TIF-2014.7.31 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 July 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, 129,294,784 shares outstanding at the close of business on July 31, 2014.

Table of Contents

TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 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)
 
July 31, 2014
 
January 31, 2014
 
July 31, 2013
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
398,242

 
$
345,778

 
$
489,664

Short-term investments
192

 
21,257

 
118

Accounts receivable, less allowances of $9,537, $10,337 and $8,918
190,318

 
188,814

 
161,746

Inventories, net
2,531,451

 
2,326,580

 
2,328,510

Deferred income taxes
104,909

 
101,012

 
77,948

Prepaid expenses and other current assets
225,863

 
244,947

 
181,931

Total current assets
3,450,975

 
3,228,388

 
3,239,917

Property, plant and equipment, net
857,317

 
855,095

 
814,593

Deferred income taxes
246,156

 
278,390

 
309,823

Other assets, net
381,377

 
390,478

 
367,385

 
$
4,935,825

 
$
4,752,351

 
$
4,731,718

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term borrowings
$
275,433

 
$
252,365

 
$
207,412

Accounts payable and accrued liabilities
300,781

 
342,090

 
276,810

Income taxes payable
28,374

 
31,976

 
36,731

Merchandise and other customer credits
65,510

 
70,309

 
67,921

Total current liabilities
670,098

 
696,740

 
588,874

Long-term debt
750,070

 
751,154

 
756,807

Pension/postretirement benefit obligations
279,502

 
268,112

 
342,361

Deferred gains on sale-leasebacks
77,858

 
81,865

 
86,688

Other long-term liabilities
213,869

 
220,512

 
221,692

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 129,295, 128,312 and 127,945
1,293

 
1,283

 
1,279

Additional paid-in capital
1,152,139

 
1,095,304

 
1,061,849

Retained earnings
1,824,220

 
1,682,398

 
1,778,490

Accumulated other comprehensive loss, net of tax
(47,273
)
 
(58,548
)
 
(119,318
)
Total Tiffany & Co. stockholders' equity
2,930,379

 
2,720,437

 
2,722,300

Non-controlling interests
14,049

 
13,531

 
12,996

Total stockholders' equity
2,944,428

 
2,733,968

 
2,735,296

 
$
4,935,825

 
$
4,752,351

 
$
4,731,718

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 July 31,
 
Six Months Ended July 31,
 
2014
 
2013
 
2014
 
2013
Net sales
$
992,930

 
$
925,884

 
$
2,005,062

 
$
1,821,368

Cost of sales
397,767

 
393,755

 
820,373

 
786,015

Gross profit
595,163

 
532,129

 
1,184,689

 
1,035,353

Selling, general and administrative expenses
386,642

 
355,243

 
766,375

 
717,309

Earnings from operations
208,521

 
176,886

 
418,314

 
318,044

Interest and other expenses, net
16,151

 
14,694

 
32,427

 
27,406

Earnings from operations before income taxes
192,370

 
162,192

 
385,887

 
290,638

Provision for income taxes
68,250

 
55,411

 
136,158

 
100,280

Net earnings
$
124,120

 
$
106,781

 
$
249,729

 
$
190,358

Net earnings per share:
 
 
 
 
 
 
 
Basic
$
0.96

 
$
0.84

 
$
1.93

 
$
1.49

Diluted
$
0.96

 
$
0.83

 
$
1.92

 
$
1.48

Weighted-average number of common shares:
 
 
 
 
 
 
 
Basic
129,252

 
127,826

 
129,093

 
127,572

Diluted
129,908

 
128,771

 
129,851

 
128,606

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 July 31,
 
Six Months Ended July 31,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
124,120

 
$
106,781

 
$
249,729

 
$
190,358

Other comprehensive (loss) earnings, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(4,955
)
 
(15,346
)
 
12,196

 
(30,784
)
Unrealized (loss) gain on marketable securities
(513
)
 
(920
)
 
254

 
(105
)
Unrealized loss on hedging instruments
(1,297
)
 
(2,977
)
 
(4,776
)
 
(190
)
Net unrealized gain on benefit plans
1,559

 
2,712

 
3,601

 
5,636

Total other comprehensive (loss) earnings, net of tax
(5,206
)
 
(16,531
)
 
11,275

 
(25,443
)
Comprehensive earnings
$
118,914

 
$
90,250

 
$
261,004

 
$
164,915

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, 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")
29,307

 
—

 
—

 
1,122

 
12

 
29,295

 
—

Tax effect of exercise of stock options and vesting of RSUs
12,504

 
—

 
—

 
—

 
—

 
12,504

 
—

Share-based compensation expense
13,534

 
—

 
—

 
—

 
—

 
13,534

 
—

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

 
—

 
—

 
45

 
—

 
3,925

 
—

Purchase and retirement of Common Stock
(16,402
)
 
(15,058
)
 
—

 
(184
)
 
(2
)
 
(1,342
)
 
—

Cash dividends on Common Stock
(92,849
)
 
(92,849
)
 
—

 
—

 
—

 
—

 
—

Other comprehensive earnings, net of tax
11,275

 
—

 
11,275

 
—

 
—

 
—

 
—

Net earnings
249,729

 
249,729

 
—

 
—

 
—

 
—

 
—

Redemption of non-controlling interest
—

 
—

 
—

 
—

 
—

 
(1,081
)
 
1,081

Non-controlling interests
(563
)
 
—

 
—

 
—

 
—

 
—

 
(563
)
Balances, July 31, 2014
$
2,944,428

 
$
1,824,220

 
$
(47,273
)
 
129,295

 
$
1,293

 
$
1,152,139

 
$
14,049

See notes to condensed consolidated financial statements.


