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 October 31, 2001.
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, 144,897,036 shares outstanding at the close
of business on October 31, 2001.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2001
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - October 31, 2001,
January 31, 2001 and
October 31, 2000 (Unaudited) 3
Consolidated Statements of Earnings - for the
three and nine month periods ended
October 31, 2001 and 2000 (Unaudited) 4
Consolidated Statements of Cash Flows - for
the nine months ended October 31, 2001
and 2000 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
(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)
October 31, January 31, October 31,
2001 2001 2000
--------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 106,404 $ 195,613 $ 121,143
Accounts receivable, less allowances
of $7,042, $7,973 and $9,490 99,094 106,988 100,662
Inventories, net 702,752 651,717 657,106
Deferred income taxes 38,030 28,069 36,525
Prepaid expenses and other current assets 42,795 22,458 42,499
--------------- -------------- --------------
Total current assets 989,075 1,004,845 957,935
Property and equipment, net 511,271 423,244 356,847
Deferred income taxes 5,360 7,282 5,046
Other assets, net 151,087 132,969 132,831
--------------- -------------- --------------
$ 1,656,793 $ 1,568,340 $ 1,452,659
=============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 113,331 $ 28,778 $ 36,850
Obligation under capital lease 45,221 40,747 -
Accounts payable and accrued liabilities 183,685 189,531 213,848
Income taxes payable 2,543 42,085 5,750
Merchandise and other customer credits 35,418 36,057 32,679
--------------- -------------- --------------
Total current liabilities 380,198 337,198 289,127
Long-term debt 237,548 242,157 247,859
Postretirement/employment benefit obligations 28,822 26,134 25,444
Other long-term liabilities 41,806 37,368 36,170
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value; authorized 240,000 shares,
issued and outstanding 144,897, 145,897 and 145,867 1,449 1,459 1,459
Additional paid-in capital 327,359 318,794 320,891
Retained earnings 669,291 630,076 553,126
Accumulated other comprehensive loss (29,680) (24,846) (21,417)
--------------- -------------- --------------
Total stockholders' equity 968,419 925,483 854,059
--------------- -------------- --------------
$ 1,656,793 $ 1,568,340 $ 1,452,659
================ ============== ==============
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 Nine Months Ended
October 31, October 31,
------------------------------ -------------------------------
2001 2000 2001 2000
----------- ------------ ------------- -------------
Net sales $ 333,074 $ 372,074 $ 1,040,776 $ 1,091,665
Cost of sales 140,235 165,709 441,926 484,137
----------- ------------ ------------- -------------
Gross profit 192,839 206,365 598,850 607,528
Selling, general and administrative expenses 146,798 143,313 437,918 424,004
----------- ------------ ------------- -------------
Earnings from operations 46,041 63,052 160,932 183,524
Other expenses, net 5,993 2,516 9,527 7,005
----------- ------------ ------------- -------------
Earnings before income taxes 40,048 60,536 151,405 176,519
Provision for income taxes 16,020 24,216 60,563 70,609
----------- ------------ ------------- -------------
Net earnings $ 24,028 $ 36,320 $ 90,842 $ 105,910
=========== ============ ============= =============
Net earnings per share:
Basic $ 0.17 $ 0.25 $ 0.62 $ 0.73
=========== ============ ============= ==============
Diluted $ 0.16 $ 0.24 $ 0.60 $ 0.70
=========== ============ ============= ==============
Weighted average number of common shares:
Basic 145,273 145,809 145,743 145,357
Diluted 150,114 152,136 151,046 151,853
See notes to consolidated financial statements.
