UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
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(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 for the quarter ended October 31, 2004. OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 for the transition period from ________ to
_____________.
Commission file number: 1-9494
TIFFANY & CO.
(Exact name of registrant as specified in its charter)
Delaware 13-3228013
(State of incorporation) (I.R.S. Employer Identification No.)
727 Fifth Ave. New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 755-8000
Former name, former address and former fiscal year, if changed since last report
_________.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
------- ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X . No .
------- -------
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, 145,499,996 shares outstanding at the close
of business on November 30, 2004.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2004
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - October 31, 2004,
January 31, 2004 and October 31, 2003 (Unaudited) 3
Condensed Consolidated Statements of Earnings - for the three
and nine months ended October 31, 2004 and
2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows - for the
nine months ended October 31, 2004 and 2003 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-23
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(e) Issuer Purchases of Equity Securities 25
Item 6. Exhibits and Reports on Form 8-K 26
(a) Exhibits
(b) Reports on Form 8-K
2
PART I. Financial Information
Item 1. Financial Statements
TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)
October 31, January 31, October 31,
2004 2004 2003
-------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 129,776 $ 276,115 $ 152,724
Accounts receivable, less allowances
of $6,264 $6,992 and $6,485 124,080 131,990 115,411
Inventories, net 1,130,767 871,251 897,482
Deferred income taxes 51,181 45,043 44,503
Prepaid expenses and other current assets 43,613 23,683 43,840
-------------- -------------- --------------
Total current assets 1,479,417 1,348,082 1,253,960
Property, plant and equipment, net 917,837 885,092 877,205
Deferred income taxes - - 1,967
Other assets, net 188,860 157,914 158,854
-------------- -------------- --------------
$ 2,586,114 $ 2,391,088 $ 2,291,986
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 267,389 $ 41,948 $ 128,202
Current portion of long-term debt - 51,920 50,573
Accounts payable and accrued liabilities 193,458 209,842 199,756
Income taxes payable 12,425 45,922 952
Merchandise and other customer credits 50,230 45,527 44,867
-------------- -------------- --------------
Total current liabilities 523,502 395,159 424,350
Long-term debt 393,194 392,991 386,677
Postretirement/employment benefit obligations 39,639 36,746 36,803
Deferred income taxes 26,256 22,397 -
Other long-term liabilities 93,628 75,595 97,508
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; authorized 240,000 shares,
issued and outstanding 145,756, 146,735 and 146,285 1,457 1,467 1,463
Additional paid-in capital 404,613 395,182 384,315
Retained earnings 1,086,641 1,058,203 955,060
Accumulated other comprehensive gain (loss), net of tax:
Foreign currency translation adjustments 19,307 15,856 11,148
Deferred hedging losses (1,952) (2,508) (2,691)
Unrealized losses on marketable securities (171) - -
Minimum pension liability adjustment - - (2,647)
-------------- -------------- --------------
Total stockholders' equity 1,509,895 1,468,200 1,346,648
-------------- -------------- --------------
$ 2,586,114 $ 2,391,088 $ 2,291,986
============== ============== ==============
See notes to condensed consolidated financial statements
3
TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------------------------------------------------------
2004 2003 2004 2003
------------- ------------- --------------- ---------------
Net sales $ 461,152 $ 430,123 $ 1,394,709 $ 1,268,457
Cost of sales 214,842 192,402 623,449 546,120
------------- ------------- --------------- ---------------
Gross profit 246,310 237,721 771,260 722,337
Selling, general and administrative expenses 207,362 188,506 600,119 545,700
------------- ------------- --------------- ---------------
Earnings from operations 38,948 49,215 171,141 176,637
Other expenses, net 5,276 4,933 13,398 10,696
------------- ------------- --------------- ---------------
Earnings before income taxes 33,672 44,282 157,743 165,941
Provision for income taxes 12,863 16,251 60,010 60,900
------------- ------------- --------------- ---------------
Net earnings $ 20,809 $ 28,031 $ 97,733 $ 105,041
============= ============= =============== ===============
Net earnings per share:
Basic $ 0.14 $ 0.19 $ 0.67 $ 0.72
============= ============= =============== ===============
Diluted $ 0.14 $ 0.19 $ 0.66 $ 0.71
============= ============= =============== ===============
Weighted average number of common shares:
Basic 145,943 146,047 146,376 145,412
Diluted 147,750 149,079 148,608 148,024
See notes to condensed consolidated financial statements.
4
TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
October 31,
---------------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 97,733 $ 105,041
Adjustments to reconcile net earnings to net cash
(used in) provided by operating activities:
Depreciation and amortization 79,709 65,181
(Gain) loss on equity investments (759) 1,565
Provision for uncollectible accounts 1,603 821
Provision for inventories 4,747 4,299
Deferred income taxes (3,988) 4,937
Provision for postretirement/employment benefits 2,893 3,686
Deferred hedging losses transferred to earnings 2,085 2,247
Changes in assets and liabilities:
Accounts receivable 13,893 925
Inventories (260,943) (143,557)
Prepaid expenses and other current assets (21,168) (20,497)
Other assets, net (5,441) 6,906
Accounts payable (1,688) 20,322
Accrued liabilities (15,009) 9,709
Income taxes payable (30,088) (26,952)
Merchandise and other customer credits 4,643 2,049
Other long-term liabilities 13,732 13,048
---------------- ----------------
Net cash (used in) provided by operating activities (118,046) 49,730
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (111,012) (247,752)
Purchases of marketable securities (24,778) -
Proceeds from lease incentives 3,329 3,214
Purchases of other investments (2,382) (400)
Proceeds from sale of other investments 364 -
---------------- ----------------
Net cash used in investing activities (134,479) (244,938)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 135,105
Proceeds from short-term borrowings, net 224,263 73,048
Repayment of long-term borrowings, net (51,530) (4,000)
Repurchase of Common Stock (46,576) (4,610)
Proceeds from exercise of stock options 5,943 16,831
Cash dividends on Common Stock (24,887) (20,366)
---------------- ----------------
Net cash provided by financing activities 107,213 196,008
---------------- ----------------
Effect of exchange rate changes on
cash and cash equivalents (1,027) (4,273)
---------------- ----------------
Net decrease in cash and cash equivalents (146,339) (3,473)
Cash and cash equivalents at beginning of year 276,115 156,197
---------------- ----------------
Cash and cash equivalents at end of nine months $ 129,776 $ 152,724
================ ================
See notes to condensed consolidated financial statements.