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TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Six Months Ended July 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net earnings
   $
249,729

 
   $
190,358

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
97,214

 
86,323

Amortization of gain on sale-leasebacks
(4,744
)
 
(4,733
)
Excess tax benefits from share-based payment arrangements
(12,504
)
 
(10,832
)
Provision for inventories
14,741

 
17,421

Deferred income taxes
19,569

 
(8,343
)
Provision for pension/postretirement benefits
19,655

 
24,505

Share-based compensation expense
13,398

 
15,309

Changes in assets and liabilities:
 
 
 
Accounts receivable
(200
)
 
6,673

Inventories
(213,332
)
 
(143,437
)
Prepaid expenses and other current assets
(23,257
)
 
(26,505
)
Accounts payable and accrued liabilities
(19,504
)
 
(22,857
)
Income taxes payable
28,263

 
20,196

Merchandise and other customer credits
(5,125
)
 
2,018

Other, net
(11,107
)
 
(26,016
)
Net cash provided by operating activities
152,796

 
120,080

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of marketable securities and short-term investments
(698
)
 
(616
)
Proceeds from sales of marketable securities and short-term investments
21,729

 
—

Capital expenditures
(91,126
)
 
(86,686
)
Notes receivable funded
—

 
(3,050
)
Proceeds from notes receivable
7,277

 
484

Net cash used in investing activities
(62,818
)
 
(89,868
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from credit facility borrowings, net
13,966

 
3,244

Other proceeds from credit facility borrowings
12,067

 
82,643

Other repayments of credit facility borrowings
(964
)
 
(68,100
)
Repurchase of Common Stock
(16,402
)
 
—

Proceeds from exercised stock options
35,305

 
15,505

Excess tax benefits from share-based payment arrangements
12,504

 
10,832

Cash dividends on Common Stock
(92,849
)
 
(83,209
)
Distribution to non-controlling interest
(1,910
)
 
—

Financing fees
(97
)
 
(893
)
Net cash used in financing activities
(38,380
)
 
(39,978
)
Effect of exchange rate changes on cash and cash equivalents
866

 
(5,408
)
Net increase/(decrease) in cash and cash equivalents
52,464

 
(15,174
)
Cash and cash equivalents at beginning of year
345,778

 
504,838

Cash and cash equivalents at end of six months
   $
398,242

 
   $
489,664

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 July 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 six months ended July 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.

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,

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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 July 31, 2014 and 2013, the carrying amount of the Credit Card Receivables (recorded in accounts receivable, net) was $55,690,000 and $49,948,000, 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 July 31, 2014 and $1,500,000 at July 31, 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 July 31, 2014 and 2013, the current portion of the carrying amount of financing arrangements including accrued interest was $17,059,000 and $7,807,000 and was recorded in prepaid expenses and other current assets. At July 31, 2014 and 2013, the non-current portion of the carrying amount of financing arrangements including accrued interest was $49,231,000 and $64,425,000 and was included in other assets, net. The Company has not recorded any material impairment charges on such loans as of July 31, 2014 and 2013.

4.
INVENTORIES

(in thousands)
 
July 31,
2014
 
January 31,
2014
 
July 31,
2013
Finished goods
 
$
1,453,175

 
$
1,333,926

 
$
1,370,966

Raw materials
 
933,311

 
874,799

 
843,380

Work-in-process
 
144,965

 
117,855

 
114,164

Inventories, net
 
$
2,531,451

 
$
2,326,580

 
$
2,328,510


5.
INCOME TAXES

The effective income tax rate for the three months ended July 31, 2014 was 35.5% versus 34.2% in the prior year. The effective income tax rate for the three months ended July 31, 2014 includes an increase of 0.6 percentage point due to the one-time impact of a change in state tax legislation. The effective income tax rate for the six months ended July 31, 2014 was 35.3% versus 34.5% in the prior year. The effective income tax rate for the six months ended July 31, 2014 includes an increase of 1.3 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 0.6 percentage point.

At July 31, 2014, the Company’s gross uncertain tax positions decreased by $20,231,000 from January 31, 2014 primarily as a result of the settlement of an audit conducted by the Internal Revenue Service ("IRS"). At July 31, 2014, gross accrued interest and penalties decreased by $4,605,000 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

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Consolidated Statements of Earnings was not material for the three and six months ended July 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. An audit is currently being conducted by the IRS (tax years 2010–2011). 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 July 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 July 31,
 
Six Months Ended July 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net earnings for basic and diluted
EPS
 
$
124,120

 
$
106,781

 
$
249,729

 
$
190,358

Weighted-average shares for basic
EPS
 
129,252

 
127,826

 
129,093

 
127,572

Incremental shares based upon
the assumed exercise of stock options and unvested restricted stock units
 
656

 
945

 
758

 
1,034

Weighted-average shares for
diluted EPS
 
129,908

 
128,771

 
129,851

 
128,606


For the three months ended July 31, 2014 and 2013, there were 347,000 and 412,000 stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect. For the six months ended July 31, 2014 and 2013, there were 336,000 and 589,000 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 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.


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•
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.

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 July 31, 2014, the notional amount of foreign exchange forward contracts accounted for as cash flow hedges was $163,106,000 and the notional amount of foreign exchange forward contracts accounted for as undesignated hedges was $57,027,000. The term of all outstanding foreign exchange forward contracts as of July 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. 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 July 31, 2014, there were precious metal derivative instruments outstanding for approximately 14,900 ounces of platinum and 454,100 ounces of silver.


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Information on the location and amounts of derivative gains and losses in the condensed consolidated financial statements is as follows:
 
 
Three Months Ended July 31,
 
 
2014
 
2013
(in thousands)
 
Pre-Tax Gain
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
 
$
591

 
$
5,474

 
$
191

 
$
3,139

Put option contracts a
 
—

 
—

 
(8
)
 
662

Precious metal forward contracts a
 
1,396

 
(1,237
)
 
(2,415
)
 
(1,008
)
Forward-starting interest rate swaps b
 
—

 
(369
)
 
—

 
(386
)
 
 
$
1,987

 
$
3,868

 
$
(2,232
)
 
$
2,407

 
 
Six Months Ended July 31,
 
 
2014
 
2013
(in thousands)
 
Pre-Tax Gain
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
 
$
447

 
$
12,847

 
$
9,367

 
$
5,068

Put option contracts a
 
—

 
—

 
1,270

 
930

Precious metal forward contracts a
 
1,808

 
(2,740
)
 
(7,399
)
 
(1,933
)
Forward-starting interest rate swaps b
 
—

 
(742
)
 
—

 
(776
)
 
 
$
2,255

 
$
9,365

 
$
3,238

 
$
3,289

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 July 31, 2014 and 2013. There was no material ineffectiveness related to the Company's hedging instruments for the periods ended July 31, 2014 and 2013. The Company expects approximately $3,800,000 of net pre-tax derivative gains included in accumulated other comprehensive income at July 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 8. Fair Value of Financial Instruments."


