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 October 31, 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, 135,347,259 shares outstanding at the close
of business on November 30, 2006.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2006
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - October 31, 2006,
January 31, 2006 and October 31, 2005 (Unaudited) 3
Condensed Consolidated Statements of Earnings - for the three
and nine months ended October 31, 2006 and
2005 (Unaudited) 4
Condensed Consolidated Statements of Stockholders' Equity -
for the nine months ended October 31, 2006 and
Comprehensive Earnings - for the three and nine months
ended October 31, 2006 and 2005 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows - for the
nine months ended October 31, 2006 and 2005 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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,
2006 2006 2005
-------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 58,185 $ 393,609 $ 111,586
Accounts receivable, less allowances
of $7,693, $8,002 and $6,670 150,067 142,294 129,454
Inventories, net 1,309,466 1,060,164 1,104,326
Deferred income taxes 78,727 69,576 74,544
Prepaid expenses and other current assets 70,977 33,200 73,801
---------------- ---------------- ----------------
Total current assets 1,667,422 1,698,843 1,493,711
Property, plant and equipment, net 926,989 866,004 860,712
Deferred income taxes 30,770 29,828 428
Other assets, net 184,838 182,597 145,095
---------------- ---------------- ----------------
$ 2,810,019 $ 2,777,272 $ 2,499,946
================ ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 237,447 $ 38,942 $ 30,365
Current portion of long-term debt 6,259 6,186 -
Accounts payable and accrued liabilities 223,377 202,646 182,831
Income taxes payable 9,754 60,364 15,460
Merchandise and other customer credits 58,722 56,472 54,238
---------------- ---------------- ----------------
Total current liabilities 535,559 364,610 282,894
Long-term debt 416,863 426,548 373,606
Postretirement/employment benefit obligations 43,323 41,982 41,106
Deferred income taxes 1,072 - -
Other long-term liabilities 126,532 113,219 109,693
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 135,358, 142,509 and 142,120 1,353 1,425 1,421
Additional paid-in capital 510,527 488,960 464,109
Retained earnings 1,159,044 1,331,321 1,219,946
Accumulated other comprehensive gain, net of tax:
Foreign currency translation adjustments 14,948 5,281 5,183
Deferred hedging gain 646 3,247 1,828
Unrealized gain on marketable securities 152 679 160
---------------- ---------------- ----------------
Total stockholders' equity 1,686,670 1,830,913 1,692,647
---------------- ---------------- ----------------
$ 2,810,019 $ 2,777,272 $ 2,499,946
================ ================ ================
See notes to condensed consolidated financial statements.
3
TIFFANY & CO. AMD SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
---------------------------------------------
(Unaudited)
-----------
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------------- ---------------------------------
2006 2006 2005 2005
-------------- -------------- -------------- --------------
Net sales $ 547,786 $ 500,105 $ 1,661,967 $ 1,536,707
Cost of sales 254,311 229,575 750,388 699,272
-------------- -------------- -------------- --------------
Gross profit 293,475 270,530 911,579 837,435
Selling, general and administrative expenses 249,419 230,735 720,640 657,261
-------------- -------------- -------------- --------------
Earnings from operations 44,056 39,795 190,939 180,174
Other (income) expenses, net (1,225) 4,289 8,057 12,353
-------------- -------------- -------------- --------------
Earnings before income taxes 45,281 35,506 182,882 167,821
Provision for income taxes 16,139 11,717 69,454 53,423
-------------- -------------- -------------- --------------
Net earnings $ 29,142 $ 23,789 $ 113,428 $ 114,398
============= ============== ============== ==============
Net earnings per share:
Basic $ 0.21 $ 0.17 $ 0.81 $ 0.80
-------------- -------------- -------------- --------------
Diluted $ 0.21 $ 0.16 $ 0.80 $ 0.79
-------------- -------------- -------------- --------------
Weighted average number of common shares:
Basic 136,753 142,280 139,288 143,172
Diluted 138,872 144,993 141,647 145,472
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 6,694 - - 441 4 6,690
Tax benefit from exercise of stock
options and vesting of restricted
stock units 3,065 - - - - 3,065
Share-based compensation expense 24,662 - - - - 24,662
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 (264,115) (246,639) - (7,713) (77) (17,399)
Cash dividends on Common Stock (39,066) (39,066) - - - -
Deferred hedging loss, net of tax (2,601) - (2,601) - - -
Unrealized gain on marketable
securities, net of tax (527) - (527) - - -
Foreign currency translation