5
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. and all majority-owned domestic and
foreign subsidiaries ("Company"). 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 include only normal recurring adjustments
including the adjustment necessary as a result of the use of the LIFO
(last-in, first-out) method of inventory valuation, which is based on
assumptions as to inflation rates and projected fiscal year-end
inventory levels) necessary to present fairly the Company's financial
position as of October 31, 2004 and the results of its operations and
cash flows for the interim periods presented. The condensed
consolidated balance sheet data for January 31, 2004 is derived from
the audited financial statements, which are included in the Company's
report on Form 10-K, which should be read in connection with these
financial statements. In accordance with the rules of the Securities
and Exchange Commission, these financial statements do not include all
disclosures required by generally accepted accounting principles.
Certain reclassifications were made to the prior year's financial
statement amounts and related note disclosures to conform with the
current year's presentation.
The Company's business is seasonal, with a higher proportion of sales
and earnings generated in the last quarter of the fiscal year and,
therefore, the results of its operations for the three and nine months
ended October 31, 2004 and 2003 are not necessarily indicative of the
results of the entire fiscal year.
2. STOCK - BASED COMPENSATION
Employee stock options are accounted for using the intrinsic value
method in accordance with Accounting Principle Board Opinion No. 25
"Accounting for Stock Issued to Employees" and its related
interpretations. Compensation costs were not recorded in net earnings
for stock options, as all options granted had an exercise price equal
to the market value of the underlying common stock on the date of
grant.
6
STOCK - BASED COMPENSATION (continued)
Had compensation expense been determined and recorded based upon the
fair-value recognition provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation",
net earnings and earnings per share would have been reduced to pro
forma amounts as follows:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------------------------------------
(in thousands, except per
share amounts) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------
Net earnings as reported $20,809 $28,031 $ 97,733 $105,041
Stock-based employee
compensation expense
determined under fair-
value-based method for all
awards, net of tax (3,451) (3,292) (10,474) (9,911)
---------------- --------------- -------------- ---------------
Pro forma net earnings $17,358 $24,739 $ 87,259 $95,130
================ =============== ============== ===============
Earnings per basic share:
As reported $ 0.14 $ 0.19 $ 0.67 $ 0.72
================ =============== ============== ===============
Pro forma $ 0.12 $ 0.17 $ 0.60 $ 0.65
================ =============== ============== ===============
Earnings per diluted share:
As reported $ 0.14 $ 0.19 $ 0.66 $ 0.71
================ =============== ============== ===============
Pro forma $ 0.12 $ 0.17 $ 0.59 $ 0.64
================ =============== ============== ===============
3. NEW ACCOUNTING PRONOUNCEMENTS
In May 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FSP No. 106-2"). FSP No. 106-2, which
replaced the same titled FSP No. 106-1, provides guidance on the
accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("Act") that was signed into
law in December 2003. The Act provides subsidies to plan sponsors who
provide prescription benefits that are at least actuarially equivalent
to prescription benefits under regulations issued by the Centers for
Medicare & Medicaid Services. Under FSP No. 106-1, the Company elected
to defer the accounting for the effects of the Act. FSP No. 106-2 is
effective for interim periods beginning after June 15, 2004. The
Company adopted FSP No. 106-2 in the third quarter of 2004 and its
impact was not significant on the Company's financial position,
earnings or cash flows.
7
NEW ACCOUNTING PRONOUNCEMENTS (continued)
In December 2003, the FASB issued Interpretation No. 46R,
"Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R
replaced the same titled FIN 46 that was issued in January 2003. FIN
46R requires that variable interest entities be consolidated by the
primary beneficiary (if any) if the entity's equity investors at risk
do not have the characteristics of a controlling financial interest or
the equity investors do not have significant equity at risk for the
entity to finance its activities without additional financial support.
The provisions of FIN 46 were effective immediately for all entities
created after January 31, 2003 and FIN 46R was effective for those
entities in the first quarter of 2004. For those entities created
prior to February 1, 2003, the Company was required to adopt the
provisions of FIN 46R by the end of the first quarter of 2004. The
adoption of FIN 46R did not have an impact on the Company's financial
position, earnings or cash flows.
4. INVENTORIES
October 31, January 31, October 31,
(in thousands) 2004 2004 2003
----------------------------------------------------------------------------------------------------
Finished goods $ 824,736 $659,558 $706,653
Raw materials 241,046 165,768 141,520
Work-in-process 70,160 50,517 53,911
---------------- ---------------- ----------------
1,135,942 875,843 902,084
Reserves (5,175) (4,592) (4,602)
---------------- ---------------- ----------------
Inventories, net $ 1,130,767 $871,251 $897,482
================ ================ ================
LIFO-based inventories at October 31, 2004, January 31, 2004 and
October 31, 2003 represented 68%, 69% and 71% of inventories, net,
with the current cost exceeding the LIFO inventory value by
$48,296,000, $30,587,000 and $27,735,000 at the end of each period.
The LIFO valuation method had the effect of decreasing earnings per
diluted share by $0.04 and $0.01 for the three months ended October
31, 2004 and 2003 and by $0.07 and $0.03 for the nine months ended
October 31, 2004 and 2003.
5. MARKETABLE SECURITIES
The Company's marketable securities are classified as available-for-
sale and are recorded at fair value in other assets, net, with
unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses are recorded in other
expenses, net. The marketable securities are held for an indefinite
period of time, but might be sold in the future as changes in market
conditions or economic factors occur. The fair-value of the marketable
securities is determined based on prevailing market prices. The
Company did not have investments in marketable securities at January
31, 2004 or October 31, 2003. The following is a summary of the cost
and fair values of the Company's marketable securities at October 31,
2004:
Unrealized
(in thousands) Cost Fair Value Losses
----------------------------------------------------------------------
Mutual Fund $24,778 $24,607 $171
====================================================
8
6. DEBT
In October 2004, the Company entered into a yen 5,000,000,000
short-term loan agreement, due in January 2005, bearing interest at a
rate of 0.59%. The proceeds of this loan were used to repay a portion
of the Company's yen 5,500,000,000 loan which came due in October
2004.
In September 2004, the Company exercised its option to increase by
$50,000,000 its multicurrency revolving credit facility ("Credit
Facility") to $250,000,000. The Credit Facility, originally entered
into in November 2001 and expiring in November 2006, is with six
participating banks and contains covenants that require maintenance of
certain debt/equity interest-coverage ratios and other requirements
customary to loan facilities of this nature. At October 31, 2004,
January 31, 2004 and October 31, 2003, the amounts outstanding under
the Credit Facility were $210,528,000, $32,861,000 and $118,085,000.
7. INCOME TAXES
The effective income tax rate for the three and nine months ended
October 31, 2004 was 38.2% and 38.0%. The effective income tax rate
for the three and nine months ended October 31, 2003 was 36.7%. The
increase from the prior year's tax rate was primarily due to a
favorable reserve adjustment recorded in the prior year relating to
the elimination of certain tax exposures. The effective income tax
rate for both years also includes a tax benefit from the
Extraterritorial Income Exclusion Act ("ETI") of 2000. The ETI
provides for the exclusion from United States taxable income of
certain "extraterritorial" income earned from the sale or license of
qualified property.