-4-
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
October 31,
---------------------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 90,842 $ 105,910
Adjustments to reconcile net earnings to net cash
provided by (used in)operating activities:
Depreciation and amortization 46,640 33,360
(Gain) loss on equity investments (2,780) 1,064
Provision for uncollectible accounts 816 809
Provision for inventories 4,500 12,926
Tax benefit from exercise of stock options 3,488 15,288
Deferred income taxes (10,175) (5,163)
Loss on disposal of fixed assets 426 866
Provision for postretirement/employment benefits 2,688 2,279
Changes in assets and liabilities:
Accounts receivable 10,778 17,756
Inventories (65,335) (174,756)
Prepaid expenses and other current assets (16,813) (22,730)
Other assets, net (7,710) (4,460)
Accounts payable (7,138) 28,154
Accrued liabilities 7,582 11,907
Income taxes payable (39,191) (47,646)
Merchandise and other customer credits (610) 2,509
Other long-term liabilities 1,810 3,220
----------------- ------------------
Net cash provided by (used in) operating activities 19,818 (18,707)
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (135,780) (70,878)
Equity investments (9,535) (8,014)
Proceeds from lease incentives 1,950 3,761
----------------- ------------------
Net cash used in investing activities (143,365) (75,131)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings, net 85,511 19,530
Repurchase of Common Stock (36,416) (11,204)
Proceeds from exercise of stock options 4,576 9,726
Cash dividends on Common Stock (17,519) (15,985)
----------------- ------------------
Net cash provided by financing activities 36,152 2,067
----------------- ------------------
Effect of exchange rate changes on
cash and cash equivalents (1,814) (4,022)
----------------- ------------------
Net decrease in cash and cash equivalents (89,209) (95,793)
Cash and cash equivalents at beginning of year 195,613 216,936
----------------- ------------------
Cash and cash equivalents at end of nine months $ 106,404 $ 121,143
================= ==================
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"). All material intercompany balances and
transactions have been eliminated. 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 October 31, 2001 and the results of its operations and
cash flows for the interim periods presented. The consolidated balance
sheet data for January 31, 2001 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.
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 nine months ended
October 31, 2001 and 2000 are not necessarily indicative of the
results of the entire fiscal year.
2. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Supplemental cash flow information:
Nine Months Ended
October 31,
---------------------------------------
(in thousands) 2001 2000
-------------- ---------------- -----------------
Cash paid for:
Interest $ 11,596 $ 9,510
================ =================
Income taxes $ 104,559 $ 107,453
================ =================
Supplemental Noncash Investing
and Financing Activities:
Issuance of Common Stock for the
Employee Profit Sharing and
Retirement Savings Plan $ 2,800 $ 3,300
================ =================
- 6 -
3. INVENTORIES
-----------
October 31, January 31, October 31,
(in thousands) 2001 2001 2000
-------------- ---------------------- -------------------- ---------------------
Finished goods $605,534 $510,888 $524,263
Raw materials 72,470 87,207 67,496
Work-in-process 28,633 56,636 70,457
---------------------- -------------------- ---------------------
706,637 654,731 662,216
Reserves (3,885) (3,014) (5,110)
---------------------- -------------------- ---------------------
$702,752 $651,717 $657,106
====================== ==================== =====================
LIFO-based inventories at October 31, 2001, January 31, 2001 and
October 31, 2000 were $544,868,000, $531,936,000 and $516,673,000,
with the current cost exceeding the LIFO inventory value by
approximately $19,432,000, $15,942,000 and $14,958,000 at the end of
each period. The LIFO valuation method had no effect on net earnings
per diluted share for the three month periods ended October 31, 2001
and 2000. The LIFO valuation method had the effect of decreasing net
earnings per diluted share by $0.01 for the nine month periods ended
October 31, 2001 and 2000.
4. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." Effective February 1, 2002, the Company will no
longer be required to amortize goodwill and certain other intangible
assets as a charge to earnings. In addition, the Company will be
required to review goodwill and other intangible assets for potential
impairment. The Company will adopt these standards on February 1, 2002
and does not expect a significant impact on its financial position,
earnings or cash flows.
5. FINANCIAL HEDGING INSTRUMENTS
-----------------------------
Effective February 1, 2001, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", and
its related amendment, SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". These
standards require that all derivative instruments be recorded on the
consolidated balance sheet at their fair value as either assets or
liabilities. Changes in the fair value of derivatives are recorded
each period in current or comprehensive earnings, depending on whether
a derivative is designated as part of an effective hedge transaction
and, if it is, the type of hedge transaction. Gains and losses on
derivative instruments will be reclassified to earnings in the period
in which earnings are affected by the hedged item. As of February 1,
2001, the adoption of these new standards resulted in a cumulative
effect of an accounting change of $1,653,000, recorded in Cost of
sales, which reduced net earnings by $975,000, net of income taxes,
and increased accumulated comprehensive earnings by $3,773,000, net of
income taxes of $2,622,000.
- 7 -
The Company uses various derivative financial instruments to manage
its foreign currency and interest rate exposures. For a derivative to
qualify as a hedge at inception and throughout the hedged period, the
Company formally documents the nature and relationships between the
hedging instruments and hedged items, as well as its risk-management
objectives, strategies for undertaking the various hedge transactions
and method of assessing hedge effectiveness.
