EXHIBIT 13.1
Tiffany & Co.
Report on Form 10-K
SELECTED FINANCIAL DATA
The following table sets forth selected financial data, certain of which have
been derived from the Company's audited financial statements for 1998-2002.
Certain reclassifications were made to prior years' financial data to conform
with the current year's presentation. All references to years relate to the
fiscal year that ends on January 31 of the following calendar year.
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(in thousands, except per share amounts, percentages,
retail locations and employees) 2002 2001 2000 1999 1998
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EARNINGS DATA
Net sales $ 1,706,602 $ 1,606,535 $ 1,668,056 $ 1,471,690 $ 1,177,929
Gross profit 1,011,448 943,477 948,414 821,680 625,599
Earnings from operations 319,197 309,897 327,396 256,883 161,122
Net earnings 189,894 173,587 190,584 145,679 90,062
Net earnings per diluted share 1.28 1.15 1.26 0.97 0.63
Weighted-average number of
diluted common shares 148,591 150,517 151,816 149,666 143,936
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BALANCE SHEET AND CASH FLOW DATA
Total assets $ 1,923,586 $ 1,631,074 $ 1,568,340 $ 1,343,562 $ 1,057,023
Cash and cash equivalents 156,197 173,675 195,613 216,936 188,593
Inventories, net 732,088 611,653 651,717 504,800 481,439
Working capital 770,481 638,709 695,548 633,022 538,483
Net cash provided by operations 221,441 241,506 110,696 230,351 80,178
Capital expenditures 219,717 170,806 108,382 171,237 62,821
Short-term borrowings and current
portion of long-term debt 52,552 91,902 28,778 20,646 97,370
Long-term debt 297,107 179,065 242,157 249,581 194,420
Stockholders' equity 1,208,049 1,036,945 925,483 757,076 516,453
Stockholders' equity per share 8.34 7.15 6.34 5.22 3.72
Cash dividends per share 0.160 0.160 0.150 0.113 0.085
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RATIO ANALYSIS AND OTHER DATA
As a percentage of net sales:
Gross profit 59.3% 58.7% 56.9% 55.8% 53.1%
Earnings from operations 18.7% 19.3% 19.6% 17.5% 13.7%
Net earnings 11.1% 10.8% 11.4% 9.9% 7.6%
Current ratio 3.6:1 3.0:1 3.2:1 3.4:1 2.9:1
Return on average assets 10.7% 10.9% 13.1% 12.1% 9.6%
Return on average stockholders' equity 16.9% 17.7% 22.7% 22.9% 18.8%
Net-debt as a percentage of total capital 13.8% 8.6% 7.5% 6.6% 16.7%
Company-operated retail locations 131 126 119 110 104
Number of employees 6,431 5,938 5,960 5,368 4,845
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TIFFANY & CO. AND SUBSIDIARIES
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CHANNELS OF DISTRIBUTION
The Company operates four channels of distribution. U.S. Retail includes sales
in Company-operated TIFFANY & CO. stores. International Retail primarily
includes sales in Company-operated TIFFANY & CO. retail locations in markets
outside the U.S., as well as a limited amount of business-to-business sales,
Internet sales and wholesale sales of TIFFANY & CO. products to independent
retailers and distributors in certain of those markets. Direct Marketing
includes business-to-business, catalog and Internet sales in the U.S. of TIFFANY
& CO. products. Specialty Retail primarily includes the retail sales made by
Little Switzerland, Inc. ("Little Switzerland") in its jewelry, watches,
crystal, china and giftware stores, as well as consolidated results from other
ventures that are now or will be operated under non-TIFFANY & CO. trademarks or
trade names.
All references to years relate to the fiscal year that ends on January 31 of the
following calendar year.
In order to focus on operating its own TIFFANY & CO. stores and/or to eliminate
marginally profitable operations, the Company eliminated certain selling
operations in recent years. In 2002, the Company announced that it would no
longer solicit new employee service award programs through its Business Sales
division and would phase out of the service award business when existing
customer commitments were satisfied. Employers use service award programs to
commemorate employees' anniversaries with gifts. Sales affected by this action
represent less than $30,000,000 annually, or less than half of the Business
Sales division's sales. As a consequence of that decision, the Company recorded
a pre-tax charge of $1,400,000 in the fourth quarter of 2002 primarily related
to employee separation costs and the disposal of obsolete program-specific
inventory.
In January 2001, the Company discontinued wholesale sales of fragrance products
in the U.S. and in most international markets; in July 2000, the Company
discontinued wholesale sales of jewelry and non-jewelry items in Europe; and in
January 2000, the Company discontinued wholesale sales of jewelry and
non-jewelry items in the U.S. In connection with these decisions, the Company
established product return reserves, which had the cumulative effect of reducing
gross profit by $9,364,000, and recorded a charge of $3,146,000 to selling,
general and administrative expenses, primarily relating to the write-off of
unrecoverable store fixtures maintained by such customers. There were no product
return reserves remaining for these operations at January 31, 2002.
Management believes that these decisions, singularly and in the aggregate, did
not significantly affect the Company's financial position, earnings or cash
flows.
OVERVIEW
Net sales increased 6% in 2002 following a 4% decline in 2001. The Company's
reported sales reflect either a translation-related benefit from strengthening
foreign currencies or a detriment from a strengthening U.S. dollar. Therefore,
on a constant-exchange-rate basis, net sales increased 6% in 2002 and
fractionally in 2001, and worldwide comparable store sales declined 1% in 2002
and 4% in 2001. Net earnings rose 9% in 2002 following a 9% decline in 2001.
Certain operating data as a percentage of net sales were as follows:
2002 2001 2000
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Net sales 100.0% 100.0% 100.0%
Cost of sales 40.7 41.3 43.1
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Gross profit 59.3 58.7 56.9
Selling, general
and administrative expenses 40.6 39.4 37.3
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Earnings from operations 18.7 19.3 19.6
Other expenses, net 1.2 1.3 0.6
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Earnings before income taxes 17.5 18.0 19.0
Provision for income taxes 6.4 7.2 7.6
----------------------------
Net earnings 11.1% 10.8% 11.4%
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TIFFANY & CO. AND SUBSIDIARIES
21
NET SALES
Net sales by channel of distribution were as follows:
(in thousands) 2002 2001 2000
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U.S. Retail $ 819,814 $ 786,792 $ 833,221
International Retail 683,489 659,028 679,274
Direct Marketing 179,175 160,715 155,561
Specialty Retail 24,124 - -
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$ 1,706,602 $ 1,606,535 $ 1,668,056
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U.S. Retail sales increased 4% in 2002 and comparable store sales increased 2%.
U.S. Retail sales declined 6% in 2001 and comparable store sales declined 8%.
Management attributes the increase in 2002 largely to a partial recovery from
the adverse effects of September 11, 2001, although continued challenging
economic and retail conditions affected overall results in both years. The
number of comparable store transactions increased in 2002 and 2001. However, the
average transaction size declined in both years. Sales in the New York flagship
store increased fractionally in 2002 and declined 15% in 2001, and represented
10%, 11% and 12% of net sales in 2002, 2001 and 2000. Comparable branch store
sales increased 2% in 2002 and declined 6% in 2001. Comparable store sales to
domestic customers, which account for the majority of U.S. sales, increased in
2002 and declined in 2001. Comparable store sales to foreign tourists decreased
in 2002 and 2001.
International Retail sales increased 4% in 2002 and decreased 3% in 2001. When
compared with the prior year, the weighted-average U.S. dollar exchange rate was
weaker in 2002 and stronger in 2001. Therefore, on a constant-exchange-rate
basis, International Retail sales increased 3% in 2002 and 7% in 2001.
Japan represented 26% of net sales in 2002, compared with 28% in 2001 and 2000.
Retail sales in Japan in local currency declined 1% in 2002 and rose 10% in
2001; comparable store sales declined 8% in 2002 and increased 3% in 2001. Unit
sales declined in 2002 and rose in 2001, while the average price per unit sold
increased in 2002 and declined in 2001. Management believes that results in 2002
and 2001 were affected by increasingly weak economic conditions in Japan and
increasing competition. In addition, in 2002 the Company began a process to
reposition its merchandising and marketing efforts to mitigate the effect of
declining solitaire diamond engagement ring sales, which have resulted from
lessened demand in the overall market for such products. 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. The new agreements largely
continue the principles on which Mitsukoshi and the Company 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 TIFFANY & CO. boutiques. Separate agreements cover the operation of a
freestanding TIFFANY & CO. store on Tokyo's Ginza. Under the new agreements, the
Company is not restricted from further expansion of its Tokyo operations. Under
the main agreement, the Company pays to Mitsukoshi a percentage of certain
sales; this percentage is lower than under the prior agreements. There will be a
further reduction in fees paid to Mitsukoshi starting in 2003, and the Company
will employ increasing numbers of its own personnel in certain boutiques in the
future.
In non-U.S. markets outside of Japan, the Asia-Pacific region represented 6%, 6%
and 7% of net sales in 2002, 2001 and 2000, and comparable store sales on a
constant-exchange-rate basis increased 5% in 2002 and declined fractionally in
2001. Europe represented 5% of net sales in 2002, compared with 4% in 2001 and
2000, and comparable store sales on a constant-exchange-rate basis increased 2%
in 2002 and 1% in 2001.
Worldwide gross square footage for Company-operated stores increased 5% in 2002
and 9% in 2001, which was consistent with the Company's strategy to increase
such square footage by at least 5% per year. In the U.S., the Company opened
five stores and closed two in 2002 and opened two stores in 2001.
Internationally, in 2002 the Company opened two locations and closed one in
Japan, opened retail locations in Korea, Taiwan and Paris and closed one
location in both Australia and Taiwan. In 2001,
TIFFANY & CO. AND SUBSIDIARIES
22
the Company opened four retail locations and closed one in Japan, opened two
stores and closed three retail locations in the Asia-Pacific region, opened two
stores in Europe and opened a store in Brazil. Plans in the U.S. for 2003 are to
open three stores, including stores in Coral Gables, Florida, and Walnut Creek,
California, and to convert an independently-operated location in Guam to
Tiffany's control. International plans call for opening three retail locations
and closing one in Japan and opening several locations in other markets.