8. EARNINGS PER SHARE
Basic earnings per share is computed as net earnings divided by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share include the dilutive effect of the assumed
exercise of stock options.
The following table summarizes the reconciliation of the numerators
and denominators for the basic and diluted earnings per share ("EPS")
computations:
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------
Net earnings for basic
and diluted EPS $20,809 $28,031 $97,733 $105,041
============= ============= ============= =============
Weighted average shares
for basic EPS 145,943 146,047 146,376 145,412
Incremental shares based
upon the assumed
exercise of stock
options 1,807 3,032 2,232 2,612
------------- ------------- ------------- -------------
Weighted average shares
for diluted EPS 147,750 149,079 148,608 148,024
============= ============= ============= =============
9
EARNINGS PER SHARE (continued)
For the three months ended October 31, 2004 and 2003, there were
6,616,000 and 1,421,000 stock options excluded from the computations
of earnings per diluted share due to their antidilutive effect. For
the nine months ended October 31, 2004 and 2003, there were 3,674,000
and 4,665,000 stock options excluded from the computations of earnings
per diluted share due to their antidilutive effect.
9. COMPREHENSIVE EARNINGS
The components of comprehensive earnings were:
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------
Net earnings $20,809 $28,031 $97,733 $105,041
Other comprehensive gain
(loss), net of tax:
Deferred hedging (losses)
gains (1,216) (1,080) 556 (407)
Foreign currency
translation adjustments 14,762 25,116 3,451 25,709
Unrealized gains/(losses)
on marketable securities 568 - (171) -
------------- ------------- ------------- -------------
Comprehensive earnings $34,923 $52,067 $101,569 $130,343
============= ============= ============= =============
10. EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory defined benefit pension plan
("Pension Plan"), an unfunded Supplemental Retirement Income Plan and,
in January 2004, established a non-qualified unfunded retirement
income plan to recognize compensation in excess of the Internal
Revenue Service Code limits. The Company also provides certain
health-care and life insurance benefits ("Other Postretirement
Benefits") and maintains other retirement plans, profit sharing and
retirement savings plans.
Net periodic pension and other postretirement benefit expense included
the following components:
Three Months Ended October 31,
---------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
---------------------------------------------------------
(in thousands) 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------
Service cost $2,699 $ 2,357 $ 307 $ 823
Interest cost 2,640 2,265 400 648
Expected return on plan assets (2,079) (1,599) - -
Amortization of prior service
cost 201 47 (303) (2)
Amortization of net loss 395 239 82 64
---------------------------------------------------------
Net expense $3,856 $ 3,309 $ 486 $1,533
=========================================================
10
EMPLOYEE BENEFIT PLANS (continued)
Nine Months Ended October 31,
-------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
-------------------------------------------------------
(in thousands) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------
Service cost $ 8,097 $7,071 $ 921 $2,469
Interest cost 7,920 6,795 1,236 1,944
Expected return on plan assets (6,237) (4,797) - -
Amortization of prior service
cost 603 141 (909) (6)
Amortization of net loss 1,185 717 278 192
-------------------------------------------------------
Net expense $11,568 $9,927 $1,526 $4,599
=======================================================
The Company's funding policy for the Pension Plan is to contribute the
maximum tax-deductible contribution in any given year. The Company
anticipates making a cash contribution to the Pension Plan in 2004 of
approximately $25,000,000.
11. SEGMENT INFORMATION
The Company's reportable segments are: U.S. Retail, International
Retail, Direct Marketing and Specialty Retail (see Management's
Discussion and Analysis of Financial Condition and Results of
Operations for an overview of the Company's business). The Company's
reportable segments, excluding Specialty Retail, represent channels of
distribution that offer similar merchandise and service and have
similar marketing and distribution strategies. The Specialty Retail
segment includes the consolidated results of other ventures operated
under non-TIFFANY & CO. trademarks or trade names. In deciding how to
allocate resources and assess performance, the Company's Executive
Officers regularly evaluate the performance of its reportable segments
on the basis of net sales and earnings from operations, after the
elimination of inter-segment sales and transfers.
Certain information relating to the Company's reportable segments is
set forth below:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
------------------------------------------------------------------------------------------------------
Net sales:
U.S. Retail $ 216,500 $202,844 $ 666,932 $ 589,466
International Retail 190,851 173,533 556,530 508,044
Direct Marketing 36,861 39,311 114,034 120,537
Specialty Retail 16,940 14,435 57,213 50,410
-------------- --------------- -------------- ---------------
$ 461,152 $430,123 $1,394,709 $1,268,457
============== =============== ============== ===============
Earnings(losses)from
operations*:
U.S. Retail $ 35,844 $ 37,654 $ 133,722 $ 118,638
International Retail 43,978 43,568 138,755 134,429
Direct Marketing 1,938 5,053 14,404 22,145
Specialty Retail (5,352) (4,132) (9,828) (7,213)
-------------- --------------- -------------- ---------------
$ 76,408 $ 82,143 $ 277,053 $ 267,999
============== =============== ============== ===============
* Represents earnings from operations before unallocated corporate
expenses and other expenses, net.
11
SEGMENT INFORMATION (continued)
The following table sets forth a reconciliation of the reportable
segment's earnings from operations to the Company's consolidated
earnings before income taxes:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------
Earnings from
operations for
reportable segments $ 76,408 $82,143 $277,053 $267,999
Unallocated corporate
expenses (37,460) (32,928) (105,912) (91,362)
Other expenses, net (5,276) (4,933) (13,398) (10,696)
--------------- --------------- --------------- ---------------
Earnings before income
taxes $33,672 $44,282 $157,743 $165,941
=============== =============== =============== ===============
Unallocated corporate expenses include costs related to the Company's
administrative support functions such as information technology,
finance, legal and human resources, as well as changes in the LIFO
inventory valuation reserve, which the Company does not allocate to
its reportable segments.
12. SUBSEQUENT EVENT
On November 18, 2004, the Company's Board of Directors declared a
quarterly dividend of $0.06 per share. This dividend will be paid on
January 10, 2005 to stockholders of record on December 20, 2004.
On November 5, 2004, the Company entered into an agreement with Tahera
Diamond Corporation ("Tahera"), a Canadian diamond mining and
exploration company, to buy or market all of the diamonds to be mined
at the Jericho mine to be constructed and developed by Tahera in
Nunavut, Canada (the "Project"). In consideration of that agreement,
the Company has provided Tahera a credit facility which allows Tahera
to draw up to Cdn$35,000,000 (approximately $28,000,000) to finance
the development and construction of the Project. Mine construction is
expected to commence in 2005.
