alleged to have been injured upon premises under the Company's control and litigation with present and former employees and customers. Although litigation with present and former employees is routine and incidental to the conduct of the Company's business, as well as for any business employing significant numbers of employees, such litigation can result in large monetary awards when a civil jury is allowed to determine compensatory and/or punitive damages for actions claiming discrimination on the basis of age, gender, race, religion, disability or other legally-protected characteristic or for termination of employment that is wrongful or in violation of implied contracts. However, the Company believes that litigation currently pending to which it is a party or to which its

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properties are subject will be resolved without any material adverse effect on the Company's financial position, earnings or cash flows.

Environmental Matter. In 2005, the US Environmental Protection Agency (“EPA”) designated a 17-mile stretch of the Passaic River (the “River”) part of the Diamond Alkali “Superfund” site. This designation resulted from the detection of hazardous substances at the site, which was previously home to the Diamond Shamrock Corporation, a manufacturer of pesticides and herbicides. Under the Superfund law, the EPA will negotiate with potentially responsible parties to agree on remediation approaches.

The Company, which operated a silverware manufacturing facility on a tributary of the River from approximately 1897 to 1985, is one of more than 300 parties (the "Potentially Responsible Parties") designated by the EPA as potentially responsible parties with respect to the River. Of these parties, the Company, along with approximately 70 other Potentially Responsible Parties (collectively, the “Cooperating Parties Group” or “CPG”) voluntarily entered into an Administrative Settlement Agreement and Order on Consent (“AOC”) with the EPA in May 2007 to perform a Remedial Investigation/Feasibility Study (the “RI/FS”) of the lower 17 miles of the River. In June 2012, the CPG voluntarily entered into a second AOC related to focused remediation actions at Mile 10.9 of the River. The actions under the Mile 10.9 AOC are substantially complete, and the RI/FS under the 2007 AOC is expected to be substantially complete no earlier than March 2015. The Company has accrued for its financial obligations under both AOCs, which have not been material to its financial position or results of operations in previous financial periods or on a cumulative basis.

Separately, the EPA has issued and is reviewing comments on its proposed plan for remediating the lower eight miles of the River, which is supported by a Focused Feasibility Study (the “FFS”). The FFS provides multiple approaches to remediation, which range in cost from $360,000,000 to $3,250,000,000, with the cost of the EPA-recommended approach ranging from $950,000,000 to $1,731,000,000. It cannot be determined how any costs of remediation identified as a result of the FFS would be allocated among any of the potentially responsible parties.

The Company expects that the RI/FS, once complete, will be reviewed and subject to comment by the EPA and other governmental agencies and stakeholders, with the EPA ultimately issuing a Record of Decision identifying a proposed remediation approach. With respect to the FFS, the Company expects that the EPA will, after review of the comments, identify and negotiate with any or all of the potentially responsible parties regarding any remediation action that may be necessary, and ultimately issue a Record of Decision with a proposed remediation approach.

Until one or more Records of Decision are issued, neither the ultimate remedial approaches and their costs, nor the Company’s participation, if any, relative to the other potentially responsible parties in these approaches and costs, can be determined. As such, the Company’s obligations, if any, beyond those already recorded for the 2007 AOC and the Mile 10.9 AOC cannot be estimated at this time, and the Company has therefore not recorded any additional liability related to this matter. In light of the number of companies in the CPG participating in the 2007 AOC and the Mile 10.9 AOC and the Company’s relative participation in the costs related thereto, the Company does not expect that its ultimate liability, if any, related to these matters will be material to its financial position. However, it is possible that, when the uncertainties discussed above are resolved, such liability could be material to its results of operations or cash flows in the period in which such uncertainties are resolved.


