UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q ---------------- (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ---- EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2006. 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One). Large Accelerated filer X Accelerated filer ___ Non-Accelerated filer ___ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ____. No X . APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: Common Stock, $.01 par value, 140,640,105 shares outstanding at the close of business on May 31, 2006. TIFFANY & CO. AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 2006 PART I - FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets - April 30, 2006, January 31, 2006 and April 30, 2005 (Unaudited) 3 Condensed Consolidated Statements of Earnings - for the three months ended April 30, 2006 and 2005 (Unaudited) 4 Condensed Consolidated Statements of Stockholders' Equity - for the three months ended April 30, 2006 and Comprehensive Earnings - for the three months ended April 30, 2006 and 2005 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows - for the three months ended April 30, 2006 and 2005 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Controls and Procedures 19 PART II - OTHER INFORMATION Item 1A. Risk Factors 20 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21 Item 6. Exhibits 22 (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) April 30, January 31, April 30, 2006 2006 2005 ------------- ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 180,541 $ 393,609 $ 213,708 Short-term investments 46,175 - - Accounts receivable, less allowances of $6,197, $8,002 and $6,181 156,124 142,294 120,713 Inventories, net 1,140,829 1,060,164 1,073,605 Deferred income taxes 73,501 69,576 69,385 Prepaid expenses and other current assets 54,180 33,200 41,119 --------------- --------------- --------------- Total current assets 1,651,350 1,698,843 1,518,530 Property, plant and equipment, net 888,221 866,004 917,415 Deferred income taxes 27,361 29,828 - Other assets, net 184,919 182,597 140,512 --------------- --------------- --------------- $ 2,751,851 $ 2,777,272 $ 2,576,457 --------------- --------------- --------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 47,726 $ 38,942 $ 47,488 Current portion of long-term debt 6,244 6,186 - Accounts payable and accrued liabilities 210,215 202,646 177,514 Income taxes payable 38,040 60,364 35,137 Merchandise and other customer credits 55,614 56,472 52,084 --------------- --------------- --------------- Total current liabilities 357,839 364,610 312,223 Long-term debt 428,450 426,548 392,178 Postretirement/employment benefit obligations 42,429 41,982 40,449 Deferred income taxes 797 - 21,666 Other long-term liabilities 118,588 113,219 99,409 Commitments and contingencies Stockholders' equity: Preferred Stock, $0.01 par value; authorized 2,000 shares, none issued and outstanding - - - Common Stock, $0.01 par value; authorized 240,000 shares, issued and outstanding 140,599, 142,509 and 143,830 1,406 1,425 1,438 Additional paid-in capital 499,595 488,960 439,235 Retained earnings 1,288,169 1,331,321 1,245,309 Accumulated other comprehensive gain (loss), net of tax: Foreign currency translation adjustments 14,193 5,281 26,000 Deferred hedging (loss) gain (329) 3,247 (1,449) Unrealized gain (loss) on marketable securities 714 679 (1) --------------- --------------- --------------- Total stockholders' equity 1,803,748 1,830,913 1,710,532 --------------- --------------- --------------- $ 2,751,851 $ 2,777,272 $ 2,576,457 --------------- --------------- --------------- 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 April 30, --------------------------------- 2006 2005 -------------- -------------- Net sales $ 539,241 $ 509,901 Cost of sales 238,115 235,080 -------------- -------------- Gross profit 301,126 274,821 Selling, general and administrative expenses 226,879 208,510 -------------- -------------- Earnings from operations 74,247 66,311 Other expenses, net 3,975 4,206 -------------- -------------- Earnings before income taxes 70,272 62,105 Provision for income taxes 27,130 22,047 -------------- -------------- Net earnings $ 43,142 $ 40,058 -------------- -------------- Net earnings per share: Basic $ 0.30 $ 0.28 -------------- -------------- Diluted $ 0.30 $ 0.27 -------------- -------------- Weighted average number of common shares: Basic 141,941 144,248 Diluted 144,367 146,285 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, 2006 $ 1,830,913 $ 1,331,321 $ 9,207 142,509 $ 1,425 $ 488,960 Exercise of stock options and vesting of restricted stock units 3,024 - - 148 1 3,023 Tax benefit from exercise of stock options and vesting of restricted stock units 642 - - - - 642 Share-based compensation expense 7,259 - - - - 7,259 Issuance of Common Stock under the Employee Profit Sharing and Retirement Savings Plan 4,550 - - 121 1 4,549 Purchase and retirement of Common Stock (79,750) (74,891) - (2,179) (21) (4,838) Cash dividends on Common Stock (11,403) (11,403) - - - - Deferred hedging loss, net of tax (3,576) - (3,576) - - - Unrealized gain on marketable securities 