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, 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, 142,242,919 shares outstanding at the close
of business on November 30, 2005.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2005
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - October 31, 2005,
January 31, 2005 and October 31, 2004 (Unaudited) 3
Condensed Consolidated Statements of Earnings - for the three
and nine months ended October 31, 2005 and
2004 (Unaudited) 4
Condensed Consolidated Statements of Stockholders' Equity -
for the nine months ended October 31, 2005 and
Comprehensive Earnings - for the three and nine months
ended October 31, 2005 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows - for the
nine months ended October 31, 2005 and 2004 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-24
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(e) Issuer Purchases of Equity Securities 26
Item 6. Exhibits 27
(a) Exhibits
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,
2005 2005 2004
-------------- -------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 111,586 $ 187,681 $ 129,776
Short-term investments - 139,200 -
Accounts receivable, less allowances
of $6,670, $7,491 and $6,264 129,454 133,545 124,080
Inventories, net 1,104,326 1,057,245 1,130,767
Deferred income taxes 74,544 64,790 57,814
Prepaid expenses and other current assets 73,801 25,428 43,613
---------------- ---------------- ----------------
Total current assets 1,493,711 1,607,889 1,486,050
Property, plant and equipment, net 860,712 917,853 917,837
Other assets, net 145,523 140,376 188,860
---------------- ---------------- ----------------
$ 2,499,946 $ 2,666,118 $ 2,592,747
---------------- ---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 30,365 $ 42,957 $ 267,389
Accounts payable and accrued liabilities 182,831 186,013 193,458
Income taxes payable 15,460 118,536 12,619
Merchandise and other customer credits 54,238 52,315 50,230
---------------- ---------------- ----------------
Total current liabilities 282,894 399,821 523,696
Long-term debt 373,606 397,606 393,194
Postretirement/employment benefit obligations 41,106 40,220 39,639
Deferred income taxes - 33,175 26,256
Other long-term liabilities 109,693 94,136 93,628
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; authorized 240,000 shares,
issued and outstanding 142,120, 144,548 and 145,756 1,421 1,445 1,457
Additional paid-in capital 464,109 426,308 421,526
Retained earnings 1,219,946 1,246,331 1,076,167
Accumulated other comprehensive gain (loss), net of tax:
Foreign currency translation adjustments 5,183 29,045 19,307
Deferred hedging gains (losses) 1,828 (2,118) (1,952)
Unrealized gains (losses) on marketable securities 160 149 (171)
---------------- ---------------- ----------------
Total stockholders' equity 1,692,647 1,701,160 1,516,334
---------------- ---------------- ----------------
$ 2,499,946 $ 2,666,118 $ 2,592,747
---------------- ---------------- ----------------
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,
------------------------------- --------------------------------
2005 2004 2005 2004
------------- -------------- -------------- --------------
Net sales $ 500,105 $ 461,152 $ 1,536,707 $ 1,394,709
Cost of sales 229,575 215,624 699,272 625,817
------------- -------------- -------------- --------------
Gross profit 270,530 245,528 837,435 768,892
Selling, general and administrative expenses 230,735 212,164 657,261 614,663
-------------- -------------- -------------- --------------
Earnings from operations 39,795 33,364 180,174 154,229
Other expenses, net 4,289 5,276 12,353 13,398
------------- -------------- -------------- --------------
Earnings before income taxes 35,506 28,088 167,821 140,831
Provision for income taxes 11,717 10,730 53,423 53,572
------------- -------------- -------------- --------------
Net earnings $ 23,789 $ 17,358 $ 114,398 $ 87,259
------------- -------------- -------------- --------------
Net earnings per share:
Basic $ 0.17 $ 0.12 $ 0.80 $ 0.60
------------- -------------- -------------- --------------
Diluted $ 0.16 $ 0.12 $ 0.79 $ 0.59
------------- -------------- -------------- --------------
Weighted average number of common shares:
Basic 142,280 145,943 143,172 146,376
Diluted 144,993 147,735 145,472 148,546
See notes to condensed consolidated financial statements.
