10-Q
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
     
  X 
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
  EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2007.
OR
     
     
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
  EXCHANGE ACT OF 1934
For the transition period from             to                   .
Commission file number: 1-9494
TIFFANY & CO.
(Exact name of registrant as specified in its charter)
     
Delaware
  13-3228013
(State of incorporation)
  (I.R.S. Employer Identification No.)
 
   
727 Fifth Ave. New York, NY
  10022
(Address of principal executive offices)
  (Zip Code)
Registrant’s telephone number, including area code:                    (212) 755-8000
Former name, former address and former fiscal year, if changed since last report          .
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    X   . No       .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One).
         
Large Accelerated filer   X    Accelerated filer         Non-Accelerated filer      
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes       . No    X  .
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: Common Stock, $.01 par value, 136,722,420 shares outstanding at the close of business on July 31, 2007.


 

TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2007
 
 
             
PART I - FINANCIAL INFORMATION   PAGE
             
Item 1.  
Financial Statements
       
             
   
Condensed Consolidated Balance Sheets - July 31, 2007, January 31, 2007 and July 31, 2006 (Unaudited)
      3
             
   
Condensed Consolidated Statements of Earnings - for the three and six months ended July 31, 2007 and 2006 (Unaudited)
      4
             
   
Condensed Consolidated Statements of Stockholders’ Equity - for the six months ended July 31, 2007 and Comprehensive Earnings - for the three and six months ended July 31, 2007 and 2006 (Unaudited)
      5
             
   
Condensed Consolidated Statements of Cash Flows - for the six months ended July 31, 2007 and 2006 (Unaudited)
      6
             
   
Notes to Condensed Consolidated Financial Statements (Unaudited)
      7-12
             
Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
      13-20
             
Item 3.  
Quantitative and Qualitative Disclosures About Market Risk
      21
             
Item 4.  
Controls and Procedures
      22
             
             
PART II - OTHER INFORMATION        
             
             
Item 1A.  
Risk Factors
      23
             
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
      24
             
Item 4.  
Submission of Matters to a Vote of Security Holders
      25
             
Item 6.  
Exhibits
      26
             
   
(a) Exhibits
       


 

PART I. Financial Information
Item 1. Financial Statements
TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)
                         
    July 31,     January 31,     July 31,  
    2007     2007     2006  
ASSETS
                       
 
                       
Current assets:
                       
Cash and cash equivalents
    $     129,027       $     175,008       $     144,868  
Short-term investments
    -       15,500       -  
Accounts receivable, less allowances of
$6,133, $7,900 and $7,095
    152,353       165,594       141,724  
Inventories, net
    1,253,657       1,146,674       1,174,319  
Deferred income taxes
    104,185       72,934       79,882  
Prepaid expenses and other current assets
    79,816       57,460       60,936  
Assets held for sale
    48,900       73,474       68,467  
 
           
 
                       
Total current assets
    1,767,938       1,706,644       1,670,196  
 
                       
Property, plant and equipment, net
    945,280       912,143       888,249  
Deferred income taxes
    51,100       37,368       28,072  
Other assets, net
    168,180       156,097       164,180  
Assets held for sale - noncurrent
    -       33,258       36,329  
 
           
 
                       
 
    $     2,932,498       $     2,845,510       $     2,787,026  
 
           
 
                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
 
                       
Current liabilities:
                       
Short-term borrowings
    $     130,995       $     106,681       $     142,215  
Current portion of long-term debt
    5,455       5,398       6,272  
Accounts payable and accrued liabilities
    164,164       198,471       185,312  
Income taxes payable
    28,147       62,979       31,333  
Merchandise and other customer credits
    64,600       61,511       57,577  
Liabilities held for sale
    14,544       17,631       14,123  
 
           
 
                       
Total current liabilities
    407,905       452,671       436,832  
 
                       
Long-term debt
    400,643       406,383       423,819  
Pension/postretirement benefit obligations
    95,204       84,466       75,825  
Other long-term liabilities
    132,858       92,718       85,812  
Liabilities held for sale - noncurrent
    -       4,377       4,187  
 
                       
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 136,722, 135,875 and 138,139
    1,368       1,358       1,381  
Additional paid-in capital
    619,456       536,187       504,678  
Retained earnings
    1,265,992       1,269,940       1,237,237  
Accumulated other comprehensive gain (loss), net of tax:
                       
Foreign currency translation adjustments
    24,802       11,846       16,050  
Deferred hedging gain
    92       2,046       655  
Unrealized gain on marketable securities
    155       178       550  
Net unrealized losses on benefit plans
    (15,977 )     (16,660 )     -  
 
           
 
                       
Total stockholders’ equity
    1,895,888       1,804,895       1,760,551  
 
           
 
                       
 
    $     2,932,498       $     2,845,510       $     2,787,026  
 
           
See notes to condensed consolidated financial statements.

3


 

TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,  
    2007     2006     2007     2006  
 
                               
Net sales
   $ 662,562      $ 554,657      $ 1,258,291      $ 1,070,013  
 
                               
Cost of sales
    296,449       244,214       564,850       468,443  
 
               
 
                               
Gross profit
    366,113       310,443       693,441       601,570  
 
                               
Selling, general and administrative expenses
    259,119       233,565       505,160       449,758  
 
               
 
                               
Earnings from continuing operations
    106,994       76,878       188,281       151,812  
 
                               
Other expenses, net
    2,748       5,214       5,833       9,143  
 
               
 
                               
Earnings from continuing operations before income taxes
    104,246       71,664       182,448       142,669  
 
                               
Provision for income taxes
    41,027       26,950       69,824       54,471  
 
               
 
                               
Net earnings from continuing operations
    63,219       44,714       112,624       88,198  
 
                               
Loss from discontinued operations, net of tax benefits
    (26,246 )     (3,570 )     (25,992 )     (3,912 )
 
               
 
                               
Net earnings
   $ 36,973      $ 41,144      $ 86,632      $ 84,286  
 
               
 
                               
 
                               
Earnings per share:
                               
 
                               
Basic
                               
Net earnings from continuing operations
   $ 0.46      $ 0.32      $ 0.82      $ 0.63  
Loss from discontinued operations
    (0.19 )     (0.02 )     (0.19 )     (0.03 )
 
               
Net earnings
   $ 0.27      $ 0.30      $ 0.63      $ 0.60  
 
               
 
                               
Diluted
                               
Net earnings from continuing operations
   $ 0.45      $ 0.32      $ 0.80      $ 0.62  
Loss from discontinued operations
    (0.19 )     (0.03 )     (0.18 )     (0.03 )
 
               
Net earnings
   $ 0.26      $ 0.29      $ 0.62      $ 0.59  
 
               
 
                               
Weighted-average number of common shares:
                               
Basic
    136,743       139,170       136,616       140,556  
Diluted
    140,325       141,177       140,100       142,896  

See notes to condensed consolidated financial statements.