12
PART I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
--------
The Company is a holding company that operates through its subsidiary companies.
The Company's principal subsidiary, Tiffany and Company, is a jeweler and
specialty retailer. Through Tiffany and Company and other subsidiaries, the
Company is engaged in product design, manufacturing and retailing activities.
The Company operates four channels of distribution:
o U.S. Retail - sales in TIFFANY & CO. stores in the U.S.;
o International Retail - sales in TIFFANY & CO. stores and department store
boutiques outside the U.S. (also includes a modest amount of
business-to-business sales, Internet sales and wholesale sales of TIFFANY &
CO. products outside the U.S.);
o Direct Marketing - Internet, catalog and business-to-business sales of
TIFFANY & CO. products in the U.S.;
o Specialty Retail - primarily includes retail sales in Little Switzerland
stores on Caribbean islands, as well as in Florida and Alaska. It also
includes worldwide sales made under additional trademarks or trade names
other than TIFFANY & CO.
All references to years relate to the fiscal year that ends on January 31 of the
following calendar year.
In the discussion that follows, a store's sales are included in "comparable
store sales" when the store has been open more than 12 months. If a store is
opened in the first 15 days of a month it is considered open for a full month.
If a store closes in the first 15 days of a month, it will not be considered
comparable as of that month. The results of relocated stores remain in
comparable store sales if the relocation occurs within the same geographical
market. The results of a store in which the square footage has been expanded or
reduced remain in the comparable store base.
Net sales increased 7% to $461,152,000 in the three months ended October 31,
2004 ("third quarter") and 10% to $1,394,709,000 in the nine months ended
October 31, 2004 ("year-to-date"). The Company's reported sales reflect either a
translation-related benefit from strengthening foreign currencies or a detriment
from a strengthening U.S dollar. On a constant-exchange-rate basis (see Non-GAAP
Measures section below), net sales rose 5% in the third quarter primarily due to
new store openings, and rose 7% in the year-to-date primarily due to growth in
worldwide comparable store sales.
Net earnings in the third quarter declined 26% to $20,809,000, or $0.14 per
diluted share, versus $28,031,000, or $0.19 per diluted share, in the prior
year. Net earnings in the year-to-date were $97,733,000, or $0.66 per diluted
share, versus $105,041,000, or $0.71 per diluted share, in the prior year. In
both periods, the increase in sales was insufficient to offset the higher cost
of sales. The third quarter was also impacted by increased selling, general and
administrative expenses ("SG&A").
13
NON-GAAP MEASURES
-----------------
The Company reports information in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP"), but management believes that ongoing operating
results are more difficult to understand if only GAAP financial measures are
available to review. Internally, management monitors the sales performance of
its international subsidiaries on a non-GAAP basis that excludes, from GAAP
reported sales, the positive or negative effects that result from translating
sales of its international subsidiaries into U.S. dollars
(constant-exchange-rate basis). Management uses this constant-exchange-rate
measure because it believes it is a more representative assessment of the sales
performance of its international subsidiaries and provides for better
comparability between reporting periods.
The Company's management does not itself, nor does it suggest that investors
should, consider such non-GAAP financial measures in isolation from, or as a
substitute for, financial information prepared in accordance with GAAP. The
Company presents such non-GAAP financial measures in reporting its financial
results to provide investors with an additional tool to evaluate and analyze the
Company's operating results.
The following tables reconcile net sales percentage increases (decreases)
measured and reported in accordance with GAAP to the non-GAAP
constant-exchange-rate basis:
Three Months Ended Nine Months Ended
October 31, 2004 October 31, 2004
----------------------------------------- -------------------------------------------
GAAP Constant GAAP Constant
Reported Trans- Exchange Reported Trans- Exchange
Net lation Rate Net lation Rate
Net Sales: Sales Impact Sales Sales Impact Sales
---------- ------------- ------------ -------------- ------------- ------------- --------------
Worldwide 7% 2% 5% 10% 3% 7%
International
Retail 10% 4% 6% 10% 7% 3%
Japan Retail 2% 4% (2%) - 7% (7%)
Other Asia-
Pacific 24% 2% 22% 30% 4% 26%
Europe 19% 10% 9% 23% 12% 11%
Three Months Ended Nine Months Ended
October 31, 2004 October 31, 2004
----------------------------------------- --------------------------------------------
GAAP Constant GAAP Constant
Reported Trans- Exchange Reported Trans- Exchange
Comparable Net lation Rate Net lation Rate
Store Sales: Sales Impact Sales Sales Impact Sales
------------ ------------- ------------ -------------- ------------- ------------- --------------
Worldwide 3% 2% 1% 8% 3% 5%
International
Retail 3% 5% (2%) 4% 6% (2%)
Japan Retail (1%) 4% (5%) (2%) 7% (9%)
Other Asia-
Pacific 8% 2% 6% 19% 4% 15%
Europe 11% 10% 1% 14% 11% 3%
14
RESULTS OF OPERATIONS
---------------------
Certain operating data as a percentage of net sales were as follows:
Three Months Nine Months
Ended October 31, Ended October 31,
------------------ ------------------
2004 2003 2004 2003
------------------ ------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 46.6 44.7 44.7 43.1
------------------ ------------------
Gross profit 53.4 55.3 55.3 56.9
Selling, general
and administrative expenses 45.0 43.8 43.0 43.0
------------------ ------------------
Earnings from operations 8.4 11.5 12.3 13.9
Other expenses, net 1.1 1.2 1.0 0.8
------------------ ------------------
Earnings before income taxes 7.3 10.3 11.3 13.1
Provision for income taxes 2.8 3.8 4.3 4.8
------------------ ------------------
Net earnings 4.5% 6.5% 7.0% 8.3%
================== ==================
Net Sales
---------
Net sales by channel of distribution were as follows:
Three Months Nine Months
Ended October 31, Ended October 31,
--------------------- ----------------------
(in thousands) 2004 2003 2004 2003
-------------- --------------------- ----------------------
U.S. Retail $216,500 $202,844 $ 666,932 $ 589,466
International Retail 190,851 173,533 556,530 508,044
Direct Marketing 36,861 39,311 114,034 120,537
Specialty Retail 16,940 14,435 57,213 50,410
--------------------- ----------------------
$461,152 $430,123 $1,394,709 $1,268,457
===================== ======================
U.S. Retail sales increased 7% in the third quarter and 13% in the year-to-date,
primarily due to 4% and 11% comparable store sales growth. Sales in the New York
flagship store rose 1% and 14% in those periods while comparable branch store
sales increased 5% and 10%. Comparable store sales growth resulted from
increases in the average sales amount per transaction, while the number of
transactions decreased. Management attributes the increases to sales of higher
priced merchandise and selective price increases.