4
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
AND COMPREHENSIVE EARNINGS
--------------------------
(Unaudited)
-----------
(in thousands)
Accumulated
Total Other Additional
Stockholders' Retained Comprehensive Common Stock Paid-in
Equity Earnings Gain (Loss) Shares Amount Capital
------------------------------------------------------------------------------------------------------------------------------------
Balances, January 31, 2005 $ 1,701,160 $ 1,246,331 $ 27,076 144,548 $ 1,445 $ 426,308
Exercise of stock options 11,951 - - 795 8 11,943
Tax benefit from exercise of stock
options 7,045 - - - - 7,045
Stock option expense 19,464 - - - - 19,464
Issuance of Common Stock
under the Employee Profit Sharing
and Retirement Savings Plan 4,400 - - 143 1 4,399
Purchase and retirement of Common
Stock (114,342) (109,259) - (3,366) (33) (5,050)
Cash dividends on Common Stock (31,524) (31,524) - - - -
Deferred hedging gains, net of tax 3,946 - 3,946 - - -
Marketable securities gains, net
of tax 11 - 11 - - -
Foreign currency translation
adjustments (23,862) - (23,862) - - -
Net earnings 114,398 114,398 - - - -
---------------------------------------------------------------------------------------------
Balances, October 31, 2005 $ 1,692,647 $ 1,219,946 $ 7,171 142,120 $ 1,421 $ 464,109
---------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
October 31, October 31,
2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------
Net earnings $23,789 $17,358 $114,398 $87,259
Other comprehensive gain (loss), net
of tax:
Deferred hedging gains (losses) 1,237 (1,216) 3,946 556
Foreign currency translation
adjustments (4,342) 14,762 (23,862) 3,451
Unrealized gains (losses) on
marketable securities (169) 568 11 (171)
----------------------------------------------------------------------
$20,515 $31,472 $94,493 $91,095
----------------------------------------------------------------------
See notes to condensed consolidated financial statements.
5
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
-----------
(in thousands)
Nine Months Ended
October 31,
----------------------------------------
2005 2004
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 114,398 $ 87,259
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 81,720 79,709
Gain on equity investments - (759)
Provision for uncollectible accounts 1,131 1,603
Provision for inventories 7,165 4,747
Deferred income taxes (33,611) (10,621)
Loss on disposal of assets 4,316 -
Provision for postretirement/employment benefits 886 2,893
Stock compensation expense 19,464 16,912
Excess tax benefits from share-based payment arrangements (3,325) (1,811)
Deferred hedging losses transferred to earnings 1,978 2,085
Changes in assets and liabilities:
Accounts receivable (5,622) 13,893
Inventories (85,671) (260,943)
Prepaid expenses and other current assets (45,376) (21,168)
Other assets, net 2,877 (5,441)
Accounts payable (965) (1,688)
Accrued liabilities 7,117 (15,009)
Income taxes payable (95,181) (29,893)
Merchandise and other customer credits 2,002 4,643
Other long-term liabilities 14,390 13,732
---------------- -----------------
Net cash used in operating activities (12,307) (119,857)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (121,516) (111,012)
Proceeds from sale of marketable securities and short-term investments 238,175 49,370
Purchases of marketable securities and short-term investments (99,715) (46,698)
Proceeds from sale-leaseback of assets 75,000 -
Notes receivable funded (8,520) -
Other, net (786) 1,311
---------------- -----------------
Net cash provided by (used in) investing activities 82,638 (107,029)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments of) proceeds from short-term borrowings, net (10,204) 224,263
Repayment of current portion of long-term debt - (51,530)
Fees and expenses related to new short-term borrowings (600) -
Excess tax benefits from share-based payment arrangements 3,325 1,811
Repurchases of Common Stock (114,342) (46,576)
Proceeds from exercise of stock options 11,951 5,943
Cash dividends on Common Stock (31,524) (24,887)
---------------- -----------------
Net cash (used in) provided by financing activities (141,394) 109,024
---------------- ------------------
Effect of exchange rate changes on
cash and cash equivalents (5,032) (1,027)
---------------- ------------------
Net decrease in cash and cash equivalents (76,095) (118,889)
Cash and cash equivalents at beginning of year 187,681 248,665
---------------- ------------------
Cash and cash equivalents at end of nine months $ 111,586 $ 129,776
---------------- ------------------
See notes to condensed consolidated financial statements.
6
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 October 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 nine months
ended October 31, 2005 and 2004 are not necessarily indicative of the
results of the entire fiscal year.
