Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2009
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 ____
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Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes ____ No ____
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer _____
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Non-accelerated filer (Do not check if a smaller reporting company) _____ Smaller reporting company _____
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes ____ No X
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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, 124,450,850 shares outstanding at the close
of business on November 30, 2009.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2009
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - October 31, 2009,
January 31, 2009 and October 31, 2008 (Unaudited) 3
Condensed Consolidated Statements of Earnings - for the
three and nine months ended October 31, 2009 and 2008 (Unaudited) 4
Condensed Consolidated Statements of Stockholders' Equity -
for the nine months ended October 31, 2009 and
Comprehensive Earnings - for the three and nine months
ended October 31, 2009 and 2008 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows - for the
nine months ended October 31, 2009 and 2008 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1A. Risk Factors 29-31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 6. Exhibits
(a) Exhibits 33
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, 2009 January 31, 2009 October 31, 2008
----------------- ----------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 374,871 $ 160,445 $ 160,376
Accounts receivable, less allowances
of $10,204, $9,934 and $7,403 150,895 164,447 164,269
Inventories, net 1,541,888 1,601,236 1,638,479
Deferred income taxes 12,521 13,640 33,069
Prepaid expenses and other current assets 126,400 108,966 70,375
----------------- ----------------- -------------------
Total current assets 2,206,575 2,048,734 2,066,568
Property, plant and equipment, net 694,063 741,048 738,287
Deferred income taxes 157,680 166,517 172,283
Other assets, net 160,911 145,984 162,437
----------------- ----------------- -------------------
$ 3,219,229 $ 3,102,283 $ 3,139,575
================= ================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 30,906 $ 242,966 $ 414,364
Current portion of long-term debt 163,890 40,426 100,682
Accounts payable and accrued liabilities 222,313 223,566 236,191
Income taxes payable 15,412 27,653 6,930
Merchandise and other customer credits 66,287 67,311 67,924
----------------- ----------------- -------------------
Total current liabilities 498,808 601,922 826,091
Long-term debt 558,207 425,412 306,226
Pension/postretirement benefit obligations 187,872 200,603 86,355
Deferred gains on sale-leasebacks 130,861 133,641 134,444
Other long-term liabilities 132,837 152,334 140,704
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 124,304, 123,844 and 123,095 1,243 1,238 1,231
Additional paid-in capital 690,675 687,267 684,883
Retained earnings 1,032,371 971,299 962,300
Accumulated other comprehensive (loss) gain, net of tax:
Foreign currency translation adjustments 22,125 (26,238) 9,314
Deferred hedging loss (3,352) (8,984) (7,986)
Unrealized loss on marketable securities (2,325) (6,140) (6,322)
Net unrealized (loss) gain on benefit plans (30,093) (30,071) 2,335
----------------- ----------------- -------------------
Total stockholders' equity 1,710,644 1,588,371 1,645,755
----------------- ----------------- -------------------
$ 3,219,229 $ 3,102,283 $ 3,139,575
================= ================= ===================
See notes to condensed consolidated financial statements.
3
TIFFANY & CO. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
---------------------------------------------
(Unaudited)
-----------
(in thousands except per share amounts)
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------- ------------------------------
2009 2008 2009 2008
--------------- -------------- -------------- --------------
Net sales $ 598,212 $ 616,152 $ 1,728,320 $ 2,011,266
Cost of sales 270,409 269,027 773,846 862,247
--------------- -------------- -------------- --------------
Gross profit 327,803 347,125 954,474 1,149,019
Selling, general and administrative expenses 260,986 265,622 738,589 826,501
--------------- -------------- -------------- --------------
Earnings from continuing operations 66,817 81,503 215,885 322,518
Interest and other expenses, net 11,326 14,449 35,898 19,294
--------------- -------------- -------------- --------------
Earnings from continuing operations before 55,491 67,054 179,987 303,224
income taxes
Provision for income taxes 12,182 21,498 52,518 108,482
--------------- -------------- -------------- --------------
Net earnings from continuing operations 43,309 45,556 127,469 194,742
Net earnings (loss) from discontinued operations 30 (1,779) (3,013) (5,805)
--------------- -------------- -------------- --------------
Net earnings $ 43,339 $ 43,777 $ 124,456 $ 188,937
=============== ============== ============== ==============
Earnings per share:
Basic
Net earnings from continuing operations $ 0.35 $ 0.37 $ 1.03 $ 1.56
Net loss from discontinued operations -- (0.02) (0.03) (0.05)
--------------- -------------- -------------- --------------
Net earnings $ 0.35 $ 0.35 $ 1.00 $ 1.51
=============== ============== ============== ==============
Diluted
Net earnings from continuing operations $ 0.34 $ 0.36 $ 1.02 $ 1.53
Net earnings (loss) from discontinued operations -- (0.01) (0.02) (0.04)
--------------- -------------- -------------- --------------
Net earnings $ 0.35 $ 0.35 $ 1.00 $ 1.49
=============== ============== ============== ==============
Weighted-average number of common shares:
Basic 124,202 123,399 124,095 125,190
Diluted 125,582 124,899 124,756 127,053
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 (Loss) Gain Shares Amount Capital
------------------------------------------------------------------------------------------------------------------------
Balances, January 31, 2009 $ 1,588,371 $ 971,299 $ (71,433) 123,844 $ 1,238 $ 687,267
Exercise of stock options and vesting of
restricted stock units ("RSUs") 6,347 -- -- 460 5 6,342
Tax effect of exercise of stock options and
vesting of RSUs (881) -- -- -- -- (881)
Share-based compensation expense 18,407 -- -- -- -- 18,407
Purchase of noncontrolling interests (20,460) -- -- -- -- (20,460)
Cash dividends on Common Stock (63,384) (63,384) -- -- -- --
Deferred hedging gain, net of tax 5,632 -- 5,632 -- -- --
Unrealized gain on marketable securities, net
of tax 3,815 -- 3,815 -- -- --
Foreign currency translation adjustments, net
of tax 48,363 -- 48,363 -- -- --
Net unrealized loss on benefit plans,
net of tax (22) -- (22) -- -- --
Net earnings 124,456 124,456 -- -- -- --
---------------------------------------------------------------------------
Balances, October 31, 2009 $ 1,710,644 $ 1,032,371 $ (13,645) 124,304 $ 1,243 $ 690,675
===========================================================================
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------------------- ------------------------------
2009 2008 2009 2008
-------------------------------- ------------------------------
Comprehensive earnings are as follows:
Net earnings $ 43,339 $ 43,777 $124,456 $188,937
Other comprehensive gain (loss), net of tax:
Deferred hedging gain (loss) 1,808 (9,450) 5,632 (8,875)
Foreign currency translation adjustments 20,645 (39,469) 48,363 (32,803)
Unrealized gain (loss) on marketable securities 915 (4,633) 3,815 (5,701)
Net unrealized (loss) gain on benefit plans (40) 34 (22) 207
---------------- --------------- --------------- --------------
Comprehensive earnings $ 66,667 $ (9,741) $182,244 $141,765
================ =============== =============== ==============
See notes to condensed consolidated financial statements.
5
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
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(in thousands)
Nine Months Ended
October 31,
-------------------------------------------------
2009 2008
----------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 124,456 $ 188,937
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 103,591 99,671
Amortization of gain on sale-leaseback (7,264) (7,376)
Excess tax benefits from share-based payment arrangements (141) (9,801)
Provision for inventories 23,796 10,456
Deferred income taxes 11,097 (10,849)
Provision for pension/postretirement benefits 18,010 17,342
Share-based compensation expense 18,069 24,939
Derivative impairment charges -- 4,300
Changes in assets and liabilities:
Accounts receivable 20,464 32,822
Inventories 63,819 (287,678)
Prepaid expenses and other current assets 12,384 7,277
Accounts payable and accrued liabilities (9,913) 38,679
Income taxes payable (55,680) (183,551)
Merchandise and other customer credits (1,952) 892
Other, net (45,731) (2,703)
----------------------- ----------------------
Net cash provided by (used in) operating activities 275,005 (76,643)
----------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (46,888) (108,515)
Other 971 (5,102)
----------------------- ----------------------
Net cash used in investing activities (45,917) (113,617)
----------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment of) proceeds from credit facility borrowings, net (124,992) 305,972
(Repayment of) proceeds from other short-term borrowings (93,000) 66,001
Repayment of long-term debt (40,000) (11,131)
Proceeds from issuance of long-term debt 300,000 --
Repurchase of Common Stock -- (218,379)
Proceeds from exercise of stock options 6,347 25,747
Excess tax benefits from share-based payment arrangements 141 9,801
Cash dividends on Common Stock (63,384) (61,286)
Purchase of noncontrolling interests (11,000) --
Financing fees (6,255) --
----------------------- ----------------------
Net cash (used in) provided by financing activities (32,143) 116,725
----------------------- ----------------------
Effect of exchange rate changes on cash and cash equivalents 17,481 (12,743)
----------------------- ----------------------
Net increase (decrease) in cash and cash equivalents 214,426 (86,278)
Cash and cash equivalents at beginning of year 160,445 246,654
----------------------- ----------------------
Cash and cash equivalents at end of nine months $ 374,871 $ 160,376
======================= ======================
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. (the "Company") and its subsidiaries in which a
controlling interest is maintained. Controlling interest is determined by
majority ownership interest and the absence of substantive third-party
participating rights or, in the case of variable interest entities, by
majority exposure to expected losses, residual returns or both.
Intercompany accounts, transactions and profits have been eliminated in
consolidation. Subsequent events have been evaluated through the date and
time the financial statements were issued on December 2, 2009. The interim
statements are unaudited and, in the opinion of management, include all
adjustments (which include only normal recurring adjustments) necessary to
fairly state the Company's financial position as of October 31, 2009 and
2008 and the results of its operations and cash flows for the interim
periods presented. The condensed consolidated balance sheet data for
January 31, 2009 is derived from the audited financial statements, which
are included in the Company's Annual Report on Form 10-K and should be read
in connection with these financial statements. As permitted by 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 in nature, with the fourth quarter
typically representing at least one-third of annual net sales and
approximately one-half of annual net earnings. Therefore, the results of
its operations for the three and nine months ended October 31, 2009 and
2008 are not necessarily indicative of the results of the entire fiscal
year.