adjustments, net of tax 9,667 - 9,667 - - -
Net earnings 113,428 113,428 - - - -
-----------------------------------------------------------------------------------------
Balances, October 31, 2006 $ 1,686,670 $ 1,159,044 $ 15,746 135,358 $ 1,353 $ 510,527
=========================================================================================
Three Months Ended Six Months Ended
October 31, October 31,
-------------------------------- --------------------------------
2006 2005 2006 2005
-------------------------------- --------------------------------
Net earnings $ 29,142 $ 23,789 $ 113,428 $ 114,398
Other comprehensive gain (loss), net
of tax:
Deferred hedging gain (loss) (9) 1,237 (2,601) 3,946
Foreign currency translation
adjustments (1,102) (4,342) 9,667 (23,862)
Unrealized (loss) gain on
marketable securities (398) (169) (527) 11
------------------------------- --------------------------------
Comprehensive earnings $ 27,633 $ 20,515 $ 119,967 $ 94,493
=============================== ================================
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,
---------------------------------------
2006 2005
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 113,428 $ 114,398
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 87,960 81,720
Gain on sale of investments (6,774) -
Excess tax benefits from share-based payment arrangements (2,270) (3,325)
Provision for inventories 6,690 7,165
Deferred income taxes (10,669) (33,611)
Loss on disposal of assets - 4,316
Provision for postretirement/employment benefits 1,341 886
Share-based compensation expense 24,300 19,464
Changes in assets and liabilities:
Accounts receivable 1,429 (4,491)
Inventories (251,188) (85,671)
Prepaid expenses and other current assets (41,734) (43,398)
Other assets, net 5,522 2,877
Accounts payable and accrued liabilities 26,147 6,152
Income taxes payable (48,023) (95,181)
Merchandise and other customer credits 2,120 2,002
Other long-term liabilities 7,981 14,390
---------------- -----------------
Net cash used in operating activities (83,740) (12,307)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities and short-term investments (147,268) (99,715)
Proceeds from sale of marketable securities and short-term investments 150,278 238,175
Capital expenditures (143,105) (121,516)
Proceeds from sale-leaseback of assets - 75,000
Notes receivable funded (9,728) (8,520)
Purchases of other investments (3,089) (1,416)
Proceeds from the sale of other investments 4,417 630
---------------- -----------------
Net cash (used in) provided by investing activities (148,495) 82,638
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) short-term borrowings, net 198,896 (10,204)
Fees and expenses related to new short-term borrowings (87) (600)
Repayment of current portion of long-term debt (10,057) -
Repurchase of Common Stock (264,115) (114,342)
Proceeds from exercise of stock options 6,694 11,951
Excess tax benefits from share-based payment arrangements 2,270 3,325
Cash dividends on Common Stock (39,066) (31,524)
---------------- -----------------
Net cash used in financing activities (105,465) (141,394)
---------------- -----------------
Effect of exchange rate changes on
cash and cash equivalents 2,276 (5,032)
---------------- -----------------
Net decrease in cash and cash equivalents (335,424) (76,095)
Cash and cash equivalents at beginning of year 393,609 187,681
---------------- -----------------
Cash and cash equivalents at end of nine months $ 58,185 $ 111,586
---------------- -----------------
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 October 31, 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 fourth quarter of the fiscal year and,
therefore, the results of its operations for the three and nine months
ended October 31, 2006 and 2005 are not necessarily indicative of the
results of the entire fiscal year.
2. NEW ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 158,
"Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans -- an amendment of FASB Statements No. 87, 88,
106, and 132(R)" which requires an employer to fully recognize the
over-funded or under-funded status of its pension and other
postretirement benefit plans as an asset or liability in its financial
statements. In addition, the Company is required to recognize as a
component of other comprehensive income (loss) the actuarial gains and
losses and the prior service costs and credits that arise during the
period but are not immediately recognized as components of net
periodic benefit cost. SFAS No. 158 is effective for fiscal years
ending after December 15, 2006. The Company anticipates a $30,000,000
increase in liabilities and a similar after-tax decrease to
accumulated other comprehensive income (a component of stockholders'
equity) at January 31, 2007. However, the impact at adoption may be
different if assumptions at the December 31 measurement date change.
