UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 July 31, 2005. 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, 142,430,610 shares outstanding at the close
of business on August 31, 2005.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2005
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 31, 2005,
January 31, 2005 and July 31, 2004 (Unaudited) 3
Condensed Consolidated Statements of Earnings - for the
three and six months ended July 31, 2005
and 2004 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows - for the
six months ended July 31, 2005 and 2004 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-22
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(e) Issuer Purchases of Equity Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 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)
July 31, January 31, July 31,
2005 2005 2004
-------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 128,611 $ 187,681 $ 153,623
Short-term investments - 139,200 -
Accounts receivable, less allowances
of $6,198, $7,491 and $5,979 126,000 133,545 114,596
Inventories, net 1,066,371 1,057,245 1,034,404
Deferred income taxes 72,084 64,790 52,598
Prepaid expenses and other current assets 51,991 25,428 50,029
---------------- ---------------- ----------------
Total current assets 1,445,057 1,607,889 1,405,250
Property, plant and equipment, net 916,374 917,853 892,436
Other assets, net 139,237 140,376 182,361
---------------- ---------------- ----------------
$ 2,500,668 $ 2,666,118 $ 2,480,047
---------------- ---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 22,966 $ 42,957 $ 157,941
Current portion of long-term debt - - 49,033
Accounts payable and accrued liabilities 178,322 186,013 173,635
Income taxes payable 20,510 118,536 21,831
Merchandise and other customer credits 51,491 52,315 47,776
---------------- ---------------- ----------------
Total current liabilities 273,289 399,821 450,216
Long-term debt 381,297 397,606 379,363
Postretirement/employment benefit obligations 40,778 40,220 37,917
Deferred income taxes 9,790 33,175 17,713
Other long-term liabilities 101,539 94,136 87,228
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; authorized 240,000 shares,
issued and outstanding 142,385, 144,548 and 146,371 1,424 1,445 1,464
Additional paid-in capital 445,349 426,308 415,434
Retained earnings 1,236,757 1,246,331 1,087,642
Accumulated other comprehensive gain (loss), net of tax:
Foreign currency translation adjustments 9,525 29,045 4,545
Deferred hedging gains (losses) 591 (2,118) (736)
Unrealized gains (losses) on marketable securities 329 149 (739)
---------------- ---------------- ----------------
Total stockholders' equity 1,693,975 1,701,160 1,507,610
---------------- ---------------- ----------------
$ 2,500,668 $ 2,666,118 $ 2,480,047
---------------- ---------------- ----------------
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 Six Months Ended
July 31, July 31,
------------------------------- --------------------------------
2005 2004 2005 2004
------------- -------------- -------------- --------------
Net sales $ 526,701 $ 476,597 $ 1,036,602 $ 933,557
Cost of sales 234,617 212,109 469,697 410,193
------------- -------------- -------------- --------------
Gross profit 292,084 264,488 566,905 523,364
Selling, general and administrative expenses 218,016 206,318 426,526 402,499
------------- -------------- -------------- --------------
Earnings from operations 74,068 58,170 140,379 120,865
Other expenses, net 3,858 4,798 8,064 8,122
------------- -------------- -------------- --------------
Earnings before income taxes 70,210 53,372 132,315 112,743
Provision for income taxes 19,659 20,282 41,706 42,842
------------- -------------- -------------- --------------
Net earnings $ 50,551 $ 33,090 $ 90,609 $ 69,901
------------- -------------- -------------- --------------
Net earnings per share:
Basic $ 0.35 $ 0.23 $ 0.63 $ 0.48
------------- -------------- -------------- --------------
Diluted $ 0.35 $ 0.22 $ 0.62 $ 0.47
------------- -------------- -------------- --------------
Weighted average number of common shares:
Basic 142,989 146,370 143,618 146,593
Diluted 144,930 148,592 145,533 148,944
See notes to condensed consolidated financial statements.
4
TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
July 31,
----------------------------------------
2005 2004
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 90,609 $ 69,901
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 55,099 52,741
Gain on equity investments - (2)
Provision for uncollectible accounts 984 945
Provision for inventories 4,062 3,094
Deferred income taxes (22,059) (7,914)
Provision for postretirement/employment benefits 558 1,171
Stock compensation expense 12,357 11,328
Excess tax benefits from share-based payment arrangements (1,024) (1,518)
Deferred hedging losses transferred to earnings 1,480 1,447
Changes in assets and liabilities:
Accounts receivable (1,249) 18,299
Inventories (34,918) (181,447)
Prepaid expenses and other current assets (24,631) (26,139)
Other assets, net 619 (3,835)
Accounts payable 1,473 (18,907)
Accrued liabilities (1,325) (14,363)
Income taxes payable (94,954) (20,662)
Merchandise and other customer credits (732) 2,283
Other long-term liabilities 12,549 10,101
---------------- -----------------
Net cash used in operating activities (1,102) (103,477)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (76,310) (70,510)
Proceeds from sale of marketable securities and short-term investments 238,175 49,370
Purchases of marketable securities and short-term investments (99,589) (46,527)
Other, net (101) (1,705)
---------------- -----------------
Net cash provided by (used in) investing activities 62,175 (69,372)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments of) proceeds from short-term borrowings, net (17,089) 117,017
Fees and expenses related to new short-term borrowings (397) -
Excess tax benefits from share-based payment arrangements 1,024 1,518
Repurchases of Common Stock (83,948) (25,445)
Proceeds from exercise of stock options 4,330 5,071
Cash dividends on Common Stock (20,123) (16,127)
---------------- -----------------
Net cash (used in) provided by financing activities (116,203) 82,034
---------------- -----------------
Effect of exchange rate changes on
cash and cash equivalents (3,940) (4,227)
---------------- -----------------
Net decrease in cash and cash equivalents (59,070) (95,042)
Cash and cash equivalents at beginning of year 187,681 248,665
---------------- -----------------
Cash and cash equivalents at end of six months $ 128,611 $ 153,623
================ =================
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 (the "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 July 31, 2005 and the results of its
operations and cash flows for the interim periods presented. The
condensed consolidated balance sheet data for January 31, 2005 is
derived from the audited financial statements, which are included in
the Company's report on Form 10-K and 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 to 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 six months
ended July 31, 2005 and 2004 are not necessarily indicative of the
results of the entire fiscal year.
2. NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123R,
"Share-Based Payment." This Statement replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123R requires that new, modified and vested
share-based payment transactions with employees be measured at
fair-value and recognized as compensation expense over the vesting
period. The Company adopted SFAS No. 123R in the fourth quarter of
2004, retroactive to February 1, 2004, using the modified
retrospective method of transition which allowed for the restatement
of interim financial statements based on the amounts previously
calculated and reported in the pro forma footnote disclosures required
by SFAS No. 123. The results of the restatement for the three and six
months ended July 31, 2004 had the effect of reducing earnings from
operations by $5,687,000 and $11,328,000, reducing net earnings by
$3,526,000 and $7,023,000, reducing basic earnings per share by $0.02
and $0.04 and reducing diluted earnings per share by $0.03 and $0.05.
The balance sheet and statement of cash flows as of and for the six
months ended July 31, 2004 were also restated accordingly.
6
NEW ACCOUNTING STANDARDS (continued)
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). This Statement requires
that those items be recognized as current period charges. In addition,
SFAS No. 151 requires that allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Management
is currently evaluating the effect that the adoption of this statement
will have on the Company's financial position, earnings and cash
flows.
3. INVENTORIES
July 31, January 31, July 31,
(in thousands) 2005 2005 2004
-------------------------------------------------------------------------------------------
Finished goods $ 791,336 $ 771,192 $ 727,733
Raw materials 232,959 236,802 226,719
Work-in-process 46,474 53,988 84,770
------------------ ------------------- ---------------------
1,070,769 1,061,982 1,039,222
Reserves (4,398) (4,737) (4,818)
------------------ ------------------- ---------------------
Inventories, net $1,066,371 $1,057,245 $1,034,404
------------------ ------------------- ---------------------
LIFO-based inventories at July 31, 2005, January 31, 2005 and July 31,
2004 represented 70%, 66% and 70% of inventories, net, with the
current cost exceeding the LIFO inventory value by $68,228,000,
$64,058,000 and $39,614,000 at the end of each period.
4. INCOME TAXES
The effective income tax rate for the three and six months ended July
31, 2005 was 28.0% and 31.5% versus 38.0% in the three and six months
ended July 31, 2004. The decrease from the prior year's tax rate was
primarily due to additional tax benefits recognized in 2005 associated
with the repatriation provisions of the American Jobs Creation Act of
2004 ("AJCA"), which included a $6,600,000 benefit recorded in the
second quarter related to the Internal Revenue Service clarifying
certain provisions of the AJCA in May 2005.
The AJCA also provides a deduction for income from qualified domestic
production activities ("manufacturing deduction"), which will be
phased in from 2005 through 2010. Pursuant to FASB Staff Position No.
109-1, "Application of SFAS No. 109 (Accounting for Income Taxes), to
the Tax Deduction on Qualified Production Activities provided by the
AJCA," the effect of this deduction is reported in the period in which
it is claimed on the Company's tax return. Although the Company
recorded a tax benefit for the manufacturing deduction, the amount of
the benefit is immaterial for the three and six months ended July 31,
2005 and is anticipated to be immaterial for the remainder of the
year.
The AJCA provides a two-year transition from the existing
Extraterritorial Income Exclusion Act. The World Trade Organization
("WTO") ruled that this exclusion was an illegal export subsidy. The
European Union believes that the AJCA fails to adequately repeal
illegal export subsidies because of these transitional provisions and
has asked the WTO to review whether these transitional provisions are
in compliance with the WTO's prior ruling. Until the final resolution
of this matter, management will be unable to predict what impact, if
any, this will have on future earnings.
7
5. 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 includes the dilutive effect of the assumed
exercise of stock options and restricted stock units.
The following table summarizes the reconciliation of the numerators
and denominators for the basic and diluted earnings per share ("EPS")
computations:
Three Months Ended Six Months Ended
July 31, July 31,
-------------------------------------------------------------------
(in thousands) 2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------
Net earnings for basic
and diluted EPS $50,551 $33,090 $90,609 $69,901
--------------- ---------------- --------------- ----------------
Weighted average shares for
basic EPS 142,989 146,370 143,618 146,593
Incremental shares based
upon the assumed exercise
of stock options and
restricted stock units 1,941 2,222 1,915 2,351
--------------- ---------------- --------------- ----------------
Weighted average shares for
diluted EPS 144,930 148,592 145,533 148,944
---------------- ---------------- --------------- ---------------
For the three months ended July 31, 2005 and 2004, there were
7,504,000 and 3,593,000 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, 2005 and
2004, there were 7,543,000 and 3,512,000 stock options and restricted
stock units excluded from the computations of earnings per diluted
share due to their antidilutive effect.
