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 quarter ended July 31, 2002.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition 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 .
------- ------
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, 145,438,889 shares outstanding at the close
of business on July 31, 2002.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2002
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - July 31, 2002,
January 31, 2002 and
July 31, 2001 (Unaudited) 3
Consolidated Statements of Earnings - for the
three and six month periods ended
July 31, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows - for
the six months ended July 31, 2002
and 2001 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
(a) Exhibits
(b) Reports on Form 8-K
- 2 -
PART I. Financial Information
Item 1. Financial Statements
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)
July 31, January 31, July 31,
2002 2002 2001
--------------- --------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 191,326 $ 173,675 $ 112,730
Accounts receivable, less allowances
of $6,973, $6,878 and $7,033 87,565 98,527 92,077
Inventories, net 689,732 611,653 667,799
Deferred income taxes 48,957 41,170 36,037
Prepaid expenses and other current assets 34,367 26,826 38,564
--------------- --------------- --------------
Total current assets 1,051,947 951,851 947,207
Property and equipment, net 573,475 525,585 473,107
Deferred income taxes 5,415 4,560 4,446
Other assets, net 146,519 147,872 152,807
--------------- --------------- --------------
$ 1,777,356 $ 1,629,868 $ 1,577,567
=============== =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 38,313 $ 40,402 $ 51,294
Current portion of long-term debt 51,500 51,500 -
Obligation under capital lease - - 40,726
Accounts payable and accrued liabilities 133,594 134,694 120,774
Income taxes payable 9,413 48,997 16,208
Merchandise and other customer credits 39,196 38,755 36,968
--------------- --------------- --------------
Total current liabilities 272,016 314,348 265,970
Long-term debt 289,210 179,065 235,437
Postretirement/employment benefit obligations 32,666 29,999 27,926
Other long-term liabilities 74,277 69,511 72,186
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value; authorized 240,000 shares,
issued and outstanding 145,439, 145,001 and 146,073 1,454 1,450 1,461
Additional paid-in capital 350,027 330,743 327,975
Retained earnings 780,986 743,543 677,197
Accumulated other comprehensive(loss) gain:
Foreign currency translation adjustments (22,287) (45,306) (37,343)
Cash flow hedging instruments (993) 6,515 6,758
---------------- --------------- --------------
Total stockholders' equity 1,109,187 1,036,945 976,048
---------------- --------------- --------------
$ 1,777,356 $ 1,629,868 $ 1,577,567
================ =============== ==============
See notes to consolidated financial statements
- 3 -
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
July 31, July 31,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------- ------------- ------------
Net sales $ 374,427 $ 371,301 $ 721,556 $ 707,702
Cost of sales 154,620 155,430 295,334 301,691
------------ ------------- ------------- ------------
Gross profit 219,807 215,871 426,222 406,011
Selling, general and administrative expenses 160,729 150,201 308,578 291,120
------------ ------------- ------------- ------------
Earnings from operations 59,078 65,670 117,644 114,891
Other expenses, net 4,554 5,581 8,606 3,534
------------ ------------- ------------- ------------
Earnings before income taxes 54,524 60,089 109,038 111,357
Provision for income taxes 21,810 24,037 43,615 44,543
------------ ------------- ------------- ------------
Net earnings $ 32,714 $ 36,052 $ 65,423 $ 66,814
============ ============= ============= ============
Net earnings per share:
Basic $ 0.22 $ 0.25 $ 0.45 $ 0.46
============ ============= ============= ============
Diluted $ 0.22 $ 0.24 $ 0.44 $ 0.44
============ ============= ============= ============
Weighted average number of common shares:
Basic 145,780 146,042 145,607 145,979
Diluted 149,727 151,752 149,824 151,509
See notes to consolidated financial statements.
- 4 -
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
July 31,
-----------------------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 65,423 $ 66,814
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 37,140 30,513
(Gain) loss on equity investments 1,416 (4,088)
Provision for uncollectible accounts 690 545
Provision for inventories 3,986 3,461
Tax benefit from exercise of stock options 9,981 2,876
Deferred income taxes (3,963) (9,080)
Loss on disposal of fixed assets 117 300
Provision for postretirement/employment benefits 2,667 1,791
Changes in assets and liabilities:
Accounts receivable 13,725 16,491
Inventories (56,159) (34,939)
Prepaid expenses and other current assets (16,232) (7,820)
Other assets, net 611 (7,877)
Accounts payable (10,037) (23,344)
Accrued liabilities 4,019 (11,295)
Income taxes payable (41,283) (25,250)
Merchandise and other customer credits 332 948
Other long-term liabilities 5,364 4,879
------------------ ------------------
Net cash provided by operating activities 17,797 4,925
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (83,506) (84,775)
Equity investments - (9,535)
Proceeds from lease incentives 2,758 1,300
------------------ ------------------
Net cash used in investing activities (80,748) (93,010)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 100,000 -
(Payments on) proceeds from short-term borrowings, net (5,359) 24,367
Repurchase of Common Stock (17,228) (8,431)
Proceeds from exercise of stock options 9,213 3,928
Cash dividends on Common Stock (11,658) (11,683)
------------------ ------------------
Net cash provided by financing activities 74,968 8,181
------------------ ------------------
Effect of exchange rate changes on
cash and cash equivalents 5,634 (2,979)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 17,651 (82,883)
Cash and cash equivalents at beginning of year 173,675 195,613
------------------ ------------------
Cash and cash equivalents at end of six months $ 191,326 $ 112,730
================== ==================
See notes to consolidated financial statements.