In addition, the Company is required to change the measurement date of
plan assets and benefit obligations from December 31 to January 31 for
the fiscal year ending January 31, 2009.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" which establishes a framework for measuring fair value
of assets and liabilities and expands disclosures about fair value
measurements. The changes to current practice resulting from the
application of SFAS No. 157 relate to the definition of fair value,
the methods used to measure fair value, and the expanded disclosures
about fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. Management is currently
evaluating the effect that the adoption of this Statement will have on
the Company's financial position and earnings.
7
2. NEW ACCOUNTING STANDARDS (continued)
In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109" which clarifies the accounting for uncertainty
in income tax positions by prescribing a more-likely-than-not
recognition threshold for income tax positions taken or expected to be
taken in a tax return. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006 with the cumulative effect of the
change in accounting principle recorded as an adjustment to retained
earnings at the beginning of the year. Management is currently
evaluating the effect that the adoption of FIN No. 48 will have on the
Company's financial position and earnings.
In October 2005, the 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 effect on the Company's financial position,
earnings and cash flows.
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. The
adoption of this Statement in the first quarter of 2006 had no effect
on the Company's financial position, earnings and cash flows.
3. INVENTORIES
October 31, January 31, October 31,
(in thousands) 2006 2006 2005
---------------------------------------------------------------------------------------------------------
Finished goods $ 940,395 $ 764,041 $ 811,439
Raw materials 308,794 244,400 245,431
Work-in-process 60,277 51,723 47,456
--------------------- ------------------- ---------------------
Inventories, net $ 1,309,466 $ 1,060,164 $ 1,104,326
--------------------- ------------------- ---------------------
LIFO-based inventories at October 31, 2006, January 31, 2006 and
October 31, 2005 represented 69%, 69% and 71% of inventories, net,
with the current cost exceeding the LIFO inventory value by
$95,535,000, $75,624,000 and $72,405,000 at the end of each period.
4. INCOME TAXES
The effective income tax rates for the three and nine months ended
October 31, 2006 were 35.6% and 38.0%, versus 33.0% and 31.8% in the
three and nine months ended October 31, 2005. The effective tax rates
in the three months ended October 31, 2006 and 2005 included favorable
reserve adjustments relating to the expiration of certain statutory
periods during the quarter. The lower effective tax rate in the nine
months ended October 31, 2005 primarily reflected tax benefits of
$8,100,000 associated with the repatriation provisions of the American
Jobs Creation Act of 2004.
8
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 Nine Months Ended
October 31, October 31,
-------------------------------------------------------------
(in thousands) 2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------
Net earnings for basic
and diluted EPS $ 29,142 $ 23,789 $ 113,428 $ 114,398
-------------------------------------------------------------
Weighted average shares for
basic EPS 136,753 142,280 139,288 143,172
Incremental shares based
upon the assumed exercise
of stock options and
restricted stock units 2,119 2,713 2,359 2,300
-------------------------------------------------------------
Weighted average shares for
diluted EPS 138,872 144,993 141,647 145,472
-------------------------------------------------------------
For the three months ended October 31, 2006 and 2005, there were
6,099,000 and 4,429,000 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, 2006
and 2005, there were 4,706,000 and 6,188,000 stock options and
restricted stock units excluded from the computations of earnings per
diluted share due to their antidilutive effect.
6. DEBT
In October 2006, the Company exercised its option to increase its
$300,000,000 multi-bank revolving credit facility by $150,000,000 to
$450,000,000. The Company has the option to increase such commitments
up to $500,000,000. The Company had $237,447,000, $38,818,000 and
$28,223,000 outstanding under the multi-bank revolving credit facility
at October 31, 2006, January 31, 2006 and October 31, 2005,
respectively.