6. COMPREHENSIVE EARNINGS
The components of comprehensive earnings were:
Three Months Ended Six Months Ended
July 31, July 31,
----------------------------------------------------------------------
(in thousands) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------------------------
Net earnings $50,551 $ 33,090 $90,609 $69,901
Other comprehensive gain
(loss), net of tax:
Deferred hedging gains 2,040 711 2,709 1,772
Foreign currency
translation adjustments (16,475) (1,888) (19,520) (11,311)
Unrealized gains (losses)
on marketable
securities 330 46 180 (739)
-------------- --------------- -------------- --------------
Comprehensive earnings $36,446 $31,959 $73,978 $59,623
-------------- --------------- -------------- --------------
8
7. DEBT
In July 2005, the Company entered into a new $300,000,000 multi-bank
revolving credit facility ("New Credit Facility") with an option to
increase such commitments up to $500,000,000. The New Credit Facility
replaces the Company's $250,000,000 multi-bank credit facility and the
$10,000,000 Little Switzerland unsecured revolving credit facility.
The New Credit Facility will be available for working capital and
other corporate purposes and contains provisions comparable to those
under the prior agreement, except that certain covenants have been
revised to provide the Company with additional flexibility. Borrowings
are with eight participating banks and are at interest rates based
upon local currency borrowing rates plus a margin based on the
Company's fixed charge coverage ratio. As of July 31, 2005,
$22,800,000 was outstanding under the New Credit Facility with a
weighted average interest rate of 3.7%. The New Credit Facility
expires in July 2010.
8. EMPLOYEE BENEFIT PLANS
The Company maintains several pension and retirement plans, as well as
providing certain health-care and life insurance benefits.
Net periodic pension and other postretirement benefit expense included
the following components:
Three Months Ended July 31,
--------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
--------------------------------------------------------
(in thousands) 2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------
Service cost $3,181 $2,699 $342 $307
Interest cost 2,904 2,640 421 418
Expected return on plan assets (2,519) (2,079) - -
Amortization of prior service
cost 201 201 (298) (303)
Amortization of net loss 592 395 89 98
--------------------------------------------------------
Net expense $4,359 $3,856 $554 $520
--------------------------------------------------------
Six Months Ended July 31,
--------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
--------------------------------------------------------
(in thousands) 2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------
Service cost $6,362 $5,398 $ 684 $ 614
Interest cost 5,808 5,280 842 836
Expected return on plan assets (5,038) (4,158) - -
Amortization of prior service
cost 402 402 (596) (606)
Amortization of net loss 1,184 790 178 196
-------------------------------------------------------
Net expense $8,718 $7,712 $1,108 $1,040
-------------------------------------------------------
9
9. SEGMENT INFORMATION
The Company's reportable segments are: U.S. Retail, International
Retail and Direct Marketing. These reportable segments represent
channels of distribution that offer similar merchandise and service
and have similar marketing and distribution strategies. Its Other
channel of distribution includes all non-reportable segments which
consist of worldwide sales and businesses operated under trademarks or
trade names other than TIFFANY & CO., as well as sales associated with
the Company's diamond sourcing and manufacturing operations. 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.
Reclassifications were made to prior year's segment amounts to conform
to the current year presentation and to reflect the revised manner in
which management evaluates the performance of segments. The
reclassifications were associated with the following:
o Effective with the current reporting period, the Company
placed responsibility for U.S. business-to-business sales
within the U.S. Retail channel and, consequently, now
reports business-to-business sales in that channel. In the
past, such sales were reported in the Direct Marketing
channel, which will continue to report business-to-business
Internet transactions.
o As of the fourth quarter of 2004, LIFO costs are now
included in segment results, as opposed to unallocated
corporate expenses where it was previously included.
o Each segment's earnings (losses) from operations as
previously reported in 2004 was affected by an allocation of
the expense associated with the modified retrospective
adoption of SFAS No. 123R in the fourth quarter of 2004.
Certain information relating to the Company's segments is set forth
below:
Three Months Ended Six Months Ended
July 31, July 31,
-------------------------------------------------------------------------
(in thousands) 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------
Net sales:
U.S. Retail $267,710 $248,134 $ 523,562 $473,136
International Retail 202,104 180,948 392,420 365,679
Direct Marketing 30,354 28,910 59,290 54,469
Other 26,533 18,605 61,330 40,273
--------------- --------------- --------------- ---------------
$526,701 $476,597 $1,036,602 $933,557
--------------- --------------- --------------- ---------------
Earnings (losses) from
operations *:
U.S. Retail $ 54,122 $46,533 $100,734 $ 85,897
International Retail 43,382 40,101 87,057 89,394
Direct Marketing 9,624 8,099 18,346 14,623
Other (3,127) (3,337) (4,642) (4,673)
--------------- --------------- --------------- ---------------
$104,001 $91,396 $201,495 $185,241
--------------- --------------- --------------- ---------------
* Represents earnings from operations before unallocated corporate
expenses and other expenses, net.
10
SEGMENT INFORMATION (continued)
The following table sets forth a reconciliation of the segments'
earnings from operations to the Company's consolidated earnings before
income taxes:
Three Months Ended Six Months Ended
July 31, July 31,
-----------------------------------------------------------------------
(in thousands) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------
Earnings from
operations for
segments $104,001 $91,396 $201,495 $185,241
Unallocated corporate
expenses (29,933) (33,226) (61,116) (64,376)
Other expenses, net (3,858) (4,798) (8,064) (8,122)
--------------- --------------- -------------- --------------
Earnings before income
taxes $ 70,210 $53,372 $132,315 $112,743
--------------- --------------- -------------- --------------
Unallocated corporate expenses include costs related to the Company's
administrative support functions, such as information technology,
finance, legal and human resources, which the Company does not
allocate to its segments.
10. SUBSEQUENT EVENTS
On August 18, 2005, the Company's Board of Directors declared a
quarterly dividend of $0.08 per share. This dividend will be paid on
October 11, 2005 to stockholders of record on September 20, 2005.