- 5 -
TIFFANY & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
The accompanying consolidated financial statements include the
accounts of Tiffany & Co. and all majority-owned domestic and foreign
subsidiaries (the "Company"). Intercompany accounts, transactions and
profits have been eliminated in consolidation. The interim statements
are unaudited and, in the opinion of management, include all
adjustments (which include only normal recurring adjustments including
the adjustment necessary as a result of the use of the LIFO(last-in,
first-out) method of inventory valuation, which is based on
assumptions as to inflation rates and projected fiscal year-end
inventory levels) necessary to present fairly the Company's financial
position as of July 31, 2002 and the results of its operations and
cash flows for the interim periods presented. The consolidated balance
sheet data for January 31, 2002 are derived from the audited financial
statements which are included in the Company's report on Form 10-K,
which should be read in connection with these financial statements. In
accordance with the rules of the Securities and Exchange Commission,
these financial statements do not include all disclosures required by
generally accepted accounting principles.
Certain reclassifications were made to the prior year's financial
statements and note disclosures to conform to the current year's
presentation and such reclassifications principally related to
employee benefits and lease liabilities.
Since the Company's business is seasonal, with a higher proportion of
sales and earnings generated in the last quarter of the fiscal year,
the results of its operations for the three and six months ended July
31, 2002 and 2001 are not necessarily indicative of the results of the
entire fiscal year.
2. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Six Months Ended
July 31,
---------------------------------------
Cash paid for: 2002 2001
---------------- ---------------
(in thousands)
--------------
Interest $ 7,652 $ 7,798
================ ===============
Income taxes $76,984 $73,795
================ ===============
Supplemental Noncash Investing
and Financing Activities:
(in thousands)
--------------
Issuance of Common Stock for the
Employee Profit Sharing and
Retirement Savings Plan $ 1,000 $ 2,800
================ ===============
- 6 -
3. INVENTORIES
-----------
July 31, January 31, July 31,
(in thousands) 2002 2002 2001
-------------- -------------------- ------------------ ---------------------
Finished goods $564,477 $528,671 $569,293
Raw materials 95,119 67,779 73,136
Work-in-process 34,477 18,722 30,232
-------------------- ------------------ ---------------------
694,073 615,172 672,661
Reserves (4,341) (3,519) (4,862)
-------------------- ------------------ ---------------------
Inventories, net $689,732 $611,653 $667,799
==================== ================== =====================
LIFO-based inventories at July 31, 2002, January 31, 2002 and July 31,
2001 were $538,229,000, $481,716,000 and $535,551,000, with the
current cost exceeding the LIFO inventory value by approximately
$19,971,000, $18,971,000 and $18,932,000 at the end of each period.
The LIFO valuation method had no effect on net earnings per diluted
share for the three months ended July 31, 2002 and 2001. The LIFO
valuation method had no effect on net earnings per diluted share for
the six months ended July 31, 2002 and had the effect of decreasing
net earnings per diluted share by $0.01 for the six months ended July
31, 2001.
4. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142,
"Accounting for Goodwill and Other Intangible Assets." SFAS No. 142
requires that goodwill and certain other intangible assets no longer
be amortized to earnings. In addition, the Company will be required to
review goodwill and certain other intangible assets annually for
potential impairment. With respect to goodwill amortization, the
Company adopted SFAS No. 142 effective February 1, 2002. The result of
the application of the non-amortization provisions of SFAS No. 142 for
goodwill was not significant for the three and six months ended July
31, 2002. At July 31, 2002, the Company had goodwill of $10,638,000.
During the second quarter of 2002, the Company completed its test for
goodwill impairment and concluded that goodwill was not impaired.
In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and financial
reporting for legal obligations and costs associated with the
retirement of tangible long-lived assets. The provisions of SFAS No.
143 will be effective for the Company's financial statements for the
fiscal year beginning February 1, 2003. The Company does not expect
the adoption of this standard to have a significant impact on its
financial position, earnings or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the
accounting for impairment or disposal of long-lived assets and
discontinued operations. On February 1, 2002, the Company adopted this
standard and its application had no significant impact on its
financial position, earnings or cash flows.