2. NEW ACCOUNTING STANDARDS
In December 2007, new accounting guidance was issued by the Financial
Accounting Standards Board ("FASB") which requires a company to clearly
identify and present ownership interests in subsidiaries held by parties
other than the company in the consolidated financial statements within the
equity section but separate from the company's equity. It also requires the
amount of consolidated net earnings attributable to the parent and to the
noncontrolling interest to be clearly identified and presented on the face
of the consolidated statement of earnings; changes in ownership interest to
be accounted for similarly, as equity transactions; and, when a subsidiary
is deconsolidated, that any retained noncontrolling equity investment in
the former subsidiary and the gain or loss on the deconsolidation of the
subsidiary be measured at fair value. The new requirements did not have a
material effect on the Company's financial position or earnings.
In September 2006, new accounting guidance was issued by the FASB 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 the new guidance relate
to the definition of fair value, the methods used to measure fair value and
the expanded disclosures about fair value measurements. The guidance is
effective for fiscal years beginning after November 15, 2007. In February
2008, the implementation of the provisions relating to nonfinancial assets
and liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually),
was deferred to fiscal years beginning after November 15, 2008. Management
adopted the remaining provisions on February 1, 2009. This adoption impacts
the way in which the Company calculates fair value for its annual
impairment review of goodwill and when conditions exist that require the
Company to calculate the fair value of long-lived assets; management has
determined that this did not have a material effect on the Company's
financial position or earnings.
7
3. RESTRUCTURING CHARGES
In the fourth quarter of 2008, the Company's New York subsidiary offered a
voluntary retirement incentive to approximately 800 U.S. employees who met
certain age and service eligibility requirements. Approximately 600
employees accepted the early retirement incentive and retired from the
Company effective February 1, 2009. In addition, to further align the
Company's ongoing cost structure with the anticipated retail environment
for luxury goods, management approved a plan in January 2009 to
involuntarily terminate additional manufacturing, selling and
administrative employees, primarily in the U.S. The employment of most of
these employees ended in February 2009. In total, these actions resulted in
a reduction of approximately 10% of worldwide staffing.
Cash expenditures related to the restructuring charges are expected to
total $33,361,000. Most of this amount will be paid in 2009. The following
table presents the reconciliation of the cash-related restructuring
liabilities and spending against those liabilities:
Restructuring
(in thousands) Liability
-----------------------------------------------------------------------
Liability as of February 1, 2009 $ 33,361
Payments (31,642)
----------------------
Liability as of October 31, 2009 $ 1,719
======================
4. ACQUISITIONS & DISPOSITIONS
On October 26, 2009, the Company acquired all noncontrolling interests in
two majority-owned entities that indirectly engage through majority-owned
subsidiaries in diamond sourcing and polishing operations in South Africa
and Botswana, respectively, for total consideration of $18,000,000, of
which $11,000,000 was paid upon closing of the transaction and the
remaining $7,000,000 will be paid on or before August 1, 2010. This
acquisition is accounted for as an equity transaction since the Company
maintained control of the two entities prior to the acquisition. Therefore,
the Company recorded a decrease to additional paid-in capital of
$20,460,000 in the third quarter of 2009 related to this transaction. In
addition, the Company paid $4,000,000, to terminate a third party
management agreement. Management determined that this transaction was
separate from the acquisition of the remaining noncontrolling interests;
accordingly, the termination fee was recorded within selling, general and
administrative expenses.
In the fourth quarter of 2008, management concluded that it would no longer
invest in its IRIDESSE business due to its ongoing operating losses and
insufficient near-term growth prospects, especially in the current economic
environment. Therefore, management committed to a plan to close IRIDESSE
locations in 2009 as the Company reached agreements with landlords and sold
its inventory. All IRIDESSE stores have been closed.
The results of IRIDESSE are presented as a discontinued operation in the
condensed consolidated statements of earnings for all periods presented.
Prior to the reclassification, IRIDESSE results had been included within
the Other non-reportable segment.
Summarized statements of earnings data for IRIDESSE are as follows:
Three Months Ended October 31, Nine Months Ended October 31,
-----------------------------------------------------------------------------
(in thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------------------------------------------
Net sales $ 1,044 $ 2,078 $ 13,231 $ 7,516
=============================================================================
Earnings (loss) before 13 (2,986) (5,894) (9,204)
income taxes
Benefit from income taxes 17 1,207 2,881 3,399
-----------------------------------------------------------------------------
Net earnings (loss) from $ 30 $ (1,779) $ (3,013) $ (5,805)
discontinued operations
=============================================================================
8
5. INVENTORIES
October 31, January 31, October 31,
(in thousands) 2009 2009 2008
-------------------------------------------------------------------------------------------------------------
Finished goods $ 1,046,648 $ 1,115,333 $ 1,142,827
Raw materials 438,360 416,805 402,824
Work-in-process 56,880 69,098 92,828
-------------------------------------------------------------------
Inventories, net $ 1,541,888 $ 1,601,236 $ 1,638,479
===================================================================
6. INCOME TAXES
The effective income tax rate for the third quarter of 2009 was 22.0%
versus 32.1% in the prior year. The effective income tax rate for the nine
months ended October 31, 2009 was 29.2% versus 35.8% in the prior year. The
decrease in the effective income tax rates in 2009 were due to favorable
reserve adjustments of approximately $5,600,000 and $11,200,000 in the
third quarter and nine months ended October 31, 2009, respectively,
associated with the settlement of certain tax audits and the expiration of
statutory periods. Accordingly, during the nine months ended October 31,
2009, the gross amount of unrecognized tax benefits decreased $25,589,000
to $28,892,000. There were no material changes to accrued interest and
penalties as of that date.
As a matter of course, various taxing authorities regularly audit the
Company. The Company's tax filings are currently being examined by tax
authorities in jurisdictions where its subsidiaries have a material
presence, including New York state (tax years 2004-2007) and Japan (tax
years 2004-2007). Tax years from 2003-present are open to examination in
U.S. Federal, various state and other foreign jurisdictions. The Company
believes that its tax positions comply with applicable tax laws and that it
has adequately provided for these matters. However, the audits may result
in proposed assessments where the ultimate resolution may result in the
Company owing additional taxes. The Company does not anticipate any
material changes to the total gross amount of unrecognized tax benefits
over the next 12 months. Future developments may result in a change in this
assessment.
7. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period.
Diluted EPS includes the dilutive effect of the assumed exercise of stock
options and unvested restricted stock units.
The following table summarizes the reconciliation of the numerators and
denominators for the basic and diluted EPS computations:
Three Months Ended Nine Months Ended
October 31, October 31,
-----------------------------------------------------------------------------
(in thousands) 2009 2008 2009 2008
--------------------------------------------------------------------------------------------------------------
Net earnings for basic and $ 43,339 $ 43,777 $ 124,456 $ 188,937
diluted EPS
=============================================================================
Weighted-average shares for
basic EPS 124,202 123,399 124,095 125,190
Incremental shares based
upon the assumed
exercise of stock options
and unvested restricted
stock units 1,380 1,500 661 1,863
-----------------------------------------------------------------------------
Weighted-average shares for
diluted EPS 125,582 124,899 124,756 127,053
=============================================================================
For the three months ended October 31, 2009 and 2008, there were 3,528,000
and 3,665,000 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, 2009 and 2008, there were
6,380,000 and
9
3,108,000 stock options and restricted stock units excluded from the
computations of earnings per diluted share due to their antidilutive
effect.
8. DEBT
In July 2009, the Company entered into a new $400,000,000 multi-bank,
multi-currency, committed unsecured revolving credit facility ("Credit
Facility") and has the option to increase the committed amount to
$500,000,000, subject to bank approval. The Credit Facility replaces the
Company's previous $450,000,000 revolving credit facility. The Credit
Facility is intended for working capital and other corporate purposes and
includes specific financial covenants and ratios and limits certain
payments, investments and indebtedness, in addition to other requirements
customary to such borrowings. Borrowings are at nine participating banks
and are at interest rates based upon local currency borrowing rates plus a
margin based on the Company's leverage ratio. There was $30,906,000
outstanding (with a weighted average interest rate of 2.9%) and
$369,094,000 available to be borrowed under the Credit Facility at October
31, 2009. The Credit Facility will expire in July 2012.
In April 2009, the Company, in a private transaction with various
institutional lenders, issued, at par, $50,000,000 of 10% Series A Senior
Notes due April 2018. The proceeds are available for general corporate
purposes. The agreement requires lump sum repayments upon maturity and
includes specific financial covenants and ratios and limits certain
payments, investments and indebtedness, in addition to other requirements
customary to such borrowings. The note purchase agreement contains
provisions for an uncommitted shelf facility by which the Company may
issue, over the next three years, up to an additional $100,000,000 of
Senior Notes for up to a 12-year term at a fixed interest rate based on the
U.S. Treasury rates at the time of borrowing plus an applicable credit
spread.
In February 2009, the Company, in a private transaction, issued, at par,
$125,000,000 of 10% Series A-2009 Senior Notes due February 2017 and
$125,000,000 of 10% Series B-2009 Senior Notes due February 2019. The
proceeds are available to refinance existing indebtedness and for general
corporate purposes. The agreement requires lump sum repayments upon
maturity and includes specific financial covenants and ratios and limits
certain payments, investments and indebtedness, in addition to other
requirements customary to such borrowings.
9. HEDGING INSTRUMENTS
Background Information
The Company uses a limited number of derivative financial instruments,
including interest rate swap agreements, forward contracts, put option
contracts and net-zero-cost collar arrangements (combination of call and
put option contracts) to mitigate its exposures to changes in interest
rates, foreign currency and precious metal prices. Derivative instruments
are recorded on the consolidated balance sheet at their fair values, as
either assets or liabilities, with an offset to current or comprehensive
earnings, depending on whether the derivative is designated as part of an
effective hedge transaction and, if it is, the type of hedge transaction.