35 - 35 - - - Foreign currency translation adjustments, net of tax 8,912 - 8,912 - - - Net earnings 43,142 43,142 - - - - ---------------------------------------------------------------------------------------- Balances, April 30, 2006 $ 1,803,748 $ 1,288,169 $ 14,578 140,599 $ 1,406 $ 499,595 ---------------------------------------------------------------------------------------- Three Months Ended April 30, ------------------------ 2006 2005 ------------------------ Net earnings $ 43,142 $ 40,058 Other comprehensive gain (loss), net of tax: Deferred hedging (loss) gain (3,576) 669 Foreign currency translation adjustments 8,912 (3,045) Unrealized gain (loss) on marketable securities 35 (150) ------------------------ Comprehensive earnings $ 48,513 $ 37,532 ------------------------ See notes to condensed consolidated financial statements. 5 TIFFANY & CO. AND SUBSIDIARIES ------------------------------ CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited) (in thousands) Three Months Ended April 30, ---------------------------------------- 2006 2005 ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 43,142 $ 40,058 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 28,347 27,987 Excess tax benefits from share-based payment arrangements (660) (821) Provision for inventories 2,644 1,742 Deferred income taxes (4,876) (14,869) Provision for postretirement/employment benefits 447 228 Share-based compensation expense 7,109 6,173 Changes in assets and liabilities: Accounts receivable (11,896) 7,509 Inventories (74,453) (22,963) Prepaid expenses and other current assets (23,232) (14,773) Other assets, net (2,359) (770) Accounts payable and accrued liabilities 10,678 (3,638) Income taxes payable (22,028) (81,896) Merchandise and other customer credits (920) (236) Other long-term liabilities 4,302 10,524 ---------------- ----------------- Net cash used in operating activities (43,755) (45,745) ---------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities and short-term investments (46,396) (99,168) Proceeds from sale of marketable securities and short-term investments - 238,175 Capital expenditures (43,928) (31,879) Other, net (210) (404) ---------------- ----------------- Net cash (used in) provided by investing activities (90,534) 106,724 ---------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings, net 8,023 4,843 Repayment of current portion of long-term debt (1,730) - Repurchase of Common Stock (79,750) (33,978) Proceeds from exercise of stock options 3,024 2,632 Excess tax benefits from share-based payment arrangements 660 821 Cash dividends on Common Stock (11,403) (8,668) ---------------- ----------------- Net cash used in financing activities (81,176) (34,350) ---------------- ----------------- Effect of exchange rate changes on cash and cash equivalents 2,397 (602) ---------------- ----------------- Net (decrease) increase in cash and cash equivalents (213,068) 26,027 Cash and cash equivalents at beginning of year 393,609 187,681 ---------------- ----------------- Cash and cash equivalents at end of three months $ 180,541 $ 213,708 ---------------- ----------------- 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) necessary to present fairly the Company's financial position as of April 30, 2006 and 2005 and the results of its operations and cash flows for the interim periods presented. The condensed consolidated balance sheet data for January 31, 2006 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. 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 months ended April 30, 2006 and 2005 are not necessarily indicative of the results of the entire fiscal year. 2. NEW ACCOUNTING STANDARDS In October 2005, the Financial Accounting Standards Board ("FASB") issued Staff Position ("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. The adoption of FSP No. FAS 13-1 in the first quarter of 2006 had no impact on the Company's financial position, earnings and cash flows. In November 2004, the FASB issued Statement of Financial Accounting Standards ("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. The adoption of this Statement in the first quarter of 2006 had no impact on the Company's financial position, earnings and cash flows. 7 3. INVENTORIES April 30, January 31, April 30, (in thousands) 2006 2006 2005 ------------------------------------------------------------------------------------------- Finished goods $ 816,661 $ 764,041 $ 787,905 Raw materials 263,024 244,400 236,240 Work-in-process 61,144 51,723 49,460 --------------------- ------------------- --------------------- Inventories, net $ 1,140,829 $ 1,060,164 $ 1,073,605 --------------------- ------------------- --------------------- LIFO-based inventories at April 30, 2006, January 31, 2006 and April 30, 2005 represented 70%, 69% and 68% of inventories, net, with the current cost exceeding the LIFO inventory value by $76,990,000 $75,624,000 and $65,276,000 at the end of each period. 4. INCOME TAXES The effective income tax rate for the three months ended April 30, 2006 was 38.6% versus 35.5% in the three months ended April 30, 2005. The lower effective tax rate in the three months ended April 30, 2005 primarily reflected a $1,500,000 tax benefit associated with the repatriation provisions of the American Jobs Creation Act of 2004. 