Additionally, for hedges of forecasted transactions, the significant
characteristics and expected terms of a forecasted transaction must be
specifically identified, and it must be probable that each forecasted
transaction will occur. If it were deemed probable that the forecasted
transaction would not occur, the gain or loss would be recognized in
current earnings. Financial instruments qualifying for hedge
accounting must maintain a specified level of effectiveness between
the hedge instrument and the item being hedged, both at inception and
throughout the hedged period. The Company does not use derivative
financial instruments for trading or speculative purposes.
To minimize the potentially negative impact of a significant
strengthening of the U.S. dollar against the yen, the Company
purchases yen put options (the "options") and enters into forward
foreign-exchange contracts that are designated as hedges of forecasted
purchases of merchandise and to settle liabilities in foreign
currencies. The Company accounts for its option contracts as cash flow
hedges. The Company excludes time value from the assessment of the
effectiveness. The change in a foreign currency option's time value is
reported each period in Cost of sales on the Company's consolidated
statement of earnings. The effective portion of unrealized gains and
losses associated with the intrinsic value of the option contracts is
deferred as a component of accumulated other comprehensive gain (loss)
and is recognized as a component of Cost of sales on the Company's
consolidated statement of earnings when the related inventory is sold.
The Company utilizes an interest rate swap contract to effectively
convert its floating-rate obligation to a fixed-rate obligation. The
Company accounts for its interest rate swap contract as a cash flow
hedge. The Company has no ineffectiveness with regard to its interest
rate swap contract as the contract meets the criteria for accounting
under the short-cut method for cash flow hedges of debt instruments.
During the three months ended October 31, 2001, the Company recognized
pretax hedging gains relating to changes in the time value of its
foreign currency-purchased put options of $468,000, recorded in Cost
of sales. During the nine months ended October 31, 2001, the Company
recognized pretax hedging losses relating to changes in the time value
of its foreign currency-purchased put options of $375,000, recorded in
Cost of sales.
- 8 -
Hedging activity affected accumulated other comprehensive gains
(losses) as follows:
Three Months Nine Months
Ended Ended
October 31, October 31,
(in thousands) 2001 2001
------------------------------------------------ ----------------------- ------------------------
Balance at beginning of period $6,758 $ -
Impact of adoption - 3,773
Derivative gains transferred
to earnings (1,485) (2,966)
Change in fair value (1,735) 2,731
----------------------- -----------------------
Balance at October 31, 2001 $3,538 $3,538
======================= ========================
The Company expects $4,486,000 of derivative gains included in
accumulated other comprehensive income to be reclassified into
earnings within the next twelve 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 twelve months.
6. EARNINGS PER SHARE
------------------
Basic earnings per share is computed as net earnings divided by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share includes the dilutive effect of the assumed
exercise of stock options.
The following table summarizes the reconciliation of the numerators
and denominators for the basic and diluted earnings per share ("EPS")
computations:
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------------- ----------------------------
(in thousands) 2001 2000 2001 2000
-------------- ---- ---- ---- ----
Net earnings for basic
and diluted EPS $24,028 $36,320 $90,842 $105,910
=========== ============== ============ ============
Weighted average shares
for basic EPS 145,273 145,809 145,743 145,357
Incremental shares from
assumed exercise of
stock options 4,841 6,327 5,303 6,496
----------- -------------- ------------ ------------
Weighted average shares
for diluted EPS 150,114 152,136 151,046 151,853
=========== ============== ============ ============
- 9 -
For the three months ended October 31, 2001 and 2000, there were
3,254,000 and 1,601,000 stock options excluded from the computations
of earnings per diluted share due to their antidilutive effect. For
the nine months ended October 31, 2001 and 2000, there were 3,145,000
and 1,673,000 stock options excluded from the computations of earnings
per diluted share due to their antidilutive effect.
7. COMPREHENSIVE EARNINGS
----------------------
Comprehensive earnings include all changes in equity during a period
except those resulting from investments by and distributions to
stockholders. The Company's derivative financial instruments and
foreign currency translation adjustments, reported separately in
stockholders' equity, are required to be included in the determination
of comprehensive earnings.
The components of comprehensive earnings were:
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------------- ----------------------------------
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Net earnings $24,028 $36,320 $90,842 $105,910
Other comprehensive
gain(loss):
Derivative financial
instruments, net of
income taxes (3,220) - 3,538 -
Foreign currency
translation adjustments 4,125 (4,124) (8,372) (10,051)
-------------- --------------- -------------- ---------------
Comprehensive earnings $24,933 $32,196 $86,008 $ 95,859
============== =============== ============== ===============
Foreign currency translation adjustments are not adjusted for income
taxes since they relate to investments that are permanent in nature.