In August 2005, the Company's Board of Directors approved the sale of
a glassware manufacturing operation. The Company completed the sale in
August 2005 in consideration for future discounts on purchases of
merchandise over a period of time. The Company's third quarter results
will reflect a loss of approximately $2,000,000 associated with the
sale of the operation.
11
PART I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
--------
Tiffany & Co. is a holding company that operates through its subsidiary
companies (the "Company"). The Company's principal subsidiary, Tiffany and
Company, is a jeweler and specialty retailer whose merchandise offerings include
an extensive selection of fine jewelry, as well as timepieces, sterling
silverware, china, crystal, stationery, fragrances and accessories. Through
Tiffany and Company and other subsidiaries, the Company is engaged in product
design, manufacturing and retailing activities.
The Company's channels of distribution are as follows:
o U.S. Retail - sales in TIFFANY & CO. stores in the U.S. and sales of
TIFFANY & CO. products made by business-to-business sales account
executives in the U.S.;
o International Retail - sales in TIFFANY & CO. stores and department store
boutiques outside the U.S. (also includes, to a lesser extent,
business-to-business, Internet and wholesale sales of TIFFANY & CO.
products outside the U.S.);
o Direct Marketing - Internet and catalog sales of TIFFANY & CO. products in
the U.S.;
o Other - worldwide sales of businesses operated under trademarks or trade
names other than TIFFANY & CO. ("specialty retail"), as well as wholesale
sales of "rough," uncut diamonds associated with the Company's diamond
sourcing and manufacturing operations.
Effective with the current reporting period, the Company placed responsibility
for U.S. business-to-business sales within the U.S. Retail channel and,
consequently, now reports business-to-business sales in that channel. In the
past, such sales were reported in the Direct Marketing channel, which will
continue to report business-to-business Internet transactions. The prior year's
amounts affected by the change have been reclassified to conform to the current
year presentation.
All references to years relate to fiscal years ended or ending on January 31 of
the following calendar year.
A store's sales are included in "comparable store sales" when the store has been
open for more than 12 months. 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.
HIGHLIGHTS
o Net sales increased 11% to $526,701,000 in the three months ("second
quarter") ended July 31, 2005 and 11% to $1,036,602,000 in the six
months ("first half") ended July 31, 2005.
o On a constant-exchange-rate basis (see Non-GAAP Measures section
below), net sales rose 10% in both the second quarter and the first
half and worldwide comparable store sales rose 4% in both periods.
o Gross margin (gross profit as a percentage of net sales) in the second
quarter was equal to the prior year, but gross margin declined in the
first half primarily due to changes in geographic and product sales
mix and higher product costs.
12
o Selling, general and administrative ("SG&A") expenses as a percentage
of net sales improved in both the second quarter and the first half
due to sales leverage on fixed costs.
o In the three and six months ended July 31, 2005, the effective tax
rate included a benefit of $0.05 per diluted share and $0.06 per
diluted share resulting from the American Jobs Creation Act of 2004.
o The Company repurchased and retired 1.5 million and 2.6 million shares
of its Common Stock in the three and six months ended July 31, 2005.
o Net earnings in the second quarter increased 53% to $50,551,000, or
$0.35 per diluted share, versus $33,090,000, or $0.22 per diluted
share, in the prior year.
o Net earnings in the first half increased 30% to $90,609,000, or $0.62
per diluted share, versus $69,901,000, or $0.47 per diluted share, in
the prior year.
o Growth in earnings per diluted share was slightly higher than net
earnings growth in the three and six months ended July 31, 2005 due to
share repurchase activity.
NON-GAAP MEASURES
-----------------
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.
The Company reports information in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP"). Internally, management monitors the sales
performance of its international stores and boutiques on a non-GAAP basis that
eliminates the positive or negative effects that result from translating
international sales 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 stores
and boutiques and provides better comparability between reporting periods.
The Company's management does not, nor does it suggest that investors should,
consider such non-GAAP financial measures in isolation from, or as a substitute
for, financial information prepared in accordance with GAAP. The Company
presents such non-GAAP financial measures in reporting its financial results to
provide investors with an additional tool to evaluate the Company's operating
results.