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 vesting of 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 April 30, -------------------------------------------------- (in thousands) 2006 2005 --------------------------------------------------------------------------------------------------- Net earnings for basic and diluted EPS $ 43,142 $ 40,058 ----------------------- ---------------------- Weighted average shares for basic EPS 141,941 144,248 Incremental shares based upon the assumed exercise of stock options and restricted stock units 2,426 2,037 ----------------------- ---------------------- Weighted average shares for diluted EPS 144,367 146,285 ----------------------- ---------------------- For the three months ended April 30, 2006 and 2005, there were 5,066,000 and 7,422,000 stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect. 8 6. 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 April 30, ------------------------------------------------------------- Other Postretirement Pension Benefits Benefits ------------------------------------------------------------- (in thousands) 2006 2005 2006 2005 --------------------------------------------------------------------------------------------------- Service cost $ 3,840 $ 3,181 $ 376 $ 342 Interest cost 3,502 2,904 429 421 Expected return on plan assets (2,944) (2,519) - - Amortization of prior service cost 175 201 (293) (298) Amortization of net loss 1,147 592 85 89 ------------------------------------------------------------- Net expense $ 5,720 $ 4,359 $ 597 $ 554 ------------------------------------------------------------- 7. 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 and tradenames other than TIFFANY & CO., as well as wholesale sales of diamonds obtained through the Company's diamond sourcing program but subsequently deemed not suitable for production by its 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. Revisions were made to the 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 revisions were as follows: o In the second quarter of 2005, the Company placed responsibility for U.S. non-Internet business-to-business sales within the U.S. Retail segment and, consequently, began reporting non-Internet business-to-business sales in that segment. In the past, such sales were reported in the Direct Marketing segment, which will continue to report Internet business-to-business transactions. o Effective with the current reporting period, the Company allocates LIFO costs between its reportable segments based upon sales of U.S. and foreign branches only, which value inventory using the LIFO method. 9 SEGMENT INFORMATION (continued) Certain information relating to the Company's segments is set forth below: Three Months Ended April 30, --------------------------------------------------- (in thousands) 2006 2005 ------------------------------------------------------------------------------------------- Net sales: U.S. Retail $ 260,580 $ 255,852 International Retail 215,164 190,316 Direct Marketing 29,957 28,936 ---------------------- ----------------------- Total reportable segments 505,701 475,104 Other 33,540 34,797 ---------------------- ----------------------- $ 539,241 $ 509,901 ---------------------- ----------------------- Earnings (losses) from operations:* U.S. Retail $ 46,778 $ 46,261 International Retail 54,896 44,072 Direct Marketing 8,148 8,676 ---------------------- ----------------------- Total reportable segments 109,822 99,009 Other (3,412) (1,515) ---------------------- ----------------------- $ 106,410 $ 97,494 ---------------------- ----------------------- * Represents earnings from operations before unallocated corporate expenses and other expenses, net. 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 April 30, ---------------------------------------------------- (in thousands) 2006 2005 ------------------------------------------------------------------------------------------------ Earnings from operations for segments $ 106,410 $ 97,494 Unallocated corporate expenses (32,163) (31,183) Other expenses, net (3,975) (4,206) ----------------------- ----------------------- Earnings before income taxes $ 70,272 $ 62,105 ----------------------- ----------------------- Unallocated corporate expenses include certain costs related to administrative support functions, such as information technology, finance, legal and human resources, which the Company does not allocate to its segments. 8. SUBSEQUENT EVENT On May 18, 2006, the Company's Board of Directors declared a 25% increase in the quarterly dividend rate on its Common Stock, increasing it from $0.08 per share to $0.10 per share. This dividend will be paid on July 10, 2006 to stockholders of record on June 20, 2006. 