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Leases. In April 2010, Tiffany committed to a plan to consolidate and relocate its New York headquarters staff to a single leased location in Manhattan. 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 remaining accrued exit charges:
(in thousands)
 

Balance at January 31, 2014
$
10,465

Cash payments, net of estimated sublease income
(1,518
)
Interest accretion
69

Balance at April 30, 2014
9,016

Cash payments, net of estimated sublease income
(1,469
)
Interest accretion
59

Balance at July 31, 2014
7,606

Cash payments, net of estimated sublease income
(1,370
)
Interest accretion
49

Balance at October 31, 2014
$
6,285


11.
STOCKHOLDERS’ EQUITY

Accumulated Other Comprehensive Loss
(in thousands)
 
October 31,
2014
 
January 31,
2014
 
October 31,
2013
Accumulated other comprehensive earnings (loss),
   net of tax:
 
 
 
 
 
 
Foreign currency translation adjustments
 
$
(9,170
)
 
$
16,846

 
$
32,835

Unrealized gain on marketable securities
 
3,832

 
2,677

 
3,726

Deferred hedging loss
 
(11,875
)
 
(6,607
)
 
(4,806
)
Net unrealized loss on benefit plans
 
(65,890
)
 
(71,464
)
 
(127,932
)
 
 
$
(83,103
)
 
$
(58,548
)
 
$
(96,177
)


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Additions to and reclassifications out of accumulated other comprehensive loss are as follows:
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Foreign currency translation
adjustments
 
$
(41,815
)
 
$
19,706

 
$
(29,583
)
 
$
(13,646
)
Income tax benefit (expense)
 
3,603

 
(151
)
 
3,567

 
2,417

Foreign currency translation adjustments, net of tax
 
(38,212
)
 
19,555

 
(26,016
)
 
(11,229
)
Unrealized gain on
marketable securities
 
1,055

 
2,595

 
1,881

 
2,785

Income tax expense
 
(154
)
 
(613
)
 
(726
)
 
(908
)
Unrealized gain on marketable
securities, net of tax
 
901

 
1,982

 
1,155

 
1,877

Unrealized gain on hedging
instruments
 
669

 
2,821

 
2,924

 
6,059

Reclassification adjustment for gain included in net earnings a
 
(1,940
)
 
(4,825
)
 
(11,305
)
 
(8,114
)
Income tax benefit
 
779

 
595

 
3,113

 
456

Unrealized loss on hedging
instruments, net of tax
 
(492
)
 
(1,409
)
 
(5,268
)
 
(1,599
)
Prior service cost
 

 

 
(483
)
 

Amortization of net loss included
in net earnings b
 
3,286

 
4,806

 
9,860

 
14,417

Amortization of prior service
(credit) cost included in net earnings b
 
(99
)
 
78

 
(299
)
 
234

Income tax expense
 
(1,214
)
 
(1,871
)
 
(3,504
)
 
(6,002
)
Net unrealized gain on benefit plans,
net of tax
 
1,973

 
3,013

 
5,574

 
8,649

Total other comprehensive (loss)
earnings, net of tax
 
$
(35,830
)
 
$
23,141

 
$
(24,555
)
 
$
(2,302
)
a 
These gains are reclassified into Interest and other expenses, net and Cost of sales (see "Note 8. Hedging Instruments" for additional details).
b 
These accumulated other comprehensive loss components are included in the computation of net periodic pension costs (see "Note 12. Employee Benefit Plans" for additional details).

Cash Dividends. The Company's Board of Directors declared quarterly dividends of $0.38 and $0.34 per share of Common Stock in the three months ended October 31, 2014 and 2013 and $1.10 and $1.00 per share of Common Stock in the nine months ended October 31, 2014 and 2013.

Share Repurchase Program. In March 2014, the Company's Board of Directors approved a share repurchase program which authorizes the Company to repurchase up to $300,000,000 of its Common Stock through open market transactions. Purchases are discretionary and will be made from time to time based on market conditions and the Company's liquidity needs. The program will expire on March 31, 2017.


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Table of Contents

The Company's share repurchase activity was as follows:
(in thousands, except per share amounts)
Three Months Ended   
October 31, 2014
 
Nine Months Ended   
October 31, 2014
Cost of repurchases
$
5,829

 
$
22,231

Shares repurchased and retired
63

 
247

Average cost per share
$
92.02

 
$
89.91


At October 31, 2014, approximately $277,769,000 remained available for share repurchases under this authorization.