4


 

TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE EARNINGS
(Unaudited)
(in thousands)
                                                 
                    Accumulated                        
    Total             Other                     Additional  
    Stockholders’     Retained     Comprehensive     Common Stock     Paid-in  
    Equity     Earnings     Gain (Loss )   Shares     Amount     Capital  
 
Balances, January 31, 2007
    $ 1,804,895       $ 1,269,940       $ (2,590 )     135,875       $ 1,358       $ 536,187  
Implementation effect of FIN No. 48
    (4,299 )     (4,299 )     -       -       -       -  
       
Balances, February 1, 2007
    1,800,596       1,265,641       (2,590 )     135,875       1,358       536,187  
 
                                               
Exercise of stock options and vesting of restricted stock units (“RSUs”)
    54,032       -       -       1,977       21       54,011  
Tax benefit from exercise of stock options and vesting of RSUs
    11,033       -       -       -       -       11,033  
Share-based compensation expense
    18,723       -       -       -       -       18,723  
Issuance of Common Stock under Employee Profit Sharing and Retirement Savings Plan
    2,450       -       -       52       1       2,449  
Purchase and retirement of Common Stock
    (59,197 )     (56,238 )     -       (1,182 )     (12 )     (2,947 )
Cash dividends on Common Stock
    (30,043 )     (30,043 )     -       -       -       -  
Deferred hedging loss, net of tax
    (1,954 )     -       (1,954 )     -       -       -  
Unrealized loss on marketable securities, net of tax
    (23 )     -       (23 )     -       -       -  
Foreign currency translation adjustments, net of tax
    12,956       -       12,956       -       -       -  
Amortization of net losses on benefit plans, net of tax
    683       -       683       -       -       -  
Net earnings
    86,632       86,632       -       -       -       -  
     
 
                                               
Balances, July 31, 2007
    $ 1,895,888       $ 1,265,992      $ 9,072       136,722      $ 1,368      $ 619,456  
     
 
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,  
    2007     2006     2007     2006  
Comprehensive earnings are as follows:
                               
Net earnings
    $ 36,973       $ 41,144       $ 86,632       $ 84,286  
Other comprehensive gain (loss), net of tax:
                               
Deferred hedging (loss) gain
    (850 )     984       (1,954 )     (2,592 )
Foreign currency translation adjustments
    3,441       1,857       12,956       10,769  
Unrealized loss on marketable securities
    (283 )     (164 )     (23 )     (129 )
Amortization of net losses on benefit plans
    335       -       683       -  
         
Comprehensive earnings
    $ 39,616       $ 43,821       $ 98,294       $ 92,334  
         



See notes to condensed consolidated financial statements.

5


 

TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
                 
    Six Months Ended  
    July 31,  
    2007     2006  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net earnings
  $ 86,632     $ 84,286  
Loss from discontinued operations, net of tax
    (25,992 )     (3,912 )
 
       
Net earnings from continuing operations
    112,624       88,198  
 
               
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
               
Depreciation and amortization
    61,730       56,754  
Excess tax benefits from share-based payment arrangements
    (9,897 )     (721 )
Provision for inventories
    7,195       4,937  
Deferred income taxes
    (706 )     (13,067 )
Provision for pension/postretirement benefits
    13,402       13,353  
Share-based compensation expense
    18,481       16,423  
Changes in assets and liabilities:
               
Accounts receivable
    18,456       2,450  
Inventories
    (100,911 )     (170,681 )
Prepaid expenses and other current assets
    (18,014 )     (31,511 )
Other assets, net
    (9,270 )     (638 )
Accounts payable and accrued liabilities
    (23,858 )     3,361  
Income taxes payable
    (24,342 )     (28,309 )
Merchandise and other customer credits
    2,845       1,008  
Other long-term liabilities
    3,024       (6,234 )
 
           
Net cash provided by (used in) operating activities
    50,759       (64,677 )
 
       
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of marketable securities and short-term investments
    (217,861 )     (122,529 )
Proceeds from sales of marketable securities and short-term investments
    231,919       122,215  
Capital expenditures
    (87,779 )     (85,978 )
Notes receivable funded
    (2,172 )     -  
Acquisitions, net of cash acquired
    (400 )     -  
Other
    1,799       (286 )
 
           
Net cash used in investing activities
    (74,494 )     (86,578 )
 
       
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from short-term borrowings, net
    17,330       102,933  
Repayment of long-term debt
    (10,082 )     (5,807 )
Repurchase of Common Stock
    (59,197 )     (163,589 )
Proceeds from exercise of stock options
    54,032       3,978  
Excess tax benefits from share-based payment arrangements
    9,897       721  
Cash dividends on Common Stock
    (30,043 )     (25,398 )
 
       
Net cash used in financing activities
    (18,063 )     (87,162 )
 
       
 
               
Effect of exchange rate changes on cash and cash equivalents
    3,817       2,159  
 
       
 
               
CASH FLOWS FROM DISCONTINUED OPERATIONS:
               
Operating activities
    (7,168 )     (8,048 )
Investing activities
    (858 )     (2,361 )
 
       
Net cash used in discontinued operations
    (8,026 )     (10,409 )
 
       
 
               
Net decrease in cash and cash equivalents
    (46,007 )     (246,667 )
Cash and cash equivalents at beginning of year
    175,008       391,594  
Decrease (increase) in cash and cash equivalents of discontinued operations
    26       (59 )
 
       
Cash and cash equivalents at end of six months
  $ 129,027     $ 144,868  
 
       

See notes to condensed consolidated financial statements.

6


 

TIFFANY & CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.  
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
   
The accompanying condensed consolidated financial statements include the accounts of Tiffany & Co. and all majority-owned domestic and foreign subsidiaries (the “Company”). Intercompany accounts, transactions and profits have been eliminated in consolidation. The interim statements are unaudited and, in the opinion of management, include all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position as of July 31, 2007 and 2006 and the results of its operations and cash flows for the interim periods presented. The condensed consolidated balance sheet data for January 31, 2007 is derived from the audited financial statements, which are included in the Company’s Report on Form 10-K and should be read in connection with these financial statements. In accordance with the rules of the Securities and Exchange Commission, these financial statements do not include all disclosures required by generally accepted accounting principles.
 
   
The Company’s business is seasonal, with a higher proportion of sales and earnings generated in the fourth quarter of the fiscal year and, therefore, the results of its operations for the three and six months ended July 31, 2007 and 2006 are not necessarily indicative of the results of the entire fiscal year.
 
2.  
NEW ACCOUNTING STANDARDS
 
   
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” which establishes a framework for measuring fair value of assets and liabilities and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the effect that the adoption of this Statement will have on the Company’s financial position and earnings.
 
   
In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” which clarifies the accounting for uncertainty in income tax positions by prescribing a more-likely-than-not recognition threshold for income tax positions taken or expected to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the change in accounting principle recorded as an adjustment to retained earnings at the beginning of the year. The Company has adopted FIN No. 48 as of February 1, 2007 which resulted in a charge of $4,299,000 to retained earnings as a cumulative effect of an accounting change (see Note 5).
 
3.  
DISCONTINUED OPERATIONS
 
   
Management has concluded that Little Switzerland Inc.’s (“Little Switzerland”) operations do not demonstrate the potential to generate a return on investment consistent with management’s objectives and therefore, during the second quarter of 2007 the Company’s Board of Directors authorized the sale of Little Switzerland. On July 31, 2007, the Company entered into an agreement with NXP Corporation (“NXP”) by which NXP would purchase 100% of the stock of Little Switzerland, Inc. The transaction is expected to close in third quarter of 2007 for proceeds of approximately $35,000,000 which excludes payments for existing trade payables owed to the Company by Little Switzerland. The purchase price is subject to customary post-closing adjustments. The Company has agreed to continue to distribute TIFFANY & CO merchandise through TIFFANY & CO. boutiques maintained in certain LITTLE SWITZERLAND stores post-closing. In addition, the Company has agreed to provide warehousing services to Little Switzerland for a transition period.
 
   
The Company has determined that the continuing cash flows from Little Switzerland operations were not significant. Therefore, the results of Little Switzerland are presented as a discontinued operation in the consolidated financial statements for all periods presented. Prior to the reclassification, Little Switzerland’s results were included within the non-reportable segment Other.