10 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 principal merchandise offerings are an extensive selection of fine jewelry. It also sells 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 includes sales in TIFFANY & CO. stores in the U.S. and, to a lesser extent, sales of TIFFANY & CO. products through business-to-business sales personnel in the U.S.; o International Retail includes sales in TIFFANY & CO. stores and department store boutiques outside the U.S., as well as, to a lesser extent, business-to-business, Internet and wholesale sales of TIFFANY & CO. products outside the U.S.; o Direct Marketing includes Internet and catalog sales of TIFFANY & CO. products in the U.S.; and o Other includes worldwide sales of businesses operated under trademarks or tradenames other than TIFFANY & CO. ("specialty retail"), as well as wholesale sales of diamonds obtained through the Company's diamond sourcing program but subsequently deemed not suitable for production by its manufacturing operations. All references to years relate to fiscal years ended or ending on January 31 of the following calendar year. HIGHLIGHTS o Net sales increased 6% in the three months ("first quarter") ended April 30, 2006. On a constant-exchange-rate basis (see Non-GAAP Measures section below), net sales rose 9% and worldwide comparable store sales rose 5%. o U.S. comparable store sales declined 1%, but Japan comparable retail sales, on a constant-exchange-rate basis, increased 12%. o Earnings from operations rose 12% and net earnings increased 8%. o Three retail locations were opened - two in Japan and one in Monterrey, Mexico. o An informational website was launched in China. o A jewelry collection designed by the renowned architect Frank Gehry was launched. o The Company repurchased and retired 2.2 million shares of its Common Stock during the quarter. o In May 2006, the Board of Directors increased the annual dividend rate by 25%. 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 11 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), for the first quarter of 2006 versus the first quarter of 2005, from the GAAP to the non-GAAP basis: Net Sales Comparable Store Sales --------------------------------------------- --------------------------------------------- Constant- Constant- Trans- Exchange- Trans- Exchange- GAAP lation Rate GAAP lation Rate Reported Effect Basis Reported Effect Basis ---------------------------------------------------------------------------------------------- Worldwide 6% (3%) 9% 2% (3%) 5% U.S. Retail 2% - 2% (1%) - (1%) International Retail 13% (8%) 21% 8% (8%) 16% Japan Retail 4% (11%) 15% 1% (11%) 12% Other Asia- Pacific 19% (1%) 20% 20% - 20% Europe 18% (9%) 27% 14% (10%) 24% RESULTS OF OPERATIONS - --------------------- Certain operating data as a percentage of net sales were as follows: Three Months Ended April 30, ------------------------------------- 2006 2005 ------------------------------------- Net sales 100.0% 100.0% Cost of sales 44.2 46.1 ------------------------------------- Gross profit 55.8 53.9 Selling, general and administrative 42.1 40.9 expenses ------------------------------------- Earnings from operations 13.7 13.0 Other expenses, net 0.7 0.8 ------------------------------------- Earnings before income taxes 13.0 12.2 Provision for income taxes 5.0 4.3 ------------------------------------- Net earnings 8.0% 7.9% ------------------------------------- 12 Net Sales - --------- Net sales by channel of distribution were as follows: Three Months Ended (in thousands) April 30, - ------------------------------------------------------------------------------------------------- Increase 2006 2005 (Decrease) ------------------------------------------------------------------- U.S. Retail $ 260,580 $ 255,852 2% International Retail 215,164 190,316 13% Direct Marketing 29,957 28,936 4% Other 33,540 34,797 (4%) ------------------------------------------------------------------ $ 539,241 $ 509,901 6% ------------------------------------------------------------------ A store's sales are included in "comparable store sales" when the store has been open for more than 12 months. In markets other than Japan, sales for relocated stores are included if the relocation occurs within the same geographical market. In Japan, sales for a new store or boutique are not included if the store was relocated 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 in all markets. In the second quarter of 2005, the Company placed responsibility for U.S. non-Internet business-to-business sales within the U.S. Retail channel and, consequently, began reporting 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 Internet business-to-business transactions. The prior year's amounts affected by the change have been revised to conform to the current year presentation. U.S. Retail sales increased 2% in the first quarter as a result of new store openings in the past year. Comparable store sales declined 1%. Comparable branch store sales were equal to the prior year and sales in the New York flagship store declined 7%. Management expects a mid-single-digit percentage increase in full year 2006 U.S. comparable store sales. International Retail sales, on a constant-exchange-rate basis, increased 21% and comparable store sales increased 16% in the first quarter. In Japan (which represented 20% of net sales in fiscal