If a derivative instrument meets certain hedge accounting criteria, the
derivative instrument is designated as one of the following on the date the
derivative is entered into:
o Fair Value Hedge - A hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm
commitment. For fair value hedge transactions, both the effective
and ineffective portions of the changes in the fair value of the
derivative and changes in the fair value of the item being hedged
are recorded in current earnings.
o Cash Flow Hedge - A hedge of the exposure to variability in the
cash flows of a recognized asset, liability or a forecasted
transaction. For cash flow hedge transactions, the effective
portion of the changes in fair value of derivatives are reported
as other comprehensive income ("OCI") and are recognized in
current earnings in the period or periods during which the hedged
transaction affects current earnings. Amounts excluded from the
effectiveness calculation and any ineffective portions of the
change in fair value of the derivative are recognized in current
earnings.
The Company formally documents the nature and relationships between the hedging
instruments and hedged
10
items for a derivative to qualify as a hedge at inception and throughout
the hedged period. The Company also documents its risk management
objectives, strategies for undertaking the various hedge transactions and
method of assessing hedge effectiveness. Additionally, for hedges of
forecasted transactions, the significant characteristics and expected terms
of a forecasted transaction must be specifically identified, and it must be
probable that each forecasted transaction will occur. If it were deemed no
longer probable that the forecasted transaction would occur, the gain or
loss on the derivative financial instrument would be recognized in current
earnings. Derivative financial instruments qualifying for hedge accounting
must maintain a specified level of effectiveness between the hedge
instrument and the item being hedged, both at inception and throughout the
hedged period.
The Company does not use derivative financial instruments for trading or
speculative purposes.
Types of Derivative Instruments
Interest Rate Swap Agreements - In the second quarter of 2009, the Company
entered into interest rate swap agreements to effectively convert its fixed
rate 2002 Series D and 2008 Series A obligations to floating rate
obligations. Additionally, since the fair value of the Company's fixed rate
long-term debt is sensitive to interest rate changes, the interest rate
swap agreements serve as a hedge to changes in the fair value of these debt
instruments. The Company is hedging its exposure to changes in interest
rates over the remaining maturities of the debt agreements being hedged.
The Company accounts for the interest rate swaps as fair value hedges. As
of October 31, 2009, the notional amount of interest rate swap agreements
outstanding was $160,000,000.
Foreign Exchange Forward Contracts - The Company uses foreign exchange
forward contracts to offset the foreign currency exchange risks associated
with foreign currency-denominated liabilities and intercompany transactions
between entities with differing functional currencies. These foreign
exchange forward contracts are designated and accounted for as either cash
flow hedges or economic hedges that are not designated as hedging
instruments. As of October 31, 2009, the notional amount of foreign
exchange forward contracts accounted for as cash flow hedges was
approximately $107,729,000 and the notional amount of foreign exchange
forward contracts accounted for as undesignated hedges was approximately
$45,815,000. The term of all outstanding foreign exchange forward contracts
as of October 31, 2009 ranged from one to ten months.
Put Option Contracts - The Company's wholly-owned subsidiary in Japan
satisfies nearly all of its inventory requirements by purchasing
merchandise, payable in U.S. dollars, from the Company's principal
subsidiary. To minimize the potentially negative effect of a significant
strengthening of the U.S. dollar against the Japanese yen, the Company
purchases put option contracts as hedges of forecasted purchases of
merchandise over a maximum term of 12 months. If the market yen exchange
rate at the time of the put option contract's expiration is stronger than
the contracted exchange rate, the Company allows the put option to expire,
limiting its loss to the cost of the put option contract. The Company
accounts for its put option contracts as cash flow hedges. The Company
assesses hedge effectiveness based on the total changes in the put option
contracts' cash flows. As of October 31, 2009, the notional amount of put
option contracts accounted for as cash flow hedges was $10,000,000. During
October 2009, the Company de-designated several of its outstanding put
option contracts (notional amount of $107,729,000) and entered into
offsetting call option contracts. These put and call option contracts are
accounted for as undesignated hedges. Any gains or losses on these put
option contracts are substantially offset by losses or gains on the call
option contracts.
Precious Metal Collars & Forward Contracts - The Company periodically
hedges a portion of its forecasted purchases of precious metals for use in
its internal manufacturing operations in order to minimize the effect of
volatility in precious metal prices. The Company may use a combination of
call and put option contracts in net-zero-cost collar arrangements
("precious metal collars") or forward contracts. For precious metal
collars, if the price of the precious metal at the time of the expiration
of the precious metal collar is within the call and put price, the precious
metal collar would expire at no cost to the Company. The Company accounts
for its precious metal collars and forward contracts as cash flow hedges.
The Company assesses hedge effectiveness based on the total changes in the
precious metal collars' cash flows. The maximum term over which the Company
is hedging its exposure to the variability of future cash flows for all
forecasted transactions is 12 months. As of October 31, 2009, there were
3,500 ounces of platinum and 103,000 ounces of silver precious metal
collars and forward contracts outstanding.
11
Information on the location and amounts of derivative gains and losses in
the Condensed Consolidated Statements of Earnings is as follows:
Three Months Ended October 31, 2009
---------------------------------------------------
Pre-Tax Gain or (Loss) Pre-Tax Gain or (Loss)
Recognized in Earnings Recognized in Earnings
(in thousands) on Derivatives on Hedged Item
-------------------------------------------------------------------------------------------------------------
Derivatives in Fair Value Hedging Relationships:
---------------------------------------------------
Interest rate swap agreements a $ 1,953 $ (1,967)
===================================================
Nine Months Ended October 31, 2009
---------------------------------------------------
Pre-Tax Gain or (Loss) Pre-Tax Gain or (Loss)
Recognized in Earnings Recognized in Earnings
(in thousands) on Derivatives on Hedged Item
-------------------------------------------------------------------------------------------------------------
Derivatives in Fair Value Hedging Relationships:
---------------------------------------------------
Interest rate swap agreements a $ 1,330 $ (1,288)
===================================================
Three Months Ended October 31, 2009
---------------------------------------------------
Amount of Gain or
(Loss) Reclassified
Pre-Tax Gain or (Loss) from Accumulated OCI
Recognized in OCI into Earnings
(in thousands) (Effective Portion) (Effective Portion)
-------------------------------------------------------------------------------------------------------------
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange forward contracts a $ 1,078 $ --
Put option contracts b (1,420) (959)
Precious metal collars b 550 (1,259)
Precious metal forward contracts b 527 --
---------------------------------------------------
$ 735 $ (2,218)
===================================================
Nine Months Ended October 31, 2009
---------------------------------------------------
Amount of Gain or
(Loss) Reclassified
Pre-Tax Gain or (Loss) from Accumulated OCI
Recognized in OCI into Earnings
(in thousands) (Effective Portion) (Effective Portion)
-------------------------------------------------------------------------------------------------------------
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange forward contracts a $ 561 $ (1,485)
Put option contracts b (1,525) (2,905)
Precious metal collars b 2,909 (2,155)
Precious metal forward contracts b 527 --
------------------------- -------------------------
$ 2,472 $ (6,545)
===================================================
12
Pre-Tax Gain or (Loss) Recognized in Earnings
on Derivative
---------------------------------------------------
Three Months Ended Nine Months Ended
(in thousands) October 31, 2009 October 31, 2009
-------------------------------------------------------------------------------------------------------------
Derivatives Not Designated as Hedging Instruments:
Foreign exchange forward contracts a $ (225)c $ (799)c
Call option contracts b (121) (118)
Put option contracts b 121 118
---------------------------------------------------
$ (225) $ (799)
===================================================
a The gain or loss recognized in earnings is included within Interest
and other expenses, net on the Company's Condensed Consolidated
Statement of Earnings.
b The gain or loss recognized in earnings is included within Cost of
Sales on the Company's Condensed Consolidated Statement of Earnings.
c Gains or losses on the undesignated foreign exchange forward contracts
substantially offset foreign exchange losses or gains on the
liabilities and transactions being hedged.
There was no material ineffectiveness related to the Company's hedging
instruments for the period ended October 31, 2009. The Company expects that
approximately $4,292,000 of net pre-tax derivative losses included in
accumulated other comprehensive income at October 31, 2009 will be
reclassified into earnings within the next 12 months. This amount will vary
due to fluctuations in foreign currency exchange rates and precious metal
prices.
For information regarding the location and amount of the derivative
instruments in the Condensed Consolidated Balance Sheet, refer to "Note 10.
Fair Value of Financial Instruments."
Concentration of Credit Risk
A number of major international financial institutions are counterparties
to the Company's derivative financial instruments. The Company enters into
derivative financial instrument agreements only with counterparties meeting
certain credit standards (a credit rating of A/A2 or better at the time of
the agreement), limiting the amount of agreements or contracts it enters
into with any one party. The Company may be exposed to credit losses in the
event of nonperformance by individual counterparties or the entire group of
counterparties. The Company has not recognized any losses due to
counterparty non-performance for the nine months ended October 31, 2009.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. U.S. GAAP
establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. U.S. GAAP prescribes three levels of inputs that may
be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or
liabilities. Level 1 inputs are considered to carry the most weight within
the fair value hierarchy due to the low levels of judgment required in
determining fair values.
Level 2 - Observable market-based inputs or unobservable inputs that are
corroborated by market data.
Level 3 - Unobservable inputs reflecting the reporting entity's own
assumptions. Level 3 inputs are considered to carry the least weight within
the fair value hierarchy due to substantial levels of judgment required in
determining fair values.
13
The Company uses the market approach to measure fair value for its mutual
funds, interest rate swap agreements, put and call option contracts,
precious metal collars and forward contracts. The market approach uses
prices and other relevant information generated by market transactions
involving identical or comparable assets or liabilities.