8. 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 operating segments on the basis of net
sales and earnings from operations, after the elimination of
intersegment sales and transfers.
- 10 -
Certain information relating to the Company's reportable operating
segments is set forth below:
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------------------- ---------------------------------------
(in thousands) 2001 2000 2001 2000
-------------- ---- ---- ---- ----
Net sales:
U.S. Retail $ 152,068 $ 182,362 $ 497,243 $ 540,788
International Retail 147,220 154,730 444,217 455,430
Direct Marketing 33,786 34,982 99,316 95,447
--------------- --------------- ----------------- ----------------
$ 333,074 $ 372,074 $ 1,040,776 $ 1,091,665
=============== =============== ================= ================
Earnings from
operations*:
U.S. Retail $ 25,359 $ 46,673 $ 109,587 $ 143,686
International Retail 42,067 38,972 122,510 113,422
Direct Marketing 1,724 2,676 7,198 5,133
--------------- --------------- ---------------- -----------------
$ 69,150 $ 88,321 $ 239,295 $ 262,241
=============== =============== ================= =================
* Represents earnings from operations before unallocated corporate
expenses and interest and other expenses, net.
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 Nine Months Ended
October 31, October 31,
------------------------------------ ----------------------------------------
(in thousands) 2001 2000 2001 2000
-------------- ---- ---- ---- ----
Earnings from
operations for
reportable segments $ 69,150 $ 88,321 $ 239,295 $ 262,241
Unallocated
corporate expenses (23,109) (25,269) (78,363) (78,717)
Other expenses, net (5,993) (2,516) (9,527) (7,005)
---------------- ---------------- ------------------ ------------------
Earnings before
income taxes $ 40,048 $ 60,536 $ 151,405 $ 176,519
================ ================ ================== ==================
- 11 -
9. EQUITY INVESTMENT
-----------------
On May 4, 2001, the Company made an equity investment in Little
Switzerland, Inc. ("Little Switzerland"), a publicly-traded company
headquartered in the U.S. Virgin Islands, by purchasing 7,410,000
newly-issued unregistered shares of its common stock at a cost of
$9,535,000 and has provided a line of credit of $2,500,000. The amount
allocated to the Company's interest in the net book value of Little
Switzerland is being accounted for under the equity method based upon
the Company's significant influence including representation on Little
Switzerland's Board of Directors. The Company's share of Little
Switzerland's results from operations have been included in Other
expenses, net and amounted to losses of $1,307,000 and $2,455,000 for
the three and nine months ended October 31, 2001. Little Switzerland
is a leading specialty retailer of brand name watches, jewelry,
crystal, china, fragrances and accessories, operating stores on five
Caribbean islands as well as in Alaska and Florida.
On February 1, 2001, Aber Diamond Corporation ("Aber") announced the
completion of the sale of its interest in the Snap Lake Project to De
Beers Canada Mining, Inc. for $114,000,000. As a result of this sale,
the Company recorded a pretax gain of $5,253,000, net of mineral
rights allocated to the Snap Lake Project, based upon the Company's
equity interest in Aber. The pretax gain was recorded in Other
expenses, net and had the effect of increasing net earnings per
diluted share by $0.02 in the nine month period ended October 31,
2001. The Company's remaining share of Aber's results from operations
have been included in Other expenses, net and were not significant for
the three and nine months ended October 31, 2001.
10. SUBSEQUENT EVENT
----------------
On November 15, 2001, the Company's Board of Directors declared a
quarterly dividend of $0.04 per share. This dividend will be paid on
January 10, 2002 to stockholders of record on December 20, 2001.
On November 5, 2001, the Company's $160,000,000 multicurrency
revolving credit facility (the "Credit Facility") was amended to
increase the amount to $200,000,000 and the number of banks from five
to six. The Company is entitled to borrow under the Credit Facility as
follows: $38,750,000 on a pro-rata basis from each of three banks,
$25,000,000 from one bank, $15,000,000 from one 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 on November 5, 2006.
- 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 business-to-business 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 fiscal years ended on January 31 of the
following calendar year.