year 2005), on a constant-exchange-rate basis, total retail sales increased 15% in the first quarter and comparable store sales increased 12%. Management's operational focus in Japan is on new products, targeted publicity and marketing, and enhancing the quality of selling locations and improving selling skills. Management believes that the focus on these initiatives has contributed to the improved results. Sales of engagement jewelry, fine jewelry and silver jewelry increased in the first quarter. Management expects a mid-single-digit increase in full year 2006 Japan comparable store sales. In the Asia-Pacific region outside Japan (which represented 8% of net sales in fiscal year 2005), comparable store sales on a constant-exchange-rate basis increased 20% in the first quarter due to growth in all markets. In Europe (which represented 6% of net sales in fiscal year 2005), comparable store sales on a constant-exchange-rate basis increased 24% in the first quarter due to growth in London and most of Continental Europe. Direct Marketing sales rose 4% in the first quarter due to growth both in the number of orders shipped and the average order size. 13 Other sales decreased in the first quarter. In the specialty retail businesses, sales in LITTLE SWITZERLAND stores decreased 3% in the first quarter. The Company continues to invest in new IRIDESSE stores, which are devoted to the sale of pearl jewelry, and there are now seven such stores. Management's plan for openings and closings of TIFFANY & CO. stores in 2006 are shown below and, in total, would represent a 6% net increase in gross square footage: Actual Openings Expected Location (Closings) 2006 Openings 2006 - -------- --------------- --------------- Mito, Japan First Quarter Yonago, Japan First Quarter Busan, Korea (First Quarter) Monterrey, Mexico First Quarter Indianapolis, Indiana Second Quarter Atlantic City, New Jersey Third Quarter Tucson, Arizona Third Quarter Nashville, Tennessee Third Quarter Waikoloa, Hawaii Fourth Quarter Beijing, China Second Quarter Shanghai, China Third Quarter Macau Third Quarter Vienna, Austria Third Quarter Vancouver, Canada Fourth Quarter Gross Margin - ------------ Gross margin improved in the first quarter by 1.9 percentage points primarily driven by product sales mix, which more than offset higher precious metal prices. Geographic sales mix, with particularly stronger sales in Japan, also provided a benefit to a lesser extent. The Company is addressing, and as necessary will continue to address, the effect of higher precious metal costs by adjusting retail prices in various product categories. 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. Management expects gross margin in the full year 2006 to be approximately equal to the prior year. Selling, General and Administrative Expenses - -------------------------------------------- SG&A expenses increased 9% in the first quarter with almost half of the increase resulting from increased marketing expense (largely due to the launch of the Frank Gehry jewelry collection). There was also incremental growth in labor, depreciation and occupancy expenses. As a percentage of net sales, SG&A expenses increased in the first quarter because sales growth was insufficient to offset increased marketing expenses and fixed costs. Management's objective is 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 continues to expect a high-single-digit percentage increase in SG&A expenses in full year 2006 and, if sales expectations are achieved, an improvement in the expense ratio. 14 Earnings from Operations - ------------------------ Revisions were made to prior year's earnings (losses) from operations by segment to conform to the current year presentation and to reflect the manner in which management now evaluates the performance of segments. (See Note 7 to the Condensed Consolidated Financial Statements for further information on the revisions that were made). First First Quarter % of Quarter % of (in thousands) 2006 Sales* 2005 Sales* - ------------------------------------------------------------------------------------------------- Earnings (losses) from operations: U.S. Retail $ 46,778 18% $ 46,261 18% International Retail 54,896 26% 44,072 23% Direct Marketing 8,148 27% 8,676 30% Other (3,412) (10%) (1,515) (4%) --------------------------------------------------------- 106,410 97,494 Unallocated corporate expenses (32,163) (31,183) --------------------------------------------------------- Earnings from operations $ 74,247 $ 66,311 --------------------------------------------------------- * Percentages represent earnings (losses) from operations as a percentage of each segment's net sales. Earnings from operations rose 12% in the first 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 first quarter of 2006 and 2005 was as follows: o U.S. Retail was consistent with the prior year. An increase in gross margin (due to a change in product sales mix) was offset by increased SG&A expenses (particularly marketing expenses largely tied to the launch of the Frank Gehry jewelry collection as well as higher labor, depreciation and occupancy