Financial assets and liabilities carried at fair value at October 31, 2009
are classified in the table below in one of the three categories described
above:
Financial Assets Estimated Fair Value
-------------------------- --------------------------------------------------
Carrying Total Fair
(in thousands) Value Level 1 Level 2 Level 3 Value
----------------------------------------------------------------------------------------------------------------
Mutual funds a $ 28,515 $ 28,515 $ -- $ -- $ 28,515
Derivatives designated as hedging instruments:
Interest rate swap
agreements a 1,330 -- 1,330 -- 1,330
Put option contracts b 270 -- 270 -- 270
Precious metal collars b 299 -- 299 -- 299
Precious metal forward
contracts b 531 -- 531 -- 531
Foreign exchange
forward contracts b 1,078 -- 1,078 -- 1,078
Derivatives not designated as hedging instruments:
Foreign exchange
forward contracts b 61 -- 61 -- 61
Put option contracts b 717 -- 717 -- 717
-------------------------------------------------------------------------------------
Total assets $ 32,801 $ 28,515 $ 4,286 $ -- $ 32,801
=====================================================================================
Financial Liabilities Estimated Fair Value
------------------------ --------------------------------------------
(in thousands) Carrying Value Level 1 Level 2 Level 3 Total Fair Value
----------------------------------------------------------------------------------------------------------------
Derivatives designated as hedging instruments:
Precious metal
forward contracts c $ 3 $ -- $ 3 $ -- $ 3
Derivatives not designated as hedging instruments:
Foreign exchange
forward contracts c 1,445 -- 1,445 -- 1,445
Call option contracts c 639 -- 639 -- 639
---------------------------------------------------------------------------------------
Total liabilities $ 2,087 $ -- $ 2,087 $ -- $ 2,087
==============================================================================-========
a This amount is included within Other assets, net on the Company's
Condensed Consolidated Balance Sheet.
b This amount is included within Prepaid expenses and other current
assets on the Company's Condensed Consolidated Balance Sheet.
c This amount is included within Accounts payable and accrued
liabilities on the Company's Condensed Consolidated Balance Sheet.
The fair value of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximates carrying value due to the
short-term maturities of these assets and liabilities. The fair value of
debt with variable interest rates approximates carrying value. The fair
value of debt with fixed interest rates
14
was determined using the quoted market prices of debt instruments with
similar terms and maturities. The total carrying value of short-term
borrowings and long-term debt was $753,003,000 and the corresponding fair
value was approximately $800,000,000 at October 31, 2009.
11. 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
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------
(in thousands) 2009 2008 2009 2008
------------------------------------------------------------------------------------------------------------
Service cost $ 2,774 $ 3,528 $ 409 $ 414
Interest cost 5,748 4,339 689 403
Expected return on plan assets (3,491) (3,915) -- --
Amortization of prior service cost 267 321 (164) (198)
Amortization of net loss 85 118 2 --
-------------------------------------------------------------------
Net expense $ 5,383 $ 4,391 $ 936 $ 619
===================================================================
Nine Months Ended October 31,
-------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------
(in thousands) 2009 2008 2009 2008
------------------------------------------------------------------------------------------------------------
Service cost $ 8,671 $ 12,491 $ 945 $ 1,247
Interest cost 17,110 13,133 1,981 1,359
Expected return on plan assets (10,943) (11,744) -- --
Amortization of prior service cost 803 962 (494) (593)
Amortization of net (gain) loss (63) 487 -- --
-------------------------------------------------------------------
Net expense $ 15,578 $ 15,329 $ 2,432 $ 2,013
===================================================================
12. SEGMENT INFORMATION
The Company's reportable segments are as follows:
o Americas includes sales in TIFFANY & CO. stores in the United States,
Canada and Latin/South America, as well as sales of TIFFANY & CO.
products in certain of those markets through business-to-business,
Internet, catalog and wholesale operations;
o Asia-Pacific includes sales in TIFFANY & CO. stores, as well as sales
of TIFFANY & CO. products in certain markets through
business-to-business, Internet and wholesale operations;
o Europe includes sales in TIFFANY & CO. stores, as well as sales of
TIFFANY & CO. products in certain markets through
business-to-business, Internet and wholesale operations; and
o Other consists of non-reportable segments, primarily wholesale sales
of diamonds obtained through bulk purchases that were subsequently
deemed not suitable for the Company's needs. In addition, Other
includes earnings received from a third-party licensing agreement.
Certain information relating to the Company's segments is set forth below:
15
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------------------------------------------------
(in thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------------------------------------
Net sales:
Americas $ 303,515 $ 331,783 $ 887,371 $ 1,127,754
Asia-Pacific 225,840 205,992 639,190 642,262
Europe 64,994 58,157 188,913 189,302
--------------------------------------------------------------------
Total reportable segments 594,349 595,932 1,715,474 1,959,318
Other 3,863 20,220 12,846 51,948
--------------------------------------------------------------------
$ 598,212 $ 616,152 $ 1,728,320 $ 2,011,266
====================================================================
Earnings (losses) from continuing operations*:
Americas $ 39,244 $ 48,369 $ 124,451 $ 210,257
Asia-Pacific 54,395 49,010 151,610 159,270
Europe 9,382 7,843 29,109 34,931
--------------------------------------------------------------------
Total reportable segments 103,021 105,222 305,170 404,458
Other (1,863) (451) (7,293) (236)
--------------------------------------------------------------------
$ 101,158 $ 104,771 $ 297,877 $ 404,222
====================================================================
*Represents earnings (losses) from continuing operations before unallocated
corporate expenses, other income and interest and other expenses, net.
The following table sets forth a reconciliation of the segments' earnings
from continuing operations to the Company's consolidated earnings from
continuing operations before income taxes:
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------------------------------------------------------
(in thousands) 2009 2008 2009 2008
------------------------------------------------------------------------------------------------------
Earnings from continuing $ 101,158 $ 104,771 $ 297,877 $ 404,222
operations for segments
Unallocated corporate
expenses (30,341) (23,268) (82,434) (81,704)
Interest and other expenses,
net (11,326) (14,449) (35,898) (19,294)
Other (expenses) income, net (4,000) -- 442 --
----------------- -------------------------------------------------
Earnings from continuing
operations before income
taxes $ 55,491 $ 67,054 $ 179,987 $ 303,224
===================================================================
Unallocated corporate expenses includes 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.
Other (expenses) income, net in the third quarter of 2009 represents
$4,000,000 paid to terminate a third party management agreement (see "Note
4. Acquisitions & Dispositions"). Other (expenses) income, net in the nine
months ended October 31, 2009 also includes $4,442,000 of income received
in connection with the assignment of the Tahera Diamond Corporation
commitments and liens to an unrelated third party, which represents full
settlement under the terms of the assignment agreement. The Company had
taken an impairment charge of $47,981,000 in the year ended January 31,
2008 associated with the Commitment.
13. SUBSEQUENT EVENT
On November 19, 2009, the Company's Board of Directors declared a quarterly
dividend on its Common Stock of $0.17 per share. This dividend will be paid
on January 11, 2010 to stockholders of record on December 21, 2009.
16
PART I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
--------
Tiffany & Co. (the "Company") is a holding company that operates through its
subsidiary companies. The Company's principal subsidiary, Tiffany and Company,
is a jeweler and specialty retailer whose principal merchandise offerings are
fine jewelry. The Company 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 reportable segments are as follows:
o Americas includes sales in TIFFANY & CO. stores in the United States,
Canada and Latin/South America, as well as sales of TIFFANY & CO.
products in certain of those markets through business-to-business,
Internet, catalog and wholesale operations;
o Asia-Pacific includes sales in TIFFANY & CO. stores, as well as sales
of TIFFANY & CO. products in certain markets through
business-to-business, Internet and wholesale operations;
o Europe includes sales in TIFFANY & CO. stores, as well as sales of
TIFFANY & CO. products in certain markets through
business-to-business, Internet and wholesale operations; and
o Other consists of non-reportable segments, primarily wholesale sales
of diamonds obtained through bulk purchases that were subsequently
deemed not suitable for the Company's needs. In addition, Other
includes earnings received from a third-party licensing agreement.
The results of IRIDESSE are presented as a discontinued operation in the
condensed consolidated statements of earnings for all periods presented. Prior
to the reclassification, IRIDESSE results had been included within the Other
non-reportable segment. Refer to "Item 1. Notes to Condensed Consolidated
Financial Statements - Note 4. Acquisitions & Dispositions."
All references to years relate to fiscal years ended or ending on January 31 of
the following calendar year.
HIGHLIGHTS
----------
o Worldwide net sales decreased 3% in the three months ("third quarter")
and decreased 14% in the nine months ("year-to-date") ended October
31, 2009. U.S. sales declined in both the quarter and year-to-date;
however, the rate of the sales decline lessened as the year
progressed. Sales in Asia-Pacific and Europe increased in the quarter
and were consistent with the prior year on a year-to-date basis.
o On a constant-exchange-rate basis (see "Non-GAAP Measures" below),
worldwide net sales declined 5% in the third quarter and 13% in the
year-to-date, and comparable store sales decreased 6% and 15% in those
respective periods.
o The Company opened stores in all three regions in the third quarter.
Management's objective is to open 14 stores (net) in 2009, versus 22
stores (net) in 2008.
o Operating expenses decreased in line with the Company's cost reduction
initiatives primarily due to reduced staffing and marketing costs.
o Net earnings from continuing operations decreased 5% to $43,309,000 in
the third quarter and 35% to $127,469,000 in the year-to-date. Net
earnings from continuing operations per diluted share decreased 6% in
the third quarter and 33% in the year-to-date.
o In the first quarter of 2009, the Company secured $300,000,000 of
additional long-term financing. In the second quarter of 2009, the
Company established a new $400,000,000 multi-bank, multi-currency
revolving credit facility ("Credit Facility") to replace an existing
facility.