7


 

3.  
DISCONTINUED OPERATIONS (continued)
 
   
The loss before income taxes of Little Switzerland includes a $54,861,000 pre-tax impairment charge ($23,583,000 after-tax) reflecting the difference between Little Switzerland’s carrying value and its estimated fair value, less costs to dispose. The tax benefit recorded in connection with the impairment charge included the effect of basis differences in the investment in Little Switzerland.
 
   
Summarized statement of earnings data for Little Switzerland is as follows:
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,  
(in thousands)   2007     2006     2007     2006  
 
 
                               
Net revenues
      $ 18,294         $ 20,283         $ 43,439         $ 44,168  
     
 
                               
Loss before income taxes
      $ (58,404 )       $ (4,335 )       $ (58,369 )       $ (5,068 )
Benefit from income taxes
    (32,158 )     (765 )     (32,377 )     (1,156 )
     
Loss from discontinued
operations, net of tax
      $ (26,246 )       $ (3,570 )       $ (25,992 )       $ (3,912 )
     
   
Summarized balance sheet data for Little Switzerland is as follows:
                         
    July 31,     January 31,     July 31,  
(in thousands)   2007     2007     2006  
 
Assets held for sale
                       
Inventories, net
      $          66,728       $ 67,948         $          62,676  
Other current assets
    5,026       5,526       5,791  
Property, plant and equipment, net
    19,307       20,246       16,231  
Other assets
    12,700       13,012       20,098  
Impairment charge
    (54,861 )     -       -  
     
Total assets held for sale
      $ 48,900       $      106,732         $ 104,796  
     
Liabilities held for sale
                       
Current liabilities
      $ 9,268       $ 17,631         $ 14,123  
Other liabilities
    5,276       4,377       4,187  
     
Total liabilities held for sale
      $ 14,544       $ 22,008         $ 18,310  
     
4.  
INVENTORIES
                         
    July 31,     January 31,     July 31,  
(in thousands)   2007     2007     2006  
 
Finished goods
      $     840,479         $    772,102       $ 785,102  
Raw materials
    339,964       316,206       318,095  
Work-in-process
    73,214       58,366       71,122  
     
Inventories, net
      $ 1,253,657         $    1,146,674       $      1,174,319  
     
   
LIFO-based inventories at July 31, 2007, January 31, 2007 and July 31, 2006 represented 71%, 72% and 75% of inventories, net, with the current cost exceeding the LIFO inventory value by $120,940,000, $108,501,000 and $85,091,000 at the end of each period.

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5.  
INCOME TAXES
 
   
The Company adopted FIN No. 48 on February 1, 2007. As a result, the Company recorded a non-cash cumulative transition charge of $4,299,000 as a reduction to the opening retained earnings balance. As of February 1, 2007, the gross amount of unrecognized tax benefits was approximately $40,000,000, which includes interest and penalties of approximately $8,000,000. The total amount of unrecognized tax benefits that, if recognized, would have affected the effective tax rate was approximately $22,500,000. The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense.
 
   
During the six months ended July 31, 2007, there were no material changes to the unrecognized tax liability as a result of state audit settlements or the expiration of the statute of limitations. The change in accrued interest and penalties during the six months ended July 31, 2007 was not material.
 
   
The Company files income tax returns in the U.S. federal jurisdiction as well as various state and foreign locations. 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 U.S. Federal (tax years 2003-2004), Japan (tax years 2003-2005), New York State and New York City (tax years 1999-2002). Tax years from 2003-present are open to examination in various other state and foreign taxing jurisdictions. The Company believes that its tax positions comply with applicable tax law 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. Ongoing audits are in various stages of completion and while the Company does not anticipate any material changes in unrecognized income tax benefits over the next 12 months it is possible that developments in the audit process could impact this assessment.
 
6.  
EARNINGS PER SHARE
 
   
Basic earnings per share is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the dilutive effect of the assumed exercise of stock options and vesting of restricted stock units.
 
   
The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted earnings per share (“EPS”) computations:
                                 
             Three Months Ended     Six Months Ended  
              July 31, 2007     July 31, 2006  
(in thousands)   2007     2006     2007     2006  
 
 
                               
Net earnings for basic and
diluted EPS
      $      36,973         $      41,144         $      86,632         $      84,286  
     
 
                               
Weighted average shares
for basic EPS
    136,743       139,170       136,616       140,556  
 
                               
Incremental shares based
upon the assumed exercise
of stock options and
restricted stock units
    3,582       2,007       3,484       2,340  
     
 
                               
Weighted average shares for
diluted EPS
    140,325       141,177       140,100       142,896  
     
   
For the three months ended July 31, 2007 and 2006, there were 388,000 and 6,672,000 stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect. For the six months ended July 31, 2007 and 2006, there were 388,000 and 5,221,000 stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect.

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7.  
EMPLOYEE BENEFIT PLANS
 
   
The Company maintains several pension and retirement plans, as well as provides certain health-care and life insurance benefits.
 
   
Net periodic pension and other postretirement benefit expense included the following components:
                                 
    Three Months Ended July 31,  
                    Other  
    Pension Benefits     Postretirement Benefits  
(in thousands)   2007     2006     2007     2006  
 
Service cost
      $ 4,613         $ 4,140         $ 317         $ 376  
Interest cost
    4,014       3,550       470       429  
Expected return on plan assets
    (3,429 )     (2,944 )     -       -  
Amortization of prior service cost
    320       178       (224 )     (293 )
Amortization of net loss
    729       1,161       10       85  
     
Net expense
      $ 6,247         $ 6,085         $ 573         $ 597  
     
                                 
    Six Months Ended July 31,  
                    Other  
    Pension Benefits     Postretirement Benefits  
(in thousands)   2007     2006     2007     2006  
 
Service cost
      $ 9,160         $ 8,271         $ 635         $ 752  
Interest cost
    7,942       7,098       940       858  
Expected return on plan assets
    (6,858 )     (5,888 )     -       -  
Amortization of prior service cost
    641       356       (447 )     (586 )
Amortization of net loss
    1,369       2,322       20       170  
     
Net expense
      $ 12,254         $ 12,159         $ 1,148         $ 1,194  
     
8.  
SEGMENT INFORMATION
 
   
The Company’s reportable segments are: U.S. Retail, International Retail and Direct Marketing. These reportable segments represent channels of distribution that offer similar merchandise and service and have similar marketing and distribution strategies. The Other channel of distribution includes all non-reportable segments which consist of worldwide sales of businesses operated under trademarks or tradenames other than TIFFANY & CO. Other also includes wholesale sales of diamonds obtained through bulk purchases that are subsequently deemed not suitable for the Company’s needs. In deciding how to allocate resources and assess performance, the Company’s Executive Officers regularly evaluate the performance of its reportable segments on the basis of net sales and earnings from operations, after the elimination of inter-segment sales and transfers.
 
   
Reclassifications were made to the prior year’s segment amounts to conform to the current year presentation and to reflect the revised manner in which management evaluates the performance of segments. Effective with the first quarter of 2007, the Company revised certain allocations of operating expenses between unallocated corporate expenses and earnings (losses) from continuing operations for segments.