- 7 -
5. LONG-TERM DEBT
--------------
In July 2002, the Company, in a private transaction with various
institutional lenders, issued, at par, $40,000,000 of 6.15% Series C
Senior Notes Due July 18, 2009 and $60,000,000 of 6.56% Series D Notes
Due July 18, 2012 with seven-year and 10-year lump sum repayments upon
maturities. The proceeds of these issues are being and will be used by
the Company for general corporate purposes, including seasonal working
capital and to redeem the Company's $51,500,000 principal amount 7.52%
Senior Notes due in January 2003. The Note Purchase Agreements require
lump sum repayment upon maturity, maintenance of specific financial
covenants and ratios and limits certain changes to indebtedness and
the general nature of the business, in addition to other requirements
customary in such circumstances.
6. FINANCIAL HEDGING INSTRUMENTS
-----------------------------
Effective February 1, 2001, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." The adoption of SFAS No.
133 resulted in the Company recording transition adjustments in the
first quarter of 2001 to recognize its derivative instruments at fair
market value. The cumulative effect of these transition adjustments
was recorded to cost of sales and amounted to $1,653,000, which
reduced net earnings by $975,000, net of income taxes, and an increase
to accumulated comprehensive earnings of $3,773,000, net of income
taxes of $2,622,000.
Hedging activity affected accumulated other comprehensive (loss) gain,
net of income taxes as follows:
Three Months Ended Six Months Ended
July 31, July 31,
---------------------------------- -----------------------------
(in thousands) 2002 2001 2002 2001
-------------- --------------- --------------- ------------ ------------
Balance at beginning of
period $2,649 $6,538 $6,515 $ -
Impact of adoption - - - 3,773
Derivative gains
transferred to earnings (1,591) (1,032) (3,481) (1,481)
Change in fair value (2,051) 1,252 (4,027) 4,466
--------------- --------------- ------------ ------------
Balance at end of period $( 993) $6,758 $( 993) $6,758
=============== =============== ============ ============
The Company expects $226,000 of derivative losses included in
accumulated other comprehensive income to be reclassified into
earnings within the next 12 months. This amount may vary due to
fluctuations in the yen exchange rate.
The maximum term over which the Company is hedging its exposure to the
variability of future cash flows (for all forecasted transactions,
excluding interest payments on variable-rate debt) is 12 months.
- 8 -
FINANCIAL HEDGING INSTRUMENTS (continued)
-----------------------------------------
In July 2002, the Company entered into an interest-rate swap agreement
to hedge the change in fair value of its fixed-rate obligation issued
in July 2002. Under the swap agreement, the Company pays variable rate
interest and receives fixed interest rate payments periodically over
the life of the instrument. The Company accounts for its interest-rate
swap as a fair value hedge and therefore, recognizes gains or losses
on the derivative instrument and the hedged item attributable to the
hedged risk in earnings in the current period. Under SFAS No. 133, the
ineffectiveness of a fair value hedge is required to be calculated.
Ineffectiveness results when gains and losses on the hedged item are
not completely offset by gains and losses in the hedge instrument. The
Company determined that there is no ineffectiveness in the fair value
hedge.
7. 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.
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, July 31,
---------------------------- ----------------------------
(in thousands) 2002 2001 2002 2001
-------------- ---- ---- ---- ----
Net earnings for basic
and diluted EPS $32,714 $36,052 $65,423 $66,814
============= ============== ============ ==============
Weighted average shares
for basic EPS 145,780 146,042 145,607 145,979
Incremental shares from
assumed exercise of
stock options 3,947 5,710 4,217 5,530
------------- -------------- ------------ --------------
Weighted average shares
for diluted EPS 149,727 151,752 149,824 151,509
============= ============== ============ ==============
For the three months ended July 31, 2002 and 2001, there were
1,797,000 and 1,733,000 stock options excluded from the computations
of earnings per diluted share due to their antidilutive effect. For
the six months ended July 31, 2002 and 2001, there were 1,784,000 and
1,768,000 stock options excluded from the computations of earnings per
diluted share due to their antidilutive effect.
- 9 -
8. COMPREHENSIVE EARNINGS
----------------------
The components of comprehensive earnings were:
Three Months Ended Six Months Ended
July 31, July 31,
--------------------------------- ---------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
--------------
Net earnings $32,714 $36,052 $65,423 $66,814
Other comprehensive
gain(loss):
Cash flow hedging
instruments, net of tax (3,642) 220 (7,508) 6,758
Foreign currency
translation adjustments 14,592 (1,810) 23,019 (12,497)
-------------- --------------- -------------- --------------
Comprehensive earnings $43,664 $34,462 $80,934 $61,075
============== =============== ============== ==============
Foreign currency translation adjustments are not adjusted for income
taxes since they relate to investments that are permanent in nature.
9. OPERATING SEGMENTS
------------------
The Company operates its business in three reportable segments: U.S.
Retail, International Retail and Direct Marketing (see Management's
Discussion and Analysis of Financial Condition and Results of
Operations for an overview of the Company's business). The Company's
reportable segments represent channels of distribution that offer
similar merchandise and service and have similar marketing and
distribution strategies. 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
intersegment sales and transfers.