Direct Marketing sales increased 11% in 2002 and 3% in 2001. The Business Sales
division's sales declined 3% in 2002 and 13% in 2001 due to lower average
dollars per order. Combined Internet and catalog sales rose 24% in 2002 and 23%
in 2001, entirely due to Internet sales growth that resulted from a higher
number of orders. The Company currently offers more than 2,000 products online
and plans to further increase its offering in the future. The Company mailed 24
million catalogs in 2002, compared with 26 million in 2001 and 25 million in
2000, and plans to mail approximately 25 million catalogs in 2003.
Effective October 1, 2002, the Company established a new channel of
distribution, "Specialty Retail," to include the consolidated results of Little
Switzerland, as well as the consolidated results from any ventures controlled by
the Company which will operate under non-TIFFANY & CO. trademarks or trade
names.
GROSS PROFIT
Gross profit as a percentage of net sales ("gross margin") increased in 2002 and
2001. Management attributes the increases in both years to favorable shifts in
sales mix (sales of lower-priced silver items, which carry a gross margin higher
than the Company's average, increased at a faster rate), as well as to improved
efficiencies in product manufacturing and sourcing and selective price
increases.
The Company's hedging program (See Note K to the Consolidated Financial
Statements) 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 long-term strategy and objectives include achieving further product
manufacturing/sourcing efficiencies, leveraging its fixed costs and implementing
selective price adjustments in order to maintain the Company's gross margin at,
or above, prior year levels. However, gross margin in 2003 is expected to be
modestly below 2002 due to the full-year effect of consolidating the sales of
Little Switzerland, which achieves a gross margin below the Company's average,
the effect of incremental costs related to the opening of its new Customer
Fulfillment/Distribution Center ("CFC"), and costs related to the building of a
diamond sourcing organization in Belgium and Canada. Gross margin in 2003 is
expected to include benefits from increasing amounts of internal jewelry
manufacturing and from the commenced sourcing of a portion of the Company's
diamond needs from a new mine in Canada.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A rose 9% in 2002 and 2% in 2001. The increases were largely due to
incremental depreciation, staffing and occupancy expenses related to the
Company's overall worldwide expansion, as well as higher marketing expenses in
2002 to support the launch of a new collection of watches. In addition to
management's actions to restrain growth in discretionary spending in both years,
the rate of SG&A growth was also moderated by lower sales-related variable
expenses. The translation effect of a weaker U.S. dollar increased SG&A growth
fractionally in 2002, while the effect of a stronger U.S. dollar reduced SG&A
growth by 3% in 2001. However, as a percentage of net sales, SG&A rose in both
years due to insufficient sales growth to absorb the rate of increase in fixed
expenses.
Management's longer-term objective is to reduce this ratio by leveraging
anticipated improved rates of sales growth against the Company's fixed-expense
base. However, SG&A is expected to increase by a mid-teens percentage in 2003,
reflecting ongoing store expansion and accelerating
TIFFANY & CO. AND SUBSIDIARIES
23
business development spending as well as higher advertising spending,
depreciation and insurance costs.
EARNINGS FROM OPERATIONS
As a result of the above factors, earnings from operations increased 3% in 2002
and declined 5% in 2001. As a percentage of net sales, earnings from operations
declined in 2002 and 2001. On a reportable segment basis, the ratios of earnings
from operations (before the effect of unallocated corporate expenses and
interest and other expenses, net) to net sales in 2002, 2001 and 2000 were as
follows: U.S. Retail was 24%, 25% and 28%; International Retail was 30%, 30% and
28%; Direct Marketing was 23%, 17% and 14%; and Specialty Retail was (7)% in
2002. Sales levels, gross margins and the ability to leverage fixed expenses
affected changes in profitability in each segment.
INTEREST EXPENSE AND FINANCING COSTS
Interest expense declined in 2002 primarily due to the effect of the
capitalization of interest costs related to the Company's construction of its
266,000 square-foot CFC in Hanover Township, New Jersey, effective in the first
quarter of 2002, as well as the Company's decision to purchase its Parsippany,
New Jersey, Customer Service/ Distribution Center and office facility ("CSC").
Interest expense increased in 2001 primarily due to the Company's decision to
purchase the CSC, which resulted in the conversion of its operating lease into a
capital lease. Management expects interest expense and financing costs to
decline in 2003 due to lower average borrowing rates.
OTHER EXPENSE (INCOME), NET
Other expense (income), net includes interest income and realized and unrealized
gains (losses) on investment activities. Interest income earned on cash and cash
equivalents declined in 2002 and 2001. In 2001, the Company recorded a pre-tax
impairment charge of $7,800,000 representing the Company's total investment in a
third-party provider of online wedding gift registry services. In 2001, the
Company also recorded a pre-tax gain of $5,257,000, based on the Company's 14.7%
equity interest in Aber Diamond Corporation ("Aber"), a publicly-traded company
headquartered in Canada, which sold its interest in a mining project in February
2001. Management expects other expense (income), net in 2003 will benefit from
the Company's equity interest in Aber, resulting from Aber's earnings related to
the startup of production.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 36.6% in 2002, compared with 40.0% in 2001
and 2000. The lower rate in 2002 was primarily due to the effect of a
non-recurring tax benefit reflecting the recognition of the cumulative U.S. tax
benefits as provided by the Extraterritorial Income Exclusion Act ("ETI")
provision of the Internal Revenue code.
In November 2000, the United States Government repealed the tax provisions
associated with Foreign Sales Corporations ("FSC") and enacted, in their place,
the ETI, certain provisions of which differed from those governed by the FSC
regulations. The ETI provides for the exclusion from United States income tax of
certain extraterritorial income from the sale of qualified United States origin
goods. Qualified United States origin goods are generally defined as those
wherein not more than 50% of the fair market value (including intangible values)
is attributable to foreign content or value added outside the United States. The
Company determined in the third quarter of 2002 that this tax benefit was
applicable to its operations and, therefore, has recognized a tax benefit. It is
unknown if this benefit will continue to be available to the Company in the
future, as the World Trade Organization ("WTO") ruled in January 2002 in favor
of a complaint by the European Union, and joined by Canada, Japan and India,
that the ETI exclusion constitutes a prohibited export subsidy under WTO
regulations. The United States Government is currently reviewing its options in
response to this ruling.
NET EARNINGS
As a result of the above factors, net earnings rose 9% in 2002 and declined 9%
in 2001.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in accordance
with accounting principles
TIFFANY & CO. AND SUBSIDIARIES
24
generally accepted in the United States of America. These principles require
management to make certain estimates and assumptions that affect amounts
reported and disclosed in the financial statements and related notes. Actual
results could differ from these estimates. Periodically, the Company reviews all
significant estimates and assumptions affecting the financial statements and
records the effect of any necessary adjustments.
The following critical accounting policies rely on assumptions and estimates
that were used in the preparation of the Company's consolidated financial
statements:
Sales returns: Sales are recognized at the "point of sale," which occurs when
merchandise is sold in an "over-the-counter" transaction or upon receipt by a
customer. The Company's customers have the right to return merchandise. Sales
are reported net of returns. The Company maintains a reserve for potential
product returns and records, as a reduction to sales, its provision for
estimated product returns, which is based on historical experience.
Credit losses: The Company maintains a reserve for potential credit losses based
on estimates of the credit-worthiness of its customers. If the financial
condition of its customers was to change, resulting in a change in their ability
to make payments, the Company might be required to increase or decrease its
reserve.
Inventory: The Company writes down its inventory for discontinued, slow-moving
and unmarketable products. This write-down is equal to the difference between
the cost of inventory and its estimated market value and is based on assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those expected by management, additional inventory write-downs
might be required. The Company's domestic and foreign branch inventories are
valued using the last-in, first-out (LIFO) method, and inventories held by
foreign subsidiaries are valued using the first-in, first-out (FIFO) method.
Fluctuation in inventory levels, along with the costs of raw materials, could
impact the carrying value of the Company's inventory.
Long-lived assets: The Company's long-lived assets are primarily property, plant
and equipment. The Company reviews its long-lived assets for impairment when
events or changes in circumstances indicate, in management's judgment, that the
carrying value of such assets may not be recoverable. When such a determination
has been made, management compares the carrying value of the assets with their
estimated future undiscounted cash flows. If it is determined that an impairment
has occurred, the loss is calculated and recognized during that period.
Non-consolidated investments: Future adverse changes in market conditions or
poor operating results of underlying investments could result in losses or in an
inability to recover the carrying value of the investments. This may not be
reflected in an investment's current carrying value, thereby possibly requiring
an impairment charge in the future.
Income taxes: Income taxes are accounted for by using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized by
applying statutory tax rates in effect in the years in which the differences
between the financial reporting and tax filing bases of existing assets and
liabilities are expected to reverse. The Company believes that all net-deferred
tax assets shown on its balance sheet are more likely than not to be realized in
the future. While the Company has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for a
valuation allowance, in the event the Company were to determine that it would
not be able to realize all or part of its net-deferred tax assets in the future,
an adjustment to the deferred tax assets would be charged to earnings in the
period such determination was made.
Employee benefit plans: The Company maintains a noncontributory defined benefit
pension plan covering substantially all domestic salaried and full-time hourly
employees and it provides certain postretirement health-care and life insurance
benefits for retired employees. The Company makes certain assumptions that
affect the underlying estimates related to pension and other
TIFFANY & CO. AND SUBSIDIARIES
25
postretirement costs. Significant declines in interest rates, declining
securities market values and changes to projected increases in health-care costs
would require the Company to revise key assumptions and could result in a charge
to earnings. The discount rate is subject to change each year, consistent with
changes in applicable high-quality, long-term corporate bonds. Based on the
expected duration of the benefit payments for the pension plan, the Company
refers to applicable indices such as the high-quality Merrill Lynch corporate
bond yields and the Moody's corporate bond yields to select a rate at which it
believes the pension benefits could be effectively settled. Based on the
published rates as of December 31, 2002 (the date at which plan assets and
obligations are measured), the Company used a discount rate of 6.50%,
representing a decline of 25 basis points from the 6.75% rate used in 2001. This
had the effect of increasing the accumulated pension benefit obligation by
approximately $3,600,000 for the year ended January 31, 2003, and increasing
estimated pension expense for 2003 by $100,000. The expected long-term rate of
return on pension plan assets is selected by taking into account the expected
duration of the projected benefit obligation for the plan, the rates of return
expected for the asset mix (including reinvestment asset return rates),
historical performance of plan assets and the fact that plan assets are actively
managed to mitigate downside risk. Based on these factors, the expected
long-term rate of return as of January 31, 2003 is 7.50%, compared with 9.00% in
the prior year. The 150 basis point change in the expected long-term rate of
return will result in approximately a $1,300,000 increase in the Company's
estimated 2003 pension expense.