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8.  
SEGMENT INFORMATION (continued)
 
   
Certain information relating to the Company’s segments is set forth below:
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,  
(in thousands)   2007     2006     2007     2006  
 
Net sales:
                               
U.S. Retail
      $ 345,336         $ 288,556         $ 644,019         $ 549,136  
International Retail
    259,023       223,153       507,030       438,317  
Direct Marketing
    40,103       35,742       73,399       65,699  
     
Total reportable segments
    644,462       547,451       1,224,448       1,053,152  
Other
    18,100       7,206       33,843       16,861  
     
 
      $ 662,562         $ 554,657         $ 1,258,291         $ 1,070,013  
     
 
                               
Earnings (losses)
from continuing operations*:
                               
U.S. Retail
      $ 64,611         $ 43,974         $ 108,215         $ 86,115  
International Retail
    61,652       51,769       122,183       105,220  
Direct Marketing
    13,379       10,149       21,635       17,266  
     
Total reportable segments
    139,642       105,892       252,033       208,601  
Other
    (4,796 )     (3,331 )     (9,292 )     (6,218 )
     
 
      $ 134,846         $ 102,561         $ 242,741         $ 202,383  
     
   
*Represents earnings (losses) from operations before unallocated corporate expenses and other expenses, net.
 
   
The following table sets forth a reconciliation of the segments’ earnings from continuing operations to the Company’s consolidated earnings before income taxes:
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,  
(in thousands)   2007     2006     2007     2006  
 
Earnings from continuing operations for
                               
segments
      $ 134,846         $ 102,561         $ 242,741         $ 202,383  
 
                               
Unallocated corporate
                               
expenses
    (27,852 )     (25,683 )     (54,460 )     (50,571 )
 
                               
Other expenses, net
    (2,748 )     (5,214 )     (5,833 )     (9,143 )
     
 
                               
Earnings from continuing
operations before income
taxes
      $ 104,246         $ 71,664         $ 182,448         $ 142,669  
     
   
Unallocated corporate expenses include certain costs related to administrative support functions which the Company does not allocate to its segments. Such unallocated costs include those for information technology, finance, legal and human resources.

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9.  
SUBSEQUENT EVENTS
 
   
In August 2007, the Company’s Board of Directors declared a 25% increase in the quarterly rate on its Common Stock, increasing it from $0.12 per share to $0.15 per share. This dividend will be paid on October 10, 2007 to stockholders of record on September 20, 2007.
 
   
In August 2007, the Company entered into a sale-leaseback arrangement for the land and building housing the TIFFANY & CO. Flagship store in Tokyo’s Ginza shopping district. The Company is leasing back only the portion of the property that it currently occupies. In the third quarter of 2007, the Company received proceeds of $328,000,000 (yen 38,050,000,000) and the transaction is expected to result in a pre-tax gain of approximately $104,000,000, and a deferred gain of approximately $75,000,000 which will be amortized over a 15-year period. The pre-tax gain represents the profit on the sale of the property in excess of the present value of the minimum lease payments. The lease will be accounted for as an operating lease. The lease expires in 2032, however, the Company has the option to terminate the lease in 2022 and 2027 without penalty.

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PART I.
  Financial Information
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Tiffany & Co. is a holding company that operates through its subsidiary companies (the “Company”). The Company’s principal subsidiary, Tiffany and Company, is a jeweler and specialty retailer whose principal merchandise offerings are an extensive selection of fine jewelry. It also sells timepieces, sterling silverware, china, crystal, stationery, fragrances and accessories. Through Tiffany and Company and other subsidiaries, the Company is engaged in product design, manufacturing and retailing activities.
The Company’s channels of distribution are as follows:
 
U.S. Retail includes sales in TIFFANY & CO. stores in the U.S., as well as sales of TIFFANY & CO. products through business-to-business direct selling operations in the U.S.;
 
 
International Retail includes sales in TIFFANY & CO. stores and department store boutiques outside the U.S., as well as business-to-business, Internet and wholesale sales of TIFFANY & CO. products outside the U.S.;
 
 
Direct Marketing includes Internet and catalog sales of TIFFANY & CO. products in the U.S.; and
 
 
Other includes worldwide sales of businesses operated under trademarks or tradenames other than TIFFANY & CO. (“specialty retail”). Other also includes wholesale sales of diamonds obtained through bulk purchases that are subsequently deemed not suitable for the Company’s needs.
All references to years relate to fiscal years ended or ending on January 31 of the following calendar year.
Highlights
 
Net sales increased 19% in the three months (“second quarter”) ended July 31, 2007 and 18% in the six months (“first half”) ended July 31, 2007 due to growth in all channels of distribution.
 
 
Worldwide comparable store sales increased 13% in the second quarter and 11% in the first half on a constant-exchange-rate basis (see Non-GAAP Measures). Comparable TIFFANY & CO. store sales in the U.S. increased 17% in the second quarter and 15% in the first half. Comparable international store sales increased 7% in the second quarter and 6% in the first half as growth in most countries more than offset declines in Japan.
 
 
Net earnings from continuing operations rose 41% in the second quarter and 28% in the first half. Net earnings declined 10% in the second quarter and rose 3% in the first half.
 
 
In July 2007, the Company entered into an agreement to sell 100% of the stock of Little Switzerland, Inc. The Company recorded an after-tax impairment charge of $23,583,000 reflecting the difference between Little Switzerland’s carrying value and its estimated fair value, less costs to dispose. The results of Little Switzerland (including the impairment charge) are presented in discontinued operations in the consolidated financial statements for all periods presented.
 
 
The Company repurchased and retired 0.7 million and 1.2 million shares of its Common Stock during the second quarter and first half of 2007.
 
 
In May 2007, the Board of Directors increased the annual divided rate by 20%.
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 international 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 measure 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

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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:
                         
    Second Quarter 2007 vs. 2006   First Half 2007 vs. 2006
        Trans-   Constant-       Trans-   Constant-
    GAAP   lation   Exchange-   GAAP   lation   Exchange-
    Reported   Effect   Rate Basis   Reported   Effect   Rate Basis
         
Net Sales:                        
                         
Worldwide   19%   (1)%   20%   18%   1%   17%
                         
U.S. Retail   20%   -   20%   17%   -   17%
                         
International Retail   16%   (1)%   17%   16%   1%   15%
                         
Japan Retail   (7)%   (6)%   (1)%   (5)%   (4)%   (1)%
                         
Other Asia-Pacific   42%   4%   38%   38%   3%   35%
                         
Europe   43%   9%   34%   35%   10%   25%
                         
Comparable Store Sales:                        
                         
Worldwide   13%   -   13%   11%   -   11%
                         
U.S. Retail   17%   -   17%   15%   -   15%
                         
International Retail   6%   (1)%   7%   6%   -   6%
                         
Japan Retail   (12)%   (6)%   (6)%   (10)%   (4)%   (6)%
                         
Other Asia-Pacific   27%   3%   24%   27%   3%   24%
                         
Europe   31%   8%   23%   28%   11%   17%
RESULTS OF OPERATIONS
Certain operating data as a percentage of net sales were as follows:
                                 
               Second Quarter                 First Half  
    2007     2006     2007     2006  
         
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
 
                               
Cost of sales
    44.7       44.0       44.9       43.8  
         
 
                               
Gross profit
    55.3       56.0       55.1       56.2  
 
                               
Selling, general and administrative expenses
    39.1       42.1       40.1       42.0  
         
 
                               
Earnings from continuing operations
    16.2       13.9       15.0       14.2  
 
                               
Other expenses, net
    0.5       1.0       0.5       0.9  
         
 
                               
Earnings from continuing operations
    15.7       12.9       14.5       13.3  
before income taxes
                               
 
                               
Provision for income taxes
    6.2       4.8       5.5       5.1  
         
 
                               
Net earnings from continuing operations
    9.5       8.1       9.0       8.2  
 
                               
Loss from discontinued operations, net of tax benefits
    3.9       0.7       2.1       0.3  
         