The following table reconciles net sales percentage increases (decreases) from
the GAAP to the non-GAAP basis:
13
Three Months Ended Six Months Ended
July 31, 2005 July 31, 2005
-------------------------------------------- ------------------------------------------
Constant- Constant-
Trans- Exchange- Trans- Exchange-
GAAP lation Rate GAAP lation Rate
Reported Effect Basis Reported Effect Basis
-------------------------------------------- ------------------------------------------
Net Sales:
----------
Worldwide 11% 1% 10% 11% 1% 10%
U.S. Retail 8% - 8% 11% - 11%
International
Retail 12% 3% 9% 7% 2% 5%
Japan 6% 1% 5% 1% 1% -
Other Asia-
Pacific 24% 6% 18% 21% 5% 16%
Europe 10% - 10% 10% 2% 8%
Comparable Store Sales:
-----------------------
Worldwide 5% 1% 4% 5% 1% 4%
U.S. Retail 6% - 6% 8% - 8%
International
Retail 5% 2% 3% 1% 3% (2%)
Japan 2% 1% 1% (4%) 1% (5%)
Other Asia-
Pacific 12% 6% 6% 10% 4% 6%
Europe 6% 1% 5% 4% 2% 2%
RESULTS OF OPERATIONS
---------------------
Certain operating data as a percentage of net sales were as follows:
Three months Ended Six months Ended
July 31, July 31,
---------------------------------- ----------------------------------
2005 2004 2005 2004
---------------------------------- ----------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 44.5 44.5 45.3 43.9
---------------------------------- ----------------------------------
Gross profit 55.5 55.5 54.7 56.1
Selling, general and
administrative expenses 41.4 43.3 41.1 43.1
---------------------------------- ----------------------------------
Earnings from operations 14.1 12.2 13.6 13.0
Other expenses, net 0.8 1.0 0.8 0.9
---------------------------------- ----------------------------------
Earnings before income
taxes 13.3 11.2 12.8 12.1
Provision for income taxes 3.7 4.3 4.1 4.6
---------------------------------- ----------------------------------
Net earnings 9.6% 6.9% 8.7% 7.5%
---------------------------------- ----------------------------------
14
Net Sales
---------
Net sales by channel of distribution were as follows:
Three months Ended Six months Ended
July 31, July 31,
---------------------------------- ------------------------------------
(in thousands) 2005 2004 2005 2004
-------------- ---------------------------------- ------------------------------------
U.S. Retail $267,710 $248,134 $523,562 $473,136
International Retail 202,104 180,948 392,420 365,679
Direct Marketing 30,354 28,910 59,290 54,469
Other 26,533 18,605 61,330 40,273
---------------------------------- ------------------------------------
$526,701 $476,597 $1,036,602 $933,557
---------------------------------- ------------------------------------
U.S. Retail sales increased 8% in the second quarter and 11% in the first half,
primarily due to an increase in the average transaction size. Comparable store
sales rose 6% in the second quarter and 8% in the first half, due to 3% and 7%
growth, respectively, in the New York flagship store (due to increased tourist
spending) and a geographically broad-based increase of 6% and 8%, respectively,
in branch stores. As explained in a preceding paragraph, the U.S. Retail channel
now also includes business-to-business sales, which represent less than 5% of
total U.S. Retail sales.
International Retail sales increased 12% in the second quarter and 7% in the
first half. On a constant-exchange-rate basis, International Retail sales
increased 9% and 5% for the same periods; comparable store sales increased 3% in
the second quarter but declined 2% in the first half.
In Japan (which represented 22% of net sales in fiscal year 2004), on a
constant-exchange-rate basis, total retail sales increased 5% in the second
quarter and rose fractionally in the first half, while comparable store sales
increased 1% and declined 5% in those same periods. Management believes that
Japan sales have been negatively affected by generally weak consumer spending on
jewelry, increased "luxury-goods" competition and shifts in consumer demand,
particularly for silver jewelry. Management has, in recent years, increased
average price points for existing products and introduced selections at higher
price points in the silver jewelry category, which adversely affected sales.
Sales in the silver jewelry category, including designer silver, (which
represented 23% of Japan's total retail sales in fiscal year 2004) declined in
both the second quarter (although at a lesser rate) and the first half.
Management continues to focus on new products; targeted publicity and marketing;
the quality of each location within the current distribution base; programs to
enhance the shopping and customer service experience; and organizational and
training initiatives to improve selling skills and effectiveness.
In the Asia-Pacific region outside of Japan (which represented 7% of net sales
in fiscal year 2004), comparable store sales on a constant-exchange-rate basis
increased 6% in both the second quarter and the first half, due to strength in
several countries.
In Europe (which represented 6% of net sales in fiscal year 2004), comparable
store sales on a constant-exchange-rate basis increased 5% in the second quarter
and 2% in the first half, due to generally stronger growth in Continental Europe
that offset a modest decline in London.
Direct Marketing sales rose 5% in the second quarter and 9% in the first half
due to growth in the average amounts spent per e-commerce and catalog order.
Other sales increased 43% in the second quarter and 52% in the first half. More
than two-thirds of the increase in both the quarter and the first half resulted
from wholesale sales of rough diamonds; such sales commenced in the
15
third quarter of 2004 and will continue on a regular basis. In the specialty
retail businesses, sales in LITTLE SWITZERLAND stores increased 6% in the second
quarter and 13% in the first half. To a much lesser extent, sales in IRIDESSE
stores contributed to this channel's sales growth. IRIDESSE stores sell pearl
jewelry exclusively; the first two such stores opened in 2004.
Management's plan for openings and closings of TIFFANY & CO. stores in 2005 are
shown below and, in total, would represent a 3% net increase in gross square
footage:
Actual Openings Expected Openings
Location (Closings) 2005 (Closings) 2005
-------- --------------- ---------------
Carmel, California Second Quarter
San Antonio, Texas Third Quarter
Pasadena, California Fourth Quarter
Naples, Florida Fourth Quarter
Mitsukoshi, Osaka, Japan (First Quarter)
Mitsukoshi, Yokohama, Japan (First Quarter)
Mitsukoshi, Kurashiki, Japan (First Quarter)
Mitsukoshi, Fukuoka, Japan (First Quarter)
Sogo, Shinsaibashi, Osaka, Japan Third Quarter
Takashimaya, Yokohama, Japan Third Quarter
Daimaru, Shinsaibashi, Osaka, Japan (Third Quarter)
Brisbane, Australia Second Quarter
Paris, France Second Quarter
Gross Margin
------------
Gross margin in the second quarter was equal to the prior year. Late in the
first quarter the Company selectively increased U.S. retail prices due to
increased costs for diamonds and platinum. Gross margin declined 1.4 percentage
points in the first half. Approximately 0.9 percentage points of the decline in
the first half resulted from changes in geographic and product sales mix, as
well as higher product costs. The remaining decline in the first half primarily
related to wholesale sales of rough diamonds which earn a minimal or no gross
margin.
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 direct rough-diamond
sourcing and internal manufacturing), controlling costs and implementing
selective price adjustments in order to maintain the Company's gross margin at,
or above, prior year levels. However, as evidenced by the decline in gross
margin experienced in the early part of 2005, management continues to expect a
modest year-over-year decline for the full year.