Net sales declined 10% to $333,074,000 in the three months (third quarter) ended
October 31, 2001 and declined 5% to $1,040,776,000 in the nine months
(year-to-date) ended October 31, 2001. On a constant-exchange-rate basis which
excludes the effect of translating local-currency-denominated sales into U.S.
dollars, net sales declined 7% in the third quarter and 1% in the year-to-date,
while worldwide comparable store sales declined 11% and 4% in those respective
periods. Net earnings declined 34% to $24,028,000 in the third quarter and 14%
to $90,842,000 in the year-to-date.
The following table highlights certain operating data as a percentage of net
sales:
Three Months Nine Months
Ended October 31, Ended October 31,
----------------- -----------------
2001 2000 2001 2000
----------------- -----------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 42.1 44.5 42.5 44.3
----------------- -----------------
Gross profit 57.9 55.5 57.5 55.7
Selling, general
and administrative expenses 44.1 38.5 42.1 38.9
----------------- -----------------
Earnings from operations 13.8 17.0 15.4 16.8
Other expenses, net 1.8 0.7 0.9 0.6
----------------- -----------------
Earnings before income taxes 12.0 16.3 14.5 16.2
Provision for income taxes 4.8 6.5 5.8 6.5
----------------- -----------------
Net earnings 7.2% 9.8% 8.7% 9.7%
----------------- -----------------
Net sales
---------
Net sales by channel of distribution were as follows:
Three Months Nine Months
Ended October 31, Ended October 31,
------------------- -----------------------
(in thousands) 2001 2000 2001 2000
------------------------------------------------------ -----------------------
U.S. Retail $152,068 $182,362 $ 497,243 $540,788
International Retail 147,220 154,730 444,217 455,430
Direct Marketing 33,786 34,982 99,316 95,447
------------------- -----------------------
$333,074 $372,074 $1,040,776 $1,091,665
------------------- -----------------------
U.S. Retail sales declined 17% in the third quarter and 8% in the year-to-date.
Comparable store sales declined 19% in the third quarter and
-13-
10% in the year-to-date. Management attributes the declines to several factors:
challenging economic and retail conditions that resulted in smaller average
transaction sizes; and reduced levels of customer traffic and transactions in
many of Tiffany's stores following the events of September 11th. Management also
notes difficult comparisons to strong growth in 2000. Sales in the flagship New
York store declined 29% in the third quarter and 17% in the year-to-date, while
comparable branch store sales declined 16% and 8% in those respective periods.
International Retail sales declined 5% in the third quarter and 2% in the
year-to-date. The Company's reported sales reflect either a translation-related
benefit from a weakening U.S. dollar or a detriment from a strengthening U.S.
dollar. Most significantly, the yen in 2001 was weaker than in 2000. Therefore,
on a constant-exchange-rate basis, International Retail sales rose 4% and 7% in
those respective periods. In Japan, total retail sales in local currency rose 8%
in the third quarter and 12% in the year-to-date on the basis of increased unit
sales partly offset by a smaller average transaction size; comparable store
sales in local currency rose 1% and 4% in those respective periods. In non-U.S.
markets outside of Japan, comparable store sales on a constant-exchange-rate
basis in the Asia-Pacific region declined 4% and were unchanged in the
respective periods and, in Europe, declined 12% and rose 5% in the respective
periods.
In 2001 year-to-date, the Company opened U.S. stores in San Jose and Tampa, and,
internationally, three department-store boutiques in Japan, a store in Melbourne
and one in Sao Paulo. The Company closed a boutique in Melbourne and one in Hong
Kong. In the fourth quarter of 2001, the Company has opened a department-store
boutique in Tokyo, a store in Rome and a third store in London. The Company
plans to open a store in Beijing in December. A boutique in a Matsubishi
department store in Hamamatsu, Japan was closed in November due to that store's
closing.
On August 1, 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. Existing agreements were scheduled to expire later 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. A separate set of agreements covers the
operation of a freestanding TIFFANY & CO. store on Tokyo's Ginza. Under the new
arrangements, Tiffany is not restricted from further expansion of its Tokyo
operations and, beginning in 2003, Tiffany will pay a reduced percentage fee
based on sales.
Direct Marketing sales declined 3% in the third quarter and rose 4% in the
year-to-date. Business Sales Division (name changed from Corporate Division)
sales declined 20% and 6% in those respective periods due to declines in the
average size per order. Combined catalog and Internet sales increased 19% and
18% in those respective periods due to strong growth in Internet sales, which
commenced business in November 1999.