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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 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 7. Hedging Instruments."

Financial assets and liabilities carried at fair value at July 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
 
$
53,362

 
$
53,362

 
$
—

 
$
—

 
$
53,362

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Precious metal forward contracts b
 
663

 
—

 
663

 
—

 
663

Foreign exchange forward contracts b
 
3,354

 
—

 
3,354

 
—

 
3,354

Total financial assets
 
$
57,379

 
$
53,362

 
$
4,017

 
$
—

 
$
57,379

 
 
 
 
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 c
 
$
241

 
$
—

 
$
241

 
$
—

 
$
241

Foreign exchange forward contracts c
 
226

 
—

 
226

 
—

 
226

Total financial liabilities
 
$
467

 
$
—

 
$
467

 
$
—

 
$
467


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Financial assets and liabilities carried at fair value at July 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
 
$
49,343

 
$
49,343

 
$
—

 
$
—

 
$
49,343

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Precious metal forward contracts b
 
212

 
—

 
212

 
—

 
212

Foreign exchange forward contracts b
 
18,744

 
—

 
18,744

 
—

 
18,744

Total financial assets
 
$
68,299

 
$
49,343

 
$
18,956

 
$
—

 
$
68,299

 
 
 
 
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 c
 
$
3,470

 
$
—

 
$
3,470

 
$
—

 
$
3,470

Foreign exchange forward contracts c
 
617

 
—

 
617

 
—

 
617

Total financial liabilities
 
$
4,087

 
$
—

 
$
4,087

 
$
—

 
$
4,087

aIncluded within Other assets, net.
bIncluded within Prepaid expenses and other current assets.
cIncluded within Accounts payable and accrued liabilities.

The fair value of derivatives not designated as hedging instruments was not significant in the periods ended July 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 $1,025,503,000 and $964,219,000 and the corresponding fair value was approximately $1,100,000,000 at both July 31, 2014 and 2013.

9.
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

14
Table of Contents

good faith. The Swatch Parties sought damages based on alternate theories ranging from CHF 73,000,000 (or approximately $80,000,000 at July 31, 2014) (based on its alleged wasted investment) to CHF 3,800,000,000 (or approximately $4,200,000,000 at July 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 & 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 $132,000,000 at July 31, 2014) (based on its wasted investment) to approximately CHF 540,000,000 (or approximately $594,000,000 at July 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 two years; 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 July 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.


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Table of Contents

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 will require additional resources and will involve 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 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 RI/FS under the 2007 AOC and the actions under the Mile 10.9 AOC are expected to be substantially complete by the end of 2014. 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

16
Table of Contents

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.

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


10.
STOCKHOLDERS’ EQUITY

Accumulated Other Comprehensive Loss
 
(in thousands)
 
July 31,
2014
 
January 31,
2014
 
July 31,
2013
Accumulated other comprehensive earnings (loss),
   net of tax:
 
 
 
 
 
 
Foreign currency translation adjustments
 
$
29,042

 
$
16,846

 
$
13,280

Unrealized gain on marketable securities
 
2,931

 
2,677

 
1,744

Deferred hedging loss
 
(11,383
)
 
(6,607
)
 
(3,397
)
Net unrealized loss on benefit plans
 
(67,863
)
 
(71,464
)
 
(130,945
)
 
 
$
(47,273
)
 
$
(58,548
)
 
$
(119,318
)

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Table of Contents

Additions to and reclassifications out of accumulated other comprehensive loss are as follows: 
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Foreign currency translation
adjustments
 
$
(5,116
)
 
$
(15,459
)
 
$
12,232

 
$
(33,352
)
Income tax benefit (expense)
 
161

 
113

 
(36
)
 
2,568

Foreign currency translation adjustments, net of tax
 
(4,955
)
 
(15,346
)
 
12,196

 
(30,784
)
Unrealized (loss) gain on
marketable securities
 
(393
)
 
(1,076
)
 
826

 
190

Income tax (expense) benefit
 
(120
)
 
156

 
(572
)
 
(295
)
Unrealized (loss) gain on marketable
securities, net of tax
 
(513
)
 
(920
)
 
254

 
(105
)
Unrealized gain (loss) on hedging
instruments
 
1,987

 
(2,232
)
 
2,255

 
3,238

Reclassification adjustment for gain included in net earnings a
 
(3,868
)
 
(2,407
)
 
(9,365
)
 
(3,289
)
Income tax benefit (expense)
 
584

 
1,662

 
2,334

 
(139
)
Unrealized loss on hedging
instruments, net of tax
 
(1,297
)
 
(2,977
)
 
(4,776
)
 
(190
)
Prior service cost
 
(483
)
 
—

 
(483
)
 
—

Amortization of net loss included
in net earnings b
 
3,166

 
4,315

 
6,574

 
9,611

Amortization of prior service
(credit) cost included in net earnings b
 
(92
)
 
78

 
(200
)
 
156

Income tax expense
 
(1,032
)
 
(1,681
)
 
(2,290
)
 
(4,131
)
Net unrealized gain on benefit plans,
net of tax
 
1,559

 
2,712

 
3,601

 
5,636

Total other comprehensive (loss)
earnings, net of tax
 
$
(5,206
)
 
$
(16,531
)
 
$
11,275

 
$
(25,443
)
a 
These gains are reclassified into Interest and other expenses, net and Cost of sales (see "Note 7. Hedging Instruments" for additional details).
b 
These accumulated other comprehensive loss components are included in the computation of net periodic pension costs (see "Note 11. 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 July 31, 2014 and 2013 and $0.72 and $0.66 per share of Common Stock in the six months ended July 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   
July 31, 2014
 
Six Months Ended   
July 31, 2014
Cost of repurchases
$
9,256

 
$
16,402

Shares repurchased and retired
102

 
184

Average cost per share
$
90.98

 
$
89.18


At July 31, 2014, approximately $283,598,000 remained available for share repurchases under this authorization.