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
is required to review goodwill and certain other intangible assets annually for
potential impairment. In 2002, the Company adopted this standard and completed
its impairment test for goodwill and other intangible assets and determined that
there was no 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 and the associated asset retirement costs. The provisions of
SFAS No. 143 will be effective for the Company's financial statements for 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.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for exit or disposal
activities initiated after December 31, 2002. This statement requires that
liabilities associated with exit or disposal activities initiated after adoption
be recognized and measured at fair value when incurred, as opposed to at the
date an entity commits to the exit or disposal plans. The adoption of this
standard did not have a significant impact on the Company's financial position,
earnings or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 148 provides alternate methods of
transition for a voluntary change to the fair-value-based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and frequent
disclosures in financial
TIFFANY & CO. AND SUBSIDIARIES
26
statements about the effects of stock-based compensation. The disclosure
requirements have been adopted for the Company's current year financial
statements.
EURO CONVERSION
On January 1, 2002, new euro-denominated bills and coins were issued by 11 of
the 15 member countries of the European Economic and Monetary Union. Existing
currencies were subsequently withdrawn from circulation. The Company's policy is
to maintain uniform pricing among the member countries and, as a result, the
conversion to the euro had no impact on the financial position, earnings or cash
flows of the Company's European businesses.
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 $221,441,000
in 2002, compared with $241,506,000 in 2001 and $110,696,000 in 2000. The inflow
in 2002 was less than 2001 primarily due to an increased use of working capital
(primarily inventory purchases of finished goods and raw materials), partly
offset by increased net earnings. The inflow in 2001 was greater than 2000
largely due to decreased raw material purchases.
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were $770,481,000
and 3.6:1 at January 31, 2003 compared with $638,709,000 and 3.0:1 at January
31, 2002.
Accounts receivable, less allowances at January 31, 2003, were 15% above January
31, 2002 primarily due to sales growth. On a 12-month rolling basis, accounts
receivable turnover was 16 times in 2002 and 15 times in 2001.
Inventories, net at January 31, 2003 were 20% above January 31, 2002. The
translation effect of a weakening U.S. dollar contributed to the growth of
inventory versus January 31, 2002 and, on a constant-exchange-rate basis,
inventories, net were 14% above January 31, 2002. In addition, 6% of the
increase was due to the consolidation of Little Switzerland's inventories.
Finished goods inventories increased 16% due to lower-than-expected sales, new
store openings and expanded product offerings (including a new collection of
watches). A 40% increase in raw material and work-in-process inventories was
necessary to support the expansion of internal manufacturing activities. The
Company's ongoing inventory objectives are to continue to refine: worldwide
replenishment systems; the specialized disciplines of product development,
category management and sales demand forecasting; presentation and management of
inventory assortments in each store; and warehouse management and supply-chain
logistics. Management expects that inventory levels will increase in 2003 to
support anticipated comparable store sales growth, new stores, product
introductions and the Company's expansion of its diamond-sourcing operations.
Capital expenditures were $219,717,000 in 2002, $210,291,000 including the
payment of a capital lease purchase obligation in 2001 and $108,382,000 in 2000.
In all three years, a portion of capital expenditures supported the opening,
renovation and expansion of stores, expansion of distribution and manufacturing
facilities and ongoing investments in new systems. In addition, capital
expenditures in 2002 included the Company's acquisition of the property housing
its store on Old Bond Street in London and an adjacent building in order to
proceed with a renovation and reconfiguration of the interior retail selling
space. The cost to purchase the London buildings was $43,000,000, and
construction is expected to commence in 2003 and be completed in the second half
of 2004. The increase in 2001 included costs related to the capital lease buyout
and expansion of the CSC. In 2001, the Company commenced construction of its CFC
that will fulfill direct shipments to customers. Upon completion of the CFC, the
Company's 370,000 square-foot Parsippany, New Jersey CSC will be used primarily
to replenish retail store inventories. The CFC is scheduled to open in
late-2003, and the Company estimates that the overall cost of that project will
be approximately $104,500,000, of which $76,500,000
TIFFANY & CO. AND SUBSIDIARIES
27
has been incurred. 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. A new second floor opened in 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 in New York and relocated
several of its administrative functions. The Company has spent $56,910,000 to
date for the New York store and related projects. The Company currently
estimates that the overall cost of these projects will be approximately
$95,000,000. Based on current plans, management estimates that capital
expenditures will be approximately $150,000,000 in 2003, due to costs related to
the opening, renovation and expansion of store and distribution facilities, as
well as ongoing investments in new systems. Management expects that capital
expenditures will approximate 7-8% of net sales in future years.
In July 2002, the Company, in a private transaction with various institutional
lenders, issued, at par, $40,000,000 of 6.15% Series C Senior Notes Due July 18,
2009 and $60,000,000 of 6.56% Series D Senior Notes Due July 18, 2012 with
seven-year and 10-year lump sum repayments upon maturities. The proceeds of
these issues are being and will be used by the Company for general corporate
purposes, including seasonal working capital, and were used to redeem the
Company's $51,500,000 principal amount 7.52% Senior Notes which came due in
January 2003. The Note Purchase Agreements require maintenance of specific
financial covenants and ratios and limit certain changes to indebtedness and the
general nature of the business, in addition to other requirements customary to
such borrowings. Concurrently, the Company entered into an interest-rate swap
agreement to hedge the change in fair value of its fixed-rate obligation. Under
the swap agreement, the Company pays variable-rate interest and receives fixed
interest-rate payments periodically over the life of the instrument. The Company
accounts for its interest-rate swap as a fair-value hedge and, therefore,
recognizes gains or losses on the derivative instrument and the hedged item
attributable to the hedged risk in earnings in the current period. The terms of
the swap agreement match the terms of the underlying debt, thereby resulting in
no ineffectiveness.
In May 2001, the Company purchased 45% of Little Switzerland's outstanding
shares of common stock by means of a direct investment in newly-issued
unregistered shares at a cost of $9,546,000. The Company accounted for this
investment under the equity method based upon its ownership interest and its
significant influence. In 2001, the Company also provided Little Switzerland
with an interest-bearing loan in the amount of $2,500,000. The Company's equity
share of Little Switzerland's results from operations has been included in other
expense (income), net and amounted to a loss of $1,482,000 in 2002 (through
September 30) and $2,483,000 in 2001. In August 2002, a wholly-owned subsidiary
of the Company commenced a cash tender offer to acquire the remaining balance of
the outstanding shares of Little Switzerland's common stock at $2.40 per share.
In October 2002, the Company purchased and paid for the shares acquired, which
represented 98% of the outstanding shares of Little Switzerland. On November 20,
2002, the subsidiary merged with and into Little Switzerland. Under the terms of
the merger, common stock of Little Switzerland not owned by the subsidiary has
been converted into the right to receive the same consideration paid in the
tender offer. The cost of acquiring all of the outstanding shares of Little
Switzerland, other than those already owned by the Company, including
professional fees and other related costs, was $27,530,000. The Company
commenced the consolidation of Little Switzerland's operations effective October
1, 2002, and the interest-bearing loan provided to Little Switzerland in 2001
has been eliminated in consolidation. The acquisition was accounted for in
accordance with SFAS No. 141, "Business Combinations."
TIFFANY & CO. AND SUBSIDIARIES
28
In December 2002, a wholly-owned subsidiary of the Company made a $4,000,000
investment in a privately-held venture that designs and sells jewelry. The
subsidiary has an additional funding commitment of $9,000,000 and the option to
buy out and own 100% of the venture in future periods. This venture is being
consolidated in the Company's financial statements based on the percentage of
ownership and effective control over the direction of the operations of the
venture. The venture is not significant to the Company's financial position,
earnings or cash flows.
In February 2000, the Company acquired a 5.4% equity interest in Della.com
("Della"), a provider of online wedding gift registry services. In April 2000,
Della merged with and into WeddingChannel.com with the consequence that the
Company's equity interest in Della was converted to a 2.7% interest in
WeddingChannel.com, assuming the conversion of all outstanding preferred shares
to common. In 2001, the Company recorded a pre-tax impairment charge of
$7,800,000, representing the Company's total investment.
In July 1999, the Company made a strategic investment in Aber by purchasing
eight million unregistered shares of its common stock, which represents 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
developed to mine diamonds. Startup is expected in the first quarter of 2003. In
addition, the Company entered into a diamond purchase agreement with Aber
whereby the Company has the obligation to purchase, subject to the Company's
quality standards, a minimum of $50,000,000 of diamonds per year for 10 years.
It is expected that this commercial relationship will enable the Company to
secure a considerable portion of its future diamond needs. The Company is
establishing the necessary facilities in Yellowknife, Canada, and Antwerp,
Belgium, to handle the receipt and sorting of diamonds and a portion of the
subsequent cutting and polishing operations.
Cash dividends paid were $23,256,000 in 2002, $23,315,000 in 2001 and
$21,820,000 in 2000. In May 2000, the Board of Directors declared a 33% increase
in the quarterly dividend rate on common shares, effective in July 2000. The
dividend payout ratio (dividends as a percentage of net earnings) was 12% in
2002, 13% in 2001 and 11% in 2000. The Company expects to continue to retain the
majority of its earnings to support its business activities and future
expansion.