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)
 
2014
 
2013
 
2014
 
2013
Net Periodic Benefit Cost:
 
 
 
 
 
 
 
 
Service cost
 
$
4,226

 
$
4,783

 
$
581

 
$
698

Interest cost
 
7,064

 
6,752

 
662

 
691

Expected return on plan assets
 
(5,909
)
 
(5,560
)
 

 

Amortization of prior service cost (credit)
 
69

 
243

 
(168
)
 
(165
)
Amortization of net loss
 
3,281

 
4,753

 
5

 
53

Net expense
 
$
8,731

 
$
10,971

 
$
1,080

 
$
1,277


 
 
Nine Months Ended October 31,
 
 
Pension Benefits
 
Other
Postretirement Benefits
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net Periodic Benefit Cost:
 
 
 
 
 
 
 
 
Service cost
 
$
12,707

 
$
14,360

 
$
1,745

 
$
2,094

Interest cost
 
21,195

 
20,256

 
1,985

 
2,072

Expected return on plan assets
 
(17,727
)
 
(16,680
)
 

 

Amortization of prior service cost (credit)
 
206

 
729

 
(505
)
 
(495
)
Amortization of net loss
 
9,845

 
14,258

 
15

 
159

Net expense
 
$
26,226

 
$
32,923

 
$
3,240

 
$
3,830


Employer Contributions. The Company disclosed in its financial statements for the year ended January 31, 2014, that it expected to contribute $30,000,000 in 2014 to its noncontributory defined benefit pension plan qualified in accordance with the IRS Code (“Qualified Plan”). However, under IRS guidelines, the Company is not required to make a minimum cash contribution in 2014 to the Qualified Plan. As such, the Company is currently evaluating whether to make a discretionary contribution in 2014.

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Table of Contents

13.
SEGMENT INFORMATION

The Company's reportable segments are as follows:

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

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

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

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

Other consists of all non-reportable segments, including (i) retail sales in Company-operated TIFFANY & CO. stores and wholesale distribution in the Emerging Markets region; (ii) wholesale sales of diamonds; and (iii) licensing agreements.

Certain information relating to the Company's segments is set forth below:
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net sales:
 
 
 
 
 
 
 
 
Americas
 
$
458,579

 
$
416,748

 
$
1,380,862

 
$
1,268,301

Asia-Pacific
 
243,190

 
238,412

 
740,939

 
670,164

Japan
 
113,322

 
128,300

 
406,301

 
409,222

Europe
 
114,360

 
104,488

 
335,678

 
308,721

Total reportable segments
 
929,451

 
887,948

 
2,863,780

 
2,656,408

Other
 
30,138

 
23,530

 
100,871

 
76,438

 
 
$
959,589

 
$
911,478

 
$
2,964,651

 
$
2,732,846

Earnings (losses) from operations*:
 
 
 
 
 
 
 
 
Americas
 
$
82,738

 
$
61,662

 
$
274,027

 
$
208,355

Asia-Pacific
 
65,143

 
59,975

 
202,476

 
165,316

Japan
 
34,293

 
46,528

 
144,962

 
148,182

Europe
 
19,367

 
17,672

 
61,453

 
54,288

Total reportable segments
 
201,541

 
185,837

 
682,918

 
576,141

Other
 
1,695

 
(1,722
)
 
6,358

 
(2,066
)
 
 
$
203,236

 
$
184,115

 
$
689,276

 
$
574,075


*
Represents earnings (losses) from operations before (i) unallocated corporate expenses, (ii) interest and other expenses, net, (iii) loss on extinguishment of debt, and (iv) other operating expense.


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Table of Contents

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)
 
2014
 
2013
 
2014
 
2013
Earnings from operations for
segments
 
$
203,236

 
$
184,115

 
$
689,276

 
$
574,075

Unallocated corporate expenses
 
(34,745
)
 
(30,497
)
 
(102,471
)
 
(93,034
)
Interest and other expenses, net
 
(15,375
)
 
(13,922
)
 
(47,802
)
 
(41,328
)
Loss on extinguishment of debt
 
(93,779
)
 

 
(93,779
)
 

Other operating expense
 

 

 

 
(9,379
)
Earnings from operations before
income taxes
 
$
59,337

 
$
139,696

 
$
445,224

 
$
430,334


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.