11.
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 July 31,
 
 
Pension Benefits
 
Other
Postretirement Benefits
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net Periodic Benefit Cost:
 
 
 
 
 
 
 
 
Service cost
 
$
3,858

 
$
4,521

 
$
569

 
$
673

Interest cost
 
7,001

 
6,639

 
651

 
653

Expected return on plan assets
 
(5,928
)
 
(6,170
)
 
—

 
—

Amortization of prior service cost (credit)
 
77

 
243

 
(169
)
 
(165
)
Amortization of net loss
 
3,163

 
4,305

 
3

 
10

Net expense
 
$
8,171

 
$
9,538

 
$
1,054

 
$
1,171


 
 
Six Months Ended July 31,
 
 
Pension Benefits
 
Other
Postretirement Benefits
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net Periodic Benefit Cost:
 
 
 
 
 
 
 
 
Service cost
 
$
8,481

 
$
9,577

 
$
1,164

 
$
1,396

Interest cost
 
14,131

 
13,504

 
1,323

 
1,381

Expected return on plan assets
 
(11,818
)
 
(11,120
)
 
—

 
—

Amortization of prior service cost (credit)
 
137

 
486

 
(337
)
 
(330
)
Amortization of net loss
 
6,564

 
9,505

 
10

 
106

Net expense
 
$
17,495

 
$
21,952

 
$
2,160

 
$
2,553



19
Table of Contents

12.
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 July 31,
 
Six Months Ended July 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net sales:
 
 
 
 
 
 
 
 
Americas
 
$
483,595

 
$
443,856

 
$
922,283

 
$
851,553

Asia-Pacific
 
236,805

 
208,325

 
497,749

 
431,752

Japan
 
119,085

 
136,395

 
292,979

 
280,922

Europe
 
120,033

 
111,247

 
221,318

 
204,233

Total reportable segments
 
959,518

 
899,823

 
1,934,329

 
1,768,460

Other
 
33,412

 
26,061

 
70,733

 
52,908

 
 
$
992,930

 
$
925,884

 
$
2,005,062

 
$
1,821,368

Earnings (losses) from operations*:
 
 
 
 
 
 
 
 
Americas
 
$
109,805

 
$
87,731

 
$
191,289

 
$
146,693

Asia-Pacific
 
65,492

 
49,882

 
137,333

 
105,341

Japan
 
39,173

 
48,235

 
110,669

 
101,654

Europe
 
25,114

 
22,338

 
42,086

 
36,616

Total reportable segments
 
239,584

 
208,186

 
481,377

 
390,304

Other
 
2,399

 
(1,188
)
 
4,663

 
(344
)
 
 
$
241,983

 
$
206,998

 
$
486,040

 
$
389,960


*
Represents earnings (losses) from operations before (i) unallocated corporate expenses, (ii) interest and other expenses, net, and (iii) other operating expense.


20
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 July 31,
 
Six Months Ended July 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Earnings from operations for
segments
 
$
241,983

 
$
206,998

 
$
486,040

 
$
389,960

Unallocated corporate expenses
 
(33,462
)
 
(30,112
)
 
(67,726
)
 
(62,537
)
Interest and other expenses, net
 
(16,151
)
 
(14,694
)
 
(32,427
)
 
(27,406
)
Other operating expense
 
—

 
—

 
—

 
(9,379
)
Earnings from operations before
income taxes
 
$
192,370

 
$
162,192

 
$
385,887

 
$
290,638


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 six months ended July 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.

13.
SUBSEQUENT EVENT
On August 21, 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 October 10, 2014 to shareholders of record on September 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 55 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 7% to $992,930,000 in the three months ("second quarter") ended July 31, 2014 due to growth across all jewelry categories and solid growth in the Americas and Asia-Pacific regions, while net sales in Japan declined (see "Net Sales" below). Worldwide net sales increased 10% in the six months ("first half") ended July 31, 2014 to $2,005,062,000 due to growth across all jewelry categories and in all regions.

•
On a constant-exchange-rate basis (see "Non-GAAP Measures" below), worldwide net sales increased 7% in the second quarter and 11% in the first half and comparable store sales increased 3% in the second quarter and 7% in the first half.

•
The Company opened five TIFFANY & CO. stores in the first half (opening two in the Americas and one each in Japan, Europe and the Emerging Markets region) while closing one in the Americas.

•
Earnings from operations as a percentage of net sales ("operating margin") improved 1.9 percentage points in the second quarter due to an increase in gross margin. Operating margin improved 3.4 percentage points in the first half; however, excluding certain expenses recorded in the first half of 2013 (see "Non-GAAP Measures" below), operating margin improved 2.9 percentage points due to an increase in gross margin and sales leverage on operating expenses.

•
Net earnings increased 16% to $124,120,000, or $0.96 per diluted share in the second quarter. Net earnings increased 31% to $249,729,000, or $1.92 per diluted share in the first half. Excluding certain expenses recorded in the first quarter of 2013 (see "Non-GAAP Measures" below), net earnings increased 27% in the first half of 2014.

•
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.


22
Table of Contents

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:
 
Second Quarter 2014 vs. 2013
 
First Half 2014 vs. 2013
 
GAAP 
Reported
 
Translation Effect
 
Constant-Exchange-
Rate Basis
 
GAAP 
Reported
 
Translation Effect
 
Constant-Exchange-
Rate Basis
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
7
 %
 
—
 %
 
7
 %
 
10
%
 
(1
)%
 
11
 %
Americas
9
 %
 
(1
)%
 
10
 %
 
8
%
 
(1
)%
 
9
 %
Asia-Pacific
14
 %
 
1
 %
 
13
 %
 
15
%
 
(1
)%
 
16
 %
Japan
(13
)%
 
(3
)%
 
(10
)%
 
4
%
 
(6
)%
 
10
 %
Europe
8
 %
 
7
 %
 
1
 %
 
8
%
 
6
 %
 
2
 %
Other
28
 %
 
—
 %
 
28
 %
 
34
%
 
—
 %
 
34
 %
Comparable Store Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
3
 %
 
—
 %
 
3
 %
 
6
%
 
(1
)%
 
7
 %
Americas
8
 %
 
—
 %
 
8
 %
 
7
%
 
(1
)%
 
8
 %
Asia-Pacific
7
 %
 
—
 %
 
7
 %
 
8
%
 
(1
)%
 
9
 %
Japan
(15
)%
 
(2
)%
 
(13
)%
 
3
%
 
(6
)%
 
9
 %
Europe
(2
)%
 
6
 %
 
(8
)%
 
1
%
 
6
 %
 
(5
)%
Other
2
 %
 
—
 %
 
2
 %
 
10
%
 
—
 %
 
10
 %



23
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 table reconciles certain GAAP amounts to non-GAAP amounts:
(in thousands)
 
GAAP
Reported

Specific cost-reduction initiatives a
(decrease)/increase

Non-GAAP
Six months ended July 31, 2013
 





Selling, general and administrative expenses
 
$
717,309


$
(9,379
)

$
707,930

Earnings from operations
 
318,044


9,379


327,423

Earnings from operations as a % of net sales
 
17.5
%
 
 
 
18.0
%
Net earnings
 
190,358


5,785


196,143

a 
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.