Certain information relating to the Company's reportable segments is
set forth below:
Three Months Ended Six Months Ended
July 31, July 31,
-------------------------------- --------------------------------
(in thousands) 2002 2001 2002 2001
-------------- ---- ---- ---- ----
Net sales:
U.S. Retail $ 187,218 $ 186,163 $ 352,888 $ 345,175
International Retail 148,462 150,574 296,100 296,997
Direct Marketing 38,747 34,564 72,568 65,530
------------- -------------- ------------- -------------
$ 374,427 $ 371,301 $ 721,556 $ 707,702
============= ============== ============= =============
Earnings from
operations*:
U.S. Retail $ 41,809 $ 47,081 $ 76,395 $ 81,410
International Retail 41,345 42,950 88,408 81,427
Direct Marketing 6,449 3,956 11,446 5,987
------------- -------------- ------------- -------------
$ 89,603 $ 93,987 $ 176,249 $ 168,824
============= ============== ============= =============
* Represents earnings from operations before unallocated corporate
expenses and interest and other expenses, net.
- 10 -
OPERATING SEGMENTS (continued)
------------------------------
Executive Officers of the Company evaluate the performance of the
Company's assets on a consolidated basis. Therefore, separate
financial information for the Company's assets on a segment basis is
not available.
The following table sets forth a reconciliation of the reportable
segment's earnings from operations to the Company's consolidated
earnings before income taxes:
Three Months Ended Six Months Ended
July 31, July 31,
--------------------------------- ------------------------------------
(in thousands) 2002 2001 2002 2001
-------------- ---- ---- ---- ----
Earnings from
operations for
reportable segments $ 89,603 $ 93,987 $ 176,249 $ 168,824
Unallocated
corporate expenses (30,525) (28,317) (58,605) (53,933)
Other expenses, net (4,554) (5,581) (8,606) (3,534)
-------------- ------------- -------------- --------------
Earnings before
income taxes $ 54,524 $ 60,089 $ 109,038 $ 111,357
============== ============= ============== ==============
10. SUBSEQUENT EVENTS
-----------------
INTENT TO ACQUIRE OUTSTANDING SHARES OF LITTLE SWITZERLAND, INC.
---------------------------------------------------------------------
On August 12, 2002, TSAC Corp., an indirect wholly-owned subsidiary of
the Company, entered into a stock purchase agreement with Seymour
Holtzman and certain of his affiliates, including Jewelcor Management,
Inc., to purchase their shares of common stock of Little Switzerland,
Inc. ("Little Switzerland"), representing approximately 12% of Little
Switzerland's outstanding common stock, at $2.40 per share. As of July
31, 2002, the Company beneficially owned approximately 45% of Little
Switzerland's outstanding common stock. TSAC Corp. also commenced a
cash tender offer to acquire the balance of the outstanding shares of
Little Switzerland's common stock at $2.40 per share. The offer will
expire on September 13, 2002, subject to the Company's right to extend
the offering period or to provide a subsequent offering period of
between three to 20 business days.
The Stock Purchase Agreement and the tender offer are subject to: (i)
the tender of a sufficient number of Little Switzerland shares so
that, upon the closing of the tender offer and the stock purchase
agreement, the Company would beneficially own at least 90% of the
outstanding Little Switzerland's common stock on a fully-diluted
basis, and (ii) the Stock Purchase Agreement and the tender offer are
subject to the tender of at least a majority of the outstanding Little
Switzerland shares, excluding shares beneficially owned by the
Company, Mr. Holtzman or any of Mr. Holtzman's affiliates. Condition
(i) may be waived by the Company and condition (ii) may not.
- 11 -
SUBSEQUENT EVENTS (continued)
-----------------------------
The Company anticipates causing TSAC Corp. to acquire any shares not
purchased under the Stock Purchase Agreement and in the tender offer
through a short form merger at the same cash price per share as the
tender offer, so long as the tender offer is successful and the
Company beneficially owns at least 90% of the outstanding shares of
Little Switzerland common stock after its completion, including the
shares purchased pursuant to the Stock Purchase Agreement. The Company
estimates that the total amount of funds required to purchase all of
the outstanding shares of Little Switzerland, other than those already
owned by the Company but including the shares to be acquired pursuant
to the stock purchase agreement, and to pay related fees and expenses
will be approximately $27,100,000.
DECLARATION OF QUARTERLY DIVIDEND
-----------------------------------
On August 13, 2002, the Company's Board of Directors declared a
quarterly dividend of $0.04 per share. This dividend will be paid on
October 10, 2002 to stockholders of record on September 20, 2002.
-12-
PART I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
- ---------------------
Overview
- --------
The Company operates three channels of distribution. U.S. Retail includes retail
sales in Company-operated stores in the U.S. International Retail primarily
includes retail sales in Company-operated stores and boutiques in markets
outside the U.S., as well as a limited amount of business-to-business sales,
Internet sales and wholesale sales to independent retailers and distributors in
certain of those markets. Direct Marketing includes business-to-business,
catalog and Internet sales in the U.S.
