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 April 30, 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, 145,695,181 shares outstanding at the close
of business on April 30, 2002.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2002
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - April 30, 2002,
January 31, 2002 and
April 30, 2001 (Unaudited) 3
Consolidated Statements of Earnings - for the
three months ended April 30, 2002
and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows - for
the three months ended April 30, 2002
and 2001 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
(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)
April 30, January 31, April 30,
2002 2002 2001
------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 145,265 $ 173,675 $ 124,695
Accounts receivable, less allowances
of $6,935, $6,878 and $7,619 100,982 98,527 94,011
Inventories, net 653,082 611,653 665,893
Deferred income taxes 45,796 41,170 33,383
Prepaid expenses and other current assets 33,841 29,389 36,715
--------------- --------------- ---------------
Total current assets 978,966 954,414 954,697
Property and equipment, net 540,384 525,585 444,489
Deferred income taxes 5,452 4,560 4,917
Other assets, net 145,659 145,309 138,187
--------------- --------------- ---------------
$ 1,670,461 $ 1,629,868 $ 1,542,290
=============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 41,975 $ 40,402 $ 33,933
Current portion of long-term debt 51,500 51,500 -
Obligation under capital lease - - 41,581
Accounts payable and accrued liabilities 171,906 161,782 162,942
Income taxes payable 27,743 48,997 21,794
Merchandise and other customer credits 38,184 38,755 36,135
--------------- --------------- ---------------
Total current liabilities 331,308 341,436 296,385
Long-term debt 181,995 179,065 236,141
Postretirement/employment benefit obligations 31,333 29,999 27,030
Other long-term liabilities 43,337 42,423 37,596
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value; authorized 240,000 shares,
issued and outstanding 145,719, 145,001 and 145,883 1,457 1,450 1,459
Additional paid-in capital 344,828 330,743 323,077
Retained earnings 770,433 743,543 649,597
Accumulated other comprehensive(loss) gain:
Foreign currency translation adjustments (36,879) (45,306) (35,533)
Cash flow hedging instruments 2,649 6,515 6,538
--------------- --------------- ---------------
Total stockholders' equity 1,082,488 1,036,945 945,138
--------------- --------------- ---------------
$ 1,670,461 $ 1,629,868 $ 1,542,290
=============== =============== ===============
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
April 30,
-----------------------------------
2002 2001
-------------- ---------------
Net sales $ 347,129 $ 336,401
Cost of sales 140,714 146,261
-------------- ---------------
Gross profit 206,415 190,140
Selling, general and administrative expenses 147,849 140,919
-------------- ---------------
Earnings from operations 58,566 49,221
Other expense (income), net 4,052 (2,047)
-------------- ---------------
Earnings before income taxes 54,514 51,268
Provision for income taxes 21,805 20,506
-------------- ---------------
Net earnings $ 32,709 $ 30,762
============== ===============
Net earnings per share:
Basic $ 0.22 $ 0.21
============== ===============
Diluted $ 0.22 $ 0.20
============== ===============
Weighted average number of common shares:
Basic 145,434 145,915
Diluted 150,181 151,304
See notes to consolidated financial statements.
- 4 -
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
April 30,
------------------------------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 32,709 $ 30,762
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 18,014 15,357
Loss (gain) on equity investments 384 (5,195)
Provision for uncollectible accounts 368 246
Provision for inventories 2,475 1,976
Tax benefit from exercise of stock options 6,915 665
Deferred income taxes (3,203) (7,771)
Loss on disposal of fixed assets 33 27
Provision for postretirement/employment benefits 1,333 896
Changes in assets and liabilities:
Accounts receivable 755 12,484
Inventories (34,426) (27,976)
Prepaid expenses and other current assets (10,130) (5,756)
Other assets, net (462) (524)
Accounts payable 5,647 (12,430)
Accrued liabilities 2,935 (10,401)
Income taxes payable (21,960) (19,816)
Merchandise and other customer credits (607) 112
Other long-term liabilities 1,279 510
------------------ -------------------
Net cash provided by (used in) operating activities 2,059 (26,834)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (32,133) (38,273)
Proceeds from lease incentives 2,570 1,000
------------------ -------------------
Net cash used in investing activities (29,563) (37,273)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment of) proceeds from short-term borrowings, net (6) 6,537
Repurchase of Common Stock - (5,700)
Proceeds from exercise of stock options 2,850 1,120
Cash dividends on Common Stock (5,819) (5,843)
------------------ -------------------
Net cash used in financing activities (2,975) (3,886)
------------------ -------------------
Effect of exchange rate changes on
cash and cash equivalents 2,069 (2,925)
------------------ -------------------
Net decrease in cash and cash equivalents (28,410) (70,918)
Cash and cash equivalents at beginning of year 173,675 195,613
------------------ -------------------
Cash and cash equivalents at end of three months $ 145,265 $ 124,695
================== ===================
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 April 30, 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 prior years' note disclosures
to conform to the current year's presentation.