The Board of Directors has authorized the Company's stock repurchase program,
which expires in November 2003. The program was initially authorized in November
1997 for the repurchase of up to $100,000,000 of the Company's Common Stock in
the open market over a three-year period. That authorization was superseded in
September 2000 by a further authorization of repurchases of up to $100,000,000
of the Company's Common Stock in the open market. The timing and actual number
of shares repurchased depend on a variety of factors such as price and other
market conditions. In 2002, the Company repurchased and retired 1,350,000 shares
of Common Stock at a cost of $37,526,000, or an average cost of $27.80 per
share. In 2001, the Company repurchased and retired 1,628,000 shares of Common
Stock at a cost of $39,265,000, or an average cost of $24.12 per share. In 2000,
the Company repurchased and retired 465,000 shares of Common Stock at a cost of
$13,319,000, or an average cost of $28.64 per share. At January 31, 2003,
$21,100,000 of purchase authority remained available for future share
repurchases.
The Company's sources of working capital are internally-generated cash flows,
borrowings available under a multicurrency revolving credit facility ("Credit
Facility") and Little Switzerland's senior collateralized revolving and term
loan credit facility ("LS Facility"). In November 2001, the Company entered into
a new Credit Facility to increase the borrowing limit from $160,000,000 to
$200,000,000 and the number of banks from five to six. All borrowings
TIFFANY & CO. AND SUBSIDIARIES
29
are at interest rates based on a prime rate or LIBOR and are affected by local
borrowing conditions. The Credit Facility expires in November 2006. The LS
Facility allows Little Switzerland to borrow up to $12,000,000 through March 21,
2005, of which up to $8,000,000 is a revolving loan and $4,000,000 is a term
loan, at an interest rate of 2.75% above the Adjusted Eurodollar Rate or 0.75%
above the Prime Rate, plus customary servicing costs and unused facility fees.
Amounts advanced to Little Switzerland under the LS Facility are limited to a
stated borrowing base, which is calculated as a percentage of certain inventory
less specific reserves (as defined in the LS Facility agreement). The LS
Facility is collateralized by certain assets of Little Switzerland. The Company
has begun discussions to replace the LS Facility with an unsecured revolving
credit facility. The proposed terms of this unsecured revolving credit facility
should result in a reduction in interest expense, and contain certain financial
ratios and covenants that are consistent with those contained in the Company's
Credit Facility.
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 $193,462,000 and 14% at January 31, 2003, compared with $97,292,000 and 9%
at January 31, 2002.
Based on the Company's financial condition at January 31, 2003, management
believes that internally-generated cash flows, funds available under the Credit
Facility and the proceeds from the Senior Notes offering will be sufficient to
support the Company's planned worldwide business expansion and seasonal
working capital increases that are typically required during the third and
fourth quarters of the year.
CONTRACTUAL CASH OBLIGATIONS AND
COMMERCIAL COMMITMENTS
The following summarizes the Company's contractual cash obligations at January
31, 2003:
Due Due
Due 2004- There-
(in thousands) Total 2003 2006 after
- ---------------------------------------------------------------------
Long-term debt $ 297,107 $ - $ 50,167 $ 246,940
Operating leases 426,077 62,871 137,263 225,943
Inventory purchase
obligations 636,268 136,268 150,000 350,000
Construction-
in-progress 28,672 28,672 - -
Other contractual
obligations 16,825 6,575 7,250 3,000
----------------------------------------------
Total contractual
cash obligations $ 1,404,949 $234,386 $ 344,680 $ 825,883
==============================================
The following summarizes the Company's commercial commitments at January 31,
2003:
Amount of commitment
expiration per period
-----------------------------------
Total Less
Amounts Than 1-3
(in thousands) Committed 1 year years
- ---------------------------------------------------------------------
Lines of credit(1) $ 212,539 $ 4,539 $ 208,000
Letters of credit and
financial guarantees 13,683 13,502 181
-----------------------------------
Total commercial
commitments $ 226,222 $ 18,041 $ 208,181
===================================
(1) At January 31, 2003, $52,552 was drawn against these facilities.
TIFFANY & CO. AND SUBSIDIARIES
30
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 fair value of foreign currency-purchased put options is sensitive to changes
in foreign currency exchange rates. On the Company's purchased put options, an
unrealized net loss amounted to $6,756,000 at January 31, 2003 and an unrealized
net gain amounted to $8,109,000 at January 31, 2002. Unrealized gains and losses
from foreign currency exchange contracts are defined as the difference between
the contract rate at the inception date and the current market exchange rate. If
the market yen exchange rates are stronger than the contracted exchange rates,
the Company will allow the option to expire, limiting its loss to the cost of
the option contract. At January 31, 2003 and 2002, a 10% appreciation in yen
exchange rates from the prevailing market rates would have resulted in an
unrealized loss equal to the cost of the option contracts (which was $3,115,000
and $3,276,000). At January 31, 2003 and 2002, a 10% depreciation in yen
exchange rates from the prevailing market rates would have resulted in
additional unrealized gains of $13,569,000 and $12,389,000.
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. In order to manage the
exposure to interest-rate changes, the Company has entered into an interest-rate
swap to offset a portion of the outstanding fixed-rate debt. Based on a
hypothetical immediate 100 basis point increase in interest rates at January 31,
2003 and 2002, the market value of the Company's fixed-rate long-term debt,
including the impact of the interest-rate swap, would have decreased by
$7,315,000 and $9,562,000. Based on a hypothetical immediate 100 basis point
decrease in interest rates at January 31, 2003 and 2002, the market value of the
Company's fixed-rate long-term debt, including the impact of the interest-rate
swap, would have increased by $10,481,000 and $10,321,000.
The Company also 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. The
Company monitors its interest-rate risk on the basis of changes in fair value.
If there had been a 10% decrease in interest rates at January 31, 2003 and 2002,
the loss for changes in market value of the interest-rate swap and the
underlying debt would have been $7,000 and $2,000.
Management neither foresees nor expects significant changes in exposure to
interest-rate fluctuations, nor in market risk-management practices.
TIFFANY & CO. AND SUBSIDIARIES
31
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 unsettled regional and/or global conflicts do not result in
military and/or terrorist activities creating long- or short-term disruptions
to, or changes in the pattern, practice or frequency of tourist travel to the
various regions where the Company operates retail stores nor to the Company's
ability to operate in those regions; (iv) that sales in Japan will not decline
substantially; (v) that there will not be a substantial adverse change in the
exchange relationship between the Japanese yen and the U.S. dollar; (vi) that
Mitsukoshi and other department store operators in Japan, in the face of
declining or stagnant department store sales, will not close or consolidate
stores in which TIFFANY & CO. retail locations 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; (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; (xiv) that the Company can successfully
improve the results of Little Switzerland and achieve satisfactory results from
any future ventures into which it enters that are operated under non-TIFFANY &
CO. trademarks or trade names; and (xv) that the Company's expansion plans for
retail and direct selling operations and merchandise development, production and
management can continue to be executed without meaningfully diminishing the
distinctive appeal of the TIFFANY & CO. brand.
TIFFANY & CO. AND SUBSIDIARIES
32
REPORT OF MANAGEMENT
The Company's consolidated financial statements were prepared by management, who
are responsible for their integrity and objectivity. The financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America and, as such, include amounts based on
management's best estimates and judgments.
Management is further responsible for maintaining a system of internal
accounting control designed to provide reasonable assurance that the Company's
assets are adequately safeguarded and that the accounting records reflect
transactions executed in accordance with management's authorization. The system
of internal control is continually reviewed and is augmented by written policies
and procedures, the careful selection and training of qualified personnel and a
program of internal audit.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, Independent Accountants. Their report is shown on
this page.
The Audit Committee of the Board of Directors, which is composed solely of
non-employee directors, meets regularly with financial management and the
independent accountants to discuss specific accounting, financial reporting and
internal control matters. Both the independent accountants and the internal
auditors have full and free access to the Audit Committee. Each year the Audit
Committee selects the firm that is to perform audit services for the Company.
/s/Michael J. Kowalski
Michael J. Kowalski
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
/s/James E. Quinn
James E. Quinn
PRESIDENT
/s/James N. Fernandez
James N. Fernandez
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Tiffany & Co.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, stockholders' equity and comprehensive
earnings and cash flows present fairly, in all material respects, the financial
position of Tiffany & Co. and Subsidiaries at January 31, 2003 and 2002 and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 25, 2003
TIFFANY & CO. AND SUBSIDIARIES
33
CONSOLIDATED BALANCE SHEETS
January 31,
-----------------------------
(in thousands, except per share amount) 2003 2002
=====================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 156,197 $ 173,675
Accounts receivable, less allowances of $8,258 and $6,878 113,061 98,527
Inventories, net 732,088 611,653
Deferred income taxes 44,380 41,170
Prepaid expenses and other current assets 24,662 28,032
-----------------------------
Total current assets 1,070,388 953,057
Property, plant and equipment, net 677,630 525,585
Deferred income taxes 6,595 4,560
Other assets, net 168,973 147,872
-----------------------------
$ 1,923,586 $ 1,631,074
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 52,552 $ 40,402
Current portion of long-term debt - 51,500
Accounts payable and accrued liabilities 163,338 134,694
Income taxes payable 41,297 48,997
Merchandise and other customer credits 42,720 38,755
-----------------------------
Total current liabilities 299,907 314,348
Long-term debt 297,107 179,065
Postretirement/employment benefit obligations 33,117 29,999
Other long-term liabilities 85,406 70,717
Commitments and contingencies
Stockholders' equity:
Common Stock, $0.01 par value; authorized 240,000 shares,
issued and outstanding 144,865 and 145,001 1,449 1,450
Additional paid-in capital 351,398 330,743
Retained earnings 874,694 743,543
Accumulated other comprehensive (loss) gain:
Foreign currency translation adjustments (14,561) (45,306)
Deferred hedging (losses) gains, net of tax (2,284) 6,515
Minimum pension liability adjustment, net of tax (2,647) -
-----------------------------
Total stockholders' equity 1,208,049 1,036,945
-----------------------------
$ 1,923,586 $ 1,631,074
=============================
See Notes to Consolidated Financial Statements.