2. NEW ACCOUNTING STANDARDS
In October 2005, the FASB issued FSP No. FAS 13-1, "Accounting for
Rental Costs Incurred during a Construction Period" which requires
that rental costs associated with ground or building operating leases
incurred during a construction period be recognized as rental expense
and included in income from continuing operations. FSP No. FAS 13-1 is
effective for reporting periods beginning after December 15, 2005.
Management has evaluated the provisions of FSP No. FAS 13-1 and
determined that the effect of its adoption will have no impact on the
Company's financial position, earnings and cash flows.
In December 2004, the 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.
7
NEW ACCOUNTING STANDARDS (continued)
The results of the restatement for the three and nine months ended
October 31, 2004 had the effect of reducing earnings from operations
by $5,584,000 and $16,912,000, reducing net earnings by $3,451,000 and
$10,474,000, reducing basic earnings per share by $0.02 and $0.07 and
reducing diluted earnings per share by $0.02 and $0.07. The balance
sheet and statement of cash flows as of and for the nine months ended
October 31, 2004 were also restated accordingly.
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
October 31, January 31, October 31,
(in thousands) 2005 2005 2004
------------------------------------------------------------------------------------------------------
Finished goods $ 814,872 $ 771,192 $ 824,736
Raw materials 246,488 236,802 241,046
Work-in-process 47,456 53,988 70,160
--------------------- ------------------- ------------------
1,108,816 1,061,982 1,135,942
Reserves (4,490) (4,737) (5,175)
--------------------- ------------------- ------------------
Inventories, net $1,104,326 $1,057,245 $1,130,767
--------------------- ------------------- ------------------
LIFO-based inventories at October 31, 2005, January 31, 2005 and
October 31, 2004 represented 71%, 66% and 68% of inventories, net,
with the current cost exceeding the LIFO inventory value by
$72,405,000 $64,058,000 and $48,296,000 at the end of each period.
4. ACQUISITION AND DISPOSITIONS
In October 2005, the Company acquired a corporation that specializes
in polishing small carat weight diamonds in Vietnam. The price payable
by the Company for the entire equity interest in this corporation is
$2,000,000, of which $1,200,000 will be paid in the fourth quarter;
the balance will be paid when certain post-acquisition requirements
are satisfied but no later than a fixed due date. This acquisition was
not significant to the Company's financial position, earnings or cash
flows.
In October 2005, the Company sold its equity interest in Temple St.
Clair. The Company recorded a loss of $2,201,000 in Selling, General
and Administrative ("SG&A") expenses associated with the sale.
In August 2005, the Company sold a glassware manufacturing operation.
The Company recorded a loss of $2,115,000 in SG&A expenses associated
with the sale of the operation.
8
5. INCOME TAXES
The effective income tax rate for the three and nine months ended
October 31, 2005 was 33.0% and 31.8% versus 38.2% and 38.0% in the
three and nine months ended October 31, 2004. The decrease in the
effective tax rate in the three months ended October 31, 2005 was
primarily due to favorable reserve adjustments relating to the
expiration of certain statutory periods during the quarter. In
addition, the lower effective tax rate in the nine-month period ending
October 31, 2005 was due to tax benefits of $8,100,000 recorded
earlier in the year associated with the repatriation provisions of the
American Jobs Creation Act of 2004 ("AJCA").
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. The Company has recorded a
tax benefit for the manufacturing deduction, which is immaterial for
the three and nine months ended October 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.
6. 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 Nine Months Ended
October 31, October 31,
-------------------------------------------------------------------
(in thousands) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------------------------
Net earnings for basic
and diluted EPS $23,789 $17,358 $114,398 $87,259
--------------- ---------------- --------------- ----------------
Weighted average shares for
basic EPS 142,280 145,943 143,172 146,376
Incremental shares based
upon the assumed exercise
of stock options and
restricted stock units 2,713 1,792 2,300 2,170
--------------- ---------------- --------------- ----------------
Weighted average shares for
diluted EPS 144,993 147,735 145,472 148,546
--------------- ---------------- --------------- ----------------
9
EARNINGS PER SHARE (continued)
For the three months ended October 31, 2005 and 2004, there were
4,429,000 and 6,616,000 stock options and restricted stock units
excluded from the computations of earnings per diluted share due to
their antidilutive effect. For the nine months ended October 31, 2005
and 2004, there were 6,188,000 and 3,674,000 stock options and
restricted stock units excluded from the computations of earnings per
diluted share due to their antidilutive effect.