There were no such adjustments in the first half of 2014.

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.

Net Sales

Net sales by segment were as follows: 
 
 
Second Quarter
 
First Half
(in thousands)
 
2014
 
2013
 
Increase/(Decrease)
 
2014
 
2013
 
Increase
Americas
 
$
483,595

 
$
443,856

 
9
 %
 
$
922,283

 
$
851,553

 
8
%
Asia-Pacific
 
236,805

 
208,325

 
14

 
497,749

 
431,752

 
15

Japan
 
119,085

 
136,395

 
(13
)
 
292,979

 
280,922

 
4

Europe
 
120,033

 
111,247

 
8

 
221,318

 
204,233

 
8

Other
 
33,412

 
26,061

 
28

 
70,733

 
52,908

 
34

 
 
$
992,930

 
$
925,884

 
7
 %
 
$
2,005,062

 
$
1,821,368

 
10
%

Americas. Total sales in the Americas increased $39,739,000, or 9%, in the second quarter due to an increase in the average price per jewelry unit sold. In addition, a modest decline in jewelry units was entirely due to fashion jewelry, primarily in silver jewelry at price points below $500, while all other jewelry categories increased. Comparable store sales increased $29,522,000, or 8%, due to geographically broad-based growth across most of the region. Non-comparable store sales grew $9,006,000. On a constant-exchange-rate basis, sales in the Americas increased 10% and comparable store sales increased 8%.

Total sales in the Americas increased $70,730,000, or 8%, in the first half due to an increase in the average price per jewelry unit sold. In addition, a modest decline in jewelry units was entirely due to fashion jewelry, primarily in silver jewelry at price points below $500, while all other jewelry categories increased. Comparable store sales

24
Table of Contents

increased $53,289,000, or 7%, due to geographically broad-based growth across most of the region. Non-comparable store sales grew $16,561,000. On a constant-exchange-rate basis, sales in the Americas increased 9% and comparable store sales increased 8%.

Asia-Pacific. Total sales in Asia-Pacific increased $28,480,000, or 14%, in the second quarter primarily due to increases in the average price per jewelry unit sold and in the number of jewelry units sold. Comparable store sales increased $14,037,000, or 7% and non-comparable store sales grew $9,889,000. On a constant-exchange-rate basis, Asia-Pacific sales increased 13% and comparable store sales increased 7% primarily due to strong growth in Greater China and Australia.

Total sales in Asia-Pacific increased $65,997,000, or 15%, in the first half primarily due to increases in the number of jewelry units sold and in the average price per jewelry unit sold. Comparable store sales increased $31,315,000, or 8% and non-comparable store sales grew $24,372,000. On a constant-exchange-rate basis, Asia-Pacific sales increased 16% and comparable store sales increased 9% primarily due to strong growth in Greater China and Australia.

Japan. Total sales in Japan decreased $17,310,000, or 13%, in the second quarter and comparable store sales decreased $19,010,000, or 15%, primarily due to a decrease in the number of jewelry units sold in all categories. The decline reflected a softening of customer demand throughout the second quarter, after exceptionally strong 20% total sales growth in the first quarter, or 29% on a constant-exchange-rate basis, when customers had accelerated their purchases in anticipation of an increase in Japan’s consumption tax on April 1, 2014. On a constant-exchange-rate basis, Japan sales decreased 10% and comparable store sales decreased 13%.

Total sales in Japan increased $12,057,000, or 4%, in the first half and comparable store sales increased $8,817,000, or 3%, due to an increase in the average price per jewelry unit sold. On a constant-exchange-rate basis, Japan sales increased 10% and comparable store sales increased 9%.

Europe. Total sales in Europe increased $8,786,000, or 8%, in the second quarter primarily due to the effect of currency translation and an increase in the number of jewelry units sold. Comparable store sales decreased $1,906,000, or 2%, and non-comparable store sales increased $8,716,000. On a constant-exchange-rate basis, sales in Europe increased 1% while comparable store sales decreased 8% due to declines in the United Kingdom ("U.K.") and in most of continental Europe.

Total sales in Europe increased $17,085,000, or 8%, in the first half due to the effect of currency translation and an increase in the number of jewelry units sold. Comparable store sales increased $1,046,000, or 1%, and non-comparable store sales increased $12,589,000. On a constant-exchange-rate basis, sales in Europe increased 2% while comparable store sales decreased 5% due to declines in the U.K. and in most of continental Europe.

Other. Other sales increased $7,351,000, or 28%, in the second quarter and $17,825,000, or 34%, in the first half primarily due to retail sales growth in the Emerging Markets region of $3,738,000 and $9,686,000, respectively, primarily reflecting the opening of the first Company-operated TIFFANY & CO. store in Russia. The remainder of the sales growth in both periods is primarily due to wholesale sales of diamonds.

Product Category Information. In the second quarter, worldwide net sales increased $67,046,000, or 7%, primarily driven by increases of $25,698,000, or 7%, in the fashion jewelry category (primarily due to sales growth in gold jewelry), $20,260,000, or 10%, in the statement, fine & solitaire jewelry category (reflecting growth throughout the category); and $15,587,000, or 6%, in the engagement jewelry & wedding bands category (reflecting growth in solitaire diamond rings).

In the first half, worldwide net sales increased $183,694,000, or 10%, primarily driven by increases of $62,410,000, or 11%, in the engagement jewelry & wedding bands category (reflecting growth in solitaire diamond rings and wedding bands); $62,041,000, or 9%, in the fashion jewelry category (reflecting growth throughout the category); and $52,189,000, or 13%, in the statement, fine & solitaire jewelry category (reflecting growth throughout the category).