9
7. 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) 2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------
Service cost $ 3,923 $ 3,165 $ (4) $ 294
Interest cost 3,162 3,160 191 397
Expected return on plan
assets (2,886) (2,501) - -
Amortization of prior
service cost 175 201 (382) (299)
Amortization of net loss 803 971 (75) 68
------------------------------------------------------------
Net expense $ 5,177 $ 4,996 $ (270) $ 460
------------------------------------------------------------
Nine Months Ended October 31,
------------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
------------------------------------------------------------
(in thousands) 2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------
Service cost $ 11,603 $ 9,527 $ 748 $ 978
Interest cost 10,166 8,968 1,049 1,239
Expected return on plan
assets (8,774) (7,539) - -
Amortization of prior
service cost 525 603 (968) (895)
Amortization of net loss 3,097 2,155 95 246
------------------------------------------------------------
Net expense $ 16,617 $ 13,714 $ 924 $ 1,568
------------------------------------------------------------
8. 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. The "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 the Company's needs. 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. Effective with
the first quarter of 2006, the Company allocates LIFO charges between
its reportable segments based only upon sales of U.S. and foreign
branches which value their inventories using the LIFO method.
10
8. SEGMENT INFORMATION (continued)
Certain information relating to the Company's segments is set forth
below:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------------------------------------------------
(in thousands) 2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------------
Net sales:
U.S. Retail $ 270,373 $ 247,782 $ 819,509 $ 771,344
International
Retail 221,681 204,287 659,998 596,707
Direct Marketing 30,308 27,308 96,007 86,598
------------------------------------------------------------------------
Total reportable
Segments 522,362 479,377 1,575,514 1,454,649
Other 25,424 20,728 86,453 82,058
------------------------------------------------------------------------
$ 547,786 $ 500,105 $ 1,661,967 $ 1,536,707
------------------------------------------------------------------------
Earnings (losses) from operations*:
U.S. Retail $ 29,517 $ 36,739 $ 125,094 $ 136,268
International
Retail 51,054 42,339 159,412 130,756
Direct Marketing 4,426 4,733 23,768 22,925
-------------------------------------------------------------------------
Total reportable
Segments 84,997 83,811 308,274 289,949
Other (7,919) (10,584) (18,735) (15,226)
-------------------------------------------------------------------------
$ 77,078 $ 73,227 $ 289,539 $ 274,723
-------------------------------------------------------------------------
* Represents earnings (losses) 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 Nine Months Ended
October 31, October 31,
--------------------------------------------------------------------------
(in thousands) 2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------
Earnings from
operations for
segments $ 77,078 $ 73,227 $ 289,539 $ 274,723
Unallocated
corporate expenses (33,022) (33,432) (98,600) (94,549)
Other income
(expenses), net 1,225 (4,289) (8,057) (12,353)
--------------------------------------------------------------------------
Earnings before
income taxes $ 45,281 $ 35,506 $ 182,882 $ 167,821
-------------------------------------------------------------------------
Unallocated corporate expenses include certain costs related to
administrative support functions which the Company does not allocate to its
segments. Such unallocated costs include those for information technology,
finance, legal and human resources.
11
9. SUBSEQUENT EVENT
On November 16, 2006, the Company's Board of Directors declared a quarterly
dividend of $0.10 per share. This dividend will be paid on January 10, 2007
to stockholders of record on December 20, 2006.
12
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
category is 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
direct selling operations in the U.S.;
o International Retail includes sales in TIFFANY & CO. stores and department
store boutiques outside the U.S. and, 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 the Company's needs.
All references to years relate to fiscal years ended or ending on January 31 of
the following calendar year.
HIGHLIGHTS
o Net sales increased 10% in the three months ("third quarter") ended October
31, 2006 and 8% in the nine months ("year-to-date") ended October 31, 2006.
On a constant-exchange-rate basis (see Non-GAAP Measures section below),
net sales rose 10% in the third quarter and 9% in the year-to-date and
worldwide comparable store sales rose 4% and 5% in those periods.
o U.S. comparable store sales increased 6% in the third quarter and 3% in the
year-to-date, and Japan comparable retail sales (on a
constant-exchange-rate basis) declined 5% and rose 3% in those periods.
o Seven retail locations were opened during the third quarter, three in the
U.S. and one each in Japan, China, Korea and Austria.
o The Company repurchased and retired 3.0 million and 7.7 million shares of
its Common Stock during the three and nine months ended October 31, 2006.
o Net earnings in the third quarter rose 23%, which included gains associated
with the sale of investments, as well as favorable tax reserve adjustments.
o Net earnings in the year-to-date declined 1%, however, prior year net
earnings included tax benefits associated with the repatriation provisions
of the American Jobs Creation Act of 2004.