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 months ended April 30,
2002 and 2001 are not necessarily indicative of the results of the
entire fiscal year.
2. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash paid during the year for:
April 30, April 30,
(in thousands) 2002 2001
-------------- ---------------- ----------------
Interest $ 1,767 $ 1,768
================ ================
Income taxes $38,947 $44,882
================ ================
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
-----------
April 30, January 31, April 30,
(in thousands) 2002 2002 2001
-------------- ------------------- -------------------- ---------------------
Finished goods $539,423 $528,671 $546,024
Raw materials 86,755 67,779 66,188
Work-in-process 30,716 18,722 57,776
------------------- -------------------- ---------------------
656,894 615,172 669,988
Reserves (3,812) (3,519) (4,095)
------------------- -------------------- ---------------------
$653,082 $611,653 $665,893
=================== ==================== =====================
LIFO-based inventories at April 30, 2002, January 31, 2002 and April
30, 2001 were $514,523,000, $481,716,000 and $545,007,000, with the
current cost exceeding the LIFO inventory value by approximately
$19,471,000, $18,971,000 and $18,205,000 at the end of each period.
The LIFO valuation method had no effect on net earnings per diluted
share for the three month period ended April 30, 2002 and had the
effect of decreasing net earnings per diluted share by $0.01 in the
three month period ended April 30, 2001.
4. 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 ended April 30,
2002. At April 30, 2002, the Company had goodwill of $10,520,000.
During the second quarter of 2002, the Company will complete its test
for goodwill impairment and, if impairment is indicated, record such
impairment as a cumulative effect of an accounting change effective
February 1, 2002. The Company does not expect the results of the
impairment test to have a significant impact on the Company's
financial position, earnings or cash flows.
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. 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
April 30,
-----------------------------------
(in thousands) 2002 2001
-------------- ---------------- ---------------
Balance at beginning of period $6,515 $ -
Impact of adoption - 3,773
Derivative gains transferred to
earnings (1,890) (449)
Change in fair value (1,976) 3,214
---------------- ---------------
$2,649 $6,538
================ ===============
The Company expects $3,432,000 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.
- 8 -
The following table summarizes the reconciliation of the numerators
and denominators for the basic and diluted earnings per share ("EPS")
computations:
Three Months Ended
April 30,
--------------------------------
(in thousands) 2002 2001
-------------- ------------- -------------
Net earnings for basic
and diluted EPS $32,709 $30,762
============= =============
Weighted average shares
for basic EPS 145,434 145,915
Incremental shares from
assumed exercise of
stock options 4,747 5,389
------------- -------------
Weighted average shares
for diluted EPS 150,181 151,304
============= =============
At April 30, 2002 and 2001, there were 1,717,000 and 3,191,000 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 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
April 30,
--------------------------------
(in thousands) 2002 2001
-------------- -------------- --------------
Net earnings $32,709 $30,762
Other comprehensive
gain (loss):
Cash flow hedging instruments
(net of taxes of $2,081 and $4,544) (3,866) 6,538
Foreign currency
translation adjustments 8,427 (10,687)
-------------- --------------
Comprehensive earnings $37,270 $26,613
============== ==============
Foreign currency translation adjustments are not adjusted for income
taxes since they relate to investments that are permanent in nature.
- 9 -
8. SEGMENT INFORMATION
-------------------
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 operating
segments is set forth below:
Three Months Ended
April 30,
---------------------------------------
(in thousands) 2002 2001
----------------------- ---------------- ----------------
Net sales:
U.S. Retail $ 165,670 $ 159,012
International Retail 147,638 146,423
Direct Marketing 33,821 30,966
---------------- ----------------
$ 347,129 $ 336,401
================ ================
Earnings from operations*:
U.S. Retail $ 34,661 $ 34,564
International Retail 47,073 38,487
Direct Marketing 4,934 2,159
---------------- ----------------
$ 86,668 $ 75,210
================ ================
* 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.