25
Table of Contents

Store Data. Management expects to add 10 Company-operated stores and close three existing stores during 2014: opening four in the Americas, two in Asia-Pacific, two in Japan and one each in Europe and Russia, while closing one each in the Americas, Asia-Pacific and the U.A.E. 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 2014
 
Expected Openings
2014
Americas:
 
 
 
 
Cancun, Mexico
 
First Quarter
 
 
East Hampton, New York
 
(First Quarter)
 
 
Aventura, Florida
 
Second Quarter
 
 
Newbury Street – Boston, Massachusetts
 
 
 
Third Quarter
Design District – Miami, Florida
 
 
 
Fourth Quarter
Asia-Pacific:
 
 
 
 
Adelaide, Australia
 
 
 
Third Quarter
Japan:
 
 
 
 
Kobe, Sogo department store
 
First Quarter
 
 
Shinjuku – Tokyo
 
 
 
Third Quarter
Europe:
 
 
 
 
Champs Elysees – Paris, France
 
First Quarter
 
 
Emerging Markets:
 
 
 
 
Moscow, Russia
 
First Quarter
 
 

Gross Margin
 
Second Quarter
 
First Half
 
2014
 
2013
 
2014
 
2013
Gross profit as a percentage of net sales
59.9%
 
57.5%
 
59.1%
 
56.8%

Gross margin (gross profit as a percentage of net sales) increased by 2.4 percentage points in the second quarter and 2.3 percentage points in the first half largely benefiting from favorable product costs and price increases, as well as, to a lesser extent, from sales leverage on fixed costs resulting from the increase in worldwide net sales.

Management periodically reviews and adjusts its retail prices when appropriate to address product cost increases, specific market conditions and changes in foreign currencies/U.S. dollar relationships. Its long-term strategy is to continue that approach. Among the market conditions that management considers are consumer demand for the product category involved, which may be influenced by consumer confidence, and competitive pricing conditions. Management uses derivative instruments to mitigate certain foreign exchange and precious metal price exposures (see "Item 1. Notes to Condensed Consolidated Financial Statements – Note 7. Hedging Instruments"). Management increased retail prices in the first half of both 2014 and 2013 across all geographic regions and product categories.

Selling, General and Administrative ("SG&A") Expenses
 
Second Quarter
 
First Half
 
2014
 
2013
 
2014
 
2013
SG&A expenses as a percentage of net sales
38.9%
 
38.4%
 
38.2%
 
39.4%

SG&A expenses increased $31,399,000, or 9%, in the second quarter primarily due to increased labor costs of $12,080,000 (primarily increased store-related labor costs), increased store occupancy and depreciation expenses of $5,692,000 (related to new and existing stores) and increased marketing expenses of $3,771,000. SG&A expenses as a percentage of net sales increased 0.5 percentage point.

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Table of Contents

SG&A expenses increased $49,066,000, or 7%, in the first half. Excluding the expense noted in "Non-GAAP Measures" in the first quarter of 2013, SG&A expenses increased $58,445,000, or 8%, largely reflecting increased labor costs of $18,050,000 (primarily increased store-related labor costs), increased store occupancy and depreciation expenses of $17,922,000 (related to new and existing stores). SG&A expenses as a percentage of net sales decreased 1.2 percentage points and would have decreased 0.7 percentage point, when excluding the item noted in "Non-GAAP Measures", due to the leveraging effect of fixed costs.

Earnings from Operations

Earnings from operations increased 18% in the second quarter. Earnings from operations as a percentage of net sales ("operating margin") improved 1.9 percentage points due to an increase in gross margin. Results by segment are as follows:
(in thousands)
 
Second Quarter
2014
 
% of Net
Sales
 
Second Quarter
2013
 
% of Net
Sales
Earnings (losses) from operations*:
 
 
 
 
 
 
Americas
 
$
109,805

 
22.7
 %
 
$
87,731

 
19.8
 %
Asia-Pacific
 
65,492

 
27.7
 %
 
49,882

 
23.9
 %
Japan
 
39,173

 
32.9
 %
 
48,235

 
35.4
 %
Europe
 
25,114

 
20.9
 %
 
22,338

 
20.1
 %
Other
 
2,399

 
7.2
 %
 
(1,188
)
 
(4.6
)%
 
 
241,983

 
 
 
206,998

 
 
Unallocated corporate expenses
 
(33,462
)
 
(3.4
)%
 
(30,112
)
 
(3.3
)%
Earnings from operations
 
$
208,521

 
21.0
 %
 
$
176,886

 
19.1
 %
*    Percentages represent earnings (losses) from operations as a percentage of each segment's net sales.
On a segment basis, the ratio of earnings (losses) from operations to each segment's net sales in the second quarter of 2014 compared with 2013 was as follows:
•
Americas – the ratio increased 2.9 percentage points due to an improvement in gross margin and sales leverage of operating expenses, which partly benefited from a shift in marketing spending to later in the year;
•
Asia-Pacific – the ratio increased 3.8 percentage points due to an improvement in gross margin partly offset by increased store-related operating expenses and marketing spending;
•
Japan – the ratio decreased 2.5 percentage points due to decreased sales partly offset by 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);
•
Europe – the ratio increased 0.8 percentage point due to an improvement in gross margin largely offset by increased store-related operating expenses and marketing spending; and
•
Other – the ratio increased 11.8 percentage points due to an improvement in gross margin from sales generated by retail operations in the Emerging Markets region and lower charges associated with the write-down of wholesale diamond inventory deemed not suitable for the Company's needs which were partly offset by increased store-related expenses.