13
NON-GAAP MEASURES
- -----------------
The Company's reported 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 believes this constant-exchange-rate measure 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:
Third Quarter 2006 vs. 2005 Year-to-Date 2006 vs. 2005
--------------------------------------------- ---------------------------------------------
Constant- Constant-
Trans- Exchange- Trans- Exchange-
GAAP lation Rate GAAP lation Rate
Reported Effect Basis Reported Effect Basis
----------------------------------------------------------------------------------------------
Net Sales:
- ----------
Worldwide 10% - 10% 8% (1%) 9%
U.S. Retail 9% - 9% 6% - 6%
International
Retail 9% - 9% 11% (3%) 14%
Japan Retail (8%) (5%) (3%) (1)% (7%) 6%
Other Asia-
Pacific 24% 2% 22% 22% 1% 21%
Europe 32% 7% 25% 23% - 23%
Comparable Store Sales:
- -----------------------
Worldwide 4% - 4% 4% (1%) 5%
U.S. Retail 6% - 6% 3% - 3%
International
Retail 3% (1%) 4% 6% (4%) 10%
Japan Retail (9%) (4%) (5%) (4%) (7%) 3%
Other Asia-
Pacific 19% 2% 17% 22% 1% 21%
Europe 27% 6% 21% 20% - 20%
14
RESULTS OF OPERATIONS
- ---------------------
Certain operating data as a percentage of net sales were as follows:
Third Quarter Year-to-Date
----------------------------------- --------------------------------------
2006 2005 2006 2005
-----------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 46.4 45.9 45.2 45.5
-----------------------------------------------------------------------------
Gross profit 53.6 54.1 54.8 54.5
Selling, general and
administrative expenses 45.5 46.1 43.4 42.8
-----------------------------------------------------------------------------
Earnings from operations 8.1 8.0 11.4 11.7
Other (income)
expenses, net (0.2) 0.9 0.4 0.8
-----------------------------------------------------------------------------
Earnings before income
taxes 8.3 7.1 11.0 10.9
Provision for income
taxes 3.0 2.3 4.2 3.5
-----------------------------------------------------------------------------
Net earnings 5.3% 4.8% 6.8% 7.4%
-----------------------------------------------------------------------------
Net Sales
- ---------
Net sales by channel of distribution were as follows:
(in thousands) Third Quarter
- ----------------------------------------------------------------------------------------------------------------------
2006 2005 Increase
--------------------------------------------------------------------------
U.S. Retail $ 270,373 $ 247,782 9%
International Retail 221,681 204,287 9%
Direct Marketing 30,308 27,308 11%
Other 25,424 20,728 23%
--------------------------------------------------------------------------
$ 547,786 $ 500,105 10%
--------------------------------------------------------------------------
(in thousands) Year-to-Date
- ----------------------------------------------------------------------------------------------------------------------
2006 2005 Increase
--------------------------------------------------------------------------
U.S. Retail $ 819,509 $ 771,344 6%
International Retail 659,998 596,707 11%
Direct Marketing 96,007 86,598 11%
Other 86,453 82,058 5%
--------------------------------------------------------------------------
$ 1,661,967 $ 1,536,707 8%
--------------------------------------------------------------------------
A store's sales are included in "comparable store sales" when the store has been
open for more than 12 months. In all markets except 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.
U.S. Retail sales increased 9% in the third quarter and 6% in the year-to-date.
Comparable store sales increased 6% in the third quarter (consisting of
increases of 13% in the New York flagship store and 4% in branch stores) and 3%
in the year-to-date (consisting of a 4% increase in the New York flagship store
and a 3% increase in branch stores). In each period the increase was due to an
increase in the average transaction size. Management continues to
15
expect 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 9% in
the third quarter and 14% in the year-to-date. Comparable store sales increased
4% and 10% for those periods.