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
replaced 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 is 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 may be
made from eight participating banks and are at interest rates based
upon local currency borrowing rates plus a margin that fluctuates with
the Company's fixed charge coverage ratio. As of October 31, 2005,
$28,223,000 was outstanding under the New Credit Facility with a
weighted average interest rate of 3.3%. The New Credit Facility
expires in July 2010.
8. COMMITMENTS AND CONTINGENCIES
In September 2005, the Company entered into a sale-leaseback
arrangement for its Retail Service Center, a distribution and
administrative office facility. The Company received proceeds of
$75,000,000 resulting in a gain of $5,300,000, which has been deferred
and is being amortized over the lease term. The lease has been
accounted for as an operating lease. The lease expires in September
2025 and has two ten-year renewal options. Total rental payments under
the lease are $103,960,000 during the initial lease term.
In November 2004, the Company entered into an agreement with Tahera
Diamond Corporation ("Tahera"), a Canadian diamond mining and
exploration company, to purchase or market all of the diamonds to be
mined at the Jericho mine which is being developed and constructed by
Tahera in Nunavut, Canada (the "Project"). In consideration of that
agreement, the Company provided a credit facility to Tahera which
allows Tahera to draw up to Cnd$35,000,000 (U.S.$30,000,000 on October
31, 2005) to finance the development and construction of the Project.
At October 31, 2005 approximately Cnd$9,983,000 (U.S.$8,477,000 at
October 31, 2005) was outstanding under this credit facility.
Principal and interest payments are due periodically throughout the
term of the facility which matures in December 2013.
10
9. EMPLOYEE BENEFIT PLANS
The Company maintains several pension and retirement plans, as well as
provides certain health-care and life insurance benefits.
Net periodic pension and other postretirement benefit expense included
the following components:
Three Months Ended October 31,
---------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
---------------------------------------------------------
(in thousands) 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------
Service cost $3,165 $2,699 $ 294 $307
Interest cost 3,160 2,640 397 400
Expected return on plan assets (2,501) (2,079) - -
Amortization of prior service
cost 201 201 (299) (303)
Amortization of net loss 971 395 68 82
---------------------------------------------------------
Net expense $4,996 $3,856 $ 460 $486
---------------------------------------------------------
Nine Months Ended October 31,
---------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
---------------------------------------------------------
(in thousands) 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------
Service cost $ 9,527 $ 8,097 $ 978 $ 921
Interest cost 8,968 7,920 1,239 1,236
Expected return on plan assets (7,539) (6,237) - -
Amortization of prior service
cost 603 603 (895) (909)
Amortization of net loss 2,155 1,185 246 278
---------------------------------------------------------
Net expense $13,714 $11,568 $1,568 $1,526
---------------------------------------------------------
10. 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 wholesale sales of
diamonds not suitable for the Company's production by 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.
11
SEGMENT INFORMATION (continued)
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. These
reclassifications were as follows:
o Effective with the second quarter of 2005 (three months
ended July 31, 2005), the Company placed responsibility for
U.S., non-Internet, business-to-business sales within the
U.S. Retail channel and, consequently, now reports
non-Internet 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 they were previously included.
o Each segment's earnings (losses) from operations as
previously reported in 2004 were 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 Nine Months Ended
October 31, October 31,
-----------------------------------------------------------------------
(in thousands) 2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------
Net sales:
U.S. Retail $247,782 $227,029 $ 771,344 $ 700,165
International Retail 204,287 190,851 596,707 556,530
Direct Marketing 27,308 26,332 86,598 80,801
Other 20,728 16,940 82,058 57,213
-------------- --------------- --------------- --------------
$500,105 $461,152 $1,536,707 $1,394,709
-------------- --------------- --------------- --------------
Earnings (losses) from
operations*:
U.S. Retail $37,911 $27,014 $138,646 $112,911
International Retail 41,021 39,473 128,078 128,866
Direct Marketing 4,879 3,544 23,225 18,167
Other (10,584) (5,449) (15,226) (10,122)
-------------- --------------- --------------- --------------
$73,227 $64,582 $274,723 $249,822
-------------- --------------- --------------- --------------
* Represents earnings from operations before unallocated corporate
expenses and other expenses, net.