TIFFANY & CO. AND SUBSIDIARIES
34
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended January 31,
----------------------------------------
(in thousands, except per share amounts) 2003 2002 2001
====================================================================================================
Net sales $ 1,706,602 $ 1,606,535 $ 1,668,056
Cost of sales 695,154 663,058 719,642
----------------------------------------
Gross profit 1,011,448 943,477 948,414
Selling, general and administrative expenses 692,251 633,580 621,018
----------------------------------------
Earnings from operations 319,197 309,897 327,396
Interest expense and financing costs 15,129 19,834 16,207
Other expense (income), net 4,431 751 (6,452)
----------------------------------------
Earnings before income taxes 299,637 289,312 317,641
Provision for income taxes 109,743 115,725 127,057
----------------------------------------
Net earnings $ 189,894 $ 173,587 $ 190,584
========================================
Net earnings per share:
Basic $ 1.31 $ 1.19 $ 1.31
========================================
Diluted $ 1.28 $ 1.15 $ 1.26
========================================
Weighted-average number of common shares:
Basic 145,328 145,535 145,493
Diluted 148,591 150,517 151,816
See Notes to Consolidated Financial Statements.
TIFFANY & CO. AND SUBSIDIARIES
35
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE EARNINGS
Accumulated
Total Other Common Stock Additional
Stockholders' Retained Comprehensive ----------------- Paid-in
(in thousands) Equity Earnings (Loss) Gain Shares Amount Capital
=============================================================================================================================
Balances, January 31, 2000 $ 757,076 $ 473,819 $ (11,366) 144,952 $ 1,450 $ 293,173
Exercise of stock options 10,741 - - 1,307 13 10,728
Tax benefit from exercise of stock options 12,401 - - - - 12,401
Issuance of Common Stock
under the Employee Profit Sharing
and Retirement Savings Plan 3,300 - - 103 1 3,299
Purchase and retirement of Common Stock (13,319) (12,507) - (465) (5) (807)
Cash dividends on Common Stock (21,820) (21,820) - - - -
Foreign currency translation adjustments (13,480) - (13,480) - - -
Net earnings 190,584 190,584 - - - -
-------------------------------------------------------------------------------
Balances, January 31, 2001 925,483 630,076 (24,846) 145,897 1,459 318,794
Exercise of stock options 6,306 - - 643 7 6,299
Tax benefit from exercise of stock options 5,294 - - - - 5,294
Issuance of Common Stock
under the Employee Profit Sharing
and Retirement Savings Plan 2,800 - - 89 1 2,799
Purchase and retirement of Common Stock (39,265) (36,805) - (1,628) (17) (2,443)
Cash dividends on Common Stock (23,315) (23,315) - - - -
Deferred hedging gains, net of tax 6,515 - 6,515 - - -
Foreign currency translation adjustments (20,460) - (20,460) - - -
Net earnings 173,587 173,587 - - - -
-------------------------------------------------------------------------------
Balances, January 31, 2002 1,036,945 743,543 (38,791) 145,001 1,450 330,743
Exercise of stock options 10,654 - - 1,185 13 10,641
Tax benefit from exercise of stock options 11,039 - - - - 11,039
Issuance of Common Stock
under the Employee Profit Sharing
and Retirement Savings Plan 1,000 - - 29 - 1,000
Purchase and retirement of Common Stock (37,526) (35,487) - (1,350) (14) (2,025)
Cash dividends on Common Stock (23,256) (23,256) - - - -
Deferred hedging losses, net of tax (8,799) - (8,799) - - -
Foreign currency translation adjustments 30,745 - 30,745 - - -
Minimum pension liability adjustment,
net of tax (2,647) - (2,647) - - -
Net earnings 189,894 189,894 - - - -
-------------------------------------------------------------------------------
BALANCES, JANUARY 31, 2003 $ 1,208,049 $ 874,694 $ (19,492) 144,865 $ 1,449 $ 351,398
===============================================================================
2003 2002 2001
----------------------------------
Comprehensive earnings is as follows:
Net earnings $ 189,894 $ 173,587 $ 190,584
Deferred hedging (losses) gains,
net of tax of $1,230 and $3,508 (8,799) 6,515 -
Foreign currency translation adjustments 30,745 (20,460) (13,480)
Minimum pension liability adjustment,
net of tax of $1,863 (2,647) - -
----------------------------------
$ 209,193 $ 159,642 $ 177,104
==================================
See Notes to Consolidated Financial Statements.
TIFFANY & CO. AND SUBSIDIARIES
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 31,
------------------------------------
(in thousands) 2003 2002 2001
===========================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 189,894 $ 173,587 $ 190,584
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 78,008 65,159 47,508
Loss (gain) on equity investments 2,893 (2,633) 1,168
Provision for uncollectible accounts 829 1,702 1,277
Provision for inventories 12,258 10,085 17,666
Impairment of investment in third-party online provider - 7,800 -
Tax benefit from exercise of stock options 11,039 5,294 12,401
Deferred income taxes (1,315) (14,668) 782
Provision for postretirement/employment benefits 3,117 3,865 2,970
Deferred hedging gains transferred to earnings (6,762) (7,188) -
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable (7,987) 4,107 10,235
Inventories (64,460) 2,819 (182,041)
Prepaid expenses and other current assets 445 10,079 (3,913)
Other assets, net (130) (9,453) (4,219)
Accounts payable (3,527) (17,163) 11,044
Accrued liabilities 13,235 (6,197) 605
Income taxes payable (11,425) 8,564 (10,897)
Merchandise and other customer credits 3,786 2,755 5,875
Other long-term liabilities 1,543 2,992 9,651
------------------------------------
Net cash provided by operating activities 221,441 241,506 110,696
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (219,717) (170,806) (108,382)
Acquisitions, net of cash acquired (26,499) - -
Equity investments - (9,546) (7,903)
Proceeds from lease incentives 2,945 4,554 3,761
Investments in notes receivable - (2,500) (1,519)
------------------------------------
Net cash used in investing activities (243,271) (178,298) (114,043)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 100,000 - -
Repayment of current portion of long-term debt (51,500) - -
(Repayment of) proceeds from short-term borrowings (1,905) 13,852 9,840
Payment on capital lease obligation - (39,485) -
Repurchase of Common Stock (37,526) (39,265) (13,319)
Proceeds from exercise of stock options 10,654 6,306 10,741
Cash dividends on Common Stock (23,256) (23,315) (21,820)
------------------------------------
Net cash used in financing activities (3,533) (81,907) (14,558)
------------------------------------
Effect of exchange rate changes on cash and cash equivalents 7,885 (3,239) (3,418)
------------------------------------
Net decrease in cash and cash equivalents (17,478) (21,938) (21,323)
Cash and cash equivalents at beginning of year 173,675 195,613 216,936
------------------------------------
Cash and cash equivalents at end of year $ 156,197 $ 173,675 $ 195,613
====================================
See Notes to Consolidated Financial Statements.
TIFFANY & CO. AND SUBSIDIARIES
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Tiffany & Co. retails and distributes fine jewelry, timepieces, sterling
silverware, china, crystal, stationery, fragrances and personal accessories. It
is also engaged in product design and manufacturing activities. Sales are made
through four segments of business. U.S. Retail includes sales in Company-
operated stores in the U.S.; International Retail primarily includes sales in
Company-operated retail locations 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.;
and Specialty Retail includes sales of Little Switzerland, Inc. (which the
Company acquired in October 2002) and other ventures operated under non-TIFFANY
& CO. trademarks or trade names.
B. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on January 31 of the following calendar year. All
references to years relate to fiscal years rather than calendar years.
BASIS OF REPORTING
The consolidated financial statements include the accounts of Tiffany & Co. and
all majority-owned domestic and foreign subsidiaries ("Company"). Intercompany
accounts, transactions and profits have been eliminated in consolidation. The
equity method of accounting is used for investments in which the Company has
significant influence, but not a controlling interest. These statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America; these principles require management to make certain
estimates and assumptions that affect amounts reported and disclosed in the
financial statements and related notes. The most significant estimates include
valuation of inventories, provisions for income taxes and uncollectible accounts
and the recoverability of non-consolidated investments and long-lived assets.
Actual results could differ from these estimates. Periodically, the Company
reviews all significant estimates and assumptions affecting the financial
statements relative to current conditions and records the effect of any
necessary adjustments.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' consolidated financial
statement amounts and related note disclosures to conform with the current
year's presentation, and such reclassifications were principally related to
employee benefits, lease liabilities and hedging instruments.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are stated at cost plus accrued interest, which
approximates fair value. Cash equivalents include highly liquid investments with
an original maturity of three months or less and consist of time deposits with a
number of U.S. and non-U.S. commercial banks with high credit ratings. The
Company's policy restricts the amounts invested in any one bank.
RECEIVABLES AND FINANCE CHARGES
The Company's domestic and international presence and its large, diversified
customer base serve to limit overall credit risk. The Company maintains reserves
for potential credit losses and, historically, such losses, in the aggregate,
have not exceeded expectations.
Finance charges on retail revolving charge accounts are not significant and are
accounted for as a reduction of selling, general and administrative expenses.
INVENTORIES
Inventories are valued at the lower of cost or market. Domestic and foreign
branch inventories are valued using the last-in, first-out (LIFO) method.
Inventories held by foreign subsidiaries are valued using the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the following estimated
useful lives: 39 years for buildings, 5-15 years for machinery and
TIFFANY & CO. AND SUBSIDIARIES
38
equipment and 3-10 years for office equipment and store fixtures. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the related lease terms. Maintenance and repair costs are charged to earnings
while expenditures for major renewals and improvements are capitalized. Upon the
disposition of property, plant and equipment, the accumulated depreciation is
deducted from the original cost, and any gain or loss is reflected in current
earnings.
The Company capitalizes interest on borrowings during the active construction
period of major capital projects. Capitalized interest is added to the cost of
the underlying assets and is amortized over the useful lives of the assets. The
Company capitalized interest costs of $3,296,000 in 2002. No interest was
capitalized in 2001 and 2000.