In Japan (which represents approximately one-half of International Retail
sales), on a constant-exchange-rate basis, total retail sales declined 3% in the
third quarter due to a decrease in unit volume partly offset by an increase in
the average transaction size, and increased 6% in the year-to-date due to an
increase in the average transaction size. Comparable store sales on a
constant-exchange-rate basis declined 5% in the third quarter and increased 3%
in the year-to-date. Local management continues to focus on selling technique
and location upgrades through renovation, expansion and/or relocation.
In the Asia-Pacific region outside Japan, comparable store sales on a
constant-exchange-rate basis increased 17% in the third quarter and 21% in the
year-to-date due to growth in most markets.
In Europe, comparable store sales on a constant-exchange-rate basis increased
21% in the third quarter and 20% in the year-to-date due to growth in London and
most Continental European markets.
Management currently expects a high-single-digit percentage increase in full
year 2006 International Retail comparable store sales.
Direct Marketing sales rose 11% in both the third quarter and the year-to-date
due to growth both in the number of orders shipped and in the average order
size.
Other sales increased 23% in the third quarter and 5% in the year-to-date.
Approximately half of the increase in both the third quarter and the
year-to-date resulted from wholesale sales of diamonds. In the specialty retail
businesses, sales in LITTLE SWITZERLAND stores increased 9% in the third quarter
and 4% in the year-to-date; however, the results were below management's
expectations. IRIDESSE increased its store base from six stores in 2005 to 13 by
the end of 2006.
16
The Company expects to increase gross square footage of TIFFANY & CO. stores by
7% (net) in 2006. Management's plan for openings and closings of TIFFANY & CO.
stores are shown below:
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
Tottori, Japan (Second Quarter)
Beijing, China Second Quarter
Atlantic City, New Jersey Third Quarter
Tucson, Arizona Third Quarter
Nashville, Tennessee Third Quarter
Omiya, Japan Third Quarter
Macau, China Third Quarter
Busan, Korea Third Quarter
Vienna, Austria Third Quarter
Waikoloa, Hawaii Fourth Quarter
Tokyo-Roppongi Hills, Japan Fourth Quarter
Shanghai, China Fourth Quarter
Vancouver, Canada Fourth Quarter
Gross Margin
- ------------
Gross margin declined in the third quarter by 0.5 percentage point. The primary
components of this net decline were (i) a 0.6 percentage point decline due to
increased low margin wholesale sales of diamonds; (ii) a 0.6 percentage point
decline due to changes in product sales mix and increased product costs; and
(iii) a 0.7 percentage point improvement due to the leverage effect of fixed
product-related costs, which includes costs associated with merchandising and
distribution. Gross margin improved in the year-to-date by 0.3 percentage point
mostly due to the leverage effect described above. The Company is addressing,
and as necessary will continue to address, the effect of higher product-related
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 currently expects gross margin in the full year 2006 to
be slightly lower than the prior year.
Selling, General and Administrative ("SG&A") Expenses
- -----------------------------------------------------
SG&A expenses increased approximately $19 million, or 8%, in the third quarter
and $63 million, or 10%, in the year-to-date largely due to increased labor of
approximately $8 million and $25 million, respectively, and increased
depreciation and occupancy expenses of approximately $7 million and $20 million,
respectively, which is due to new and existing stores. In addition, marketing
expense increased approximately $8 million in the third quarter and $15 million
in the year-to-date. The prior year third quarter and year-to-date included
$4,316,000 of losses associated with business dispositions. As a percentage of
net sales, SG&A expenses were lower than in the prior year by 0.6 percentage
point in the third quarter. SG&A expenses as
17
a percentage of net sales increased 0.6 percentage point in the year-to-date
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 sales growth can result in higher
earnings growth. 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.
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 8 to the
Condensed Consolidated Financial Statements).