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Gross Profit
------------
Gross profit as a percentage of net sales ("gross margin") in the third quarter
and year-to-date was higher than the prior year. Management attributes the
increases to a shift in sales mix toward lower-priced items that carry a higher
gross margin, as well to improved efficiencies in product manufacturing and
sourcing.
The Company adjusts its retail prices in Japan from time to time to address
changes in the yen/dollar relationship and local competitive pricing.
Management's ongoing strategy includes implementing selective price adjustments,
achieving further product manufacturing/sourcing efficiencies and leveraging its
fixed costs, in order to maintain the Company's gross margin at or above prior
year levels.
Selling, General and Administrative Expenses ("SG&A")
-------------------------------------------------------
SG&A increased 2% in the third quarter and 3% in the year-to-date. Incremental
depreciation and staffing expenses related to the Company's overall worldwide
expansion were partly offset by lower sales-related variable expenses. In
addition, the weaker yen had the effect of decreasing SG&A growth in both
periods when translating yen-denominated SG&A into U.S. dollars. The ratio of
SG&A to net sales rose in both periods due to the declines in the Company's net
sales, but management's longer-term objective is to reduce this ratio by
leveraging sales growth against the Company's fixed-expense base.
Other expenses, net
-------------------
Other expenses, net in the third quarter and year-to-date were higher than the
prior year due to lower interest income on cash and cash equivalents, interest
expense on higher short-term borrowings and the recognition of the Company's
share of losses in equity investments. Other expenses, net in 2001 include a
pretax gain in the first quarter of $5,253,000, based on Tiffany's approximate
14.7% 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 of 40.0% in the third quarter and year-to-date
was equal to the prior year.
New Accounting Pronouncements
-----------------------------
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142 "Goodwill and Other Intangible Assets." Effective February 1, 2002, the
Company will no longer be required to amortize goodwill and certain other
intangible assets as a charge to earnings. In addition, the Company will be
required to review goodwill and other intangible assets for potential
impairment. The Company will adopt these standards on February 1, 2002 and does
not expect a significant impact on its financial position, earnings or cash
flows.
Effective February 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and its related amendment, SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." These standards require that all derivative instruments be recorded
on the consolidated balance sheet at their fair value as either assets or
liabilities. Changes in
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the fair value of derivatives are recorded each period in current or
comprehensive earnings, depending on whether a derivative is designated as part
of an effective hedge transaction and, if it is, the type of hedge transaction.
Gains and losses on derivative instruments will be reclassified to earnings in
the period in which earnings are affected by the hedged item. As of February 1,
2001, the adoption of these new standards resulted in a cumulative effect of an
accounting change of $1,653,000, recorded in Cost of sales, which reduced net
earnings by $975,000, net of income taxes, and increased accumulated
comprehensive earnings by $3,773,000, net of income taxes of $2,622,000.
During the three months ended October 31, 2001, the Company recognized pretax
hedging gains relating to changes in the time value of its foreign
currency-purchased put options of $468,000, recorded in Cost of sales. During
the nine months ended October 31, 2001, the Company recognized pretax hedging
losses relating to changes in the time value of its foreign currency-purchased
put options of $375,000, recorded in Cost of sales.
Hedging activity affected accumulated other comprehensive gains (losses) as
follows:
Three Months Nine Months
Ended Ended
(in thousands) October 31, 2001 October 31, 2001
-------------- ---------------- ----------------
Balance at beginning of period $6,758 $ -
Impact of adoption - 3,773
Derivative gains transferred
to earnings (1,485) (2,966)
Change in fair value (1,735) 2,731
------ ------
Balance at October 31,2001 $ 3,538 $ 3,538
====== ======
The Company expects $4,486,000 of derivative gains included in accumulated other
comprehensive income to be reclassified into earnings within the next twelve
months. This amount may vary due to fluctuations in the yen exchange rate.
FINANCIAL CONDITION
-------------------
Liquidity and Capital Resources
-------------------------------
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. Management believes
that the Company's financial condition at October 31, 2001 provides sufficient
resources to support current business activities and planned expansion.
The Company incurred a net cash inflow from operating activities of $19,818,000
in the nine months ended October 31, 2001 compared with an outflow of
$18,707,000 in the prior year. The improvement in cashflow in 2001 was primarily
due to a decreased use of working capital.
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Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were $608,877,000
and 2.6:1 at October 31, 2001 compared with $667,647,000 and 3.0:1 at January
31, 2001 and $668,808,000 and 3.3:1 at October 31, 2000.