expenses); o International Retail increased 3 percentage points primarily due to sales growth more than offsetting increased operating expenses; o Direct Marketing decreased 3 percentage points primarily because sales growth was insufficient to absorb increased operating expenses; and o Other decreased 6 percentage points primarily due to the continued investment in the expansion of the specialty retail businesses. Unallocated corporate expenses include certain costs related to administrative support functions, such as information technology, finance, legal and human resources, which the Company does not allocate to its segments. Provision for Income Taxes - -------------------------- The effective income tax rate for the three months ended April 30, 2006 was 38.6% versus 35.5% in the three months ended April 30, 2005. The lower effective tax rate in the first quarter of 2005 primarily reflected a $1,500,000 tax benefit associated with the repatriation provisions of the American Jobs Creation Act of 2004. Management continues to expect the effective tax rate to be approximately 38% for full year 2006. New Accounting Standards - ------------------------ See Note 2 to Condensed Consolidated Financial Statements. 15 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's liquidity needs are primarily a function of its requirements for seasonal and expansion-related working capital and capital expenditures. The Company had a net cash outflow from operating activities of $43,755,000 in the first quarter of 2006, compared with an outflow of $45,745,000 in the first quarter of 2005. Tax payments in 2006 were lower than 2005 when taxes on the gain from the sale of the Company's equity investment in Aber Diamond Corporation were paid. In addition, inventory purchases in the first quarter were higher than in the first quarter of 2005, as discussed in the Working Capital section below. Working Capital - --------------- Working capital (current assets less current liabilities) and the corresponding current ratio (current assets divided by current liabilities) were $1,293,511,000 and 4.6 at April 30, 2006, compared with $1,334,233,000 and 4.7 at January 31, 2006 and $1,206,307,000 and 4.9 at April 30, 2005. Accounts receivable, less allowances at April 30, 2006 were 10% higher than at January 31, 2006 and was affected by the timing of certain end-of-month receipts which were collected in May and were 29% higher than at April 30, 2005 partly due to sales growth and also affected by the timing of receipts. Inventories, net at April 30, 2006 were 8% above those at January 31, 2006 and 6% above those at April 30, 2005. Combined raw material and work-in-process inventories increased 9% versus January 31, 2006 and 13% versus April 30, 2005 due to increased costs and quantities needed to support increased internal jewelry manufacturing. Finished goods inventories increased 7% versus January 31, 2006, and 4% versus April 30, 2005, partly due to weaker-than-expected U.S. sales growth as well as anticipated comparable store sales growth and store openings. Changes in foreign currency exchange rates increased inventories, net by 1% compared to January 31, 2006 and decreased inventories, net 1% compared to April 30, 2005. 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 continues to expect a mid-to-high single-digit percentage increase in the overall year-over-year inventory growth rate in 2006. Capital Expenditures - -------------------- Capital expenditures were $43,928,000 in the first quarter compared with $31,879,000 in the first quarter of 2005. Management estimates that capital expenditures will be approximately $170,000,000 in 2006 (compared with approximately $157,000,000 in the prior year) due to costs related to the opening and renovation of stores and to ongoing investments in new systems. 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 $94,000,000 to-date for 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 by the end of 2006. 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 16 repurchased depend on a variety of discretionary factors such as price and other market conditions. In the first quarter, the Company repurchased and retired 2,179,272 shares of Common Stock at a total cost of $79,750,000, or an average cost of $36.59 per share. At April 30, 2006, there remained $196,416,000 of authorization for future repurchases under the 2005 Program. Borrowings - ---------- The Company's sources of working capital are internally-generated cash flows and funds available under a revolving credit facility. The ratio of total debt (short-term borrowings, current portion of long-term debt and long-term debt) to stockholders' equity was 27% at April 30, 2006, 26% at January 31, 2006 and 26% at April 30, 2005. At April 30, 2006, the Company was in compliance with all loan covenants. Based on the Company's financial position at April 30, 2006, 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 for the foreseeable future. Contractual Obligations - ----------------------- The Company's contractual cash obligations and commercial commitments at April 30, 2006 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, 2006. 