 
                               
Net earnings
    5.6 %     7.4 %     6.9 %     7.9 %
         

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Net Sales
Net sales by channel of distribution were as follows:
                         
    Second Quarter  
(in thousands)   2007     2006     Increase  
 
 
                       
U.S. Retail
      $           345,336         $           288,556       20 %
 
                       
International Retail
    259,023       223,153       16 %
 
                       
Direct Marketing
    40,103       35,742       12 %
 
                       
Other
    18,100       7,206       151 %
     
 
                       
 
      $ 662,562         $ 554,657       19 %
     
                         
    First Half  
(in thousands)   2007     2006     Increase  
 
                       
U.S. Retail
      $           644,019         $           549,136       17 %
 
                       
International Retail
    507,030       438,317       16 %
 
                       
Direct Marketing
    73,399       65,699       12 %
 
                       
Other
    33,843       16,861       101 %
     
 
                       
 
      $ 1,258,291         $ 1,070,013       18 %
     
A store’s sales are included in “comparable store sales” when the store has been open for more than 12 months. In markets except Japan, sales for relocated stores are included in comparable store sales if the relocation occurs within the same geographical market. In Japan, sales for a new store or boutique are not included if the store was relocated from one department store to another or from a department store to a free-standing location. In all markets, the results of a store in which the square footage has been expanded or reduced remain in the comparable store base.
U.S. Retail sales increased 20% in the second quarter and 17% in the first half as a result of comparable store sales growth of 17% and 15% in those periods and the opening of new stores. In the second quarter and first half, the New York Flagship store’s sales increased 31% and 29%, and comparable branch store sales increased 14% and 12%. Comparable store sales growth resulted primarily from increases in the average sales amount per transaction. The increased amount per transaction reflected strong sales of diamond jewelry. In addition, the New York Flagship store benefited from higher levels of sales to foreign visitors. Management currently expects a low double-digit percentage increase in full year 2007 U.S. comparable store sales.
International Retail sales, on a constant-exchange-rate basis, increased 17% in the second quarter and 15% in the first half. Comparable store sales rose 7% and 6% for those periods.
In Japan (which represents slightly less than half of International Retail sales), on a constant-exchange-rate basis, total retail sales declined 1% in both the second quarter and first half due to a decrease in unit volume partly offset by an increase in the average transaction size. Comparable store sales on a constant-exchange-rate basis declined 6% in both the second quarter and first half. Despite the sales decline the Company continues to make progress on expanding and furthering developing relationships with key customers, introducing new products, with particular focus in the silver jewelry category and by enhancing retail branches through renovation, expansion and relocation.
In the Asia-Pacific region outside Japan, comparable store sales on a constant-exchange-rate basis increased 24% in both the second quarter and in the first half due to growth in most markets.
In Europe, comparable store sales on a constant-exchange-rate basis increased 23% in the second quarter and 17% in the first half due to growth in London (which represents more than half of Europe’s sales) and all Continental European markets.
Management currently expects a high single-digit percentage increase on a constant-exchange-rate basis in full year 2007 International Retail comparable store sales.
Direct Marketing sales rose 12% in both the second quarter and first half due to growth both in the number of orders shipped and in the average order size. Management continues to expect a mid-teens percentage increase in full year 2007 Direct Marketing sales.

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Other sales increased in the second quarter and in the first half primarily due to increased wholesale sales of diamonds, which increased from $5,525,000 in the prior year second quarter to $15,636,000 in the second quarter of 2007 and increased from $13,927,000 in prior year first half to $29,274,000 in the first half of 2007. IRIDESSE store sales increased largely due to an increased store base, as well as comparable store sales growth. Management currently expects an approximately 40% increase in full year 2007 sales within the Other channel of distribution.
Management expects to increase the number of Company-operated TIFFANY & CO. stores and boutiques by approximately 10% (net) in 2007. Management’s announced openings and closings of TIFFANY & CO. stores are shown below:
         
    Actual Openings   Expected
Location   (Closings) 2007   Openings 2007
Americas:
       
Austin, Texas
  First Quarter    
New York-Wall Street, New York
      Third Quarter
Las Vegas – Forum Shops, Nevada
      Third Quarter
Natick, Massachusetts
      Third Quarter
Red Bank, New Jersey
      Fourth Quarter
Providence, Rhode Island
      Fourth Quarter
Santa Barbara, California
      Fourth Quarter
Mexico City, Mexico
      Third Quarter
Japan:
       
Tokyo-Shibuya, Japan
  First Quarter    
Tokyo-Shinjuku, Japan
  First Quarter    
Hiroshima, Japan
  First Quarter    
Hoshigaoka, Japan
  (First Quarter)    
Okinawa, Japan
  (First Quarter)    
Nagoya, Japan
      Third Quarter
Other Asia-Pacific:
       
Changi Airport, Singapore
  First Quarter    
Seoul, Korea
  First Quarter    
Kuala Lumpur, Malaysia
      Third Quarter
Kowloon Station, Hong Kong
      Third Quarter
Macau, China
      Third Quarter
Europe:
       
Hamburg, Germany
  Second Quarter    
London-Selfridges, England
      Third Quarter
Bologna, Italy
      Fourth Quarter
Gross Margin
Gross margin (gross profit as a percentage of net sales) declined in the second quarter by 0.7 percentage points. The primary components of the net decline were: (i) a 1.0 percentage point decline due to increased low-margin wholesale sales of diamonds; and (ii) a 0.4 percentage point decline due to a shift in geographic mix partly offset by (iii) a 0.6 percentage point increase due to the leverage effect of fixed product-related costs, which includes costs associated with merchandising and distribution. Gross margin declined in the first half by 1.1 percentage points. The primary components of the net decline were: (i) a 0.7 percentage point decline due to increased low-margin wholesale sales of diamonds; (ii) a 0.5 percentage point decline due to increased product costs and changes in sales mix; and (iii) a 0.4 percentage decline due to a shift in geographic mix partly offset by (iv) a 0.5 percentage point increase due to the leverage effect of fixed product-related costs.
Management’s objective is to improve gross margin through greater product manufacturing/sourcing efficiencies (including increased direct rough-diamond sourcing and internal manufacturing), increased use of distribution center capacity, and selective price adjustments to address higher product costs. Management currently expects a slight decline in full year 2007 gross margin.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses increased $25,554,000, or 11%, in the second quarter largely due to increased labor and benefit costs of $9,316,000 and increased depreciation and occupancy expenses of $7,492,000, (both of which are largely

16


 

due to new and existing stores), as well as an increase of $3,227,000 in marketing expenses. SG&A expenses increased $55,402,000, or 12%, in the first half largely due to increased labor and benefit costs of $21,800,000 and increased depreciation and occupancy expenses of $15,283,000, (both of which are largely due to new and existing stores), as well as an increase of $8,390,000 in marketing expenses. SG&A expenses as a percentage of net sales improved by 3.0 percentage points to 39.1% in the second quarter and by 1.9 percentage points to 40.1% in the first half of 2007. Strong sales growth in the second quarter provided for significant leveraging of fixed costs.
Management’s objective is to improve the ratio of SG&A expenses to net sales by controlling expenses so that sales growth can result in a higher rate of earnings growth (leveraging of operating expenses). Management continues to expect an improvement in the expense ratio for the full year 2007.
Earnings from Continuing Operations
Reclassifications were made to prior year’s earnings (losses) from continuing operations by segment to conform to the current year presentation and to reflect the revised manner in which management now evaluates the performance of the segments. Effective with the first quarter of 2007, the Company revised certain allocations of operating expenses between unallocated corporate expenses and earnings (losses) from continuing operations for segments.
                                 