Accounts receivable at October 31, 2001 were 7% below January 31, 2001 and 2%
below October 31, 2000, due to lower sales as well as the discontinuation of
most wholesale trade sales during the past year.
Inventories at October 31, 2001 were 8% higher than at January 31, 2001 and 7%
higher than at October 31, 2000. An increase in finished goods was primarily due
to lower-than-planned sales levels in 2001's year-to-date period. Inventories
were also increased to support new store openings, new product introductions and
broadened product offerings especially in the engagement jewelry category. In
order to adjust inventory levels to reflect recent and anticipated sales demand,
management has reduced the quantities of certain finished goods to be purchased
from outside suppliers and has selectively reduced levels of internal
production. The effect has been a deceleration in the rate of year-over-year
inventory growth at the end of each quarter in 2001. In 2000, management
increased raw materials inventories to support internal jewelry manufacturing.
In addition, management responded to projected shortages in the market supply of
high quality diamonds by increasing its purchases in the second half of 2000. In
addition, raw materials and work-in-process inventories have declined from
January 31, 2001 levels. The Company's inventory purchase commitments from its
outside suppliers amounted to approximately $90,000,000 at October 31, 2001.
The Company's ongoing inventory objectives are: to refine worldwide
replenishment systems; to focus on the specialized disciplines of product
development, category management and sales demand forecasting; to improve
presentation and management of inventories in each store; and to improve
warehouse management and supply-chain logistics.
Capital expenditures were $135,780,000 in the nine months ended October 31,
2001, compared with $70,878,000 in the prior year. The increase in capital
expenditures was the result of costs related to the expansion of internal
jewelry manufacturing and office facilities and the opening, renovation and
expansion of retail stores. Based on current plans, management expects that
capital expenditures in 2001 will be approximately $206,000,000, due to the
costs related to the above projects, as well as investments in new systems and
the purchase of the Company's Parsippany, New Jersey customer
service/distribution center and office facility ("CSC").
In addition to the above capital projects, the Company finalized plans and
commenced costruction of an additional distribution center in Hanover Township,
New Jersey during the second quarter of 2001. The new customer fulfillment
center ("CFC") of approximately 280,000 square feet will fulfill shipments to
retail, catalog, e-commerce and business sales customers. Subsequently, the
Company's CSC will be used to replenish store inventories. The CFC is scheduled
to open in late-2003 and the Company estimates that the overall cost of the
project will be approximately $95,000,000.
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In May 2001, the Company made an equity investment in Little Switzerland by
purchasing 7,410,000 newly-issued unregistered shares of its common stock at a
cost of $9,535,000 and has provided a line of credit of $2,500,000.
In fiscal 2000, the Company began a four-year project to renovate and
reconfigure its flagship New York 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, with 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 approximately $27,600,000 for
the nine months ended October 31, 2001 and $33,000,000 for the project to date.
Based on current plans, the Company estimates that the overall cost of these
projects will be approximately $87,000,000.
In February 2000, the Company announced the acquisition of an approximate 5.4%
equity interest in Della.com, Inc. ("Della"), a provider of on-line wedding gift
registry services. Immediately thereafter, the Company entered into a Gift
Registry Service Agreement, whereby the Company agreed to offer products through
Della's site and whereby Della agreed to develop an on-line wedding gift
registry for the Company, which was launched in August 2000. In April 2000,
Della.com merged with and into Wedcom Inc. with the consequence that the
Company's equity interest in Della.com was converted to an approximate 2.7%
interest in Wedcom Inc., assuming the conversion of all outstanding preferred
shares to common.
In July 1999, the Company made a strategic investment in Aber by purchasing 8
million shares of its common stock at a cost of $70,636,000, which represents
approximately 14.7% of Aber's outstanding shares. 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 2003. In addition, prior to the start of production, the Company will form a
joint venture and enter 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.
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 and would have expired in
November 2000. As extended, the program authorized future 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 will depend on a variety of factors such as
price and other market conditions. The Company repurchased and retired 1,528,800
shares of Common Stock in the nine months ended October 31, 2001 at an aggregate
cost of $36,416,000, or an average cost of $23.82 per share. At October 31,
2001, $61,472,000 remains available for future share repurchases.
As a result of many of the above factors, net-debt (short-term borrowings plus
long-term debt less cash and cash equivalents) and the
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corresponding ratio of net-debt as a percentage of total capital (net-debt plus
stockholders' equity) were $244,475,000 and 20% at October 31, 2001, compared
with $75,322,000 and 8% at January 31, 2001 and $163,566,000 and 16% at October
31, 2000.