Selling, General and Administrative Expenses
--------------------------------------------
SG&A expenses increased 6% in the second quarter due to several factors: growth
in depreciation and occupancy expenses (representing approximately 38% of the
increase), higher labor costs (representing approximately 35% of the increase)
and increased marketing expense (representing approximately 9% of the increase).
SG&A expenses increased 6% in the first half primarily due to: growth in
depreciation and occupancy expenses (representing approximately 43%
16
of the increase) and higher labor costs (representing approximately 41% of the
increase). As a percentage of net sales, SG&A expenses improved in the second
quarter and the first half due to the strong overall sales growth. Management's
objective is to continue to improve the ratio of SG&A expenses to net sales by
controlling expenses so that anticipated sales growth will result in improved
earnings. Management expects a low-to-mid single-digit percentage increase in
SG&A expenses in 2005 and, therefore, improvement in the expense ratio versus
the prior year.
Earnings from Operations
------------------------
Reclassifications were made to prior year's earnings (losses) from operations by
segment to conform to the current year presentation and to reflect the revised
manner in which management evaluates the performance of segments. U.S. business
gift results (excluding business-to-business internet transactions) were
reclassified from the Direct Marketing channel to the U.S. Retail channel. LIFO
costs have been included in segment results as opposed to unallocated corporate
expenses as previously reported (consistent with the change made in fourth
quarter 2004). In addition, each segment's earnings (losses) from operations in
2004 was affected by an allocation of the expense associated with the adoption
of SFAS No. 123R, "Share-Based Payment."
Three Months Ended
July 31,
------------------------------------------
(in thousands) 2005 2004
------------------------------------------------------------------ ------------------------------------------
Earnings (losses) from operations:
U.S. Retail $54,122 $46,533
International Retail 43,382 40,101
Direct Marketing 9,624 8,099
Other (3,127) (3,337)
------------------------------------------
Earnings from operations for segments 104,001 91,396
Unallocated corporate expenses (29,933) (33,226)
------------------------------------------
Earnings from operations $74,068 $58,170
------------------------------------------
Earnings from operations rose 27% in the second quarter. On a segment basis, the
ratio of earnings (losses) from operations (before the effect of unallocated
corporate expenses and other expenses, net) to each segment's net sales in the
second quarter of 2005 and 2004 was as follows:
o U.S. Retail: 20% in 2005 versus 19% in 2004 (increase was primarily due to
increased sales and gross margin and the leveraging of fixed expenses);
o International Retail: 21% in 2005 versus 22% in 2004 (decrease was
primarily due to lower gross margin resulting from changes in geographic
and product sales mix);
o Direct Marketing: 32% in 2005 versus 28% in 2004 (increase was primarily
due to increased sales and the leveraging of fixed expenses); and
o Other: (12)% in 2005 versus (18)% in 2004 (improvement was primarily due to
increased sales).
17
Six Months Ended
July 31,
------------------------------------------
(in thousands) 2005 2004
------------------------------------------------------------------ ------------------------------------------
Earnings (losses) from operations:
U.S. Retail $100,734 $ 85,897
International Retail 87,057 89,394
Direct Marketing 18,346 14,623
Other (4,642) (4,673)
------------------------------------------
Earnings from operations for segments 201,495 185,241
Unallocated corporate expenses (61,116) (64,376)
------------------------------------------
Earnings from operations $140,379 $120,865
------------------------------------------
Earnings from operations rose 16% in the first half. On a segment basis, the
ratio of earnings (losses) from operations (before the effect of unallocated
corporate expenses and other expenses, net) to each segment's net sales in the
first half of 2005 and 2004 was as follows:
o U.S. Retail: 19% in 2005 versus 18% in 2004 (increase was primarily due to
increased sales and the leveraging of fixed expenses);
o International Retail: 22% in 2005 versus 24% in 2004 (decrease was
primarily due to lower gross margin resulting from changes in geographic
and product sales mix);
o Direct Marketing: 31% in 2005 versus 27% in 2004 (increase was primarily
due to increased sales and the leveraging of fixed expenses); and
o Other: (8)% in 2005 versus (12)% in 2004 (improvement was primarily due to
increased sales).
Unallocated corporate expenses include costs related to the Company's
administrative support functions, such as information technology, finance, legal
and human resources, which the Company does not allocate to its segments.
Other Expenses, Net
-------------------
Other expenses, net in the second quarter were lower than the prior year
primarily due to increased interest income as a result of increased average
investments and higher interest rates. Other expenses, net in the first half
were relatively consistent with the prior year.
Provision for Income Taxes
--------------------------
The effective income tax rate for the three and six months ended July 31, 2005
was 28.0% and 31.5% versus 38.0% in the three and six months ended July 31,
2004. The decrease from the prior year's tax rate was primarily due to
additional tax benefits recognized in 2005 associated with the repatriation
provisions of the American Jobs Creation Act of 2004 ("AJCA"), which included a
$6,600,000 benefit recorded in the second quarter related to the Internal
Revenue Service clarifying certain provisions of the AJCA in May 2005.
The AJCA also provides a deduction for income from qualified domestic production
activities ("manufacturing deduction"), which will be phased in from 2005
through 2010. Pursuant to FASB Staff Position No. 109-1, "Application of SFAS
No. 109 (Accounting for Income Taxes), to the Tax Deduction on Qualified
Production Activities provided by the AJCA," the effect of this deduction is
reported in the period in which it is claimed on the Company's tax return.
Although the Company recorded a tax benefit for the manufacturing deduction, the
amount of the benefit is immaterial for the three and six months ended July 31,
2005 and is anticipated to be immaterial for the remainder of the year.