27
Table of Contents

Earnings from operations increased 32% in the first half. Operating margin improved 3.4 percentage points in the first half; however, excluding certain expenses recorded in the first half of 2013 (see "Non-GAAP Measures"), operating margin improved 2.9 percentage points due to an increase in gross margin and sales leverage on operating expenses. Results by segment are as follows:
(in thousands)
 
First Half
2014
 
% of Net
Sales
 
First Half
2013
 
% of Net
Sales
Earnings (losses) from operations*:
 
 
 
 
 
 
Americas
 
$
191,289

 
20.7
 %
 
$
146,693

 
17.2
 %
Asia-Pacific
 
137,333

 
27.6
 %
 
105,341

 
24.4
 %
Japan
 
110,669

 
37.8
 %
 
101,654

 
36.2
 %
Europe
 
42,086

 
19.0
 %
 
36,616

 
17.9
 %
Other
 
4,663

 
6.6
 %
 
(344
)
 
(0.7
)%
 
 
486,040

 
 
 
389,960

 
 
Unallocated corporate expenses
 
(67,726
)
 
(3.4
)%
 
(62,537
)
 
(3.4
)%
Other operating expense
 
—

 
 
 
(9,379
)
 
 
Earnings from operations
 
$
418,314

 
20.9
 %
 
$
318,044

 
17.5
 %
On a segment basis, the ratio of earnings (losses) from operations to each segment's net sales in the first half of 2014 compared with 2013 was as follows:
•
Americas – the ratio increased 3.5 percentage points due to an improvement in gross margin and sales leverage of operating expenses, which partly benefited from a shift in timing of marketing spending to later in the year;
•
Asia-Pacific – the ratio increased 3.2 percentage points due to an improvement in gross margin;
•
Japan – the ratio increased 1.6 percentage points 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 1.1 percentage points due to an improvement in gross margin largely offset by increased store-related operating expenses and marketing spending, including the opening of a significant store on the Champs Elysees in Paris; and
•
Other – the ratio increased 7.3 percentage points due to an improvement in gross margin from sales generated by retail operations in the Emerging Markets region and lower charges associated with the write-down of wholesale diamond inventory deemed not suitable for the Company's needs which were partly offset by increased store-related expenses, including the opening of a new store in Russia.

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. In the second quarter, unallocated corporate expenses increased versus the comparable period in the prior year and increased modestly as a percentage of net sales. In the first half, unallocated corporate expenses increased versus the comparable period in the prior year but remained constant as a percentage of net sales.

Other operating expense in the first half of 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.

Interest and Other Expenses, net

Interest and other expenses, net increased $1,457,000, or 10%, in the second quarter of 2014 and $5,021,000, or 18%, in the first half of 2014 primarily due to increased interest expense and financing costs.

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Table of Contents

Provision for Income Taxes

The effective income tax rate for the second quarter of 2014 was 35.5% versus 34.2% in the prior year. The effective income tax rate for the second quarter of 2014 includes an increase of 0.6 percentage point due to the one-time impact of a change in state tax legislation. The effective income tax rate for the first half of 2014 was 35.3% versus 34.5% in the prior year. The effective income tax rate for the first half of 2014 includes an increase of 1.3 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 0.6 percentage point.

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:
 
 
First Half
(in thousands)
 
2014
 
2013
Net cash provided by (used in):
 
 
 
 
Operating activities
 
$
152,796

 
$
120,080

Investing activities
 
(62,818
)
 
(89,868
)
Financing activities
 
(38,380
)
 
(39,978
)
Effect of exchange rates on cash and cash equivalents
 
866

 
(5,408
)
Net increase/(decrease) in cash and cash equivalents
 
$
52,464

 
$
(15,174
)

Operating Activities

The Company had a net cash inflow from operating activities of $152,796,000 in the first half of 2014 compared with a net cash inflow of $120,080,000 in the same period in 2013. The variance is primarily due to increases in net earnings and in deferred income taxes offset by inventory growth. Additionally, the first half of 2013 includes the Company's contribution of $30,000,000 to its pension plan, which is reflected in Other, net on the Condensed Consolidated Statements of Cash Flows.

Working Capital. Working capital (current assets less current liabilities) and the corresponding current ratio (current assets divided by current liabilities) were $2,780,877,000 and 5.1 at July 31, 2014, compared with $2,531,648,000 and 4.6 at January 31, 2014 and $2,651,043,000 and 5.5 at July 31, 2013.

Accounts receivable, less allowances at July 31, 2014 were 1% higher than January 31, 2014 and 18% higher than July 31, 2013 largely due to sales growth.

Inventories, net at July 31, 2014 were 9% higher than both January 31, 2014 and July 31, 2013. Finished goods inventories rose 9% from January 31, 2014 and 6% from July 31, 2013 and combined raw material and work-in-process inventories increased 9% and 13% from January 31, 2014 and July 31, 2013 in support of new product introductions and anticipated sales growth.


29
Table of Contents

Prepaid expenses and other current assets at July 31, 2014 were 8% lower than January 31, 2014 and 24% higher than July 31, 2013. The increase from July 31, 2013 is largely due to income tax receivables which were recorded in the fourth quarter of 2013 resulting from the impact of the Arbitration Award. See "Part II – Item 1. Legal Proceedings" for additional information regarding the Arbitration Award.

Investing Activities

The Company had a net cash outflow from investing activities of $62,818,000 in the first half of 2014 compared with an outflow of $89,868,000 in 2013. The decreased outflow in the current year is primarily due to net proceeds received upon the maturity of short-term investments which were reinvested in cash equivalents of $21,729,000. Additionally, in the first half of 2014, the Company received repayments of $7,277,000 associated with loans extended to diamond mining and exploration companies whereas, in the first half of 2013, the Company loaned $3,050,000 to such companies and received repayments of $484,000 associated with loans extended.

Financing Activities

The Company had a net cash outflow from financing activities of $38,380,000 in the first quarter of 2014 compared with an outflow of $39,978,000 in 2013. Year-over-year changes in cash flows from financing activities are largely driven by an increase in net proceeds from total borrowings as well as proceeds from the exercise of stock options partly offset by share repurchases. Additionally, there was an increase in cash dividends paid on Common Stock with $0.72 paid per share of Common Stock in the first half of 2014 compared with $0.66 in the first half of 2013.

Recent Borrowings. The Company had net proceeds from short-term borrowings as follows:
 
 
First Half
(in thousands)
 
2014
 
2013
Short-term borrowings:
 
 
 
 
Proceeds from credit facility borrowings, net
 
$
13,966

 
$
3,244

Other proceeds from credit facility borrowings
 
12,067

 
82,643

Other repayments of credit facility borrowings
 
(964
)
 
(68,100
)
Net proceeds from total borrowings
 
$
25,069

 
$
17,787

Under all of the Company's revolving credit facilities, there were $275,433,000 of borrowings outstanding, $3,905,000 letters of credit issued but not outstanding and $542,352,000 available for borrowing at July 31, 2014. The weighted-average interest rate for the amount outstanding at July 31, 2014 was 3.50%.
The ratio of total debt (short-term borrowings and long-term debt) to stockholders’ equity was 35% at July 31, 2014, 37% at January 31, 2014 and 35% at July 31, 2013.
At July 31, 2014, the Company was in compliance with all debt covenants.