- 10 -
The following table sets forth a reconciliation of the reportable
segments' earnings from operations to the Company's consolidated
earnings before income taxes:
Three Months Ended
April 30,
----------------------------------------
(in thousands) 2002 2001
--------------------- ----------------- ----------------
Earnings from operations
for reportable segments $ 86,668 $ 75,210
Unallocated corporate expenses 28,102 25,989
Other expense (income), net 4,052 (2,047)
----------------- ----------------
Earnings before income taxes $ 54,514 $ 51,268
================= ================
9. SUBSEQUENT EVENTS
-----------------
On May 16, 2002, the Company's Board of Directors declared a quarterly
dividend of $0.04 per common share. This dividend will be paid on July
10, 2002 to stockholders of record on June 20, 2002.
- 11 -
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 (first quarter) ended April 30, 2002, net sales rose 3% to
$347,129,000. The Company's reported sales reflect either a translation-related
benefit from strengthening foreign currencies or a detriment from a
strengthening U.S. dollar. Most significantly, the Japanese yen in the first
quarter was weaker than in 2001. Therefore, on a constant-exchange-rate basis,
net sales increased 6% and worldwide comparable store sales increased 1%. Net
earnings increased 6% to $32,709,000 in the first quarter.
The following table highlights certain operating data as a percentage of net
sales:
Three Months
Ended April 30,
--------------------
2002 2001
--------------------
Net sales 100.0% 100.0%
Cost of sales 40.5 43.5
--------------------
Gross profit 59.5 56.5
Selling, general
and administrative expenses 42.6 41.9
--------------------
Earnings from operations 16.9 14.6
Other expenses, net 1.2 (0.6)
--------------------
Earnings before income taxes 15.7 15.2
Provision for income taxes 6.3 6.1
--------------------
Net earnings 9.4% 9.1%
--------------------
Net Sales
---------
Net sales by channel of distribution were as follows:
Three Months
Ended April 30,
--------------------
(in thousands) 2002 2001
--------------- --------------------
U.S. Retail $165,670 $159,012
International Retail 147,638 146,423
Direct Marketing 33,821 30,966
--------------------
$347,129 $336,401
U.S. Retail sales rose 4% in the first quarter. Comparable store sales increased
2%. Sales in the flagship New York store declined 1% in the
-12-
first quarter, while comparable branch store sales rose 2%. There were an
increased number of retail transactions, but management believes that smaller
average transaction sizes resulted from challenging economic and retail
conditions. In addition, sales to foreign tourists were below the prior year.
International Retail sales rose 1% in the first quarter (8% on a
constant-exchange-rate basis). In Japan, total retail sales in local currency
rose 7% in the first quarter due to an increased average price per unit sold
partly offset by a decline in unit volume; comparable store sales in local
currency declined 1%. In non-U.S. markets outside of Japan, comparable store
sales in the first quarter on a constant-exchange-rate basis increased 5% in the
Asia-Pacific region and declined 5% in Europe.
In the first quarter, the Company opened two department-store boutiques in
Japan. The expansion plan for 2002 includes: in the U.S., new stores in
Bellevue, Washington (opened in May 2002), East Hampton, New York, Orlando,
Florida, St. Louis, Missouri and Honolulu, Hawaii (but will close two small
hotel-boutiques); internationally, opening locations in both Korea and Taiwan.
In total, worldwide retail gross square footage is expected to increase at least
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.
A separate set of agreements covers 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 greater reduction in fees paid to Mitsukoshi in
2003 and beyond, as the Company employs increasing numbers of its own personnel
in the boutiques.
Direct Marketing sales increased 9% in the first quarter. Business Sales
division sales declined 11% due to a decline in the average size per order.
Combined catalog/Internet sales increased 37% 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 first quarter
was higher than the prior year. Management attributes the increase primarily to
a shift in sales mix toward lower-priced items that carry a higher gross margin,
as well as 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,
-13-
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
remainder of the year, management expects a quarterly year-over-year increase in
gross margin, but to a lesser extent than in the first quarter.