18
The AJCA provides a two-year transition from the existing Extraterritorial
Income Exclusion Act. The World Trade Organization ("WTO") ruled that this
exclusion was an illegal export subsidy. The European Union believes that the
AJCA fails to adequately repeal illegal export subsidies because of these
transitional provisions and has asked the WTO to review whether these
transitional provisions are in compliance with the WTO's prior ruling. Until the
final resolution of this matter, management will be unable to predict what
impact, if any, this will have on future earnings.
New Accounting Standards
------------------------
See Note 2 to the Condensed Consolidated Financial Statements.
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. The Company had a net cash outflow from operating activities of
$1,102,000 in the first half of 2005, compared with an outflow of $103,477,000
in the first half of 2004. The reduced outflow was due to smaller growth in
inventories partly offset by increased tax payments largely associated with a
gain recognized on the sale of the Company's equity holdings in Aber Diamond
Corporation in the fourth quarter of 2004.
Working Capital
---------------
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were
$1,171,768,000 and 5.3 at July 31, 2005, compared with $1,208,068,000 and 4.0 at
January 31, 2005 and $955,034,000 and 3.1 at July 31, 2004.
Accounts receivable, less allowances at July 31, 2005 were 6% lower than at
January 31, 2005 (which is typically a seasonal high point) and were 10% higher
than at July 31, 2004 due to sales growth.
Inventories, net at July 31, 2005 were 1% above January 31, 2005 and 3% above
July 31, 2004. Combined raw material and work-in-process inventories decreased
4% versus January 31, 2005 and 10% versus July 31, 2004. The decrease resulted
from a substantial buildup in the prior year during the initial development of
rough diamond sourcing activities. Finished goods inventories increased 3%
versus January 31, 2005 and 9% versus July 31, 2004 largely due to broadened
product offerings and new and anticipated store openings. The effects from
changes in foreign currency exchange rates were not significant. The Company
continually strives to improve its inventory management by developing more
effective systems and processes for product development, assortment planning,
sales forecasting, supply-chain logistics, and store replenishment. Management
expects a mid-single-digit percentage increase in the overall year-over-year
inventory growth rate compared with a 21% increase in 2004.
Capital Expenditures
--------------------
Capital expenditures were $76,310,000 in the first half of 2005 compared with
$70,510,000 in the first half of 2004. Management estimates that capital
expenditures will be approximately $175,000,000 in 2005 (compared with
approximately $142,000,000 in fiscal year 2004) due to costs related to the
opening and renovation of stores and manufacturing facilities and to ongoing
investments in new systems. 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 Company has spent
19
approximately $84,000,000 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.
Business Dispositions
---------------------
The Company continuou sly evaluates its manufacturing operations and supply
chain to ensure that the Company has the optimal production mix to support
long-term growth needs. In August 2005, the Company's Board of Directors
approved the sale of a glassware manufacturing operation. The Company completed
the sale in August 2005 in consideration for future discounts on purchases of
merchandise over a period of time. The Company's third quarter results will
reflect a loss of approximately $2,000,000 associated with the sale of the
operation.
Share Repurchases
-----------------
In March 2005, the Company's Board of Directors approved a new stock repurchase
program ("2005 Program") that authorized the repurchase of up to $400,000,000 of
the Company's Common Stock through March 2007 through open market or private
transactions. The 2005 Program replaced and terminated an earlier program. The
timing of repurchases and the actual number of shares to be repurchased depend
on a variety of discretionary factors such as price and other market conditions.
In the second quarter, the Company repurchased and retired 1,538,520 shares of
Common Stock at a cost of $49,970,000, or an average cost of $32.48 per share.
In the first half, the Company repurchased and retired 2,575,312 shares of
Common Stock at a cost of $83,948,000, or an average cost of $32.60 per share.
At July 31, 2005, there remained $325,034,000 of authorization for future
repurchases under the 2005 Program.
Borrowings
----------
In July 2005, the Company entered into a new $300,000,000 multi-bank revolving
credit facility ("New Credit Facility") with an option to increase such
commitments up to $500,000,000. The New Credit Facility replaces the Company's
previous $250,000,000 multi-bank credit facility and the $10,000,000 Little
Switzerland unsecured revolving credit facility. The New Credit Facility will be
available for working capital and other corporate purposes and contains
provisions comparable to those under the prior agreement, except that certain
covenants have been revised to provide the Company with additional flexibility.
Borrowings are with eight participating banks and are at interest rates based
upon local currency borrowing rates plus a margin based on the Company's fixed
charge coverage ratio. The weighted average interest rate at July 31, 2005 was
3.7%. The New Credit Facility expires in July 2010.
The Company's sources of working capital are internally-generated cash flows and
funds available under the New Credit Facility.
The ratio of total debt (short-term borrowings, current portion of long-term
debt and long-term debt) to stockholders' equity was 24% at July 31, 2005, 26%
at January 31, 2005 and 39% at July 31, 2004.
Based on the Company's financial position at July 31, 2005, management
anticipates that cash on hand, internally-generated cash flows and the funds
available under its revolving credit facility will be sufficient to support the
Company's planned worldwide business expansion, share repurchases, debt service
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 July
31, 2005 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, 2005.
20
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.
In Japan, the Company uses yen put options to minimize the impact of a
strengthening of the U.S. dollar on yen-denominated transactions. To a lesser
extent, the Company uses foreign-exchange forward contracts to protect against
weakening local currencies. Gains or losses on these instruments substantially
offset losses or gains on the assets, liabilities and transactions being hedged.
Management does not expect 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 borrowing costs. 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.