The Company's sources of working capital are internally-generated cash flows and
borrowings available under a multicurrency revolving 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
Company is entitled to borrow under the Credit Facility as follows: $38,750,000
on a pro-rata basis from each of three banks, $25,000,000 from one bank,
$15,000,000 from one 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 on November
5, 2006. Management anticipates that internally-generated cash flows and funds
available under the revolving credit facility 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.
Market Risk
-----------
The Company is exposed to market risk from fluctuations in foreign currency
exchange rates and interest rates, which could impact 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 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. The Company's primary net
foreign currency market exposure is the Japanese yen. Management does not
foresee nor expect any significant changes in foreign currency exposure in the
near future.
The Company also manages its portfolio of fixed-rate debt 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.
Management does not foresee nor expect any significant changes in its exposure
to interest rate fluctuations, nor in how such exposure is managed in the near
future.
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.
-19-
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.
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 sales in Japan will not decline substantially; (ii) that there will not be
a substantial adverse change in the exchange relationship between the Japanese
yen and the U.S. dollar; (iii) that Mitsukoshi's ability to continue as a
leading department store operator in Japan will continue; (iv) 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; (v) 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"; (vi) that existing product supply arrangements, including
license arrangements with third-party designers Elsa Peretti and Paloma Picasso,
will continue; (vii) that the wholesale market for high-quality cut diamonds
will provide continuity of supply and pricing; (viii) that the investment in
Aber achieves its financial and strategic objectives; (ix) 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; (x)
that new systems, particularly for inventory management, can be successfully
integrated into the Company's operations; (xi) that consumer spending does not
decline substantially during the fourth quarter of any year; (xii) that the
events of September 11, 2001 and subsequent military operations, as well as
economic conditions, do not result in long-term disruptions to, or a slowing of,
tourist travel; and (xiii) that warehousing and distribution productivity and
capacity can be further improved to support the Company's worldwide
distribution requirements.
-20-
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.130 Credit Agreement dated as of November 5, 2001, by and among
Registrant, Tiffany and Company, Tiffany & Co. International, each
other Subsidiary of Registrant that is a Borrower and is a signatory
thereto and The Bank of New York, as the Swing Line Lender, as the
Issuing Bank, as a Lender, and as Administrative Agent, ABN AMRO Bank
N.V., The Chase Manhattan Bank, The Dai-ichi Kangyo Bank Ltd., Firstar
Bank, NA, and Fleet National Bank, Fleet Precious Metals Inc.
(collectively, as a Lender).
10.131 Guaranty Agreement dated as of November 5, 2001,with respect to Credit
Agreement (see Exhibit 10.129 above) by and among Registrant, Tiffany
and Company, Tiffany & Co. International, and Tiffany & Co. Japan Inc.
and The Bank of New York, as Administrative Agent.
(b) Reports on Form 8-K
On August 1, 2001, Registrant's wholly-owned subsidiary, Tiffany & Co.
Japan Inc. ("Tiffany-Japan") entered into agreements with Mitsukoshi
Ltd. of Japan ("Mitsukoshi").
On August 16, 2001, Registrant issued a press release announcing its
sales and earnings for the three-month period ended July 31, 2001.
On October 3, 2001, Registrant issued a press release providing
updated earnings guidance for the remainder of the year and
information concerning its stock repurchase program.
- 21 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIFFANY & CO.
(Registrant)
Date: December 11, 2001 By:/s/ James N. Fernandez
----------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
- 22 -
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.130 Credit Agreement dated as of November 5, 2001, by and among
Registrant, Tiffany and Company, Tiffany & Co. International, each
other Subsidiary of Registrant that is a Borrower and is a signatory
thereto and The Bank of New York, as the Swing Line Lender, as the
Issuing Bank, as a Lender, and as Administrative Agent, ABN AMRO Bank
N.V., The Chase Manhattan Bank, The Dai-ichi Kangyo Bank Ltd., Firstar
Bank, NA, and Fleet National Bank, Fleet Precious Metals Inc.
(collectively, as a Lender).
10.131 Guaranty Agreement dated as of November 5, 2001,with respect to Credit
Agreement (see Exhibit 10.129 above) by and among Registrant, Tiffany
and Company, Tiffany & Co. International, and Tiffany & Co. Japan Inc.
and The Bank of New York, as Administrative Agent.
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