GOODWILL
Goodwill represents the excess of cost over fair value of net assets acquired
and, until February 1, 2002, was being amortized over 20 years using the
straight-line method (see Note B - New Accounting Standards). At January 31,
2003 and 2002, unamortized goodwill of $22,445,000 and $10,393,000 was included
in other assets, net.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or changes
in circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. When such a determination has been made,
management compares the carrying value of the assets with their estimated future
undiscounted cash flows. If it is determined that an impairment loss has
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and the present value
of estimated net cash flows or comparable market values, giving consideration to
recent operating performance and pricing trends. In 2002, 2001 and 2000, there
were no significant impairment losses related to long-lived assets.
HEDGING INSTRUMENTS
Effective February 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("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,
with an offset to 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. For fair-value hedge transactions, changes in
fair value of the derivative and changes in the fair value of the item being
hedged are recorded in current earnings. For cash-flow hedge transactions, the
effective portion of the changes in fair value of derivatives are reported as
other comprehensive earnings and are recognized in current earnings in the
period or periods during which the hedge transaction affects current earnings.
Amounts excluded from the effectiveness calculation and any ineffective portion
of the change in fair value of the derivative of a cash-flow hedge are
recognized in current earnings. At 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 tax,
and increased accumulated comprehensive earnings by $3,773,000, net of tax of
$2,622,000.
The Company uses a limited number of derivative financial instruments to
mitigate 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
TIFFANY & CO. AND SUBSIDIARIES
39
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.
PREOPENING COSTS
Costs associated with the opening of new retail stores are expensed in the
period incurred.
ADVERTISING COSTS
Media and production costs for print advertising are expensed as incurred, while
catalog costs are expensed upon mailing. Media and production costs associated
with television advertising are expensed when the advertising first takes place.
Advertising costs, which include media, production, catalogs, promotion events
and other related costs totaled $101,867,000, $86,351,000 and $84,171,000 in
2002, 2001 and 2000.
INCOME TAXES
Income taxes are accounted for by using the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized by applying
statutory tax rates in effect in the years in which the differences between the
financial reporting and tax filing bases of existing assets and liabilities are
expected to reverse. The Company, its domestic subsidiaries and its foreign
branches of U.S. corporations file a consolidated Federal income tax return.
FOREIGN CURRENCY
The functional currency of the Company's foreign subsidiaries is the applicable
local currency. Assets and liabilities are translated into U.S. dollars using
the current exchange rates in effect at the balance sheet date, while revenues
and expenses are translated at the average exchange rates during the period. The
resulting translation adjustments are recorded as a component of other
comprehensive earnings within stockholders' equity. Gains and losses resulting
from foreign currency transactions have not been significant and are included in
other expense (income), net.
REVENUE RECOGNITION
Sales are recognized at the "point of sale," which occurs when merchandise is
sold in an "over-the-counter" transaction or upon receipt by a customer. Sales
are reported net of returns. Shipping and handling fees billed to customers are
included in net sales and the related costs are included in cost of sales.
Revenues for gift card and certificate sales and store credits are recognized
upon redemption. The Company maintains a reserve for potential product returns
and it records, as a reduction to sales, its provision for estimated product
returns, which is determined based on historical experience. In 2002, 2001 and
2000, the largest portion of the Company's sales was denominated in U.S.
dollars.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"),
which provides guidance in applying generally accepted accounting principles
with respect to revenue recognition. The Company adopted SAB 101 in the fourth
quarter of 2000 and its application, retroactive to the beginning of 2000, had
no significant impact on its financial position, earnings or cash flows.
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.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued 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 is required to review goodwill
and certain other intangible assets annually for potential impairment. In 2002,
the Company adopted this standard and completed its impairment test for goodwill
and certain other intangible assets and determined that there was no significant
impact on the Company's financial position, earnings or cash flows.
TIFFANY & CO. AND SUBSIDIARIES
40
In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and financial reporting
for legal obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. 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.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for exit or disposal
activities initiated after December 31, 2002. This statement requires that
liabilities associated with exit or disposal activities initiated after adoption
be recognized and measured at fair value when incurred, as opposed to at the
date an entity commits to the exit or disposal plans. The adoption of this
standard did not have a significant impact on the Company's financial position,
earnings or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 148 provides alternate methods of
transition for a voluntary change to the fair-value-based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and frequent
disclosures in financial statements about the effects of stock-based
compensation. The disclosure requirements have been adopted for the Company's
current year financial statements.
STOCK-BASED COMPENSATION
Employee stock options are accounted for under the intrinsic value method, which
measures compensation cost as the excess, if any, of the quoted market price of
the stock at grant date over the amount an employee must pay to acquire the
stock. Accordingly, compensation expense has not been recognized for stock
options granted at or above fair value. Had compensation expense been determined
and recorded based upon the fair-value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," net earnings and earnings per share
would have been reduced to pro forma amounts as follows:
Years Ended January 31,
-----------------------------------
(in thousands, except
per share amounts) 2003 2002 2001
- --------------------------------------------------------------------
Net earnings as reported $ 189,894 $ 173,587 $ 190,584
Stock-based employee
compensation expense
determined under
fair-value-based method
for all awards, net of tax (12,803) (10,713) (9,111)
-----------------------------------
Pro forma net earnings $ 177,091 $ 162,874 $ 181,473
-----------------------------------
Earnings per basic share:
As reported $ 1.31 $ 1.19 $ 1.31
Pro forma 1.22 1.12 1.25
Earnings per diluted share:
As reported 1.28 1.15 1.26
Pro forma 1.19 1.08 1.20
The weighted-average fair values of options granted for the years ended January
31, 2003, 2002 and 2001 were $9.40, $12.33 and $12.14. The fair value of each
option grant is estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Years Ended January 31,
-------------------------------
2003 2002 2001
- ---------------------------------------------------------------------
Dividend yield 0.6% 0.7% 0.7%
Expected volatility 37.5% 36.5% 35.0%
Risk-free interest rate 2.9% 4.3% 4.9%
Expected life (years) 5 5 5
TIFFANY & CO. AND SUBSIDIARIES
41
C. ACQUISITIONS AND DISPOSITIONS
In May 2001, the Company purchased 45% of Little Switzerland, Inc.'s ("Little
Switzerland") outstanding shares of common stock by means of a direct investment
in newly-issued unregistered shares at a cost of $9,546,000. Little Switzerland
is a specialty retailer of jewelry, watches, crystal, china and giftware,
operating stores primarily on Caribbean islands, as well as in Florida and
Alaska. The Company accounted for this investment under the equity method based
upon its ownership interest and its significant influence. In 2001, the Company
also provided Little Switzerland with an interest-bearing loan in the amount of
$2,500,000. The Company's equity share of Little Switzerland's results from
operations has been included in other expense (income), net and amounted to a
loss of $1,482,000 in 2002 (through September 30) and $2,483,000 in 2001. In
August 2002, a wholly-owned subsidiary of the Company commenced a cash tender
offer to acquire the remaining balance of the outstanding shares of Little
Switzerland's common stock at $2.40 per share. In October 2002, the Company
purchased and paid for the shares acquired, which represented 98% of the
outstanding shares of Little Switzerland. On November 20, 2002, the subsidiary
merged with and into Little Switzerland. Under the terms of the merger, common
stock of Little Switzerland not owned by the subsidiary has been converted into
the right to receive the same consideration paid in the tender offer. The cost
of acquiring all of the outstanding shares of Little Switzerland, other than
those already owned by the Company, including professional fees and other
related costs, was $27,530,000. Pro forma financial data, assuming the
acquisition had been completed on February 1, 2001 and 2002, has not been
presented since the Little Switzerland acquisition is not significant to the
Company's financial condition or results of operations. The purchase price has
been allocated to the assets acquired and liabilities assumed according to
estimated fair values. The amount assigned to intangible assets is $10,615,000
and is being amortized over 20 years. The amount assigned to goodwill is
$9,536,000, none of which is expected to be deductible for tax purposes. The
Company commenced the consolidation of Little Switzerland's operations effective
October 1, 2002, and the interest-bearing loan provided to Little Switzerland in
2001 has been eliminated in consolidation. The acquisition was accounted for in
accordance with SFAS No. 141, "Business Combinations."
In November 2002, the Company made a decision to discontinue offering service
award programs which it operates through its Business Sales division. The
Company will fulfill its existing customer commitments, without soliciting new
employee service award programs. Sales affected by this action represent less
than $30,000,000 annually, or less than half of the Business Sales division's
sales. As a consequence of that decision, the Company recorded a pre-tax charge
of $1,400,000 in 2002, primarily related to employee separation costs and the
disposal of obsolete, program-specific inventory.
In January 2001, the Company discontinued wholesale sales of fragrance products
in the U.S. and in most international markets; in July 2000, the Company
discontinued wholesale sales of jewelry and non-jewelry items in Europe; and in
January 2000, the Company discontinued wholesale sales of jewelry and
non-jewelry items in the U.S. In connection with these decisions, the Company
established product return reserves, which had the cumulative effect of reducing
gross profit by $9,364,000, and recorded a charge of $3,146,000 to selling,
general and administrative expenses, primarily relating to the write-off of
unrecoverable store fixtures maintained by such customers. At January 31, 2002,
all costs relating to these discontinued operations had been incurred and there
was no product return reserve remaining.
D. INVESTMENTS
In December 2002, a wholly-owned subsidiary of the Company made a $4,000,000
investment in a privately-held venture that designs and sells jewelry. The
subsidiary has an additional funding commitment of $9,000,000 and the option to
buy out and own 100% of the venture in future periods. This venture is being
consolidated in the Company's financial statements based on the percentage of
TIFFANY & CO. AND SUBSIDIARIES
42
ownership and effective control over the direction of the operations of the
venture. The venture is not significant to the Company's financial position,
earnings or cash flows.
In February 2000, the Company acquired a 5.4% equity interest in Della.com, Inc.