International Retail sales increased 10% in both the third quarter and
year-to-date. On a constant-exchange-rate basis, International Retail sales
increased 6% and 3%, while comparable store sales decreased 2% in both the third
quarter and year-to-date.
In Japan, on a constant-exchange-rate basis, total retail sales declined 2% in
the third quarter and 7% in the year-to-date and comparable store sales declined
5% and 9%. Management believes that Japan sales have been affected by generally
weak consumer spending on jewelry and increased "luxury-goods" competition, as
well as by management's decision to increase the average price point and
introduce selections at higher price points in the silver jewelry category.
Sales declined in silver jewelry overall and non-silver designer jewelry
categories in both the third quarter and year-to-date (categories that
represented 26% and 15% of Japan's total sales in 2003). Management continues to
focus on product assortment repositioning and new product introductions and
believes that incremental publicity and targeted marketing initiatives, as well
as the recent opening of two free-standing stores, have enhanced and will
enhance overall customer awareness and lead to gradually improving sales and
profitability.
In the Asia-Pacific region outside of Japan, comparable store sales on a
constant-exchange-rate basis increased 6% in the third quarter and 15% in the
year-to-date due to growth in most markets. In Europe, comparable store
15
sales on a constant-exchange-rate basis increased 1% in the third quarter and 3%
in the year-to-date due to growth in all markets except London. However, total
sales in London increased due to the opening of a new store in 2004.
Direct Marketing sales declined 6% in the third quarter and 5% in the
year-to-date. Combined e-commerce/catalog sales declined 1% in the third quarter
and increased 5% in the year-to-date. The number of catalog orders decreased in
the third quarter and year-to-date, while the number of e-commerce orders was
slightly lower in the third quarter and higher in the year-to-date. However,
there were increases in both the average catalog and e-commerce order size which
management attributes to selective price increases. The Company continues to
experience increased web site traffic, as well as shifts by purchasers from
catalog to e-commerce. In the Business Sales division, management made a
decision to discontinue service award program sales as of the end of 2003. As a
result of that decision, sales in the Business Sales division declined 17% in
the third quarter and 23% in the year-to-date. The Business Sales division
continues to offer a range of business gifts, event-related trophies and other
awards and those sales increased 6% in the third quarter and 7% in the
year-to-date.
Specialty Retail sales rose 17% in the third quarter and 13% in the
year-to-date. The third quarter's sales increase was primarily due to the
commencement of sales of rough diamonds purchased as part of larger assortments
from certain mines but determined, in the normal course of business, to be
unsuitable for Tiffany's production. During the quarter, sales growth in LITTLE
SWITZERLAND stores was affected by severely adverse weather in the Caribbean. In
addition, in October the first IRIDESSE store opened in Tysons Galleria in
McLean, Virginia, and a second store opened in November in The Mall at Short
Hills in New Jersey. IRIDESSE focuses exclusively on the pearl jewelry category.
Worldwide retail gross square footage of Company-operated TIFFANY & CO. stores
has increased 8% in 2004; the Company's long-term strategy calls for a 5% annual
increase. Actual 2004 store openings (closings) are as follows:
Actual Openings
Location (Closings) 2004
-------- ---------------
Palm Beach Gardens, Florida Second Quarter
Edina, Minnesota Second Quarter
Kansas City, Missouri Third Quarter
Westport, Connecticut Fourth Quarter
Wakayama, Japan First Quarter
Nagano, Japan (First Quarter)
Takasaki, Japan Third Quarter
Marunouchi, Tokyo, Japan Third Quarter
Umeda, Osaka, Japan Fourth Quarter
London, England First Quarter
Taipei, Taiwan Second Quarter
Shanghai, China Third Quarter
No additional new store openings will occur during 2004.
Gross Profit
------------
Gross profit as a percentage of net sales ("gross margin") declined in the third
quarter and year-to-date by 1.9 and 1.6 percentage points. Approximately 58% and
44% of the declines resulted from LIFO inventory charges of $8,682,000 in the
third quarter and $17,708,000 in the year-to-date (versus $3,500,000 and
$7,600,000 a year ago), primarily related to higher costs of precious metals and
diamonds. In order to maintain competitive pricing, the Company has not
increased retail prices sufficiently
16
to offset the higher costs. Another factor negatively affecting gross margin
related to unused internal jewelry manufacturing capacity (representing
approximately 21% and 25% of the decline in the quarter and year-to-date) due to
decreased demand for silver jewelry. To a lesser extent, other factors included
changes in sales mix, the opening of an additional distribution center in the
third quarter of 2003, expansion of rough diamond sourcing and increased import
tariffs on U.S. manufactured products shipped to Europe; none of the foregoing
other factors was individually significant.
The Company's hedging program uses yen put options to stabilize product costs in
Japan over the short-term despite exchange rate fluctuations. The Company
adjusts its retail prices in Japan from time to time to address longer-term
changes in the yen/dollar relationship and local competitive pricing.
Management's long-term strategy and objectives include achieving product
manufacturing/sourcing efficiencies (including increased internal manufacturing
and direct rough-diamond sourcing), controlling costs and implementing selective
price adjustments in order to maintain the Company's gross margin at, or above,
prior year levels. However, management expects a year-over-year decline in gross
margin in the fourth quarter due to some continued effect of recent adverse
factors affecting gross margin.
Selling, General and Administrative Expenses
--------------------------------------------
SG&A expenses increased 10% in both the third quarter and year-to-date. The
majority of the increases were due to higher marketing expenses (representing
approximately 45% of the increase in the third quarter and 23% in the
year-to-date), labor and benefit costs (representing approximately 23% of the
increase in the third quarter and 38% in the year-to-date) and depreciation and
occupancy expenses (representing approximately 20% of the increase in the third
quarter and 21% in the year-to-date). As a percentage of net sales, SG&A
increased in the third quarter due to insufficient sales growth to offset fixed
costs, but was unchanged in the year-to-date. Management's longer-term objective
is to reduce the ratio of SG&A expenses to net sales by controlling expenses so
that anticipated sales growth will result in improved earnings. If net sales
reach management's expectations for the fourth quarter (a high-single-digit
percentage increase), management expects the ratio in the fourth quarter and
full year to improve modestly from the prior year.