Loss on extinguishment of debt in the three and nine months ended October 31, 2014 was related to the redemption of $400,000,000 in aggregate principal amount of the Private Placement Notes prior to their scheduled maturities (see "Note 7. Debt" for additional details).

Other operating expense in the nine months ended October 31, 2013 was related to specific cost-reduction initiatives. These cost-reduction initiatives included severance related to staffing reductions and subleasing of certain office space for which only a portion of the Company's future rent obligations will be recovered.

14.
SUBSEQUENT EVENT
On November 20, 2014, the Company’s Board of Directors approved a quarterly dividend of $0.38 per share of Common Stock. This dividend will be paid on January 12, 2015 to shareholders of record on December 22, 2014.

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Table of Contents

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

Asia-Pacific includes sales in 72 Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations;

Japan includes sales in 56 Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products through business-to-business, Internet and wholesale operations;

Europe includes sales in 38 Company-operated 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, including (i) retail sales in 6 Company-operated TIFFANY & CO. stores and wholesale distribution in the Emerging Markets region; (ii) wholesale sales of diamonds; and (iii) licensing agreements.

HIGHLIGHTS

Worldwide net sales increased 5% to $959,589,000 in the three months ("third quarter") ended October 31, 2014 led by growth in the Americas region, with the largest growth in the fashion jewelry category. Worldwide net sales increased 8% in the nine months ("year-to-date") ended October 31, 2014 to $2,964,651,000 due to growth in most regions and across all jewelry categories.

On a constant-exchange-rate basis (see "Non-GAAP Measures" below), worldwide net sales increased 7% in the third quarter and 9% in the year-to-date and comparable store sales increased 4% in the third quarter and 6% in the year-to-date.

The Company opened six TIFFANY & CO. stores in the year-to-date (opening two each in the Americas and in Japan and one each in Europe and the Emerging Markets region) while closing one in the Americas.

Earnings from operations as a percentage of net sales ("operating margin") improved 0.7 percentage point in the third quarter due to an increase in gross margin, partly offset by higher selling, general and administrative expenses due to a substantial increase in marketing spending and increases in labor and other store-related costs. Operating margin improved 2.5 percentage points in the year-to-date primarily due to an increase in gross margin.

Net earnings decreased 60% to $38,268,000, or $0.29 per diluted share in the third quarter. Net earnings increased 1% to $287,997,000, or $2.22 per diluted share in the year-to-date. Excluding the loss on extinguishment of debt recorded in the third quarter and year-to-date of 2014 and certain expenses recorded in the year-to-date of 2013 (see "Non-GAAP Measures" below), net earnings increased 5% to $99,224,000, or $0.76 per diluted share, in the third quarter and 20% to $348,953,000, or $2.69 per diluted share, in the year-to-date.

In May 2014, the Board of Directors approved a 12% increase in the quarterly dividend rate to $0.38 per share of the Company's Common Stock, or an annual dividend rate of $1.52 per share.

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Table of Contents

The Company issued $250,000,000 of 3.8% Senior Notes due 2024 and $300,000,000 of 4.9% Senior Notes due 2044. The Company used the net proceeds from such issuances primarily to redeem $400,000,000 in aggregate principal amount of existing senior notes (the "Private Placement Notes") carrying an average interest rate of 9.8%, and with maturities ranging from 2015 to 2019, prior to their scheduled maturities, as well as for the payment of debt extinguishment costs. As a result of such issuances and redemption, the Company's average interest rate on its outstanding long-term debt was reduced and long-term debt maturities were extended. Additionally, the Company entered into new credit facilities with greater borrowing capacities replacing certain previous credit facilities.

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.