All references to years relate to the fiscal year that ends on January 31 of the
following calendar year.
In the three months (second quarter) ended July 31, 2002, net sales rose 1% to
$374,427,000. In the six months (first half) ended July 31, 2002, net sales rose
2% to $721,556,000. The Company's reported sales reflect either a
translation-related benefit from strengthening foreign currencies or a detriment
from a strengthening U.S. dollar. Therefore, on a constant-exchange-rate basis,
net sales were unchanged in the second quarter and rose 3% in the first half;
worldwide comparable store sales declined 5% and 2% in those periods. Net
earnings declined 9% to $32,714,000 in the second quarter and declined 2% to
$65,423,000 in the first half.
The following tables highlight certain operating data as a percentage of net
sales:
Three Months Six Months
Ended July 31, Ended July 31,
------------- ----------------
2002 2001 2002 2001
------------- ----------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 41.3 41.9 40.9 42.6
------------- ----------------
Gross profit 58.7 58.1 59.1 57.4
Selling, general
and administrative expenses 42.9 40.4 42.8 41.2
------------- ----------------
Earnings from operations 15.8 17.7 16.3 16.2
Other expenses, net 1.2 1.5 1.2 0.5
------------- ----------------
Earnings before income taxes 14.6 16.2 15.1 15.7
Provision for income taxes 5.9 6.5 6.0 6.3
------------- ----------------
Net earnings 8.7% 9.7% 9.1% 9.4%
------------- ----------------
Net Sales
- ---------
Net sales by channel of distribution were as follows:
Three Months Six Months
Ended July 31, Ended July 31,
------------------ ------------------
(in thousands) 2002 2001 2002 2001
- ------------------ ------------------ ------------------
U.S. Retail $187,218 $186,163 $352,888 $345,175
International Retail 148,462 150,574 296,100 296,997
Direct Marketing 38,747 34,564 72,568 65,530
------------------ ------------------
$374,427 $371,301 $721,556 $707,702
------------------ ------------------
U.S. Retail sales rose 1% in the second quarter and 2% in the first half.
Comparable store sales declined 2% in the second quarter and were unchanged in
the first half. Sales in the flagship New York store declined 6% in the
-13-
second quarter and 4% in the first half, while comparable branch store sales
were unchanged in the second quarter and rose 1% in the first half. Management
believes that smaller average transaction sizes resulted from challenging
economic and retail conditions. In addition, a decline in sales to foreign
tourists affected sales in certain stores, especially in New York and Hawaii.
International Retail sales declined 1% in the second quarter and declined
fractionally in the first half (a decline of 3% and an increase of 2% on a
constant-exchange-rate basis). In Japan, total retail sales in local currency
declined 6% in the second quarter and were unchanged in the first half,
primarily resulting from a decline in jewelry unit volume and offset by an
increased average price per unit sold; comparable store sales in local currency
declined 13% in the second quarter and 7% in the first half. In non-U.S. markets
outside of Japan, comparable store sales in the second quarter and first half on
a constant-exchange-rate basis were unchanged and increased 3% in the
Asia-Pacific region and declined 10% and 8% in Europe.
In the first half, the Company opened U.S. stores in Bellevue, Washington and
East Hampton, New York and, internationally, opened department-store boutiques
in Japan (2), Korea and Taiwan. The expansion plans for the second half of 2002
include: in the U.S., new stores in St. Louis, Missouri, Orlando, Florida and
Honolulu, Hawaii (which will replace two small hotel-boutiques) and,
internationally, a department-store boutique in Paris, France. In total,
worldwide retail gross square footage is expected to increase 5% in 2002.
In 2001, the Company signed new distribution agreements with Mitsukoshi Ltd. of
Japan ("Mitsukoshi"), whereby TIFFANY & CO. boutiques will continue to operate
within Mitsukoshi's stores in Japan until at least January 31, 2007. Prior
agreements expired in 2001. The new agreements largely continue the principles
on which Mitsukoshi and Tiffany have been cooperating since 1993, when the
relationship was last renegotiated. The main agreement, which will expire on
January 31, 2007, covers the continued operation of 24 TIFFANY & CO. boutiques.
Separate agreements cover the operation of a freestanding TIFFANY & CO. store on
Tokyo's Ginza. Under the new agreements, the Company is not restricted from
further expansion of its Tokyo operations. Under the main agreement, the Company
pays to Mitsukoshi a reduced percentage fee based on certain sales. There will
be a further reduction in fees paid to Mitsukoshi in 2003 and beyond, as the
Company employs increasing numbers of its own personnel in certain boutiques.
Direct Marketing sales rose 12% in the second quarter and 11% in the first half.
Business Sales division sales declined 5% and 8% in those periods primarily due
to a decline in the average size per order. Combined catalog/Internet sales rose
27% and 32% in those periods due to strong growth in Internet sales that
primarily resulted from a higher number of orders.