12
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 Nine Months Ended
October 31, October 31,
------------------------------------------------------------------------
(in thousands) 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------
Earnings from
operations for segments $73,227 $64,582 $274,723 $249,822
Unallocated corporate
expenses (33,432) (31,218) (94,549) (95,593)
Other expenses, net (4,289) (5,276) (12,353) (13,398)
--------------- --------------- -------------- ---------------
Earnings before income
taxes $35,506 $28,088 $167,821 $140,831
--------------- -------------- -------------- ---------------
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.
11. SUBSEQUENT EVENT
On November 17, 2005, the Company's Board of Directors declared a
quarterly dividend of $0.08 per share on its Common Stock. This
dividend will be paid on January 10, 2006 to stockholders of record on
December 20, 2005.
13
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 through business-to-business sales personnel 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 diamonds not suitable for the Company's production by the
Company's diamond sourcing and manufacturing operations.
Effective with the second quarter of 2005 (three months ended July 31, 2005),
the Company placed responsibility for U.S., non-Internet, business-to-business
sales within the U.S. Retail channel and, consequently, now reports non-Internet
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 and the results of relocated stores are so included
if the relocation occurs within the same geographical market. However, in Japan
the sales result of a new store or boutique is not included in comparable store
sales if it constitutes a relocation from one department store to another or
from a department store to a free-standing location. 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 8% in the three months ("third quarter") ended
October 31, 2005 and 10% in the nine months ("year-to-date") ended
October 31, 2005.
o On a constant-exchange-rate basis (see Non-GAAP Measures section
below), net sales rose 9% in the third quarter and 10% in the
year-to-
14
date and worldwide comparable store sales rose 5% and 4% in those
periods.
o Gross margin (gross profit as a percentage of net sales) in the third
quarter improved compared to the prior year. Gross margin declined in
the year-to-date primarily due to changes in geographic and product
sales mix and higher product costs.
o Selling, general and administrative ("SG&A") expenses as a percentage
of net sales increased slightly in the third quarter which included
losses associated with business dispositions, but improved in the
year-to-date due to sales leverage on fixed costs.
o In the three and nine months ended October 31, 2005, the effective tax
rate was lower than the prior year.
o The Company repurchased and retired 0.8 million and 3.4 million shares
of its Common Stock in the three and nine months ended October 31,
2005.
o Net earnings increased 37% in the third quarter and 31% in the
year-to-date.
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:
15
Three Months Ended Nine Months Ended
October 31, 2005 October 31, 2005
-------------------------------------------- ------------------------------------------
Constant- Constant-
Trans- Exchange- Trans- Exchange-
GAAP lation Rate GAAP lation Rate
Reported Effect Basis Reported Effect Basis
-------------------------------------------- ------------------------------------------
Net Sales:
----------
Worldwide 8% (1%) 9% 10% - 10%
U.S. Retail 9% - 9% 10% - 10%
International
Retail 7% - 7% 7% 1% 6%
Japan 3% (2%) 5% 2% - 2%
Other Asia-
Pacific 17% 4% 13% 20% 5% 15%
Europe 6% (1%) 7% 9% 1% 8%
Comparable Store Sales:
-----------------------
Worldwide 5% - 5% 5% 1% 4%
U.S. Retail 7% - 7% 8% - 8%
International
Retail 1% - 1% 1% 2% (1%)
Japan (2%) (2%) - (3%) - (3%)
Other Asia-
Pacific 8% 4% 4% 9% 4% 5%
Europe (2%) (1%) (1%) 2% 1% 1%
RESULTS OF OPERATIONS
---------------------
Certain operating data as a percentage of net sales were as follows:
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------------------- ----------------------------------
2005 2004 2005 2004
---------------------------------- ----------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 45.9 46.8 45.5 44.9
---------------------------------- ----------------------------------
Gross profit 54.1 53.2 54.5 55.1
Selling, general and
administrative expenses 46.1 46.0 42.8 44.1
---------------------------------- ----------------------------------
Earnings from operations 8.0 7.2 11.7 11.0
Other expenses, net 0.9 1.1 0.8 0.9
---------------------------------- ----------------------------------
Earnings before income
taxes 7.1 6.1 10.9 10.1
Provision for income taxes 2.3 2.3 3.5 3.8
---------------------------------- ----------------------------------
Net earnings 4.8% 3.8% 7.4% 6.3%
---------------------------------- ----------------------------------