Earnings from Operations
------------------------
Three months ended October 31,
--------------------------------------
(in thousands) 2004 2003
------------------------------------------------------------------------------------
Earnings (losses) from operations:
U.S. Retail $ 35,844 $ 37,654
International Retail 43,978 43,568
Direct Marketing 1,938 5,053
Specialty Retail (5,352) (4,132)
------------------------------------------
Earnings from operations for reportable
segments 76,408 82,143
Unallocated corporate expenses (37,460) (32,928)
------------------------------------------
Earnings from operations $ 38,948 $ 49,215
==========================================
17
Nine months ended October 31,
---------------------------------------
(in thousands) 2004 2003
------------------------------------------------------------------------------------
Earnings (losses) from operations:
U.S. Retail $ 133,722 $ 118,638
International Retail 138,755 134,429
Direct Marketing 14,404 22,145
Specialty Retail (9,828) (7,213)
---------------------------------------
Earnings from operations for reportable
segments 277,053 267,999
Unallocated corporate expenses (105,912) (91,362)
---------------------------------------
Earnings from operations $ 171,141 $ 176,637
---------------------------------------
Earnings from operations declined 21% in the third quarter. On a reportable
segment basis, the ratios of earnings (losses) from operations (before the
effect of unallocated corporate expenses and other expenses, net) to each
segment's net sales in the third quarter of 2004 and 2003 were as follows:
o U.S. Retail: 17% in 2004 versus 19% in 2003 (affected by higher SG&A
expenses);
o International Retail: 23% in 2004 versus 25% in 2003 (affected by a lower
gross margin and increased SG&A expenses);
o Direct Marketing: 5% in 2004 versus 13% in 2003 (primarily due to
insufficient sales growth to offset fixed expenses; in particular,
incremental expenses associated with the Customer Fulfillment Center
("CFC") which opened in September 2003; the CFC primarily supports the
Company's Direct Marketing segment); and
o Specialty Retail: (32)% in 2004 versus (29)% in 2003 (primarily due to
expenses associated with the development of new retail concepts under
trademarks or trade names other than TIFFANY & CO., and the effect of
lower-than-expected LITTLE SWITZERLAND sales due to adverse weather
conditions in the Caribbean).
Earnings from operations declined 3% in the year-to-date. On a reportable
segment basis, the ratios of earnings (losses) from operations (before the
effect of unallocated corporate expenses and other expenses, net) to each
segment's net sales in the year-to-date of 2004 and 2003 were as follows:
o U.S. Retail: 20% in both 2004 and 2003;
o International Retail: 25% in 2004 versus 26% in 2003;
o Direct Marketing: 13% in 2004 versus 18% in 2003 (primarily due to
insufficient sales growth to offset fixed expenses; in particular,
incremental expenses associated with the CFC which opened in September
2003; the CFC primarily supports the Company's Direct Marketing segment);
and
o Specialty Retail: (17)% in 2004 versus (14)% in 2003 (primarily due to
expenses associated with the development of new retail concepts under
trademarks or trade names other than TIFFANY & CO., partly offset by
decreases in LITTLE SWITZERLAND losses).
Unallocated corporate expenses include costs related to the Company's
administrative support functions such as information technology, finance, legal
and human resources, as well as changes in the LIFO inventory valuation reserve,
which the Company does not allocate to the operating segments. The 14% increase
in unallocated corporate expenses in the third quarter was primarily due to an
increase in the LIFO inventory valuation reserve (primarily due to increases in
the price of precious metals and diamonds). The 16% increase in unallocated
corporate expenses in the year-to-date was primarily due to an increase in the
LIFO inventory valuation reserve
18
(representing approximately two-thirds of the increase, primarily due to
increases in the price of precious metals and diamonds) and to a lesser extent,
increases in information technology infrastructure costs (approximately
one-quarter of the increase) and increases in other administrative support
costs.
Other Expenses, Net
-------------------
Other expenses, net in the third quarter and year-to-date were higher than the
prior year primarily due to an increase in interest expense ($2,065,000 and
$5,337,000). Interest expense rose as a consequence of the Company's
yen-denominated long-term debt issuance in September 2003, as well as from
increased borrowing for on-going operating needs under the Credit Facility (see
"Borrowings" below). Increased expenses were partially offset by an increase in
the Company's portion of earnings in equity investment ($1,638,000 and
$1,844,000) related to Aber Diamond Corporation in the third quarter and
year-to-date, in addition to higher interest income ($1,034,000) in the
year-to-date.
Provision for Income Taxes
--------------------------
The effective income tax rate in the third quarter and year-to-date was 38.2%
and 38.0%. The effective income tax rate was 36.7% in both prior-year periods.
The increase from the prior year's tax rate was primarily due to a favorable
reserve adjustment recorded in the prior year relating to the elimination of
certain tax exposures. The effective tax rate for both years also includes a tax
benefit from the Extraterritorial Income Exclusion Act ("ETI") of 2000. The ETI
provides for the exclusion from United States taxable income of certain
"extraterritorial" income earned from the sale or license of qualified property.
The American Jobs Creation Act of 2004 ("AJCA"), which was signed into law on
October 22, 2004, replaces the ETI export incentive with a deduction from
domestic manufacturing income. At this time, the Company is analyzing these new
provisions in order to determine their impact to the Company's financial
statements. The AJCA also provides that, subject to specified restrictions and
limitations, the earnings of foreign subsidiaries may be repatriated at a
reduced tax rate. Estimated undistributed earnings at October 31, 2004 which the
Company may repatriate during 2005, subject to final regulatory guidance and
approval by the Company's Board of Directors, will not exceed $165,000,000.
Since the Company has provided tax on these earnings at historical statutory
rates, it is expected that a tax benefit will be recorded with respect to any
repatriation. The Company expects to finalize the amount which may be
repatriated and the related tax benefit after the issuance of applicable
guidance by the U.S. Treasury Department.
New Accounting Standards
------------------------
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("FSP No.
106-2"). FSP No. 106-2, which replaced the same titled FSP No. 106-1, provides
guidance on accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("Act") that was signed into law in
December 2003. The Act provides subsidies to plan sponsors who provide
prescription benefits that are at least actuarially equivalent to prescription
benefits under regulations issued by the Centers for Medicare & Medicaid
Services. Under FSP No. 106-1, the Company elected to defer the accounting for
the effects of the Act. FSP No. 106-2 is effective for interim periods beginning
after June 15, 2004. The Company adopted FSP No. 106-2 in the third quarter of
2004 and its impact was not significant on the Company's financial position,
earnings or cash flows.
19
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46R"). FIN 46R replaces the same titled FIN 46
that was issued in January 2003. FIN 46R requires that certain variable interest
entities be consolidated by the primary beneficiary (if any), if the entity's
equity investors at risk do not have the characteristics of a controlling
financial interest or the equity investors do not have significant equity at
risk for the entity to finance its activities without additional financial
support. The provisions of FIN 46 were effective immediately for all entities
created after January 31, 2003 and FIN 46R is effective for those entities in
the first quarter of 2004. For those entities created prior to February 1, 2003,
the Company was required to adopt the provisions of FIN 46R by the end of the
first quarter of 2004. The adoption of FIN 46R did not have an impact on the
Company's financial position, earnings or cash flows.