17
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 its sales
performance 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 basis provides a more representative assessment of the
sales performance 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 sales percentage increases (decreases)
from the GAAP to the non-GAAP basis versus the previous year:
Third Quarter 2009 vs. 2008 Year-to-date 2009 vs. 2008
---------------------------------------- ----------------------------------------
Constant- Constant-
GAAP Translation Exchange- GAAP Translation Exchange-
Reported Effect Rate Basis Reported Effect Rate Basis
---------------------------------------- ----------------------------------------
Net Sales:
----------
Worldwide (3)% 2% (5)% (14)% (1)% (13)%
Americas (9)% (1)% (8)% (21)% (1)% (20)%
U.S. (9)% -- (9)% (23)% -- (23)%
Asia-Pacific 10% 8% 2% -- 3% (3)%
Japan 3% 13% (10)% (3)% 9% (12)%
Other Asia-Pacific 20% 2% 18% 5% (7)% 12%
Europe 12% (4)% 16% -- (15)% 15%
Comparable Store Sales:
-----------------------
Worldwide (3)% 3% (6)% (15)% -- (15)%
Americas (10)% -- (10)% (24)% (1)% (23)%
U.S. (10)% -- (10)% (25)% -- (25)%
Asia-Pacific 5% 8% (3)% (3)% 3% (6)%
Japan -- 13% (13)% (3)% 9% (12)%
Other Asia-Pacific 10% 1% 9% (3)% (6)% 3%
Europe 6% (3)% 9% (8)% (14)% 6%
18
RESULTS OF OPERATIONS
Certain operating data as a percentage of net sales were as follows:
Third Quarter Year-to-date
----------------------- ----------------------
2009 2008 2009 2008
---------------------- ---------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 45.2 43.7 44.8 42.9
---------------------- ---------------------
Gross profit 54.8 56.3 55.2 57.1
Selling, general and administrative expenses 43.6 43.1 42.7 41.1
---------------------- ---------------------
Earnings from continuing operations 11.2 13.2 12.5 16.0
Interest and other expenses, net 1.9 2.3 2.1 0.9
---------------------- ---------------------
Earnings from continuing operations before income taxes 9.3 10.9 10.4 15.1
Provision for income taxes 2.1 3.5 3.0 5.4
---------------------- ---------------------
Net earnings from continuing operations 7.2 7.4 7.4 9.7
Net earnings (loss) from discontinued operations -- (0.3) (0.2) (0.3)
---------------------- ---------------------
Net earnings 7.2% 7.1% 7.2% 9.4%
====================== =====================
Net Sales
---------
Net sales were as follows:
Third Quarter
---------------------------------------------------------------------------------
(in thousands) 2009 2008 Increase (Decrease)
--------------------------------------------------------------------------------------------------------------------
Americas $ 303,515 $ 331,783 (9)%
Asia-Pacific 225,840 205,992 10%
Europe 64,994 58,157 12%
Other 3,863 20,220 (81)%
---------------------------------------------------------------------------------
$ 598,212 $ 616,152 (3)%
=================================================================================
Year-to-date
---------------------------------------------------------------------------------
(in thousands) 2009 2008 Decrease
--------------------------------------------------------------------------------------------------------------------
Americas $ 887,371 $ 1,127,754 (21)%
Asia-Pacific 639,190 642,262 --
Europe 188,913 189,302 --
Other 12,846 51,948 (75)%
--------------------------------------------------------------------------------
$ 1,728,320 $ 2,011,266 (14)%
================================================================================
Comparable Store Sales. Reference will be made to comparable store sales below.
Comparable store sales include only sales transacted in company-operated stores
and boutiques. 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 in comparable store sales if the relocation
occurs within the same geographical market. In Japan (included in the
Asia-Pacific segment), sales for a new store or boutique are not included if the
store or boutique was relocated from one department store to another or from a
department store to a free-standing location. In all markets, the results of a
store in which the square footage has been expanded or reduced remain in the
comparable store base.
Americas. Total sales in the Americas decreased $28,268,000, or 9%, in the third
quarter due to a decline in the average price per unit sold, and $240,383,000,
or 21%, in the year-to-date equally due to declines in the number of units sold
and in the average price per unit sold. Comparable U.S. store sales declined
$26,954,000, or 10%, in the third quarter and $222,496,000, or 25%, in the
year-to-date, consisting of comparable branch store sales declines of 11% and
24% in the third quarter and year-to-date, and New York Flagship store declines
of 8% and 27% in those same periods. Combined Internet and catalog sales in the
U.S. declined $2,500,000, or 9%, in the third quarter and $11,334,000, or 11%,
in the year-to-date.
19
Asia-Pacific. Total sales in Asia-Pacific increased $19,848,000, or 10%, in the
third quarter due to an increase in the number of units sold, and decreased
$3,072,000, or less than 1%, in the year-to-date due to a slight decline in the
average price per unit. In the third quarter of 2009, non-comparable store sales
increased $12,493,000 and comparable store sales increased $8,231,000, or 5%. In
the year-to-date 2009, non-comparable store sales increased $16,525,000, and
comparable store sales declined $16,213,000, or 3%. On a constant-exchange-rate
basis, Asia-Pacific sales increased 2% and comparable store sales decreased 3%
in the third quarter (resulting from a 13% decline in Japan comparable store
sales and a 9% increase in comparable store sales in other countries). On a
constant-exchange-rate basis, Asia-Pacific sales decreased 3% and comparable
store sales decreased 6% in the year-to-date (resulting from a 12% decline in
Japan comparable store sales and a 3% increase in comparable store sales in
other countries).
Europe. Total sales in Europe increased $6,837,000, or 12%, in the third quarter
due to an increase in the number of units sold, and decreased $389,000, or less
than 1%, in the year-to-date due to the effect of translating foreign
currency-denominated sales into U.S. dollars. The overall sales increase in the
third quarter consisted of an increase in non-comparable store sales of
$6,568,000 and a comparable store sales increase of $2,791,000, or 6%, offset by
a decline of $2,522,000, or 23%, in e-commerce and other sales. In the
year-to-date, non-comparable store sales increased $23,834,000, while e-commerce
and other sales declined $12,188,000, or 33% and comparable store sales declined
$12,035,000, or 8%. On a constant-exchange-rate basis, sales increased 16% in
the third quarter and 15% in the year-to-date partly due to incremental sales
from new stores opened during the past 12 months, as well as comparable store
sales increases of 9% in the third quarter and 6% in the year-to-date,
reflecting broad-based geographical growth.
Other. Other sales decreased $16,357,000, or 81%, in the third quarter and
$39,102,000, or 75%, in the year-to-date primarily due to lower wholesale sales
of diamonds that were deemed not suitable for the Company's needs.
Store Data. Management expects to open 14 (net) Company-operated TIFFANY & CO.
stores and boutiques in 2009, increasing the store base by approximately 7%.
Management's expected openings and closings of TIFFANY & CO. stores are:
Actual Openings Expected Openings
Location (Closings) 2009 2009
--------------------------------------------------------------------------------------------------------------------
Americas:
Toronto - Yorkdale Shopping Centre, Canada First Quarter
Guadalajara, Mexico First Quarter
Roseville, California Third Quarter
Seattle - University Village, Washington Third Quarter
Las Vegas - The Crystals at CityCenter, Nevada Fourth Quarter
Asia-Pacific:
Busan - Shinsegae Centum, Korea First Quarter
Hangzhou, China First Quarter
Ikebukuro - Mitsukoshi, Japan (First Quarter)
Kagoshima - Mitsukoshi, Japan (Second Quarter)
Kagoshima - Yamakataya, Japan Second Quarter
Ikebukuro - Seibu, Japan Second Quarter
Canton Road, Hong Kong Second Quarter
Seoul - Shinsegae Youngdeungpo, Korea Third Quarter
Melbourne - Chadstone Mall, Australia Fourth Quarter
Shenzhen, China Fourth Quarter
Europe:
Manchester - Selfridges, England Third Quarter
London - Heathrow Airport Terminal 3, England Fourth Quarter
Amsterdam, Netherlands Fourth Quarter
Gross Margin
------------
Gross margin (gross profit as a percentage of net sales) decreased in the third
quarter and year-to-date by 1.5 and 1.9 percentage points primarily due to
higher product costs.
20
Management periodically reviews and may adjust its retail prices to address
specific market conditions, product cost increases/decreases and longer-term
changes in foreign currencies/U.S. dollar relationships. Among the market
conditions that the Company addresses is consumer demand for the product
category involved, which may be influenced by consumer confidence and
competitive pricing conditions. The Company uses a limited number of derivative
instruments to mitigate foreign exchange and precious metal price exposures (see
"Item 1. Notes to Condensed Consolidated Financial Statements - Note 9. Hedging
Instruments").
Selling, General and Administrative ("SG&A") Expenses
-----------------------------------------------------
SG&A expenses decreased $4,636,000, or 2%, in the third quarter, primarily due
to decreased marketing expenses of $13,902,000, partly offset by increased
depreciation and store occupancy expenses of $5,747,000 and increased labor and
benefit costs of $3,044,000 as the prior year included a reduction in
anticipated management incentive compensation. Additionally, in the third
quarter of 2009, the Company paid $4,000,000 to terminate a third party
management agreement (see "Item 1. Notes to Condensed Consolidated Financial
Statements - Note 4. Acquisitions & Dispositions"). In the year-to-date, SG&A
expenses decreased $87,912,000, or 11%, primarily due to (i) decreased marketing
expenses of $40,869,000; (ii) decreased labor and benefit costs of $33,338,000
as a result of the staff reduction initiatives announced during the fourth
quarter of 2008 (see "Item 1. Notes to Condensed Consolidated Financial
Statements - Note 3. Restructuring Charges"); and (iii) a decline in variable
expenses due to lower sales, all of which more than offset incremental costs of
new stores opened in the past 12 months. Additionally, in the second quarter,
the Company received $4,442,000 of income in connection with the assignment of
the Tahera Diamond Corporation commitments and liens to an unrelated third
party, which represented full settlement under the terms of the assignment
agreement. The Company had taken an impairment charge of $47,981,000 in the year
ended January 31, 2008 associated with the Commitment. Changes in foreign
currency exchange rates had an insignificant effect on overall SG&A expenses in
the third quarter and year-to-date compared to the prior year. SG&A expenses as
a percentage of net sales increased by 0.5 percentage point in the third quarter
and by 1.6 percentage points in the year-to-date due to the decline in sales and
the de-leveraging effect of fixed costs.