Gross Profit
- ------------
Gross profit as a percentage of net sales ("gross margin") in the second quarter
and first half was higher than the prior year. Management attributes the
increases primarily to a shift in sales mix toward lower-priced items that carry
a higher gross margin, as well as to improved efficiencies in product
manufacturing and sourcing and selective price increases.
The Company's hedging program uses yen put options to stabilize product costs in
Japan over the short-term despite exchange rate fluctuations, and the Company
adjusts its retail prices in Japan from time to time to address longer-term
changes in the yen/dollar relationship and local competitive pricing.
Management's ongoing strategy and objectives include achieving further product
manufacturing/sourcing efficiencies, leveraging its fixed costs and implementing
selective price adjustments in order to maintain the Company's gross margin at,
or above, prior year levels. For the second half
-14-
of 2002, management expects a quarterly year-over-year increase in gross margin,
but to a lesser extent than in the first half.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
SG&A rose 7% in the second quarter and 6% in the first half. Incremental
depreciation, staffing and occupancy expenses related to the Company's overall
worldwide expansion were partly offset by lower sales-related variable expenses.
As a percentage of net sales, SG&A rose in both periods due to insufficient
sales growth to absorb the rate of increase in fixed expenses. Management's
longer-term objective is to reduce this ratio by leveraging anticipated improved
rates of sales growth against the Company's fixed-expense base.
Other Expenses, Net
- -------------------
Other expenses, net in the second quarter were lower than the prior year due to
lower interest expense resulting from the effect of the capitalization of
interest costs related to the Company's construction of its 266,000 square foot
customer fulfillment/distribution center ("CFC") in Hanover Township, New
Jersey, effective in the first quarter of 2002. In addition, interest expense
rose in 2001 primarily due to construction costs and the conversion of an
operating lease into a capital lease. Other expenses, net in the first half of
2002 were higher than the prior year primarily due to a pretax gain in the first
quarter of 2001 of $5,257,000, based on the Company's equity interest in Aber
Diamond Corporation ("Aber"), a publicly-traded company headquartered in Canada,
which sold its interest in the Snap Lake Project to De Beers Canada Mining, Inc.
in February 2001.
Provision for Income Taxes
- --------------------------
The Company's effective tax rate was 40.0% in the second quarter and first half
of both 2002 and 2001.
New Accounting Standards
- ------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and
Other Intangible Assets." SFAS No. 142 requires that goodwill and certain other
intangible assets no longer be amortized to earnings. In addition, the Company
will be required to review goodwill and certain other intangible assets annually
for potential impairment. With respect to goodwill amortization, the Company
adopted SFAS No. 142 effective February 1, 2002. The result of the application
of the non-amortization provisions of SFAS No. 142 for goodwill was not
significant for the three months and six months ended July 31, 2002. At July 31,
2002, the Company had goodwill of $10,638,000. During the second quarter of
2002, the Company completed its test for goodwill impairment and concluded that
goodwill was not impaired.
In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and financial reporting
for legal obligations and costs associated with the retirement of tangible
long-lived assets. The provisions of SFAS No. 143 will be effective for the
Company's financial statements for the fiscal year beginning February 1, 2003.
The Company does not expect the adoption of this standard to have a significant
impact on its financial position, earnings or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses the accounting for impairment or
disposal of long-lived assets and discontinued operations. On February 1, 2002,
the Company adopted this standard and its application had no significant impact
on its financial position, earnings or cash flows.
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources
- -------------------------------
-15-
The Company's liquidity needs have been, and are expected to remain, primarily a
function of its seasonal working capital requirements and capital expenditure
needs, which have increased due to the Company's expansion.
The Company achieved a net cash inflow from operating activities of $17,797,000
in the six months ended July 31, 2002 compared with an inflow of $4,925,000 in
the prior year.
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were $779,931,000
and 3.9:1 at July 31, 2002 compared with $637,503,000 and 3.0:1 at January 31,
2002 and $681,237,000 and 3.6:1 at July 31, 2001.
Accounts receivable at July 31, 2002 were 11% below January 31, 2002 and 5%
below July 31, 2001.
Inventories at July 31, 2002 were 13% above January 31, 2002. In addition to
some effect from lower-than-expected sales, higher finished goods were needed to
support new stores and expanded product offerings, while higher raw material and
work-in-process inventories support the Company's strategy to further expand its
internal manufacturing activities. Inventories were 3% above July 31, 2001. The
translation effect of a weakening U.S. dollar was also a factor in the growth of
inventory versus the prior year periods. Management expects that inventory
levels in 2002 will increase to support anticipated sales growth, new stores and
product introductions that include a new collection of watches. The Company's
ongoing inventory objectives are to continue to refine: worldwide replenishment
systems; the specialized disciplines of product development, category management
and sales demand forecasting; presentation and management of inventory
assortments in each store; and warehouse management and supply-chain logistics.