16
Net Sales
---------
Net sales by channel of distribution were as follows:
Three Months Ended Nine Months Ended
(in thousands) October 31, October 31,
-------------- ---------------------------------- ----------------------------------
2005 2004 2005 2004
---------------------------------- ----------------------------------
U.S. Retail $247,782 $227,029 $ 771,344 $ 700,165
International Retail 204,287 190,851 596,707 556,530
Direct Marketing 27,308 26,332 86,598 80,801
Other 20,728 16,940 82,058 57,213
---------------------------------- ----------------------------------
$500,105 $461,152 $1,536,707 $1,394,709
---------------------------------- ----------------------------------
U.S. Retail sales increased 9% in the third quarter and 10% in the year-to-date,
due to an increase in the average transaction size. Comparable store sales rose
7% in the third quarter and 8% in the year-to-date due to the following factors:
(i) 12% and 8% growth, respectively, in the New York flagship store (due to
increased tourist spending); and (ii) 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 non-Internet
business-to-business sales, which represent less than 5% of total U.S. Retail
sales.
International Retail sales increased 7% in both the third quarter and the
year-to-date. On a constant-exchange-rate basis, International Retail sales
increased 7% and 6% for the same periods; comparable store sales increased 1% in
the third quarter but declined 1% in the year-to-date.
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 third
quarter and 2% in the year-to-date, while comparable store sales were unchanged
and declined 3% in the respective 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 third quarter and
the year-to-date. 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 4% in the third quarter and 5% in the year-to-date, primarily due to
growth in Australia and Singapore.
In Europe (which represented 6% of net sales in fiscal year 2004), comparable
store sales on a constant-exchange-rate basis declined 1% in the third quarter
and increased 1% in the year-to-date, due to growth in most of Continental
Europe that was offset by a decline in London.
Direct Marketing sales rose 4% in the third quarter and 7% in the year-to-date
due to growth in the average amounts spent per e-commerce and catalog order.
17
Other sales increased 22% in the third quarter and 43% in the year-to-date. More
than half of the increase in both the quarter and the year-to-date resulted from
wholesale sales of diamonds; such sales commenced in the third quarter of 2004
and will continue on a regular basis. In the specialty retail businesses, sales
in LITTLE SWITZERLAND stores increased 10% in the third quarter and 12% in the
year-to-date. To a much lesser extent, sales in IRIDESSE stores, which commenced
in late 2004, contributed to this channel's sales growth. There are now five
IRIDESSE stores which exclusively sell pearl jewelry.
Management's plan for openings and closings of TIFFANY & CO. stores in 2005 are
shown below and, in total, would represent a 2% net increase in gross square
footage:
Actual / Expected
Location Openings (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 improved in the third quarter by 0.9 percentage points primarily
due to changes in geographic and product sales mix combined with selective
increases in U.S. retail prices introduced late in the first quarter (0.9
percentage point improvement) and due to the negative effect in the prior year
related to unused internal jewelry manufacturing capacity (0.4 percentage point
improvement). These benefits were offset by an increase in wholesale sales of
diamonds that earn a minimal to no gross margin.
Gross margin declined 0.6 percentage points in the year-to-date primarily due to
an increase in wholesale sales of diamonds as well as geographic and product
sales mix.
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) 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.
18
Selling, General and Administrative Expenses
--------------------------------------------
SG&A expenses increased 9% in the third quarter and 7% in the year-to-date due
to several factors: higher labor costs (representing slightly less than half of
the increase in both periods), growth in depreciation and occupancy expenses
(representing approximately one quarter of the increase in the third quarter and
one third of the increase in the year-to-date) and $4,316,000 of losses
associated with business dispositions (see Business Dispositions section). As a
percentage of net sales, SG&A expenses increased marginally in the quarter but
improved in the year-to-date 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 full year 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. (See Note 10
to the Condensed Consolidated Financial Statements for further information on
the reclassifications that were made).