Earnings from Continuing Operations
-----------------------------------
Third Quarter % of Net Third Quarter % of Net
(in thousands) 2009 Sales* 2008 Sales*
----------------------------------------------------------------------------------------------------------------------
Earnings (losses) from continuing
operations:
Americas $ 39,244 12.9% $ 48,369 14.6%
Asia-Pacific 54,395 24.1% 49,010 23.8%
Europe 9,382 14.4% 7,843 13.5%
Other (1,863) (48.2%) (451) (2.2)%
----------------------------------------------------------------------------
101,158 104,771
Unallocated corporate expenses (30,341) 5.1% (23,268) 3.8%
Other expense (4,000) --
----------------------------------------------------------------------------
Earnings from continuing operations $ 66,817 11.2% $ 81,503 13.2%
============================================================================
* Percentages represent earnings (losses) from continuing operations as a
percentage of each segment's net sales.
Earnings from continuing operations decreased 18% in the third quarter. On a
segment basis, the ratio of earnings (losses) from continuing operations (before
the effect of unallocated corporate expenses, other expense and interest and
other expenses, net) to each segment's net sales in the third quarter of 2009
and 2008 was as follows:
o Americas - the ratio decreased 1.7 percentage points primarily
resulting from a decrease in gross margin (due to higher product
costs) partly offset by reduced operating expenses attributed to cost
savings from the initiatives implemented at the end of 2008;
o Asia-Pacific - the ratio increased 0.3 percentage point primarily due
to leveraging of operating expenses, partly offset by a decrease in
gross margin (due to higher product costs);
o Europe - the ratio increased 0.9 percentage point primarily due to the
leveraging of operating expenses, partly offset by a decline in gross
margin (due to higher product costs); and
21
o Other - the operating loss is attributable to lower wholesale sales of
diamonds and the write-down of wholesale diamond inventory.
Year-to-date % of Net Year-to-date % of Net
(in thousands) 2009 Sales* 2008 Sales*
----------------------------------------------------------------------------------------------------------------------
Earnings (losses) from continuing
operations:
Americas $ 124,451 14.0% $ 210,257 18.6%
Asia-Pacific 151,610 23.7% 159,270 24.8%
Europe 29,109 15.4% 34,931 18.5%
Other (7,293) (56.8%) (236) (0.5)%
----------------------------------------------------------------------------
297,877 404,222
Unallocated corporate expenses (82,434) 4.8% (81,704) 4.1%
Other income, net 442 --
----------------------------------------------------------------------------
Earnings from continuing operations $ 215,885 12.5% $ 322,518 16.0%
============================================================================
* Percentages represent earnings (losses) from continuing operations as a
percentage of each segment's net sales.
Earnings from continuing operations decreased 33% in the year-to-date. On a
segment basis, the ratio of earnings (losses) from continuing operations (before
the effect of unallocated corporate expenses, other income, net and interest and
other expenses, net) to each segment's net sales in the year-to-date 2009 and
2008 was as follows:
o Americas - the ratio decreased 4.6 percentage points primarily
resulting from a decrease in gross margin (due to higher product
costs) and a decline in sales which more than offset cost savings from
the initiatives implemented at the end of 2008;
o Asia-Pacific - the ratio decreased 1.1 percentage points primarily due
to a decrease in gross margin (due to higher product costs), partly
offset by reduced operating expenses attributed to the cost savings
initiatives;
o Europe - the ratio decreased 3.1 percentage points primarily due to a
decrease in gross margin (due to higher product costs); and
o Other - the operating loss is attributable to lower wholesale sales of
diamonds and the write-down of wholesale diamond inventory.
Unallocated corporate expenses includes 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. Total unallocated corporate expenses increased in the third quarter
and year-to-date 2009, as the prior year included a reduction in anticipated
management incentive compensation, which more than offset cost savings realized
in the current year. As a percentage of net sales, unallocated corporate
expenses increased 1.3 percentage points and 0.7 percentage point in the third
quarter and year-to-date 2009 due to similar reasons, as well as reduced sales.
Other expense in the third quarter of 2009 represents $4,000,000 paid to
terminate a third party management agreement (see "Item 1. Notes to Condensed
Consolidated Financial Statements - Note 4. Acquisitions & Dispositions").
Other income, net in the year-to-date 2009 also included $4,442,000 of income
received in connection with the assignment of the Tahera Diamond Corporation
commitments and liens to an unrelated third party, which represents full
settlement under the terms of the assignment agreement.
Interest and Other Expenses, net
--------------------------------
Interest and other expenses, net decreased $3,123,000 in the third quarter of
2009. In the third quarter of 2008, the Company recorded: (i) a $4,300,000
charge related to the unrealized gains and interest receivable associated with
interest rate swaps that the Company determined were impaired and (ii) foreign
exchange transaction losses of $4,973,000. The favorable absence of such items
in the current year more than offset higher interest expense related to
22
new long-term debt issued in the past year. Interest and other expenses, net
increased $16,604,000 in the year-to-date 2009 primarily due to higher interest
expense related to new long-term debt issued in the past year.
Provision for Income Taxes
--------------------------
The effective income tax rate for the third quarter of 2009 was 22.0% versus
32.1% in the prior year and was 29.2% in the year-to-date 2009 versus 35.8% in
the prior year comparable period. The lower effective income tax rates in 2009
were due to favorable reserve adjustments of approximately $5,600,000 and
$11,200,000 in the third quarter and year-to-date associated with the settlement
of certain tax audits and the expiration of statutory periods.
Net Earnings (Loss) from Discontinued Operations
------------------------------------------------
The loss from discontinued operations related to the Company's IRIDESSE business
was $5,894,000 pre-tax ($3,013,000 after tax) for the year-to-date 2009. The
loss from discontinued operations for the same period in 2008 was $9,204,000
pre-tax ($5,805,000 after tax). See "Item 1. Notes to Condensed Consolidated
Financial Statements - Note 4. Acquisitions & Dispositions."
2009 Outlook
------------
Management expects a mid-single-digit sales increase in worldwide sales for the
fourth quarter of 2009. Management's financial outlook for full year 2009 is
based on the following assumptions, which may or may not prove valid, and should
be read in conjunction with "Item 1A. Risk Factors" on page 29:
o A net sales decline of approximately 8%, composed of (i) a low-teens
percentage decrease in the Americas, factoring in a mid-teens
percentage U.S. comparable store sales decline; (ii) flat sales in
Asia-Pacific, which includes a mid single-digit comparable store sales
decline on a constant-exchange-rate basis; (iii) a low single-digit
percentage increase in Europe, which includes a high single-digit
comparable store sales increase on a constant-exchange-rate basis; and
(iv) a 60% decrease in Other sales.
o The Company's worldwide expansion strategy is to continue to
open Company-operated TIFFANY & CO. stores and boutiques.
The Company has moderated the rate of anticipated store
openings in 2009 to 5 in the Americas, 6 in Asia-Pacific and
3 in Europe.
o A decline in operating margin compared against the prior year (when
excluding the non-recurring items in 2008 as discussed in the notes to
"Item 6. Selected Financial Data" in the Company's Annual Report on
Form 10-K) based upon an expected decline in gross margin of more than
one point and an increase in the ratio of SG&A expenses to net sales.
SG&A expenses are expected to decline by a mid-single-digit percentage
for the full year.
o This outlook includes (i) savings of $60,000,000 resulting
from the staff reduction initiatives taken at the end of
2008; (ii) reduced marketing spending; and (iii) variable
and other fixed cost savings.
o Interest and other expenses, net of approximately $48,000,000, which
represents an increase from the prior year due to higher interest
expense as a result of recent long-term debt issuances.
o An effective income tax rate of approximately 31%.
o Net earnings from continuing operations per diluted share of $1.88 -
$1.98.
o Net inventories declining by a single-digit percentage.
o Capital expenditures of approximately $85,000,000.
New Accounting Standards
------------------------
See "Item 1. Notes to Condensed Consolidated Financial Statements - Note 2. New
Accounting Standards".
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The global credit and equity markets have undergone significant disruption since
the third quarter of 2008, making it difficult for many businesses to obtain
financing or access capital. The Company has taken steps to address these
challenges. First, as noted in the 2009 Outlook section above, management has
reduced costs to better align the
23
Company's expenses with the expected sales decline. Secondly, the Company
secured $400,000,000 of long-term debt since December 2008 to: (i) refinance
debt obligations that have come due during the year; (ii) use the funds for
general corporate purposes; and (iii) provide financial flexibility in the event
that disruptions in the economy or credit markets continue or worsen.
In July 2009, the Company entered into a new $400,000,000 multi-bank,
multi-currency, committed unsecured revolving credit facility ("Credit
Facility"), and has the option to increase the committed amount to $500,000,000,
subject to bank approval. The Credit Facility replaced the Company's previous
$450,000,000 revolving credit facility. The Credit Facility is intended for
working capital and other corporate purposes. There was $30,906,000 outstanding
under the Credit Facility at October 31, 2009. The weighted average interest
rate at October 31, 2009 was 2.9%. The Credit Facility will expire in July 2012.
Management believes that the proceeds from the debt financing that the Company
recently issued, other cash on hand, internally-generated cash flows and the
funds available under its revolving Credit Facility are sufficient to support
the Company's planned worldwide business expansion, debt service, capital
expenditures, working capital needs and dividends for the foreseeable future.
The Company's current expectation is to generate in excess of $450,000,000 of
free cash flow (cash flow from operating activities less capital expenditures)
in 2009.