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 and materials. 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
21
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 rough diamond sourcing initiative achieves its financial and strategic
objectives; (xi) that the Company's gross margins in Japan and for diamond
products can be maintained in the face of increased competition from traditional
and e-commerce retailers; (xii) that the Company is able to pass on higher costs
of raw materials to consumers through price increases; (xiii) that the sale of
counterfeit products does not significantly undermine the value of the Company's
trademarks and demand for the Company's products; (xiv) 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; (xv) that the Company can achieve satisfactory results from any
current and future businesses into which it enters that are operated under
trademarks or trade names other than TIFFANY & CO.; and (xvi) 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.
22
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 (as defined in Rules 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), as
amended) 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 July 31, 2005, 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 Control Over Financial Reporting
Subsequent to the date of the most recent evaluation of the Company's
internal controls over financial reporting (as defined in Rules 13a-15(f) or
15d-15(f) of the Exchange Act), there were no significant changes in the
Company's internal controls over financial reporting or in other factors that
could significantly affect the internal controls over financial reporting,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
23
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 second fiscal quarter of 2005:
-------------------------------------------------------------------------------------------------------------
(c)Total
Number of (d)Approximate
Shares Dollar Value
Purchased of Shares that
(a)Total Under all May Yet be
Number of (b)Average Publicly Purchased
Shares Price Paid Announced Under the
Period Purchased Per Share Programs* Programs*
-------------------------------------------------------------------------------------------------------------
May 1, 2005
through
May 31, 2005 400,200 $30.99 400,200 $362,602,000
-------------------------------------------------------------------------------------------------------------
June 1, 2005
through
June 30, 2005 732,120 $32.63 732,120 $338,714,000
-------------------------------------------------------------------------------------------------------------
July 1, 2005
through
July 31, 2005 406,200 $33.68 406,200 $325,034,000
-------------------------------------------------------------------------------------------------------------
Total 1,538,520 $32.48 1,538,520 $325,034,000
-------------------------------------------------------------------------------------------------------------
* Pursuant to the program announced on March 17, 2005, the Issuer was authorized
to expend up to $400,000,000 to purchase its Common Stock. This program will
expire on March 30, 2007.
24
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
At Registrant's Annual Meeting of Stockholders held on May 19, 2005, each of the
nominees listed below was elected a director of Registrant to hold office until
the next annual meeting of the stockholders and until his or her respective
successor has been elected and qualified. Tabulated with the name of each of the
nominees elected is the number of Common shares cast for each nominee and the
number of Common shares withholding authority to vote for each nominee. There
were no broker non-votes or abstentions with respect to the election of
directors.
Nominee Voted For Withholding Authority
Michael J. Kowalski 122,253,013 5,837,787
Rose Marie Bravo 117,657,226 10,433,574
William R. Chaney 122,166,605 5,921,194
Samuel L. Hayes III 116,906,273 11,184,527
Abby F. Kohnstamm 112,543,111 15,547,689
Charles K. Marquis 116,958,789 11,132,011
J. Thomas Presby 123,739,547 4,351,253
James E. Quinn 122,250,051 5,840,749
William A. Shutzer 121,134,129 6,956,671
At such meeting, the stockholders approved the appointment of
PricewaterhouseCoopers LLP as the independent registered public accounting firm
to examine the Company's fiscal 2005 financial statements. With respect to such
appointment, 125,912,602 shares were voted to approve, 1,363,471 were voted
against, and 814,727 shares abstained from voting. There were no broker
non-votes with respect to the approval of the appointment of
PricewaterhouseCoopers LLP.
The stockholders approved an amendment to the Company's 1998 Employee Incentive
Plan so that return on average assets may be used as a Performance Measure for
long-term incentive compensation. With respect to such approval, 121,231,846
shares were voted to approve, 5,500,756 shares were voted against, and 1,358,198
shares abstained from voting. There were no broker non-votes with respect to the
approval of the amendment to the Company's 1998 Employee Incentive Plan.
The stockholders approved the Company's 2005 Employee Incentive Plan. With
respect to such approval, 72,376,071 shares were voted for, 32,786,545 shares
were voted against, and 1,325,942 shares abstained from voting. There were no
broker non-votes with respect to the approval of the Company's 2005 Employee
Incentive Plan.
25
ITEM 6 Exhibits and Reports on Form 8-K
(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.
(b) Reports on Form 8-K:
On May 3, 2005, Registrant filed a Report on Form 8-K reporting
that the Registrant's Board of Directors amended Section
4.02(a)(iii) of Registrant's 2005 Employee Incentive Plan.
On May 13, 2005, issued a press release announcing its unaudited
earnings and results of operations for the first quarter ended
April 30, 2005.
On May 19, 2005, Registrant issued a press release announcing an
increase in its quarterly dividend by 33%.
On May 23, 2005, Registrant filed a Report on Form 8-K reporting
Registrant makes various grants and awards of cash, stock and
stock units, and provides various benefits, to its directors,
executive officers and other management employees pursuant to its
1998 Directors Option Plan and the 1998 and 2005 Employee
Incentive Plans and pursuant to various retirement plans, formal
agreements and informal agreements. The Compensation Committee of
Registrant's Board of Directors made various changes to date in
fiscal 2005.
On June 3, 2005, Registrant filed a Report on Form 8-K reporting
Registrant's Finance Division was reorganized and certain
responsibilities reassigned.
On July 26, 2005, Registrant filed a Report on Form 8-K reporting
that on July 20, 2005, Registrant entered into a new revolving
bank credit agreement with The Bank of New York, as
administrative Agent, consisting of basic commitments of $300
million, with an option by Registrant to increase such
commitments up to $500 million (the "New Credit Agreement"). The
New Credit Agreement replaced Registrant's previous $250 million
revolving bank credit facility.
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: September 2, 2005 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 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.