Capital expenditures of $83,506,000 in the six months ended July 31, 2002
compared with $84,775,000 in the prior year. Expenditures for 2002 are expected
to be approximately $200,000,000. Capital expenditures in 2002 are supporting
the opening, renovation and expansion of stores, expansion of distribution and
manufacturing facilities and ongoing investments in new systems. In 2001, the
Company commenced construction of its CFC that will fulfill shipments to retail,
catalog, Internet and business sales customers. Upon completion of the CFC, the
Company's 370,000 square foot Parsippany, New Jersey customer
service/distribution center and office facility ("CSC") will be used primarily
to replenish store inventories. The CFC is scheduled to open in late-2003 and
the Company estimates that the overall cost of that project will be
approximately $98,500,000, of which $51,409,000 has been incurred to date. In
2000, the Company began a four-year project to renovate and reconfigure its New
York flagship store in order to increase the total sales area by approximately
25%, and to provide additional space for customer service, customer hospitality
and special exhibitions. The new second floor opened in November 2001 and
provides an expanded presentation of engagement and other jewelry. In addition,
in conjunction with the New York store project, the Company relocated its
after-sales service functions to a new location and relocated several of its
administrative functions. The Company has spent $44,274,000 to date for the New
York store and related projects. Based on current plans, the Company estimates
that the overall cost of these projects will be approximately $85,000,000.
In August 2002, TSAC Corp., an indirect wholly-owned subsidiary of the Company,
entered into a stock purchase agreement with several parties to purchase their
shares of common stock of Little Switzerland, Inc. ("Little Switzerland"),
representing approximately 12% of Little Switzerland's outstanding common stock,
at $2.40 per share. TSAC Corp. also commenced a cash tender offer to acquire the
balance of the outstanding shares of Little Switzerland's common stock at $2.40
per share. The offer will expire on September 13, 2002, subject to the Company's
right to extend the offering period or to provide a subsequent offering period
of between three to 20 business days. The Company estimates that the total
amount of funds required
-16-
to purchase all of the outstanding shares of Little Switzerland, other than
those already owned by the Company but including the shares to be acquired
pursuant to the stock purchase agreement, and to pay related fees and expenses
will be approximately $27,100,000. In 2001, the Company made an equity
investment in Little Switzerland by purchasing 7,410,000 newly-issued
unregistered shares of common stock, which represented approximately 45% of
Little Switzerland's shares, at a cost of $9,546,000. The Company also provided
a loan of $2,500,000.
In July 2002, the Company, in a private transaction with various institutional
lenders, issued, at par, $40,000,000 of 6.15% Series C Senior Notes Due July 18,
2009 and $60,000,000 of 6.56% Series D Notes Due July 18, 2012 with seven-year
and 10-year lump sum repayments upon maturities. The proceeds of these issues
are being, and will be, used by the Company for general corporate purposes,
including seasonal working capital and to redeem the Company's $51,500,000
principal amount 7.52% Senior Notes due in January 2003. The Note Purchase
Agreements require lump sum repayment upon maturity, maintenance of specific
financial covenants and ratios and limits certain changes to indebtedness and
the general nature of the business, in addition to other requirements customary
in such circumstances.
In July 2002, the Company entered into an interest-rate swap agreement to hedge
the change in fair value of its fixed-rate obligation issued in July 2002. Under
the swap agreement, the Company pays variable rate interest and receives fixed
interest rate payments periodically over the life of the instrument. The Company
accounts for its interest-rate swap as a fair value hedge and therefore,
recognizes gains or losses on the derivative instrument and the hedged item
attributable to the hedged risk in earnings in the current period. Under SFAS
No. 133, the ineffectiveness of a fair value hedge is required to be calculated.
Ineffectiveness results when gains and losses on the hedged item are not
completely offset by gains and losses in the hedge instrument. The Company
determined that there is no ineffectiveness in the fair-value hedge.
In September 2000, the Board of Directors extended the Company's original stock
repurchase program until November 2003. The program was initially authorized in
November 1997 for the repurchase of up to $100,000,000 of the Company's Common
Stock in the open market over a three-year period. That authorization was
superseded in September 2000 by a further authorization of repurchases of up to
$100,000,000 of the Company's Common Stock in the open market. The timing and
actual number of shares repurchased depend on a variety of factors such as price
and other market conditions. In the six months ended July 31, 2002, the Company
repurchased and retired 600,000 shares of Common Stock at a cost of $17,228,000,
or an average cost of $28.71 per share. At July 31, 2002, $41,394,000 remained
available for future share repurchases.
In 1999, the Company made a strategic investment in Aber by purchasing 8 million
unregistered shares of its common stock, which represents approximately 14.7% of
Aber's outstanding shares, at a cost of $70,636,000. Aber holds a 40% interest
in the Diavik Diamonds Project in Canada's Northwest Territories, an operation
being developed to mine gem-quality diamonds. Production is expected to commence
in the first half of 2003. In addition, the Company has formed a joint venture
and has entered into a diamond purchase agreement with Aber. It is expected that
this commercial relationship will enable the Company to secure a considerable
portion of its future diamond needs. The Company is in the process of
establishing the necessary facilities in Yellowknife, Canada and Antwerp,
Belgium to handle the receipt and sorting of diamonds and a portion of the
subsequent cutting and polishing.