Liquidity and Capital Resources
-------------------------------
The Company's liquidity needs have been, and are expected to remain, primarily a
function of its seasonal working capital requirements and capital expenditure
needs, which have increased due to the Company's expansion. The Company had a
net cash outflow from operating activities of $118,046,000 in the nine months
ended October 31, 2004, due to higher inventory purchases, compared with an
inflow of $49,730,000 in the prior-year period.
Working Capital
---------------
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were $955,915,000
and 2.8:1 at October 31, 2004, compared with $952,923,000 and 3.4:1 at January
31, 2004 and $829,610,000 and 3.0:1 at October 31, 2003.
Accounts receivable, less allowances at October 31, 2004 were 6% lower than
January 31, 2004 (which is typically a seasonal high point) and were 8% higher
than October 31, 2003 due to sales growth.
Inventories, net at October 31, 2004 were 30% above January 31, 2004 and 26%
above October 31, 2003. Changes in foreign currency exchange rates increased
inventory by less than 1% compared to January 31, 2004 and by 2% compared to
October 31, 2003. Raw material and work-in-process inventories ($311,206,000 at
October 31, 2004) increased 44% and 59% versus January 31, 2004 and October 31,
2003. These increases supported the commencement of direct rough-diamond
sourcing operations, as well as internal jewelry manufacturing activities.
Finished goods inventories ($824,736,000 at October 31, 2004) increased 25% and
17% versus January 31, 2004 and October 31, 2003 largely due to new and
anticipated store openings, anticipated comparable store sales growth, product
introductions and merchandising investments. Management expects the overall rate
of inventory growth to begin to decelerate from current levels by year-end. The
Company continually strives to better manage its inventory investment by
developing more effective systems and processes for product development,
assortment planning, sales forecasting, supply-chain logistics, and store
replenishment.
Capital Expenditures
--------------------
Capital expenditures were $111,012,000 in the nine months ended October 31,
2004, compared with $247,752,000 in the prior-year period which included the
purchase of the Company's Tokyo flagship store (for approximately $140,000,000
at the prevailing exchange rate at that time). Based on current plans,
management estimates that capital expenditures will be approximately
$180,000,000 in 2004 due to costs related to the opening and renovation of
stores and ongoing investments in new systems. In order to meet substantially
increased customer demand for diamond and other gemstone jewelry, the Company
intends to increase its internal jewelry manufacturing operations in 2005 by
complementing its existing manufacturing facility in
20
Pelham, New York with an additional facility. Management continues to expect
that total capital expenditures in 2005 and beyond will approximate 7-8% of net
sales.
In 2000, the Company began a multi-year project to renovate and reconfigure its
New York flagship store in order to increase the total sales area by
approximately 25%, and to provide additional space for customer service,
customer hospitality and special exhibitions. The increase in the sales area was
completed in 2001 when the renovated second floor opened to provide an expanded
presentation of engagement and other jewelry. The renovated sixth floor that now
houses the customer service department opened in 2002. The renovated fourth
floor that offers tableware merchandise opened in 2003. The renovated third
floor with silver jewelry and accessories opened in 2004. In conjunction with
the New York store project, the Company relocated its after-sales service
functions and several of its administrative functions. The Company has spent
approximately $82,000,000 to date for the New York store and related projects.
Based on current plans, the Company estimates that the overall cost of these
projects will be $110,000,000 when completed in 2007.
Share Repurchases
-----------------
In November 2003, the Board of Directors extended and increased the Company's
stock repurchase program ("Program"). The Program, which was due to expire in
November 2003, was extended until November 30, 2006; the remaining authorization
was increased by $100,000,000, allowing the Company at that time to repurchase
up to $116,500,000 of the Company's outstanding Common Stock in addition to
shares which had already been purchased as of November 2003. The timing of
purchases and the actual number of shares to be repurchased under the Program
depends on a variety of discretionary factors such as price and other market
conditions. In the three months ended October 31, 2004, the Company repurchased
and retired 700,000 shares of Common Stock at a cost of $21,132,000, or an
average cost of $30.19 per share. In the nine months ended October 31, 2004, the
Company repurchased and retired 1,435,000 shares of Common Stock at a cost of
$46,577,000, or an average cost of $32.46 per share. At October 31, 2004, there
remained $69,923,000 of authorization for future repurchases.
Borrowings
----------
The Company's sources of working capital are internally-generated cash flows,
borrowings available under a multicurrency revolving credit facility ("Credit
Facility") and Little Switzerland's revolving credit facility guaranteed by the
Company ("LS Facility").
In October 2004, the Company entered into a yen 5,000,000,000 short-term loan
agreement, due in January 2005, bearing interest at a rate of 0.59%. The
proceeds of this loan were applied toward the repayment of the Company's yen
5,500,000,000 loan which came due in October 2004.
In September 2004, the Company exercised its option to increase its $200,000,000
Credit Facility by an additional $50,000,000 to $250,000,000. The Company's
Credit Facility, originally entered into in November 2001 and expiring in
November 2006, is with six participating banks and contains covenants that
require maintenance of certain debt/equity interest-coverage ratios and other
requirements customary to loan facilities of this nature. At October 31, 2004,
January 31, 2004 and October 31, 2003, the amounts outstanding under the Credit
Facility were $210,528,000, $32,861,000 and $118,085,000.
In June 2003, the Company financed the purchase of the land and building housing
its Tokyo flagship store with a short-term yen 11,000,000,000 bridge loan
("Bridge Loan") with a bank. The loan had an interest rate of 0.58% and matured
on September 30, 2003. The loan was paid in full upon maturity. In
21
September 2003, the Company issued yen 15,000,000,000 of senior unsecured First
Series Yen denominated Bonds ("Bonds") due 2010 with principal due upon maturity
and a fixed coupon rate of 2.02% payable in semi-annual installments. The Bonds
were sold in a private transaction to qualified institutional investors in
Japan. The proceeds from the issuance were primarily used by the Company to
repay the Bridge Loan.
The ratio of total debt (short-term borrowings and long-term debt) to
stockholders' equity was 44% at October 31, 2004, compared with 33% at January
31, 2004 and 42% at October 31, 2003.
Based on the Company's financial position at October 31, 2004, management
anticipates that internally-generated cash flows and the funds available under
short-term borrowings will be sufficient to support the Company's planned
worldwide business expansion and seasonal working capital increases that are
typically required during the third and fourth quarters of the year.
The Company's contractual cash obligations and commercial commitments at October
31, 2004 and the effects such obligations and commitments are expected to have
on the Company's liquidity and cash flows in future periods have not
significantly changed since January 31, 2004, except for its agreement with
Tahera Diamond Corporation ("Tahera"), a Canadian diamond mining and exploration
company. On November 5, 2004, the Company entered into an agreement with Tahera
to buy or market all of the diamonds to be mined at the Jericho mine to be
constructed and developed by Tahera in Nunavut, Canada (the "Project"). In
consideration of that agreement, the Company has provided a credit facility to
Tahera which allows Tahera to draw up to Cdn$35,000,000 (approximately
$28,000,000) to finance the development and construction of the Project. At
October 31, 2004, there were no amounts outstanding under this credit facility.