Selling, General and Administrative Expenses ("SG&A")
-----------------------------------------------------
SG&A increased 5% in the first quarter. 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 rate of SG&A growth
was moderated by the translation effect resulting from a weaker yen. As a
percentage of net sales, SG&A rose in the first quarter, but 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 Expense (Income), Net
---------------------------
Other expense (income), net in the first quarter was higher than the prior year
partly due to lower interest income on cash and cash equivalents. Other expense
(income), net in the first quarter of 2001 included a pretax gain 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 first quarter 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 ended April 30, 2002. At April 30, 2002, the
Company had goodwill of $10,520,000. During the second quarter of 2002, the
Company will complete its test for goodwill impairment and, if impairment is
indicated, record such impairment as a cumulative effect of an accounting change
effective February 1, 2002. The Company does not expect the results of the
impairment test to have a significant impact on the Company's financial
position, earnings or cash flows.
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.
-14-
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
-------------------------------
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 $2,059,000
in the three months ended April 30, 2002 compared with an outflow of $26,834,000
in the prior year. The improvement in cash flow was primarily due to a decreased
use of working capital.
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were $647,658,000
and 3.0:1 at April 30, 2002 compared with $612,978,000 and 2.8:1 at January 31,
2002 and $658,312,000 and 3.2:1 at April 30, 2001.
Accounts receivable at April 30, 2002 were 2% above January 31, 2002 and 7%
above April 30, 2001, primarily due to increased sales.
Inventories at April 30, 2002 were 7% above January 31, 2002. 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 2% below April 30, 2001. 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 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 of $32,133,000 in the three months ended April 30, 2002
were below $38,273,000 in the prior year primarily due to differences in the
timing of projects. Expenditures for 2002 are expected to be in a range of
$175,000,000-$200,000,000, which approximates 2001. Capital expenditures in 2002
will support the opening, renovation and expansion of stores and distribution
facilities, as well as ongoing investments in new systems. In 2001, the Company
commenced construction of a 266,000 square foot customer
fulfillment/distribution center ("CFC") in Hanover Township, New Jersey that
will fulfill shipments to retail, catalog, Internet and business sales
customers. Upon completion of the CFC, the Company's existing customer
service/distribution center ("CSC") in Parsippany, New Jersey will be used
primarily to replenish store inventories. The CFC is scheduled to open in
late-2003 and the Company estimates that the
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overall cost of that project will be approximately $98,500,000, of which
$31,910,000 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 approximately $41,467,000 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 2001, the Company made an equity investment in Little Switzerland Inc., a
publicly-traded company headquartered in the U.S. Virgin Islands, 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 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.
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. The Company did not repurchase any shares of Common
Stock in the three months ended April 30, 2002. At April 30, 2002, $58,622,000
remains available for future share repurchases.
The Company's $51,500,000 of 7.52% Senior Notes are due January 31, 2003. In
order to provide funds for the redemption of these Senior Notes, as well as for
general corporate purposes, the Company is currently working toward a placement
of $100,000,000 of Senior Notes to private investors. The notes would be due
2009 and 2012 with seven-year and 10-year lump sum repayments upon maturities.
Management anticipates that internally-generated cash flows, funds available
under a multicurrency revolving credit facility ("Credit Facility") and the
completion of the Senior Notes offering will be sufficient to support the
Company's planned worldwide business
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expansion and seasonal working capital increases that are typically required
during the third and fourth quarters of the year.
The Company's sources of working capital are internally-generated cash flows and
borrowings available under the 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.
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 $130,205,000 and 11% at April 30, 2002, compared with $97,292,000 and 9% at
January 31, 2002 and $145,379,000 and 13% at April 30, 2001.
The Company's contractual cash obligations and commercial commitments at April
30, 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.
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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 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.
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PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
10.126a First Amendment and Waiver Agreement to Form of Note Purchase Agreement
referred to in previously filed Exhibit 10.126, dated May 16, 2002.
10.130a Amendment No. 1 to Credit Agreement referred to in previously filed
Exhibit 10.130, dated April 12, 2002.
(b) Reports on Form 8-K
On February 28, 2002, Registrant issued a press release announcing its
sales and earnings for the fourth quarter and fiscal year ended January
31, 2002.
On April 25, 2002, Registrant issued a press release providing a
business update for its first quarter that ends on April 30.
On May 14, 2002, Registrant issued a press release reporting sales and
earnings were up in the first quarter that ended April 30, 2002.
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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: June 7, 2002 By: /s/ James N. Fernandez
____________________________
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.126a First Amendment and Waiver Agreement to Form of Note Purchase Agreement
referred to in previously filed Exhibit 10.126, dated May 16, 2002.
10.130a Amendment No. 1 to Credit Agreement referred to in previously filed
Exhibit 10.130, dated April 12, 2002.
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