Three Months Ended
October 31,
------------------------------------------
(in thousands) 2005 2004
------------------------------------------------------------------ ------------------------------------------
Earnings (losses) from operations:
U.S. Retail $37,911 $27,014
International Retail 41,021 39,473
Direct Marketing 4,879 3,544
Other (10,584) (5,449)
------------------------------------------
Earnings from operations for segments 73,227 64,582
Unallocated corporate expenses (33,432) (31,218)
------------------------------------------
Earnings from operations $39,795 $33,364
------------------------------------------
Earnings from operations rose 19% in the third 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
third quarter of 2005 and 2004 was as follows:
o U.S. Retail: 15% in 2005 versus 12% in 2004 (increase was primarily due to
increased sales and gross margin and the leveraging of fixed expenses);
o International Retail: 20% in 2005 versus 21% in 2004 (decrease was
primarily due to lower gross margin resulting from changes in geographic
and product sales mix);
o Direct Marketing: 18% in 2005 versus 13% in 2004 (increase was primarily
due to increased sales and the leveraging of fixed expenses); and
o Other: (51)% in 2005 versus (32)% in 2004 (decrease was primarily due to
losses associated with business dispositions).
19
Nine Months Ended
October 31,
------------------------------------------
(in thousands) 2005 2004
------------------------------------------------------------------ ------------------------------------------
Earnings (losses) from operations:
U.S. Retail $138,646 $112,911
International Retail 128,078 128,866
Direct Marketing 23,225 18,167
Other (15,226) (10,122)
------------------------------------------
Earnings from operations for segments 274,723 249,822
Unallocated corporate expenses (94,549) (95,593)
------------------------------------------
Earnings from operations $180,174 $154,229
------------------------------------------
Earnings from operations rose 17% in the year-to-date. 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
year-to-date of 2005 and 2004 was as follows:
o U.S. Retail: 18% in 2005 versus 16% in 2004 (increase was primarily due to
increased sales and the leveraging of fixed expenses);
o International Retail: 21% in 2005 versus 23% in 2004 (decrease was
primarily due to lower gross margin resulting from changes in geographic
and product sales mix);
o Direct Marketing: 27% in 2005 versus 22% in 2004 (increase was primarily
due to increased sales and the leveraging of fixed expenses); and
o Other: (19)% in 2005 versus (18)% in 2004 (decrease was primarily due to
losses associated with business dispositions).
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 decreased in the third quarter and year-to-date as a result
of increased interest income associated with increased average investments and
higher interest rates, transaction gains on settlement of foreign payables
partially offset by lower income in equity investments. The increases in the
year-to-date were partially offset by an increase in interest expense.
Provision for Income Taxes
--------------------------
The effective income tax rate for the three and nine months ended October 31,
2005 was 33.0% and 31.8% versus 38.2% and 38.0% in the three and nine months
ended October 31, 2004. The decrease in the effective tax rate in the three
months ended October 31, 2005 was primarily due to favorable reserve adjustments
relating to the expiration of certain statutory periods during the quarter. In
addition, the lower effective tax rate in the nine-month period ending October
31, 2005 was due to tax benefits of $8,100,000 recorded earlier in the year
associated with the repatriation provisions of the American Jobs Creation Act of
2004 ("AJCA").
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. The
Company has recorded a tax benefit for the manufacturing deduction, which is
immaterial for the three and nine months
20
ended October 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.
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
$12,307,000 in the year-to-date of 2005, compared with an outflow of
$119,857,000 in the year-to-date 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
$1,210,817,000 and 5.3 at October 31, 2005, compared with $1,208,068,000 and 4.0
at January 31, 2005 and $962,354,000 and 2.8 at October 31, 2004.
Accounts receivable, less allowances at October 31, 2005 were 3% lower than at
January 31, 2005 (which is typically a seasonal high point) and were 4% higher
than at October 31, 2004 due to sales growth.
Inventories, net at October 31, 2005 were 4% above January 31, 2005 and 2% below
October 31, 2004. Combined raw material and work-in-process inventories
increased 1% versus January 31, 2005 and decreased 6% versus October 31, 2004
which resulted from increased raw material purchases in 2004 during the initial
development of rough diamond sourcing activities. Finished goods inventories
increased 6% versus January 31, 2005, largely due to broadened product offerings
and new and anticipated store openings, and decreased 1% versus October 31,
2004. Changes in foreign currency exchange rates decreased finished goods
inventory by 4% and 2% compared to January 31, 2005 and October 31, 2004.