Mine construction is expected to commence in 2005 and full-scale diamond
production is expected in early 2006.
Market Risk
-----------
The Company is exposed to market risk from fluctuations in foreign currency
exchange rates 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.
The Company uses yen currency-purchased put options and, to a lesser extent,
foreign-exchange forward contracts, to minimize the impact of a strengthening of
the U.S. dollar on foreign currency-denominated transactions. Gains or losses on
these instruments substantially offset losses or gains on the assets,
liabilities and transactions being hedged. Management neither foresees nor
expects significant changes in foreign currency exposure in the near future.
The Company uses interest rate swap contracts related to certain debt
arrangements to manage its net exposure to interest rate changes and to reduce
its overall cost of borrowing. The interest rate swap contracts effectively
convert fixed rate obligations to floating rate instruments. Additionally, since
the fair value of the Company's fixed-rate long-term debt is sensitive to
interest rate changes, the interest rate swap contracts serve as a hedge to
changes in the fair value of these debt instruments.
Management neither foresees nor expects significant changes in exposure to
interest rate fluctuations, nor in market risk-management practices.
22
Seasonality
-----------
As a jeweler and specialty retailer, the Company's business is seasonal in
nature, with the fourth quarter typically representing a proportionally greater
percentage of annual sales, earnings from operations and cash flow. Management
expects such seasonality to continue.
Risk Factors
------------
This document contains certain "forward-looking statements" concerning the
Company's objectives and expectations with respect to store openings, retail
prices, gross profit, expenses, inventory performance, capital expenditures and
cash flow. In addition, management makes other forward-looking statements from
time to time concerning objectives and expectations. As a jeweler and specialty
retailer, the Company's success in achieving its objectives and expectations is
partially dependent upon economic conditions, competitive developments and
consumer attitudes, including changes in consumer preferences for certain
jewelry styles. However, certain assumptions are specific to the Company and/or
the markets in which it operates. The following assumptions, among others, are
"risk factors" which could affect the likelihood that the Company will achieve
the objectives and expectations communicated by management: (i) that low or
negative growth in the economy or in the financial markets, particularly in the
U.S. and Japan, will not occur and reduce discretionary spending on goods that
are, or are perceived to be, "luxuries"; (ii) that consumer spending does not
decline substantially during the fourth quarter of any year; (iii) that
unsettled regional and/or global conflicts or crises do not result in military,
terrorist or other conditions creating disruptions or disincentives to, or
changes in the pattern, practice or frequency of tourist travel to the various
regions where the Company operates retail stores nor to the Company's continuing
ability to operate in those regions; (iv) that sales in Japan will not decline
substantially; (v) that there will not be a substantial adverse change in the
exchange relationship between the Japanese yen and the U.S. dollar; (vi) that
Mitsukoshi and other department store operators in Japan, in the face of
declining or stagnant department store sales, will not close or consolidate
stores which have TIFFANY & CO. retail locations; (vii) that Mitsukoshi will
continue as a leading department store operator in Japan; (viii) that existing
product supply arrangements, including license arrangements with third-party
designers Elsa Peretti and Paloma Picasso, will continue; (ix) that the
wholesale and retail market for high-quality rough and cut diamonds will provide
continuity of supply and pricing; (x) that the Company's diamond initiative
achieves their financial and strategic objectives; (xi) that new systems,
particularly for inventory management, can be successfully integrated into the
Company's operations; (xii) that distribution and manufacturing productivity and
capacity can be further improved to support the Company's expanding
requirements; (xiii) that new and existing stores and other sales locations can
be leased, re-leased or otherwise obtained on suitable terms in desired markets
and that construction can be completed on a timely basis; (xiv) that the Company
can successfully improve the results of Little Switzerland and achieve
satisfactory results from any future ventures into which it enters that are
operated under non-TIFFANY & CO. trademarks or trade names; and (xv) that the
Company's expansion plans for retail and direct selling operations and
merchandise development, production and management can continue to be executed
without meaningfully diminishing the distinctive appeal of the TIFFANY & CO.
brand.
23
Part I. Financial Information
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures was carried out by the Company
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the date of their evaluation and as of October 31, 2004, the
Company's disclosure controls and procedures have been designed and are being
operated in a manner that provides reasonable assurance that the information
required to be disclosed by the Company in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. The Company believes that a
controls system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
(b) Changes in Internal Controls
Subsequent to the date of the most recent evaluation of the Company's
internal controls, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
24
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
This table provides information with respect to purchases by the Company of
shares of its Common Stock during the third fiscal quarter of 2004:
----------------------------------------------------------------------------------------------------------
Total Number Approximate
of Shares Dollar Value
Purchased as of Shares
Total Average Part of a that May Yet
Number of Price Publicly be Purchased
Shares Paid Per Announced Under the
Period Purchased Share Program* Program*
----------------------------------------------------------------------------------------------------------
August 1, 2004
through
August 31, 2004 300,000 $29.95 4,288,800 $82,069,000
----------------------------------------------------------------------------------------------------------
September 1, 2004
through
September 30, 2004 200,000 $31.59 4,488,800 $75,750,000
----------------------------------------------------------------------------------------------------------
October 1, 2004
through
October 31, 2004
200,000 $29.14 4,688,800 $69,923,000
----------------------------------------------------------------------------------------------------------
Total 700,000 $30.19 4,688,800 $69,923,000
----------------------------------------------------------------------------------------------------------
* In November 2003, the Board of Directors expanded the Company's stock
repurchase program, which was first announced on September 21, 2000 and
scheduled to expire in November 2003; the Board extended the program until
November 30, 2006 and increased the remaining authorization by $100,000,000,
allowing the Company to repurchase up to $116,500,000 of the Company's
outstanding Common Stock in addition to those which already had been purchased.
Under a prior program, which expired in 2000, the Company had purchased
4,484,400 shares.
25
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification by Michael J. Kowalski pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification by James N. Fernandez pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
32 Certification by Michael J. Kowalski and James N.
Fernandez pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K:
On August 12, 2004, Registrant filed a Report on Form 8-K
reporting the issuance of a press release announcing its
unaudited earnings and results of operations for the second
quarter ended July 31, 2004.
26
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: December 1, 2004 By: /s/ James N. Fernandez
----------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
31.1 Certification by Michael J. Kowalski pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
31.2 Certification by James N. Fernandez pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32 Joint certification by Michael J. Kowalski and James N. Fernandez
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.