10-Q 1 form10q_073102.txt 10-Q 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 -23-