Third % of Third % of
Quarter Net Quarter Net
(in thousands) 2006 sales* 2005 sales*
- ----------------------------------------------------------------------------------------------------------------------
Earnings (losses) from
operations:
U.S. Retail $ 29,517 11% $ 36,739 15%
International Retail 51,054 23% 42,339 21%
Direct Marketing 4,426 15% 4,733 17%
Other (7,919) (31%) (10,584) (51%)
------------------------------------------------------------------
77,078 73,227
Unallocated corporate expenses (33,022) (33,432)
------------------------------------------------------------------
Earnings from operations $ 44,056 $ 39,795
------------------------------------------------------------------
* Percentages represent earnings (losses) from operations as a percentage of
each segment's net sales.
Earnings from operations increased 11% 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 2006 and 2005 was as follows:
o U.S. Retail declined 4 percentage points primarily due to a decline in
gross margin (due to higher product costs and product mix) and increased
SG&A expenses (due to new and existing stores as well as increased
marketing expenses);
o International Retail increased 2 percentage points primarily due to sales
growth and an improved gross margin (due to a change in product mix) and
the leveraging of operating expenses;
o Direct Marketing declined 2 percentage points primarily due to a decrease
in gross margin (due to higher product costs) and increased SG&A expenses
(particularly marketing expenses); and
o Other improved by 20 percentage points due to the losses recorded in the
prior year associated with business dispositions. In the current year, the
operating losses are primarily due to continued investments in the
development of the specialty retail businesses and greater than expected
losses from the Little Switzerland business. In connection with the
Company's annual impairment review, management will analyze the
approximately $7,000,000 of goodwill associated with Little Switzerland
during the fourth quarter. The analysis will include the fourth quarter
results, which has a higher proportion of sales and earnings due to the
seasonality of the business, as well as future projections, taking into
consideration Little Switzerland's performance to date and management's
strategic initiatives.
18
% of % of
Year-to-Date Net Year-to-Date Net
(in thousands) 2006 sales* 2005 sales*
- ----------------------------------------------------------------------------------------------------------------------
Earnings (losses) from
operations:
U.S. Retail $ 125,094 15% $ 136,268 18%
International Retail 159,412 24% 130,756 22%
Direct Marketing 23,768 25% 22,925 26%
Other (18,735) (22%) (15,226) (19%)
------------------------------------------------------------------
289,539 274,723
Unallocated corporate expenses (98,600) (94,549)
------------------------------------------------------------------
Earnings from operations $ 190,939 $ 180,174
------------------------------------------------------------------
* Percentages represent earnings (losses) from operations as a percentage of
each segment's net sales.
Earnings from operations rose 6% 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 2006 and 2005 was as follows:
o U.S. Retail decreased 3 percentage points primarily due to increased SG&A
expenses (due to new and existing stores as well as increased marketing
expenses);
o International Retail increased 2 percentage points primarily due to sales
growth and an improved gross margin (due to a change in product mix) and
the leveraging of operating expenses;
o Direct Marketing decreased 1 percentage point primarily due to a decline in
gross margin (due to higher product costs) and increased marketing
expenses; and
o Other decreased by 3 percentage points primarily due to continued
investments in the development of the specialty retail businesses and
greater than expected losses from the Little Switzerland business. In
addition, the prior year included losses associated with business
dispositions.
Unallocated corporate expenses include certain costs related to administrative
support functions which the Company does not allocate to its segments. Such
unallocated costs include those for information technology, finance, legal and
human resources. Unallocated corporate expenses declined 1% in the third quarter
and rose 4% in the year-to-date.
Other (Income) Expenses, net
- ----------------------------
Other (income) expenses, net decreased in the third quarter and year-to-date as
a result of $5,185,000 of gains associated with the sale of equity investments
in an on-line retailer and a manufacturer that were written-off in previous
years and $1,589,000 of realized gains associated with the sale of marketable
securities, partially offset by increased interest expense due to higher average
borrowings.
Provision for Income Taxes
- --------------------------
The effective income tax rates for the third quarter and year-to-date of 2006
were 35.6% and 38.0%, versus 33.0% and 31.8% in the prior year. The effective
tax rates in third quarter of 2006 and 2005 included favorable reserve
adjustments relating to the expiration of certain statutory periods during the
quarter. The lower effective tax rate in the year-to-date of 2005 primarily
reflected tax benefits of $8,100,000 associated with the repatriation provisions
of the American Jobs Creation Act of 2004.
19
Management currently expects the effective tax rate to be approximately 37% for
full year 2006.