    Second Quarter   % of Net   Second Quarter   % of Net
(in thousands)   2007   Sales*   2006   Sales*
 
Earnings (losses) from continuing operations:
                               
 
                               
U.S. Retail
      $ 64,611       19 %       $ 43,974       15 %
 
                               
International Retail
    61,652       24 %     51,769       23 %
 
                               
Direct Marketing
    13,379       33 %     10,149       28 %
 
                               
Other
    (4,796 )     (26 %)     (3,331 )     (46 %)
     
 
    134,846               102,561          
 
                               
Unallocated corporate expenses
    (27,852 )             (25,683 )        
     
Earnings from continuing operations
      $ 106,994                 $ 76,878          
     
* Percentages represent earnings (losses) from continuing operations as a percentage of each segment’s net sales.
Earnings from continuing operations increased 39% in the second quarter. On a segment basis, the ratio of earnings (losses) from continuing operations (before the effect of unallocated corporate expenses and other expenses, net) to each segment’s net sales in the second quarter of 2007 and 2006 was as follows:
 
U.S. Retail increased 4 percentage points primarily due to the leveraging of operating expenses which benefited from increased sales growth;
 
 
International Retail increased 1 percentage point primarily due the leveraging of operating expenses which benefited from increased sales growth;
 
 
Direct Marketing increased 5 percentage points primarily due to an increase in gross margin (due to the leverage effect of fixed product-related costs) and the leveraging of operating expenses; and
 
 
Other improved 20 percentage points primarily due to sales growth.
                                 
    First Half   % of   First Half   % of
(in thousands)   2007   Sales*   2006   Sales*
 
Earnings (losses) from continuing operations:
                               
 
                               
U.S. Retail
      $ 108,215       17 %       $ 86,115       16 %
 
                               
International Retail
    122,183       24 %     105,220       24 %
 
                               
Direct Marketing
    21,635       29 %     17,266       26 %
 
                               
Other
    (9,292 )     (27 %)     (6,218 )     (37 %)
     
 
    242,741               202,383          
 
                               
Unallocated corporate expenses
    (54,460 )             (50,571 )        
     
 
                               
Earnings from continuing operations
      $ 188,281                 $ 151,812          
     
* Percentages represent earnings (losses) from continuing operations as a percentage of each segment’s net sales.

17


 

Earnings from continuing operations rose 24% in the first half. On a segment basis, the ratio of earnings (losses) from continuing operations (before the effect of unallocated corporate expenses and other expenses, net) to each segment’s net sales in the first half of 2007 and 2006 was as follows:
 
U.S. Retail increased 1 percentage point primarily due to the leveraging of operating expenses which benefited from increased sales growth partly offset by a decline in gross margin (due to changes in product mix and higher product costs);
 
International Retail was consistent with prior year;
 
Direct Marketing increased 3 percentage points primarily due to the leveraging of operating expenses which benefited from increased sales growth and an increase in gross margin (due to the leverage effect of fixed product-related costs); and
 
Other improved 10 percentage points primarily due to sales growth.
Unallocated corporate expenses include certain costs related to administrative support functions which the Company does not allocate to its segments. Such unallocated costs include those for information technology, finance, legal and human resources. Unallocated corporate expenses increased 8% in both the second quarter and first half due primarily to incremental labor costs.
Other Expenses, net
Other expenses, net decreased in the second quarter and first half primarily due to increased foreign currency transaction net gains.
Provision for Income Taxes
The effective income tax rates for the second quarter and first half of 2007 were 39.4% and 38.3%, versus 37.6% and 38.2% in the prior year. Management currently expects the effective tax rate to be approximately 37% for full year 2007.
Loss from discontinued operations, net of tax benefits
The loss from discontinued operations, net of tax benefits included an after-tax impairment charge of $23,583,000 reflecting the difference between Little Switzerland’s carrying value and its estimated fair value, less costs to dispose. See note 3 to condensed consolidated financial statements for additional information.
New Accounting Standards
See note 2 to condensed consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s liquidity needs have been, and are expected to remain, primarily a function of its seasonal and expansion-related working capital and capital expenditures needs. The ratio of total debt (short-term borrowings, current portion of long-term debt and long-term debt) to stockholders’ equity was 28% at July 31, 2007, 29% at January 31, 2007, and 33% at July 31, 2006.
The following table summarizes cash flows from operating, investing and financing activities:
                 
    First Half
(in thousands)   2007     2006  
 
Net cash provided by (used in):
               
Operating activities
              $ 50,759         $ (64,677 )
Investing activities
    (74,494 )     (86,578 )
Financing activities
    (18,063 )     (87,162 )
Effect of exchange rates on cash and cash equivalents
    3,817       2,159  
Net cash used in discontinued operations
    (8,026 )     (10,409 )
     
Net decrease in cash and cash equivalents
              $ (46,007 )       $ (246,667 )
     
Operating Activities
The Company’s net cash inflow from operating activities of $50,759,000 in the first half of 2007 compared with an outflow of $64,677,000 in the first half of 2006. The cash inflow in the first half of 2007 resulted primarily from smaller growth in inventories and increased net earnings from continuing operations.

18


 

Working Capital. Working capital (current assets less current liabilities) and the corresponding current ratio (current assets divided by current liabilities) were $1,360,033,000 and 4.3 at July 31, 2007, compared with $1,253,973,000 and 3.8 at January 31, 2007 and $1,233,364,000 and 3.8 at July 31, 2006.
Accounts receivable, less allowances at July 31, 2007 were 8% lower than at January 31, 2007 primarily due to a decrease in reimbursements from landlords related to new store build-outs and were 7% higher than at July 31, 2006 primarily due to sales growth.
Inventories, net at July 31, 2007 were 9% above January 31, 2007 and 7% above July 31, 2006. Combined raw material and work-in-process inventories increased 10% over January 31, 2007 and 6% over July 31, 2006 due to increased precious metal costs and diamond quantities needed to support internal jewelry manufacturing. Finished goods inventories increased 9% over January 31, 2007, and 7% over July 31, 2006, reflecting new store openings, increased product costs as well as broadened product assortments. Changes in foreign currency exchange rates did not have a significant effect on the changes in inventory balances.
Management continues to expect a high-single-digit percentage increase in inventories, net in 2007.
Investing Activities
The Company’s net cash outflow from investing activities of $74,494,000 in the first half of 2007 compared with an outflow of $86,578,000 in the first half of 2006. The reduction was primarily due to higher net proceeds from the sale of marketable securities and short-term investments in 2007.
Capital Expenditures. Capital expenditures were $87,779,000 in the first half of 2007 compared with $85,978,000 in the first half of 2006. Management estimates that capital expenditures will be approximately $180,000,000 in 2007 (compared with approximately $175,000,000 in the prior year) due to costs related to the opening and renovation of stores and to ongoing investments in new systems.
Financing Activities
The Company’s net cash outflow from financing activities of $18,063,000 in the first half of 2007 compared with an outflow of $87,162,000 in the first half of 2006. The reduced cash outflow was primarily due to reduced share repurchases as well as greater proceeds from the exercise of employees’ stock options partly offset by a reduction in proceeds from short-term borrowings, net.
Share Repurchases. The Company’s stock repurchase activity was as follows:
                 
    Second Quarter
(in thousands, except per share amounts)   2007     2006  
 
Cost of repurchases
              $ 34,200         $ 83,839  
Shares repurchased and retired
    662       2,525  
Average cost per share
              $ 51.69         $ 33.20  
                 
    First Half
(in thousands, except per share amounts)   2007     2006  
 
Cost of repurchases
              $ 59,197         $ 163,589  
Shares repurchased and retired
    1,182       4,704  
Average cost per share
              $ 50.07         $ 34.77  
At July 31, 2007, there remained $636,217,000 of authorization for future repurchases. The Company’s stock repurchase program expires in December 2009. The timing of repurchases and the actual number of shares to be repurchased depend on a variety of discretionary factors such as price and other market conditions.
Borrowings. The Company’s current sources of working capital are internally-generated cash flows and borrowings available under a revolving credit facility.
At July 31, 2007, the Company was in compliance with all loan covenants.