The following table summarizes cash flows from operating, investing and
financing activities:
Year-to-date
----------------------------------------------------
(in thousands) 2009 2008
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 275,005 $ (76,643)
Investing activities (45,917) (113,617)
Financing activities (32,143) 116,725
Effect of exchange rates on cash and cash equivalents 17,481 (12,743)
----------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 214,426 $ (86,278)
====================================================
Operating Activities
--------------------
The Company's net cash inflow from operating activities of $275,005,000 in the
year-to-date 2009 compared with an outflow of $76,643,000 in the same period in
2008. The cash inflow in the year-to-date 2009 is primarily due to a decrease in
inventories and, to a lesser extent, lower income tax payments. In addition, in
the third quarter of 2009, the Company contributed $27,500,000 to its pension
plan (reflected in Other, net on the Condensed Consolidated Statements of Cash
Flows). The cash outflow in the year-to-date 2008 was primarily due to increased
tax payments largely associated with the sale-leasebacks of the TIFFANY & CO.
stores in Tokyo's Ginza shopping district and London's Old Bond Street and
inventory purchases.
Working Capital. Working capital (current assets less current liabilities) and
the corresponding current ratio (current assets divided by current liabilities)
were $1,707,767,000 and 4.4 at October 31, 2009, compared with $1,446,812,000
and 3.4 at January 31, 2009 and $1,240,477,000 and 2.5 at October 31, 2008. The
increases in the ratio from January 31, 2009 and October 31, 2008 were primarily
due to a decrease in short-term borrowings as well as higher cash balances.
Accounts receivable, less allowances at October 31, 2009 were 8% lower than at
both January 31, 2009 and October 31, 2008 due to sales declines. Changes in
foreign currency exchange rates had an insignificant effect on the change in
accounts receivable balances.
Inventories, net at October 31, 2009 were 4% lower than January 31, 2009 and
were 6% lower than October 31, 2008 due to steps management has taken to reduce
internal manufacturing production and purchases from external vendors to address
sales weakness. Changes in foreign currency exchange rates had an insignificant
effect on the change in inventories, net.
Investing Activities
--------------------
The Company's net cash outflow from investing activities of $45,917,000 in the
year-to-date 2009 compared with an outflow of $113,617,000 in the year-to-date
2008. The decreased outflow in the current year is primarily due to lower
capital expenditures. Capital expenditures were $46,888,000 in the year-to-date
2009 compared with $108,515,000 in
24
the year-to-date 2008. The decrease reflected a moderated rate of store openings
in the current year and other cost containment.
Financing Activities
--------------------
The Company's net cash outflow from financing activities of $32,143,000 in the
year-to-date 2009 compared with an inflow of $116,725,000 in the year-to-date
2008. The variance between 2009 and 2008 was primarily due to a decrease in net
proceeds received from borrowings.
Share Repurchases. The Company suspended share repurchases during the third
quarter of 2008 in order to conserve cash, and such suspension continued at the
time of this filing. At October 31, 2009, there remained $402,427,000 of
authorization for future repurchases. The Company's stock repurchase program
expires in January 2011. At least annually, the Company's Board of Directors
reviews its policies with respect to dividends and share repurchases with a view
to actual and projected earnings, cash flow and capital requirements. During the
third quarter and year-to-date 2008, the Company paid $89,878,000 and
$218,379,000 to purchase and retire 2,269,000 and 5,375,000 shares outstanding.
Recent Borrowings. As discussed above, in July 2009, the Company entered into a
new $400,000,000 revolving Credit Facility. Borrowings are at nine participating
banks and are at interest rates based upon local currency borrowing rates plus a
margin based on the Company's leverage ratio.
In July 2009, the Company repaid $40,000,000 of indebtedness, which represented
the current portion of its long-term borrowings.
In April 2009, the Company, in a private transaction with various institutional
lenders, issued, at par, $50,000,000 10% Series A Senior Notes due April 2018.
The proceeds are available for general corporate purposes. The agreement
requires lump sum repayments upon maturity and includes specific financial
covenants and ratios and limits certain payments, investments and indebtedness,
in addition to other requirements customary to such borrowings.
In March 2009, the Company repaid $93,000,000 of its short-term borrowings.
In February 2009, the Company, in a private transaction, issued, at par,
$125,000,000 of its 10% Series A-2009 Senior Notes due February 2017 and
$125,000,000 of its 10% Series B-2009 Senior Notes due February 2019. The
proceeds are available to refinance existing indebtedness and for general
corporate purposes. The agreement requires lump sum repayments upon maturity and
includes specific financial covenants and ratios and limits certain payments,
investments and indebtedness, in addition to other requirements customary to
such borrowings.
The ratio of total debt (short-term borrowings, current portion of long-term
debt and long-term debt) to stockholders' equity was 44% at October 31, 2009,
45% at January 31, 2009 and 50% at October 31, 2008.
At October 31, 2009, the Company was in compliance with all debt covenants.
Purchase of Noncontrolling Interests. On October 26, 2009, the Company acquired
all noncontrolling interests in two majority-owned entities that indirectly
engage through majority-owned subsidiaries in diamond sourcing and polishing
operations in South Africa and Botswana, respectively,for total consideration of
$18,000,000, of which $11,000,000 was paid upon closing of the transaction and
the remaining $7,000,000 will be paid on or before August 1, 2010.
Contractual Obligations
-----------------------
The Company's contractual cash obligations and commercial commitments at October
31, 2009 and the effects such obligations and commitments are expected to have
on the Company's liquidity and cash flows in future periods have not changed
significantly since January 31, 2009. Also see Recent Borrowings above.
Seasonality
-----------
As a jeweler and specialty retailer, the Company's business is seasonal in
nature, with the fourth quarter typically representing at least one-third of
annual net sales and approximately one-half of annual net earnings. Management
expects such seasonality to continue.
25
Forward-Looking Statements
--------------------------
This quarterly report on Form 10-Q contains certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 concerning the Company's goals, plans and
projections with respect to store openings, sales, retail prices, gross margin,
expenses, effective tax rate, net earnings and net earnings per share,
inventories, capital expenditures, cash flow and liquidity. In addition,
management makes other forward-looking statements from time to time concerning
objectives and expectations. One can identify these forward-looking statements
by the fact that they use words such as "believes," "intends," "plans," and
"expects" and other words and terms of similar meaning and expression in
connection with any discussion of future operating or financial performance. One
can also identify forward-looking statements by the fact that they do not relate
strictly to historical or current facts. Such forward-looking statements are
based on management's current plan and involve inherent risks, uncertainties and
assumptions that could cause actual outcomes to differ materially from the
current plan. The Company has included important factors in the cautionary
statements included in its 2008 Annual Report on Form 10-K and in this quarterly
report, particularly under "Item 1A. Risk Factors," that the Company believes
could cause actual results to differ materially from any forward-looking
statement.
Although the Company believes it has been prudent in its plans and assumptions,
no assurance can be given that any goal or plan set forth in forward-looking
statements can or will be achieved, and readers are cautioned not to place undue
reliance on such statements which speak only as of the date this quarterly
report was first filed with the Securities and Exchange Commission. 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.
26
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, precious metal prices 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.
Foreign Currency Risk
The Company's Japanese subsidiary satisfies nearly all of its inventory
requirements by purchasing merchandise, payable in U.S. dollars, from the
Company's principal subsidiary. To minimize the potentially negative effect of a
significant strengthening of the U.S. dollar against the Japanese yen, the
Company purchases put option contracts as hedges of forecasted purchases of
merchandise over a maximum term of 12 months. The fair value of put option
contracts is sensitive to changes in yen exchange rates. If the market yen
exchange rate at the time of the put option contract's expiration is stronger
than the contracted exchange rate, the Company allows the put option to expire,
limiting its loss to the cost of the put option contract.
The Company also uses foreign exchange forward contracts to offset the foreign
currency exchange risks associated with foreign currency-denominated liabilities
and intercompany transactions between entities with differing functional
currencies. Gains or losses on these foreign exchange forward contracts
substantially offset losses or gains on the liabilities and transactions being
hedged. The term of all outstanding foreign exchange forward contracts as of
October 31, 2009 ranged from one to ten months.
Precious Metal Price Risk
The Company periodically hedges a portion of its forecasted purchases of
precious metals for use in its internal manufacturing operations in order to
minimize the effect of volatility in precious metals prices. The Company may use
a combination of call and put option contracts in net-zero-cost collar
arrangements ("precious metal collars") or forward contracts. For precious metal
collars, if the price of the precious metal at the time of the expiration of the
precious metal collar is within the call and put price, the precious metal
collar would expire at no cost to the Company. The maximum term over which the
Company is hedging its exposure to the variability of future cash flows for all
forecasted transactions is 12 months.
Interest Rate Risk
In the second quarter of 2009, the Company entered into interest rate swap
agreements to effectively convert certain fixed rate debt obligations to
floating rate obligations. Additionally, since the fair value of the Company's
fixed rate long-term debt is sensitive to interest rate changes, the interest
rate swap agreements serve as a hedge to changes in the fair value of these debt
instruments. The Company is hedging its exposure to changes in interest rates
over the remaining maturities of the debt agreements being hedged.
27
PART I. Financial Information
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), the Registrant's chief executive officer and chief financial officer
concluded that, as of the end of the period covered by this report, the
Registrant's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the 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 the ordinary course of business, the Registrant reviews its system of
internal control over financial reporting and makes changes to its systems and
processes to improve controls and increase efficiency, while ensuring that the
Registrant maintains an effective internal control environment. Changes may
include such activities as implementing new, more efficient systems and
automating manual processes.
The Registrant's chief executive officer and chief financial officer have
determined that there have been no changes in the Registrant's internal control
over financial reporting during the period covered by this report identified in
connection with the evaluation described above that have materially affected, or
are reasonably likely to materially affect, Registrant's internal control over
financial reporting.
The 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 the
Registrant's disclosure controls and procedures are (i) designed to provide such
reasonable assurance and (ii) are effective at that reasonable assurance level.