New Accounting Standards
- ------------------------
See Note 2 to Condensed Consolidated Financial Statements.
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 $83,740,000 in the
year-to-date of 2006, compared with an outflow of $12,307,000 in the
year-to-date of 2005. Inventory purchases were higher than in the prior year, as
discussed in the Working Capital section below. In addition, 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.
Working Capital
- ---------------
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were
$1,131,863,000 and 3.1 at October 31, 2006, compared with $1,334,233,000 and 4.7
at January 31, 2006 and $1,210,817,000 and 5.3 at October 31, 2005.
Accounts receivable, less allowances at October 31, 2006 were 5% higher than at
January 31, 2006 and were 16% higher than at October 31, 2005. The increases
were due to sales growth, a shift in credit card usage toward the Company's
in-house card and an increase in expected reimbursements from landlords related
to new store build-outs.
Inventories, net at October 31, 2006 were 24% above January 31, 2006 and 19%
above October 31, 2005. Combined raw material and work-in-process inventories
increased 25% versus January 31, 2006 and 26% versus October 31, 2005 due to
increased precious metal costs and diamond quantities needed to support internal
jewelry manufacturing. Finished goods inventories increased 23% versus January
31, 2006, and 16% versus October 31, 2005, reflecting anticipated comparable
store sales growth and store openings as well as broadened product assortments.
Changes in foreign currency exchange rates increased inventories, net by 1%
compared to January 31, 2006 and had an insignificant effect on the change in
inventory balances from October 31, 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 currently expects a low-double-digit percentage
increase in the overall year-over-year inventory growth rate in 2006.
Capital Expenditures
- --------------------
Capital expenditures were $143,105,000 in the year-to-date of 2006 compared with
$121,516,000 in the year-to-date 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 completed the renovation during
the third quarter of 2006, spending approximately $110,000,000 for the entire
project.
20
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. In
August 2006, the Company's Board of Directors extended the expiration date of
the Company's 2005 Program to December 2009, and authorized the repurchase up to
an additional $700,000,000 of the Company's common stock through open market or
private transactions. 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 3,008,200 shares of Common Stock at a total cost of $100,525,000, or an
average cost of $33.42 per share. In the year-to-date of 2006, the Company
repurchased and retired 7,712,607 shares of Common Stock at a total cost of
$264,115,000, or an average cost of $34.24 per share. There remains $712,475,000
available for future repurchases.
Borrowings
- ----------
In October 2006, the Company exercised its option to increase its $300,000,000
multi-bank revolving credit facility by $150,000,000 to $450,000,000. The
Company has the option to increase such commitments up to $500,000,000. The
Company had $237,447,000, $38,818,000 and $28,223,000 outstanding under the
multi-bank revolving credit facility at October 31, 2006, January 31, 2006 and
October 31, 2005, respectively.
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 39% at October 31, 2006,
26% at January 31, 2006 and 24% at October 31, 2005. The increase in the ratio
is due primarily to increased revolving credit facility borrowings as a result
of share repurchases and higher inventory levels.
At October 31, 2006, the Company was in compliance with all loan covenants.
Based on the Company's financial position at October 31, 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 October
31, 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 margin, 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
21
"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 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.
22
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.
23
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.
24
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;
25
(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 the Company's purchases of
shares of its Common Stock during the third 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*
- --------------------------------------------------------------------------------------------------------------
August 1, 2006
through
August 31, 2006 - - - $813,000,000
- --------------------------------------------------------------------------------------------------------------
September 1, 2006
through
September 30, 2006 2,127,400 $33.01 2,127,400 $742,770,000
- --------------------------------------------------------------------------------------------------------------
October 1, 2006
through
October 31, 2006 880,800 $34.40 880,800 $712,475,000
- --------------------------------------------------------------------------------------------------------------
Total 3,008,200 $33.42 3,008,200 $712,475,000
- --------------------------------------------------------------------------------------------------------------
* In August 2006, the Company's Board of Directors extended the expiration date
of the program to December 2009 and increased the authorization to $813,000,000.
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 4, 2006 By: /s/ James N. Fernandez
-----------------------------
James N. Fernandez
Executive Vice President and
Chief Financial
(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.