("Della"), a provider of online wedding gift registry services. In April 2000,
Della merged with and into WeddingChannel.com with the consequence that the
Company's equity interest in Della was converted to a 2.7% interest in
WeddingChannel.com, assuming the conversion of all outstanding preferred shares
to common. The Company accounted for this investment in accordance with the cost
method as provided in Accounting Principles Board Opinion No. 18, as amended. In
2001, the Company recorded in other expense (income), net a pre-tax impairment
charge of $7,800,000, representing the Company's total investment.
In July 1999, the Company made a strategic investment in Aber Diamond
Corporation ("Aber"), previously known as Aber Resources Ltd., a publicly-traded
company headquartered in Canada, by purchasing eight million unregistered shares
of its common stock, which represents 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 developed to mine diamonds. Startup
is expected in the first quarter of 2003. On January 31, 2003 and 2002, the
Company's investment had aggregate fair-market values of $153,280,000 and
$121,440,000, based upon the market price of Aber's common stock on those dates.
This investment is included in other assets, net and was allocated at the time
of investment between the Company's interest in the net book value of Aber and
the mineral rights obtained. At January 31, 2003 and 2002, the Company's
investment in Aber was $32,012,000 and $33,088,000, and the intangible mineral
rights balance was $41,243,000 in both years. The amount allocated to the
Company's interest in the net book value of Aber is being accounted for under
the equity method based upon the Company's significant influence, including
representation on Aber's Board of Directors. In February 2001, Aber completed
the sale of its interest in a mining project for $114,000,000. As a result of
this sale, the Company recorded in other expense (income), net a pre-tax gain
of $5,257,000, net of mineral rights costs related to this project. The
Company's equity share of Aber's results from operations (excluding the gain on
the sale of its interest in the mining project) has been included in other
expense (income), net and amounted to losses of $1,076,000, $125,000 and
$1,243,000 in 2002, 2001 and 2000. Depletion of the mineral rights will be
recorded as a charge to cost of sales based on the projected units of
production method and will commence once production has started. In addition,
the Company has entered into a diamond purchase agreement whereby the Company
has the obligation to purchase, subject to the Company's quality standards, a
minimum of $50,000,000 of diamonds per year for 10 years. It is expected that
this commercial relationship will enable the Company to secure a considerable
portion of its future diamond needs.
E. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Years Ended January 31,
-----------------------------------
(in thousands) 2003 2002 2001
- --------------------------------------------------------------------
Interest, net of
interest capitalization $ 18,652 $ 19,525 $ 15,487
Income taxes $ 100,059 $ 112,158 $ 121,019
Details of businesses acquired in purchase transactions:
Years Ended January 31,
------------------------------------
(in thousands) 2003 2002 2001
- --------------------------------------------------------------------
Fair value of assets acquired $ 48,090 $ - $ -
Less: liabilities assumed 20,560 - -
------------------------------------
Cash paid for acquisitions 27,530 - -
Less: cash acquired 1,031 - -
------------------------------------
Net cash paid for acquisitions $ 26,499 $ - $ -
------------------------------------
TIFFANY & CO. AND SUBSIDIARIES
43
Supplemental noncash investing and financing activities:
Years Ended January 31,
------------------------------------
(in thousands) 2003 2002 2001
- --------------------------------------------------------------------
Issuance of Common Stock
under the Employee
Profit Sharing and
Retirement Savings Plan $ 1,000 $ 2,800 $ 3,300
Capital lease $ - $ - $ 40,747
F. INVENTORIES
January 31,
-----------------------
(in thousands) 2003 2002
- --------------------------------------------------------------------
Finished goods $ 615,247 $ 528,671
Raw materials 91,505 67,779
Work-in-process 29,698 18,722
-----------------------
736,450 615,172
Reserves (4,362) (3,519)
-----------------------
$ 732,088 $ 611,653
=======================
LIFO-based inventories at January 31, 2003 and 2002 were $532,160,000 and
$481,716,000 with the current cost exceeding the LIFO inventory value by
$20,135,000 and $18,971,000. The LIFO valuation method had no effect on earnings
per diluted share for the year ended January 31, 2003 and had the effect of
decreasing earnings per diluted share by $0.01 for the years ended January 31,
2002 and 2001.
G. PROPERTY, PLANT AND EQUIPMENT
January 31,
-----------------------
(in thousands) 2003 2002
- --------------------------------------------------------------------
Land $ 78,754 $ 55,498
Buildings 171,578 119,316
Leasehold improvements 302,159 255,233
Construction-in-progress 92,132 55,727
Office equipment 275,055 229,565
Machinery and equipment 61,726 49,398
-----------------------
981,404 764,737
Accumulated depreciation
and amortization (303,774) (239,152)
-----------------------
$ 677,630 $ 525,585
=======================
The provision for depreciation and amortization for the years ended January 31,
2003, 2002 and 2001 was $79,682,000, $65,997,000 and $47,448,000. In 2002 and
2001, the Company accelerated the depreciation of certain leasehold improvements
and equipment as a result of the shortening of useful lives related to
renovations and/or expansions of retail stores and office facilities. The amount
of accelerated depreciation recognized was $5,304,000 and $6,516,000 for the
years ended January 31, 2003 and 2002.
H. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
January 31,
-----------------------
(in thousands) 2003 2002
- --------------------------------------------------------------------
Accounts payable -- trade $ 67,150 $ 56,291
Accrued compensation
and commissions 23,839 24,885
Accrued sales, withholding
and other taxes 37,468 25,573
Other 34,881 27,945
-----------------------
$ 163,338 $ 134,694
=======================
I. EARNINGS PER SHARE
The following table summarizes the reconciliation of the numerators and
denominators for the basic and diluted earnings per share ("EPS") computations:
Years Ended January 31,
------------------------------------
(in thousands) 2003 2002 2001
- --------------------------------------------------------------------
Net earnings for basic
and diluted EPS $ 189,894 $ 173,587 $ 190,584
------------------------------------
Weighted-average shares
for basic EPS 145,328 145,535 145,493
Incremental shares based
upon the assumed
exercise of stock options 3,263 4,982 6,323
------------------------------------
Weighted-average shares
for diluted EPS 148,591 150,517 151,816
====================================
For the years ended January 31, 2003, 2002 and 2001, there were 4,991,000,
3,220,000 and 1,683,000 stock options excluded from the computations of earnings
per diluted share due to their antidilutive effect.
TIFFANY & CO. AND SUBSIDIARIES
44
J. DEBT
January 31,
------------------------------------------------
Carrying Amount Fair Value
------------------------------------------------
(in thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Short-term borrowings:
Credit facility $ 49,194 $ 36,913 $ 49,194 $ 36,913
LS Facility
revolving loan 3,358 - 3,358 -
Other lines
of credit - 3,489 - 3,489
------------------------------------------------
52,552 40,402 52,552 40,402
================================================
Current portion
of long-term debt:
7.52% Senior Notes - 51,500 - 53,147
Long-term debt:
Senior Notes:
6.90% Series A 60,000 60,000 66,273 60,420
7.05% Series B 40,000 40,000 44,427 40,075
6.15% Series C 41,903 - 41,903 -
6.56% Series D 63,067 - 63,067 -
4.50% yen loan 41,970 37,650 52,572 45,541
Variable-rate
yen loan 46,167 41,415 46,167 41,415
LS Facility
term loan 4,000 - 4,000 -
------------------------------------------------
297,107 179,065 318,409 187,451
------------------------------------------------
$ 349,659 $ 270,967 $ 370,961 $ 281,000
================================================
The fair values of short-term borrowings, the variable-rate yen loan and the LS
Facility term loan approximate carrying value due to their variable
interest-rate terms. The fair values of the Senior Notes were determined using
the quoted market prices of debt instruments with similar terms and maturities.
The fair value of the 4.50% yen loan is based upon discounted cash-flow analysis
for securities with similar characteristics.
In July 2002, the Company, in a private transaction with various institutional
lenders, issued, at par, $40,000,000 of 6.15% Series C Senior Notes Due 2009 and
$60,000,000 of 6.56% Series D Senior Notes Due 2012 with respective seven-year
and 10-year lump sum repayments upon maturities. The proceeds of these issues
are being and will be used by the Company for general corporate purposes,
including seasonal working capital, and was used to redeem the Company's
$51,500,000 principal amount 7.52% Senior Notes which came due in January 2003.
The Note Purchase Agreement requires maintenance of specific financial covenants
and ratios and limits certain changes to indebtedness and the general nature of
the business, in addition to other requirements customary to such borrowings.
Concurrently, the Company entered into an interest-rate swap agreement to hedge
the change in fair value of its fixed-rate obligation. Under the swap agreement,
the Company pays variable-rate interest and receives fixed interest-rate
payments periodically over the life of the instrument. The Company accounts for
the interest-rate swap agreement as a fair-value hedge of the debt (see Note K),
requiring the debt to be valued at fair value. As a result, the carrying value
of the Series C and Series D Senior Notes equals the fair value. For the year
ended January 31, 2003, the interest-rate agreement had the effect of decreasing
interest expense by $1,999,000.
In November 2001, the Company entered into a new multicurrency revolving credit
facility ("Credit Facility") to increase the borrowing limit from $160,000,000
to $200,000,000 and the number of participating banks from five to six. All
borrowings are at interest rates based on a prime rate or LIBOR and are affected
by local borrowing conditions. The Credit Facility expires in November 2006. The
Credit Facility requires the payment of an annual fee based on the total amount
of available credit and contains covenants that require maintenance of certain
debt/ equity and interest-coverage ratios, in addition to other requirements
customary to loan facilities of this nature. At January 31, 2003 and 2002, the
interest rates under the Credit Facility ranged from 0.41% to 11.20% and 0.22%
to 9.70%. The weighted-average interest rates for the Credit Facility were 3.95%
and 3.57% for the years ended January 31, 2003 and 2002.
The Company also has other lines of credit totaling $4,539,000.