19


 

Contractual Obligations
The Company’s contractual cash obligations and commercial commitments at July 31, 2007 and the effects such obligations and commitments are expected to have on the Company’s liquidity and cash flows in future periods have not significantly changed since January 31, 2007.
The Company adopted the provisions of Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – an amendment of FASB Statement No. 109” on February 1, 2007. During the six months ended July 31, 2007, there were no material changes to the unrecognized tax liability as a result of state audit settlements or the expiration of the statute of limitations. The change in accrued interest and penalties during the six months ended July 31, 2007 was not material. The final outcome of tax uncertainties is dependent upon various matters including tax examinations, interpretation of those tax laws or expiration of statutes of limitations. The Company believes that its tax positions comply with applicable tax law 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. Ongoing audits are in various stages of completion and while the Company does not anticipate any material changes in unrecognized income tax benefits over the next 12 months it is possible that developments in the audit process could impact this assessment.
Based on the Company’s financial position at July 31, 2007, management anticipates that cash on hand, internally-generated cash flows and the funds available under its revolving credit facility will be sufficient to support the Company’s planned worldwide business expansion, share repurchases, debt service and seasonal working capital increases for the foreseeable future.
Seasonality
As a jeweler and specialty retailer, the Company’s business is seasonal in nature, with the fourth quarter typically representing a proportionally greater percentage of annual sales, earnings from operations and cash flow. Management expects such seasonality to continue.
Forward-Looking Statements
This document contains certain “forward-looking statements” concerning the Company’s objectives and expectations with respect to store openings, sales, retail prices, gross margin, expenses, inventory performance, capital expenditures and cash flow. In addition, management makes other forward-looking statements from time to time concerning objectives and expectations. Statements beginning with such words as “believes”, “intends”, “plans”, and “expects” include forward-looking statements that are based on management’s expectations given facts as currently known by management on the date this quarterly report was filed with the Securities and Exchange Commission. All forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
The statements in this quarterly report are made as of the date this report was filed with the Securities and Exchange Commission and the Company undertakes no obligation to update any of the forward-looking information included in this document, whether as a result of new information, future events, changes in expectations or otherwise.

20


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk
     
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, interest rates and precious metal prices, which could affect its consolidated financial position, earnings and cash flows. The Company manages its exposure to market risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company uses derivative financial instruments as risk management tools and not for trading or speculative purposes, and does not maintain such instruments that may expose the Company to significant market risk.
In Japan, the Company uses yen put options to minimize the effect of a weakening yen on U.S. dollar-denominated transactions. To a lesser extent, the Company uses foreign-exchange forward contracts to protect against changes in local currencies. Gains or losses on these instruments substantially offset losses or gains on the assets, liabilities and transactions being hedged. Management neither foresees nor expects significant changes in foreign currency exposure in the near future.
The Company uses interest-rate swap contracts related to certain debt arrangements to manage its net exposure to interest rate changes. The interest-rate swap contracts effectively convert fixed-rate obligations to floating-rate instruments. Additionally, since the fair value of the Company’s fixed-rate long-term debt is sensitive to interest rate changes, the interest-rate swap contracts serve as a hedge to changes in the fair value of these debt instruments. Management does not expect significant changes in exposure to interest rate fluctuations, nor in market risk-management practices.
Beginning in the first quarter of 2007, the Company began using a combination of call and put option contracts in a net-zero cost collar arrangement (“collars”), as hedges of forecasted purchases of precious metals. The Company accounts for its collars as cash-flow hedges. The Company assesses hedge effectiveness based on the total changes in the collars’ cash flows. The effective portion of unrealized gains and losses associated with the value of the collars is deferred as a component of other comprehensive gain (loss) and is recognized as a component of cost of sales on the Company’s condensed consolidated statement of earnings when the inventory is sold. The fair value of the outstanding collars at July 31, 2007 was not significant. The fair value was determined using quoted market prices for these instruments. Management neither foresees nor expects significant changes in exposure to fluctuations in precious metal prices.

21


 

Item 4. Controls and Procedures
     
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), Registrant’s chief executive officer and chief financial officer concluded that, as of the end of the period covered by this report, Registrant’s disclosure controls and procedures are effective to ensure that information required to be disclosed by Registrant in the reports that it files or submits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
          In the ordinary course of business, 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 Registrant maintains an effective internal control environment. Changes may include such activities as implementing new, more efficient systems and automating manual processes.
          Registrant’s chief executive officer and chief financial officer have determined that there have been no changes in Registrant’s internal control over financial reporting during the period covered by this report identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, Registrant’s internal control over financial reporting.
          Registrant’s management, including its chief executive officer and chief financial officer, necessarily applied their judgment in assessing the costs and benefits of such controls and procedures. By their nature, such controls and procedures cannot provide absolute certainty, but can provide reasonable assurance regarding management’s control objectives. Our chief executive officer and our chief financial officer have concluded that Registrant’s disclosure controls and procedures are (i) designed to provide such reasonable assurance and (ii) are effective at that reasonable assurance level.

22


 

Item 1A. Risk Factors
     
PART II.
  Other Information
Item 1A.
  Risk Factors
As a jeweler and specialty retailer, the Company’s success in achieving its objectives and expectations is partially dependent upon economic conditions, competitive developments and consumer attitudes, including changes in consumer preferences for certain jewelry styles and materials. However, certain assumptions are specific to the Company and/or the markets in which it operates.
The following assumptions, among others, are “risk factors” which could affect the likelihood that the Company will achieve the objectives and expectations communicated by management:
(i) that low or negative growth in the economy or in the financial markets, particularly in the U.S. and Japan, will not occur and reduce discretionary spending on goods that are, or are perceived to be, “luxuries”;
(ii) that consumer spending does not decline substantially during the fourth quarter of any year;
(iii) that unsettled regional and/or global conflicts or crises do not result in military, terrorist or other conditions creating disruptions or disincentives to, or changes in the pattern, practice or frequency of, tourist travel to the various regions where the Company operates retail stores nor to the Company’s continuing ability to operate in those regions;
(iv) that sales in Japan will not decline substantially;
(v) that there will not be a substantial adverse change in the exchange relationship between the Japanese yen and the U.S. dollar;
(vi) that Mitsukoshi and other department store operators in Japan, in the face of declining or stagnant department store sales, will not close or consolidate stores which have TIFFANY & CO. retail locations;
(vii) that Mitsukoshi will continue as a leading department store operator in Japan;
(viii) that existing product supply arrangements, including license arrangements with third-party designers Elsa Peretti and Paloma Picasso, will continue;
(ix) that the wholesale and retail market for high-quality rough and cut diamonds will provide continuity of supply and pricing within the quality grades, colors and sizes that customers demand;
(x) that the Company’s diamond supply initiatives achieve their financial and strategic objectives;
(xi) that the Company’s gross margins in Japan and for diamond products can be maintained in the face of increased competition from traditional and e-commerce retailers;
(xii) that the Company is able to pass on higher costs of raw materials to consumers through price increases;
(xiii) that the sale of counterfeit products does not significantly undermine the value of the Company’s trademarks and demand for the Company’s products;
(xiv) that new and existing stores and other sales locations can be leased, re-leased or otherwise obtained on suitable terms in desired markets and that construction can be completed on a timely basis;
(xv) that the Company can achieve satisfactory results from any current and future businesses into which it enters that are operated under trademarks or tradenames other than TIFFANY & CO.; and
(xvi) that the Company’s expansion plans for retail and direct selling operations and merchandise development, production and management can continue to be executed without meaningfully diminishing the distinctive appeal of the TIFFANY & CO. brand.