Share Repurchases. 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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The Company's share repurchase activity was as follows:
 
(in thousands, except per share amounts)
Second Quarter
2014
First Half
2014
Cost of repurchases
$
9,256

$
16,402

Shares repurchased and retired
102

184

Average cost per share
$
90.98

$
89.18


At July 31, 2014, approximately $283,598,000 remained available for share repurchases under this authorization.

Contractual Obligations

At July 31, 2014, the Company’s gross uncertain tax position decreased by $20,231,000 from January 31, 2014 primarily as a result of the settlement of an audit being conducted by the Internal Revenue Service. As of July 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.

The Company’s contractual cash obligations and commercial commitments at July 31, 2014 and the effects such obligations and commitments are expected to have on the Company’s liquidity and cash flows in future periods have not changed significantly since January 31, 2014.

Seasonality

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

2014 Outlook

For the fiscal year ended January 31, 2015, management is now forecasting net earnings to be in a range of $4.20–$4.30 per diluted share, compared with its most recently published forecast of $4.15–$4.25 per diluted share. This full year forecast 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, 2014:
•
Worldwide net sales increasing by a high-single-digit percentage.
•
Opening 10 Company-operated stores and closing three existing stores: opening four in the Americas, two in Asia-Pacific, two in Japan and one each in Europe and Russia, while closing one each in the Americas, Asia-Pacific and the U.A.E.
•
Operating margin increasing due to a higher gross margin and SG&A expense growth less than sales growth.
•
Interest and other expenses, net of $65,000,000 with the increase over 2013 reflecting the interest cost on higher average levels of net-debt.
•
An effective income tax rate of 35%.
•
A 6% increase in net inventories.
•
Capital expenditures of $270,000,000, versus $221,000,000 last year, with the increase largely reflecting incremental investments in certain information technology systems.
•
Free cash flow (cash flow from operating activities less capital expenditures) of at least $400,000,000.

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Forward-Looking Statements

This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the Company's goals, plans and projections with respect to store openings and closings, product introductions, sales, retail prices, gross margin, expenses, operating margin, effective income tax rate, net earnings and net earnings per share, inventories, capital expenditures, cash flow and liquidity. In addition, management makes other forward-looking statements from time to time concerning objectives and expectations. One can identify these forward-looking statements by the fact that they use words such as "believes," "intends," "plans" and "expects" and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on management's current plans and involve inherent risks, uncertainties and assumptions that could cause actual outcomes to differ materially from current goals, plans and projections. The Company has included important factors in the cautionary statements included in its 2013 Annual Report on Form 10-K and in this quarterly report, particularly under "Item 1A. Risk Factors," that the Company believes could cause actual results to differ materially from any forward-looking statement.

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

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Currency Risk

The Company may use foreign exchange forward contracts or put option contracts to offset a portion of the foreign currency exchange risks associated with foreign currency-denominated exposures, intercompany transactions and forecasted purchases of merchandise between entities with differing functional currencies. The term of all outstanding foreign exchange forward contracts as of July 31, 2014 ranged from less than one month to 12 months.
 
Precious Metal Price Risk

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 maximum term over which the Company is hedging its exposure to the variability of future cash flows for all forecasted transactions is 12 months.


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Item 4.    Controls and Procedures
Disclosure Controls and Procedures

Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the Registrant's chief executive officer and chief financial officer concluded that, as of the end of the period covered by this report, the Registrant's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Registrant in the reports that it files or submits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

In the ordinary course of business, the Registrant reviews its system of internal control over financial reporting and makes changes to its systems and processes to improve controls and increase efficiency, while ensuring that the Registrant maintains an effective internal control environment. Changes may include such activities as implementing new, more efficient systems and automating manual processes.

The Registrant's chief executive officer and chief financial officer have determined that there have been no changes in the Registrant's internal control over financial reporting during the most recently completed fiscal quarter covered by this report identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.

The Registrant's management, including its chief executive officer and chief financial officer, necessarily applied their judgment in assessing the costs and benefits of such controls and procedures. By their nature, such controls and procedures cannot provide absolute certainty, but can provide reasonable assurance regarding management's control objectives. Our chief executive officer and our chief financial officer have concluded that the Registrant's disclosure controls and procedures are (i) designed to provide such reasonable assurance and (ii) are effective at that reasonable assurance level.

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PART II. Other Information

Item 1.    Legal Proceedings

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 $80,000,000 at July 31, 2014) (based on its alleged wasted investment) to CHF 3,800,000,000 (or approximately $4,200,000,000 at July 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 & 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 $132,000,000 at July 31, 2014) (based on its wasted investment) to approximately CHF 540,000,000 (or approximately $594,000,000 at July 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 two years; 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.

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

Item 1A.
Risk Factors

For information regarding risk factors, please refer to Part I, Item 1A in the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2014.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

The following table contains the Company’s share repurchases of equity securities in the second quarter of 2014:
Issuer Purchases of Equity Securities
Period
(a) Total Number of
Shares (or Units)
Purchased
 
(b) Average
Price Paid per
Share (or Unit)
 
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
 
(d) Maximum Number
(or Approximate Dollar
Value) of Shares, (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
May 1, 2014 to
May 31, 2014
83,610

 
$
89.17

 
83,610

 
$
285,398,000

June 1, 2014 to
June 30, 2014
18,119

 
$
99.34

 
18,119

 
$
283,598,000

July 1, 2014 to
July 31, 2014
—

 
$
—

 
—

 
$
283,598,000

TOTAL
101,729

 
$
90.98

 
101,729

 
$
283,598,000


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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Item 6. Exhibits

(a)
Exhibits:
 
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
The following financial information from Tiffany & Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2014, filed with the SEC, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Earnings; (iv) the Condensed Consolidated Statement of Stockholders’ Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (vi) the Notes to the Condensed Consolidated Financial Statements.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
TIFFANY & CO.
 
 
(Registrant)
 
 
Date: August 27, 2014
 
By: /s/ Ralph Nicoletti
 
 
Ralph Nicoletti
 
 
Executive Vice President
 
 
Chief Financial Officer
 
 
(principal financial officer)


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