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 low-single-digit percentage increase in the
overall year-over-year inventory growth rate in 2005 compared with a 21%
increase in 2004.
Capital Expenditures
--------------------
Capital expenditures were $121,516,000 in the year-to-date compared with
$111,012,000 in the first nine months of 2004. Management estimates that capital
expenditures will be approximately $165,000,000 in 2005 (compared with
approximately $142,000,000 in the prior year) 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 beyond 2005 will approximate 7-8% of net sales.
21
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
approximately $87,000,000 to-date for the New York store related projects. Based
on current plans, the Company estimates that the overall cost of these projects
will be $110,000,000 when completed in 2006.
Business Dispositions
---------------------
The Company continuously 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 sold a glassware manufacturing
operation. The Company recorded a loss of approximately $2,115,000 in SG&A
expenses associated with the sale of the operation.
In October 2005, the Company sold its equity interest in Temple St. Clair. The
Company recorded a loss of $2,201,000 in SG&A expenses associated with the sale.
Share Repurchases
-----------------
In March 2005, the Company's Board of Directors approved a stock repurchase
program ("2005 Program") that authorized the repurchase of up to $400,000,000 of
the Company's Common Stock through March 2007 by means of 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 third quarter, the Company repurchased and retired 790,997 shares of
Common Stock at a total cost of $30,394,000, or an average cost of $38.42 per
share. In the year-to-date, the Company repurchased and retired 3,366,309 shares
of Common Stock at a total cost of $114,342,000, or an average cost of $33.97
per share. At October 31, 2005, there remained $294,640,000 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 replaced 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 is
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 may be made from eight participating banks and are at interest rates
based upon local currency borrowing rates plus a margin that fluctuates with the
Company's fixed charge coverage ratio. The weighted average interest rate at
October 31, 2005 was 3.3%. 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 and long-term debt) to
stockholders' equity was 24% at October 31, 2005, 26% at January 31, 2005 and
44% at October 31, 2004.
Based on the Company's financial position at October 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
22
service and seasonal working capital increases that are typically required
during the third and fourth quarters of the year.
Contractual Obligations
-----------------------
In November 2004, the Company entered into an agreement with Tahera Diamond
Corporation ("Tahera"), a Canadian diamond mining and exploration company, to
purchase or market all of the diamonds to be mined at the Jericho mine which is
being developed and constructed by Tahera in Nunavut, Canada (the "Project"). In
consideration of that agreement, the Company provided a credit facility to
Tahera which allows Tahera to draw up to Cnd$35,000,000 (U.S.$30,000,000 on
October 31, 2005) to finance the development and construction of the Project. At
October 31, 2005 approximately Cnd$9,983,000 (U.S.$8,477,000 on October 31,
2005) was outstanding under this credit facility. Principal and interest
payments are due periodically throughout the term of the facility which matures
in December 2013.
In September 2005, the Company entered into a sale-leaseback arrangement for its
Retail Service Center, a distribution and administrative office facility. The
Company received proceeds of $75,000,000 resulting in a gain of $5,300,000 which
has been deferred and is being amortized over the lease term. The lease has been
accounted for as an operating lease. The lease expires in September 2025 and has
two ten-year renewal options. Total rental payments under the lease are
$103,960,000 during the initial lease term.
The Company's other contractual cash obligations and commercial commitments at
October 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.
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.
23
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 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.
24
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, 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 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.
25
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 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*
--------------------------------------------------------------------------------------------------------------
August 1, 2005
through
August 31, 2005 - - - $325,034,000
--------------------------------------------------------------------------------------------------------------
September 1, 2005
through
September 30, 2005 718,797 $38.24 718,797 $297,546,000
--------------------------------------------------------------------------------------------------------------
October 1, 2005
through
October 31, 2005 72,200 $40.24 72,200 $294,640,000
--------------------------------------------------------------------------------------------------------------
Total 790,997 $38.42 790,997 $294,640,000
--------------------------------------------------------------------------------------------------------------
* 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.
26
ITEM 6 Exhibits
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
27
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 5, 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.