23


 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     
PART II.
  Other Information
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds
This table provides information with respect to the Company’s purchases of shares of its Common Stock during the second fiscal quarter of 2007:
                                             
                                         
                            (c)Total Number            
                            of Shares       (d)Approximate    
        (a)Total                 Purchased Under       Dollar Value of    
        Number of       (b)Average       all Publicly       Shares that May Yet    
        Shares       Price Paid Per       Announced       be Purchased Under    
  Period     Purchased       Share       Programs*       the Programs*    
                             
 
May 1, 2007 through
May 31, 2007

      93,901

        $48.18

        93,901

        $665,893,000

   
                             
 
June 1, 2007 through
June 30, 2007

      264,400

        $50.21

        264,400

        $652,617,000

   
                             
 
July 1, 2007 through
July 31, 2007

      303,300

        $54.07

        303,300

        $636,217,000

   
                             
 
Total
      661,601         $51.69         661,601         $636,217,000    
                             
 
 
                                         
* In August 2006, the Company’s Board of Directors extended the expiration date of the program to December 2009 and increased the authorization to $813,000,000.

24


 

PART II.          OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
At Registrant’s Annual Meeting of Stockholders held on May 17, 2007 each of the nominees listed below was elected a director of Registrant to hold office until the next annual meeting of the stockholders and until his or her respective successor has been elected and qualified. All directors are elected at each annual meeting. Tabulated with the name of each of the nominees elected is the number of Common shares cast for each nominee and the number of Common shares withholding authority to vote for each nominee. There were no broker non-votes with respect to the election of directors.
                         
                    Number of
                     
                    Shares
                     
Nominee     Voted For     Voted Against   Abstaining
                     
 
 
                       
Michael J. Kowalski
    116,084,761       6,222,331       790,560  
 
                       
 
                       
Rose Marie Bravo
    119,581,300       2,742,676       773,676  
 
                       
 
                       
William R. Chaney
    116,076,945       6,244,078       776,629  
 
                       
 
                       
Gary E. Costley
    119,172,469       3,131,172       794,011  
 
                       
 
                       
Abby F. Kohnstamm
    119,342,608       2,945,807       809,237  
 
                       
 
                       
Charles K. Marquis
    119,185,869       3,104,606       807,177  
 
                       
 
                       
J. Thomas Presby
    113,242,473       9,066,377       788,802  
 
                       
 
                       
James E. Quinn
    116,045,760       6,247,877       804,015  
 
                       
 
                       
William A. Shutzer
    111,633,757       10,650,048       813,847  
 
                       
At such meeting, the stockholders approved the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm to examine the Company’s fiscal 2007 financial statements. With respect to such appointment, 121,375,371 shares were voted to approve, 918,657 were voted against, and 803,624 shares abstained from voting. There were no broker non-votes with respect to the approval of the appointment of PricewaterhouseCoopers LLP.

25


 

ITEM 6 Exhibits
         
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.

26


 

SIGNATURES
          Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
             
 
      TIFFANY & CO.    
 
      (Registrant)    
 
         
 
Date: August 30, 2007
  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.

 

<PAGE>
                                                                    Exhibit 31.1

                                 CERTIFICATIONS

I, Michael J. Kowalski, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Tiffany & Co.;

2.    Based on my knowledge, this quarterly report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this quarterly report, fairly present in all
      material respects the financial condition, results of operations and cash
      flows of the registrant as of, and for, the periods presented in this
      quarterly report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and have:

      a)    designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision,
 to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this quarterly report is being prepared;

      b)    designed such internal control over financial reporting, or caused
            such internal control over financial reporting to be designed under
            our supervision, to provide reasonable assurance regarding the
            reliability of financial reporting and the preparation of financial
            statements for external purposes in accordance with generally
            accepted accounting principles;

      c)    evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this quarterly report our
            conclusions about the effectiveness of the disclosure controls and
            procedures, as of the end of the period covered by this quarterly
            report based on such evaluation; and

      d)    disclosed in this quarterly report any change in the registrant's
            internal control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an quarterly report) that has
            materially affected, or is reasonably likely to materially affect,
            the registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of
      registrant's board of directors (or persons performing the equivalent
      functions):

      a)    all significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date: August 30, 2007

                                               /s/ Michael J. Kowalski
                                    --------------------------------------------
                                        Chairman and Chief Executive Officer
                                            (principal executive officer)


<PAGE>

                                                                    Exhibit 31.2

                                 CERTIFICATIONS

I, James N. Fernandez, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Tiffany & Co.;

2.    Based on my knowledge, this quarterly report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this quarterly report, fairly present in all
      material respects the financial condition, results of operations and cash
      flows of the registrant as of, and for, the periods presented in this
      quarterly report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and have:

      a)    designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision,
 to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this quarterly report is being prepared;

      b)    designed such internal control over financial reporting, or caused
            such internal control over financial reporting to be designed under
            our supervision, to provide reasonable assurance regarding the
            reliability of financial reporting and the preparation of financial
            statements for external purposes in accordance with generally
            accepted accounting principles;

      c)    evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this quarterly report our
            conclusions about the effectiveness of the disclosure controls and
            procedures, as of the end of the period covered by this quarterly
            report based on such evaluation; and

      d)    disclosed in this quarterly report any change in the registrant's
            internal control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an quarterly report) that has
            materially affected, or is reasonably likely to materially affect,
            the registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of
      registrant's board of directors (or persons performing the equivalent
      functions):

      a)    all significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date:  August 30, 2007

                                            /s/ James N. Fernandez
                              --------------------------------------------------
                                 Executive Vice President and Chief Financial
                                     Officer (principal financial officer)


<PAGE>

                                                                    Exhibit 32.1


                                  CERTIFICATION

            PURSUANT TO 18 U.S.C. 1350 AS ADOPTED BY SECTION 906 OF
                         THE SARBANES-OXLEY ACT OF 2002

      In connection with the Quarterly Report of Tiffany & Co. (the "Company")
on Form 10-Q for the period ended July 31, 2007, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Michael J.
Kowalski, as Chairman of the Board of Directors and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. ss 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

Dated: August 30, 2007

                                               /s/ Michael J. Kowalski
                                    --------------------------------------------
                                        Chairman and Chief Executive Officer
                                            (principal executive officer)





<PAGE>

                                                                    Exhibit 32.2


                                  CERTIFICATION

             PURSUANT TO 18 U.S.C. 1350 AS ADOPTED BY SECTION 906 OF
                         THE SARBANES-OXLEY ACT OF 2002

      In connection with the Quarterly Report of Tiffany & Co. (the "Company")
on Form 10-Q for the period ended July 31, 2007, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, James N.
Fernandez, as Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. ss 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

Dated: August 30, 2007

                                            /s/ James N. Fernandez
                              --------------------------------------------------
                                              James N. Fernandez
                                         Executive Vice President and
                                            Chief Financial Officer