The Company's sources of working capital are internally-generated cash flows and
borrowings available under a multicurrency revolving credit facility
-17-
("Credit Facility"). In November 2001, the Credit Facility was amended to
increase the amount from $160,000,000 to $200,000,000 and the number of banks
from five to six. The Credit Facility entitles the Company to borrow $38,750,000
on a pro-rata basis from each of three banks, $25,000,000 from one bank,
$15,000,000 from another bank and $43,750,000 from an agent bank. All borrowings
are at interest rates based on a prime rate or a reserve-adjusted LIBOR and are
affected by local borrowing conditions. The Credit Facility expires in November
2006.
Management anticipates that internally-generated cash flows, funds available
under the Credit Facility and the proceeds from the Senior Notes offering will
be sufficient to support the Company's planned worldwide business expansion and
seasonal working capital increases that are typically required during the third
and fourth quarters of the year.
Net-debt (short-term borrowings plus the current portion of long-term debt plus
long-term debt less cash and cash equivalents) and the corresponding ratio of
net-debt as a percentage of total capital (net-debt plus stockholders' equity)
were $187,697,000 and 14% at July 31, 2002, compared with $97,292,000 and 9% at
January 31, 2002 and $174,001,000 and 15% at July 31, 2001.
The Company's contractual cash obligations and commercial commitments at July
31, 2002 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, 2002.
Market Risk
- -----------
The Company is exposed to market risk from fluctuations in foreign currency
exchange rates and interest rates, which could affect its consolidated financial
position, results of operations 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.
The Company uses foreign currency-purchased put options, primarily yen, and, to
a lesser extent, foreign-exchange forward contracts to minimize the impact of a
significant strengthening of the U.S. dollar on foreign currency-denominated
transactions. Gains or losses on these instruments substantially offset losses
or gains on the assets, liabilities and transactions being hedged. Management
does not foresee nor expect any significant changes in foreign currency exposure
in the near future.
The Company also manages its fixed-rate debt liability to reduce its exposure to
interest rate changes. The fair value of the Company's fixed-rate long-term debt
is sensitive to interest rate changes. Interest rate changes would result in
gains (losses) in the market value of this debt due to differences between
market interest rates and rates at the inception of the debt obligation. The
Company uses an interest-rate swap to manage its yen-denominated floating-rate
long-term debt in order to reduce the impact of interest rate changes on
earnings and cash flows and to lower overall borrowing costs. Management neither
foresees nor expects significant changes in exposure to interest rate
fluctuations, nor in market risk-management practices.
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.
-18-
Risk Factors
- ------------
This document contains certain "forward-looking statements" concerning the
Company's objectives and expectations with respect to store openings, retail
prices, gross profit, expenses, inventory performance, capital expenditures and
cash flow. In addition, management makes other forward-looking statements from
time to time concerning objectives and expectations. As a jeweler and specialty
retailer, the Company's success in achieving its objectives and expectations is
partially dependent upon economic conditions, competitive developments and
consumer attitudes. 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 the events of September 11, 2001 and subsequent military
operations, as well as unsettled global political and economic conditions, do
not result in long-term disruptions to, or a slowing of, tourist travel; (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 in which TIFFANY & CO. boutiques are located; (vii)
that Mitsukoshi's ability to continue as a leading department store operator in
Japan will continue; (viii) that existing product supply arrangements, including
license arrangements with third-party designers Elsa Peretti and Paloma Picasso,
will continue; (ix) that the wholesale market for high-quality cut diamonds will
provide continuity of supply and pricing; (x) that the investment in Aber
achieves its financial and strategic objectives; (xi) that new systems,
particularly for inventory management, can be successfully integrated into the
Company's operations; (xii) that warehousing and distribution productivity and
capacity can be further improved to support the Company's worldwide distribution
requirements; and (xiii) that new stores and other sales locations can be leased
or otherwise obtained on suitable terms in desired markets and that construction
can be completed on a timely basis.
-19-
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On July 9, 2002, Registrant issued a press release providing a
business update for its second quarter ending on July 31, 2002.
On July 18, 2002, Registrant announced the issuance of $100,000,000 of
Senior Notes, consisting of $40,000,000 6.15% Series C Notes due July
18, 2009 and $60,000,000 6.56% Series D Notes due July 18, 2012. The
proceeds of the Notes will be used for general corporate purposes,
including seasonal working capital needs, and the redemption of the
Registrant's $51,500,000 7.52% Senior Notes due January 31, 2003.
-20-
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: September 9, 2002 By: /s/ James N. Fernandez
----------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
-21-
CERTIFICATION
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;
Date: September 9, 2002
By: /s/ Michael J. Kowalski
-------------------------------------
Michael J. Kowalski
President and Chief Executive Officer
-22-
CERTIFICATION
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;
Date: September 9, 2002
By: /s/ James N. Fernandez
-------------------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
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