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. Forward-Looking Statements - -------------------------- This document contains certain "forward-looking statements" concerning the Company's objectives and expectations with respect to store openings, sales, 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. Statements beginning with such words as "believes", "intends", "plans", and "expects" include forward-looking statements that are based on management's expectations given facts as currently known by management on the date this quarterly report was filed with the Securities and Exchange Commission. All forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The statements in this quarterly report are made as of the date this quarterly report was filed with the Securities and Exchange Commission and the Company undertakes no obligation to update any of the forward-looking information included in this document, whether as a result of new information, future events, changes in expectations or otherwise. 17 PART I. Financial Information Item 3. Quantitative and Qualitative Disclosures About 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 effect of a weakening yen on U.S. dollar-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 neither foresees nor expects significant changes in foreign currency exposure in the near future. The Company uses interest-rate swap contracts related to certain debt arrangements to manage its net exposure to interest rate changes. 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 does not expect significant changes in exposure to interest rate fluctuations, nor in market risk-management practices. 18 Item 4. Controls and Procedures Disclosure Controls and Procedures Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), Registrant's chief executive officer and chief financial officer concluded that, as of the end of the period covered by this report, Registrant's disclosure controls and procedures are effective to ensure that information required to be disclosed by Registrant in the reports that it files or submits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. In addition, Registrant's chief executive officer and chief financial officer have determined that there have been no changes in Registrant's internal control over financial reporting during the period covered by this report identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, Registrant's internal control over financial reporting. Registrant's management, including its chief executive officer and chief financial officer necessarily applied their judgment in assessing the costs and benefits of such controls and procedures. By their nature, such controls and procedures cannot provide absolute certainty, but can provide reasonable assurance regarding management's control objectives. Our chief executive officer and our chief financial officer have concluded that Registrant's disclosure controls and procedures are (i) designed to provide such reasonable assurance and (ii) are effective at that reasonable assurance level. 19 PART II. Other Information Item 1A. Risk Factors 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, will continue; (ix) that the wholesale and retail market for high-quality rough and cut diamonds will provide continuity of supply and pricing within the quality grades, colors and sizes that customers demand; (x) that the Company's diamond supply initiatives achieve their 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; 20 (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 tradenames 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. 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 first fiscal quarter of 2006: - -------------------------------------------------------------------------------------------------------------- (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* - -------------------------------------------------------------------------------------------------------------- February 1, 2006 through February 28, 2006 - - - $276,166,000 - -------------------------------------------------------------------------------------------------------------- March 1, 2006 through March 31, 2006 264,000 $37.62 264,000 $266,234,000 - -------------------------------------------------------------------------------------------------------------- April 1, 2006 through April 30, 2006 1,915,272 $36.45 1,915,272 $196,416,000 - -------------------------------------------------------------------------------------------------------------- Total 2,179,272 $36.59 2,179,272 $196,416,000 - -------------------------------------------------------------------------------------------------------------- * The current stock repurchase program authorizes the Company to repurchase up to $400,000,000 of its Common Stock through open market or private transactions. The current program expires on March 30, 2007. 21 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. 22 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: June 2, 2006 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.