Net Sales. The Company's reported net sales reflect either a translation-related benefit from strengthening foreign currencies or a detriment from a strengthening U.S. dollar. Internally, management monitors and measures its sales performance on a non-GAAP basis that eliminates the positive or negative effects that result from translating sales made outside the U.S. into U.S. dollars ("constant-exchange-rate basis"). 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 the sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous year:
 
Third Quarter 2014 vs. 2013
 
Year-to-date 2014 vs. 2013
 
GAAP 
Reported
 
Translation Effect
 
Constant-Exchange-
Rate Basis
 
GAAP 
Reported
 
Translation Effect
 
Constant-Exchange-
Rate Basis
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
5
 %
 
(2
)%
 
7
 %
 
8
 %
 
(1
)%
 
9
 %
Americas
10
 %
 
(1
)%
 
11
 %
 
9
 %
 
(1
)%
 
10
 %
Asia-Pacific
2
 %
 
 %
 
2
 %
 
11
 %
 
 %
 
11
 %
Japan
(12
)%
 
(7
)%
 
(5
)%
 
(1
)%
 
(6
)%
 
5
 %
Europe
9
 %
 
(1
)%
 
10
 %
 
9
 %
 
4
 %
 
5
 %
Other
28
 %
 
(1
)%
 
29
 %
 
32
 %
 
 %
 
32
 %
Comparable Store Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
2
 %
 
(2
)%
 
4
 %
 
5
 %
 
(1
)%
 
6
 %
Americas
10
 %
 
(1
)%
 
11
 %
 
8
 %
 
(1
)%
 
9
 %
Asia-Pacific
(3
)%
 
 %
 
(3
)%
 
4
 %
 
(1
)%
 
5
 %
Japan
(13
)%
 
(7
)%
 
(6
)%
 
(2
)%
 
(6
)%
 
4
 %
Europe
 %
 
(2
)%
 
2
 %
 
1
 %
 
4
 %
 
(3
)%
Other
35
 %
 
 %
 
35
 %
 
17
 %
 
 %
 
17
 %



26

Table of Contents

Statement of Earnings. Internally, management monitors and measures its earnings performance excluding certain items listed below. 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 tables reconcile certain GAAP amounts to non-GAAP amounts:

(in thousands, except per share amounts)

GAAP
Reported

Debt extinguishment a
(decrease)/increase

Non-GAAP
Three months ended October 31, 2014






Loss on extinguishment of debt

$
93,779


$
(93,779
)

$

Provision for income taxes

21,069


32,823


53,892

Net earnings

38,268


60,956


99,224

Diluted earnings per share

$
0.29


$
0.47


$
0.76








Nine months ended October 31, 2014






Loss on extinguishment of debt

$
93,779


$
(93,779
)

$

Provision for income taxes

157,227


32,823


190,050

Net earnings

287,997


60,956


348,953

Diluted earnings per share

$
2.22


$
0.47


$
2.69

a 
Expenses associated with the redemption of $400,000,000 in aggregate principal amount of the Private Placement Notes prior to their scheduled maturities (see "Loss on Extinguishment of Debt" below).

(in thousands, except per share amounts)

GAAP
Reported

Specific cost-reduction initiatives b
(decrease)/increase

Non-GAAP
Nine months ended October 31, 2013






Selling, general and administrative expenses

$
1,083,172


$
(9,379
)

$
1,073,793

Earnings from operations

471,662


9,379


481,041

Earnings from operations as a % of net sales

17.3
%




17.6
%
Net earnings

284,968


5,785


290,753

Diluted earnings per share
 
$
2.21

 
$
0.05

 
$
2.26

b 
Expenses associated with 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 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.


27

Table of Contents

Net Sales

Worldwide net sales increased $48,111,000, or 5%, to $959,589,000 in the third quarter of 2014 led by growth in the Americas region. By product category, the fashion jewelry category increased $48,140,000, or 14% (due to sales growth in gold jewelry).

Worldwide net sales increased $231,805,000, or 8%, to $2,964,651,000 in the year-to-date of 2014 due to growth in most regions. By product category, the fashion jewelry category increased $110,292,000, or 11% (due to sales growth in gold jewelry); the engagement jewelry & wedding bands category increased $71,332,000, or 8% (reflecting growth in solitaire diamond rings and wedding bands); and the statement, fine & solitaire jewelry category increased $39,580,000, or 6% (reflecting growth throughout most of the category).

Net sales by segment were as follows: 
 
 
Third Quarter
 
Year-to-date
(in thousands)
 
2014
 
2013
 
Increase/(Decrease)
 
2014
 
2013
 
Increase
Americas
 
$
458,579

 
$
416,748

 
10
 %
 
$
1,380,862

 
$
1,268,301

 
9
 %
Asia-Pacific
 
243,190