28
PART II. Other Information
Item 1A. Risk Factors
As is the case for any retailer, the Registrant's success in achieving its
objectives and expectations is dependent upon general economic conditions,
competitive conditions and consumer attitudes. However, certain factors are
specific to the Registrant and/or the markets in which it operates. The
following "risk factors" are specific to the Registrant; these risk factors
affect the likelihood that the Registrant will achieve the financial objectives
and expectations communicated by management:
(i) Risk: that a continuation or worsening of challenging global economic
conditions and related low levels of consumer confidence over a prolonged period
of time could adversely affect the Registrant's sales.
As a retailer of goods which are discretionary purchases, the Registrant's
sales results are particularly sensitive to changes in economic conditions and
consumer confidence. Consumer confidence is affected by general business
conditions; changes in the market value of securities and real estate;
inflation; interest rates and the availability of consumer credit; tax rates;
and expectations of future economic conditions and employment prospects.
Consumer spending for discretionary goods generally declines during times
of falling consumer confidence, which negatively affects the Registrant's
earnings because of its cost base and inventory investment.
Many of the Registrant's competitors may continue to react to falling
consumer confidence by reducing their retail prices; such reductions and/or
inventory liquidations can have a short-term adverse effect on the Registrant's
sales.
In addition, some observers believe that the short-term attractiveness of
"luxury" goods may have waned in certain markets, thus reducing demand. This
could adversely affect the Registrant's sales and margins.
Uncertainty surrounding the current global economic environment makes it
more difficult for the Registrant to forecast operating results. The
Registrant's forecasts employ the use of estimates and assumptions. Actual
results could differ from forecasts, and those differences could be material.
(ii) Risk: that sales will decline or remain flat in the Registrant's fourth
fiscal quarter, which includes the holiday selling season.
The Registrant's business is seasonal in nature, with the fourth quarter
typically representing at least one-third of annual net sales and approximately
one-half of annual net earnings. Poor sales results during the Registrant's
fourth quarter will have a material adverse effect on the Registrant's sales and
profits.
(iii) Risk: that regional instability and conflict will disrupt tourist travel.
Unsettled regional and global conflicts or crises which 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 Registrant operates retail stores could adversely affect the
Registrant's sales and profits.
(iv) Risk: that foreign currencies will weaken against the U.S. dollar and
require the Registrant to raise prices or shrink profit margins in locations
outside of the U.S.
The Registrant operates retail stores and boutiques in various countries
outside of the U.S. and, as a result, is exposed to market risk from
fluctuations in foreign currency exchange rates. The Registrant's sales in those
countries represented 46% of its net sales, of which Japan represented 19% of
net sales, in Fiscal 2008. A substantial weakening of foreign currencies against
the U.S. dollar would require the Registrant to raise its retail prices or
reduce its profit margins in various locations outside of the U.S. Consumers in
those markets may not accept significant price increases on the Registrant's
goods; thus, there is a risk that a substantial weakening of foreign currencies
will result in reduced sales or profit margins.
(v) Risk: that the current volatile global economy may have a material adverse
effect on the Company's liquidity and capital resources.
29
U.S. and global credit and equity markets have recently undergone
significant disruption, making it difficult for many businesses to obtain
financing on acceptable terms. A prolonged downturn in the economy, extending
further than those included in management's projections, could have an effect on
the Registrant's cost of borrowing, could diminish its ability to service or
maintain existing financing, and could make it more difficult for the Registrant
to obtain additional financing or to refinance existing long-term obligations.
In addition, increased disruption in the markets could lead to the failure of
financial institutions. If any of the banks participating in the Registrant's
revolving credit facility were to declare bankruptcy, the Registrant would no
longer have access to those committed funds.
Further deterioration in the stock market could continue to negatively
impact the valuation of pension plan assets and result in increased minimum
funding requirements.
(vi) Risk: that the Registrant will be unable to continue to offer merchandise
designed by Elsa Peretti.
The Registrant's long-standing right to sell the jewelry designs of Elsa
Peretti and use her trademark is responsible for a substantial portion of the
Registrant's revenues. Merchandise designed by Ms. Peretti accounted for 11% of
Fiscal 2008 net sales. Tiffany has an exclusive license arrangement with Ms.
Peretti; this arrangement is subject to royalty payments as well as other
requirements. This license may be terminated by Tiffany or Ms. Peretti on six
months notice, even in the case where no default has occurred. Also, no
agreement has been made for the continued sale of the designs or use of the
trademarks ELSA PERETTI following the death of Ms. Peretti. Loss of this license
would materially adversely affect the Registrant's business through lost sales
and profits.
(vii) Risk: that changes in prices of diamonds and precious metals or reduced
supply availability might adversely affect the Registrant's ability to produce
and sell products at desired profit margins.
Most of the Registrant's jewelry and non-jewelry offerings are made with
diamonds, gemstones and/or precious metals. A significant change in the prices
of these commodities could adversely affect the Registrant's business, which is
vulnerable to the risks inherent in the trade for such commodities. A
substantial increase in the price of raw materials and/or high-quality rough and
polished diamonds within the quality grades, colors and sizes that customers
demand could lead to decreased customer demand and lost sales and/or reduced
gross profit margins. Conversely, a decrease in the prices of raw materials
could have a disruptive effect, negatively or positively, on sales demand and
short-term margins.
Acquiring diamonds for the engagement business has, at times, been
difficult because of supply limitations; Tiffany may not be able to maintain a
comprehensive selection of diamonds in each retail location due to the broad
assortment of sizes, colors, clarity grades and cuts demanded by customers. A
substantial increase or decrease in the supply of raw materials and/or
high-quality rough and polished diamonds within the quality grades, colors and
sizes that customers demand could lead to decreased customer demand and lost
sales and/or reduced gross profit margins.
If trade relationships between the Registrant and one or more of its
significant vendors were disrupted, the Registrant's sales could be adversely
affected in the short-term until alternative supply arrangements could be
established.
(viii) Risk: that the value of the TIFFANY & CO. trademark will decline due to
the sale of counterfeit merchandise by infringers.
The TIFFANY & CO. trademark is an asset which is essential to the
competitiveness and success of the Registrant's business and the Registrant
takes appropriate action to protect it. Tiffany actively pursues those who
produce or sell counterfeit TIFFANY & CO. goods through civil action and
cooperation with criminal law enforcement agencies. However, the Registrant's
enforcement actions have not stopped the imitation and counterfeit of the
Registrant's merchandise or the infringement of the trademark, and counterfeit
TIFFANY & CO. goods remain available in many markets. In recent years, there has
been an increase in the availability of counterfeit goods, predominantly silver
jewelry, in various markets by street vendors and small retailers, as well as on
the Internet. The continued sale of counterfeit merchandise could have an
adverse effect on the TIFFANY & CO. brand by undermining Tiffany's reputation
for quality goods and making such goods appear less desirable to consumers of
luxury goods. Damage to the brand would result in lost sales and profits.
(ix) Risk: that the Registrant will be unable to lease sufficient space for its
retail stores in prime locations.
30
The Registrant, positioned as a luxury goods retailer, has established its
retail presence in choice store locations. If the Registrant cannot secure and
retain locations on suitable terms in prime and desired luxury shopping
locations, its expansion plans, sales and profits will be jeopardized. In
addition, if any other high-end retailers were to close locations adjacent to or
near the Company's stores, it could affect the appeal of that shopping center
and reduce overall customer traffic.
In Japan, many of the retail locations are located in department stores.
TIFFANY & CO. boutiques located in department stores in Japan represented 79% of
net sales in Japan and 15% of consolidated net sales in Fiscal 2008. In recent
years, the Japanese department store industry has, in general, suffered
declining sales and there is a risk that such financial difficulties will force
further consolidations or store closings. Should one or more Japanese department
store operators elect or be required to close one or more stores now housing a
TIFFANY & CO. boutique, the Registrant's sales and profits would be reduced
while alternative premises were being obtained. The Registrant's commercial
relationships with department stores in Japan, and their abilities to continue
as leading department store operators, have been and will continue to be
substantial factors in the Registrant's continued success in Japan.
(x) Risk: that the Registrant's business is dependent upon the distinctive
appeal of the TIFFANY & CO. brand.
The TIFFANY & CO. brand's association with quality, luxury and exclusivity
is integral to the success of the Registrant's business. The Registrant's
expansion plans for retail and direct selling operations and merchandise
development, production and management support the brand's appeal. Consequently,
poor maintenance, promotion and positioning of the TIFFANY & CO. brand, as well
as market over-saturation, may adversely affect the business by diminishing the
distinctive appeal of the TIFFANY & CO. brand and tarnishing its image. This
would result in lower sales and profits.
31
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains the Company's stock repurchases of equity
securities in the third quarter of Fiscal 2009:
Issuer Purchases of Equity Securities
(d) Maximum Number
(c) Total Number of (or Approximate Dollar
Shares (or Units) Value) of Shares, (or
(a) Total Number of (b) Average Purchased as Part of Units) that May Yet Be
Shares (or Units) Price Paid per Publicly Announced Purchased Under the
Period Purchased Share (or Unit) Plans or Programs Plans or Programs
-----------------------------------------------------------------------------------------------------------------------
August 1, 2009 to -- -- -- $402,427,000
August 31, 2009
September 1, 2009 to
September 30, 2009 -- -- -- $402,427,000
October 1, 2009 to
October 31, 2009 -- -- -- $402,427,000
TOTAL -- -- -- $402,427,000
-----------------------------------------------------------------------------------------------------------------------
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. 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 of up to an additional $700,000,000 of the Company's Common
Stock. In January 2008, the Company's Board of Directors extended the expiration
date of the program to January 2011 and authorized the repurchase of up to an
additional $500,000,000 of the Company's Common Stock.
During the third quarter of 2008, the Company announced that its Board of
Directors had suspended share repurchases, and no repurchases were made during
the fourth quarter of 2008 or in the year-to-date 2009 in order to preserve
cash. Such suspension continued as of the date this quarterly report on Form
10-Q was first filed with the Securities and Exchange Commission. At October 31,
2009, there remained $402,427,000 of authorization for future repurchases.
32
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.
33
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 2, 2009 By: /s/ James N. Fernandez
----------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Exhibit Index
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