In connection with the acquisition of the remaining outstanding shares of Little
Switzerland, the Company assumed their outstanding debt. Little Switzerland has
a senior collateralized revolving and term loan credit facility ("LS Facility"),
which allows them to borrow up to
TIFFANY & CO. AND SUBSIDIARIES
45
$12,000,000 through March 21, 2005, of which up to $8,000,000 is a revolving
loan and $4,000,000 is a term loan, at an interest rate of 2.75% above the
Adjusted Eurodollar Rate or 0.75% above the Prime Rate, plus customary servicing
costs and unused facility fees. Amounts advanced to Little Switzerland under the
LS Facility are limited to a stated borrowing base, which is calculated as a
percentage of certain inventory less specific reserves (as defined in the LS
Facility agreement). The LS Facility is collateralized by certain assets of
Little Switzerland. The terms of the LS Facility require maintenance of specific
financial covenants and ratios and limit certain payments, investments and
indebtedness, in addition to other requirements customary to such borrowings.
The Company has begun discussions to replace the LS Facility with an unsecured
revolving credit facility. The proposed terms of this unsecured revolving credit
facility should result in a reduction in interest expense, and contain financial
ratios and covenants that are consistent with those contained in the Company's
credit facility. The interest rate for the LS Facility at January 31, 2003 was
4.21%.
In October 1999, the Company entered into a yen 5,500,000,000, five-year loan
agreement due 2004, bearing interest at a variable rate. The interest rate at
January 31, 2003 was 0.58% and is based upon the six-month Japanese LIBOR plus
50 basis points and is reset every six months ("floating rate"). The proceeds
from this loan were used to reduce short-term indebtedness in Japan.
Concurrently, the Company entered into a yen 5,500,000,000, five-year
interest-rate swap agreement whereby the Company pays a fixed rate of interest
of 1.815% and receives the floating rate on the yen 5,500,000,000 loan. The
interest-rate swap agreement had the effect of increasing interest expense by
$551,000, $508,000 and $538,000 for the years ended January 31, 2003, 2002 and
2001.
In December 1998, the Company, in private transactions with various
institutional lenders, issued, at par, $60,000,000 principal amount 6.90% Series
A Senior Notes Due 2008 and $40,000,000 principal amount 7.05% Series B Senior
Notes Due 2010. The proceeds of these issuances were used by the Company for
working capital and to refinance a portion of outstanding short-term
indebtedness. The Note Purchase Agreements require lump sum repayment upon
maturity, maintenance of specific financial covenants and ratios and limit
certain payments, investments and indebtedness, in addition to other
requirements customary to such borrowings.
The Company has a yen 5,000,000,000, 15-year term loan agreement due 2011,
bearing interest at a rate of 4.50%.
The Company had letters of credit and financial guarantees of $13,683,000 at
January 31, 2003.
K. HEDGING INSTRUMENTS
In the normal course of business, the Company uses financial hedging
instruments, including derivative financial instruments, for purposes other than
trading. These instruments include interest-rate swap agreements, foreign
currency-purchased put options and forward foreign-exchange contracts. The
Company does not use derivative financial instruments for speculative purposes.
The Company's foreign subsidiaries and branches satisfy all of their inventory
requirements by purchasing merchandise from the Company's New York subsidiary.
All inventory purchases are payable in U.S. dollars. Accordingly, the foreign
subsidiaries and branches have foreign-exchange risk that may be hedged. To
mitigate this risk, the Company manages a foreign currency hedging program
intended to reduce the Company's risk in foreign currency-denominated (primarily
yen) transactions.
To minimize the potentially negative impact of a significant strengthening of
the U.S. dollar against the yen, the Company purchases yen put options
("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. Effective November 1, 2001, the Company assesses hedge
effectiveness based on the total changes in the option's cash flows. The
effective portion of unrealized
TIFFANY & CO. AND SUBSIDIARIES
46
gains and losses associated with the value of the option contracts is deferred
as a component of accumulated other comprehensive (loss) gain and is recognized
as a component of cost of sales on the Company's consolidated statement of
earnings when the related inventory is sold. Prior to November 1, 2001, the
Company excluded time value from the assessment of effectiveness, which amounted
to pre-tax hedging losses of $375,000, recorded in cost of sales. There was no
ineffectiveness related to the Company's option contracts in 2002 and 2001. The
fair value of the options was $1,512,000 and $8,562,000 at January 31, 2003 and
2002. The fair value of the options was determined using quoted market prices
for these instruments.
At January 31, 2003 and 2002, the Company also had $15,620,000 and $16,306,000
of outstanding forward foreign-exchange contracts, which subsequently matured on
February 26, 2003 and 2002, to primarily support the settlement of merchandise
liabilities for the Company's business in Japan. Due to the short-term nature of
the Company's forward foreign-exchange contracts, the book value of the
underlying assets and liabilities approximates fair value.
As discussed in Note J, the Company utilizes interest-rate swap agreements to
effectively convert its variable-rate yen obligation to a fixed-rate obligation
and its fixed-rate Senior Notes Series C and Series D obligation to a
floating-rate obligation. The Company accounts for its variable-rate yen
interest-rate swap as a cash-flow hedge and its fixed-rate Senior Notes Series C
and Series D interest-rate swap as a fair-value hedge. The terms of each swap
agreement match the terms of the underlying debt, resulting in no
ineffectiveness. The fair value of the interest-rate swap agreements was a net
gain of $4,013,000 at January 31, 2003 and a net loss of $1,298,000 at January
31, 2002 and was based upon the amounts the Company would expect to pay to
terminate the agreements.
Hedging activity affected accumulated other comprehensive (loss) gain, net of
tax, as follows:
Years Ended January 31,
-----------------------
(in thousands) 2003 2002
- --------------------------------------------------------------------
Balance at beginning of period $ 6,515 $ -
Impact of adoption - 3,773
Derivative gains
transferred to earnings (4,395) (4,672)
Change in fair value (4,404) 7,414
-----------------------
$ (2,284) $ 6,515
=======================
The Company expects $1,662,000 of derivative losses included in accumulated
other comprehensive income to be reclassified into earnings within the next 12
months. This amount may vary due to fluctuations in the yen exchange rate. The
maximum term over which the Company is hedging its exposure to the variability
of future cash flows (for all forecasted transactions, excluding interest
payments on variable-rate debt) is 12 months.
L. COMMITMENTS AND CONTINGENCIES
The Company leases certain office, distribution, retail and manufacturing
facilities. Retail store leases may require the payment of minimum rentals and
contingent rent based upon a percentage of sales exceeding a stipulated amount.
The lease agreements, which expire at various dates through 2032, are subject,
in many cases, to renewal options and provide for the payment of taxes,
insurance and maintenance. Certain leases contain escalation clauses resulting
from the pass-through of increases in operating costs, property taxes and the
effect on costs from changes in consumer price indices.
In January 2001, the Company notified the lessor of its New Jersey Customer
Service/Distribution Center and office facility that it exercised its purchase
right included in the lease. The capital lease buyout was completed on January
31, 2002.
TIFFANY & CO. AND SUBSIDIARIES
47
Rent-free periods and other incentives granted under certain leases and
scheduled rent increases are charged to rent expense on a straight-line basis
over the related terms of such leases. Rent expense for the Company's operating
leases, including escalations, consisted of the following:
Years Ended January 31,
------------------------------------
(in thousands) 2003 2002 2001
- --------------------------------------------------------------------
Minimum rent for
retail locations $ 35,572 $ 32,044 $ 29,277
Contingent rent
based on sales 17,470 15,668 17,469
Office, distribution
and manufacturing
facilities rent 13,572 10,809 11,737
------------------------------------
$ 66,614 $ 58,521 $ 58,483
====================================
Aggregate minimum annual rental payments under noncancelable operating leases
are as follows:
Minimum Annual
Rental Payments
Years Ending January 31, (in thousands)
- --------------------------------------------
2004 $ 62,871
2005 54,543
2006 45,463
2007 37,257
2008 33,380
Thereafter 192,563
At January 31, 2003, the Company's contractual cash obligations and commercial
commitments were: inventory purchases of $636,268,000 including the obligation
under the agreement with Aber (see Note D), construction-in-progress of
$28,672,000 and other contractual obligations of $16,825,000 (which includes the
additional commitment of $9,000,000, see Note D).
In August 2001, the Company signed new agreements with Mitsukoshi whereby
TIFFANY & CO. boutiques will continue to operate within Mitsukoshi's stores in
Japan until at least January 31, 2007. The new agreements largely continue the
principles on which Mitsukoshi and the Company 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 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
began to pay to Mitsukoshi a reduced percentage fee based on certain sales
beginning in 2002, to be followed by a greater reduction in fees beginning in
2003. The Company also operates boutiques in other Japanese department stores.
The Company pays the department stores a percentage fee based on sales generated
in these locations. Fees paid to Mitsukoshi and other Japanese department stores
totaled $84,494,000, $93,971,000 and $102,204,000 in 2002, 2001 and 2000.
The Company is, from time to time, involved in routine litigation incidental to
the conduct of its business, including proceedings to protect its trademark
rights, litigation instituted by persons injured upon premises within the
Company's control, litigation with present and former employees and litigation
claiming infringement of the copyrights and patents of others. Management
believes that such pending litigation will not have a significant impact on the
Company's financial position, earnings or cash flows.
M. RELATED PARTIES
A member of the Company's Board of Directors, who joined in July 2001, is an
officer of International Business Machines Corporation, which has had a
long-standing business relationship with the Company. Fees paid to that company
for equipment and services rendered amounted to $11,600,000, $4,700,000 and
$3,100,000 in 2002, 2001 and 2000.
A member of the Company's Board of Directors is an officer of Lehman Brothers,
which served as a placement agent for the 2002 debt issuance and as an advisor
for the purchase of the remaining shares of Little Switzerland and other
matters. Fees paid to that company for services rendered amounted to $956,000,
$35,000 and $4,000 in 2002, 2001 and 2000.
TIFFANY & CO. AND SUBSIDIARIES
48
A member of the Company's Board of Directors is a member of the Board of
Directors of The Bank of New York, which serves as the Company's lead bank for
its Credit Facility, provides other general banking services and serves as the
plan administrator for the Company's pension plan. Fees paid to that company for
services rendered amounted to $842,000, $1,021,000 and $641,000 in 2002, 2001
and 2000.
N. STOCKHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM
The Board of Directors has authorized the Company's stock repurchase program,
which expires in 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 repurchased and retired 1,350,000 shares of
Common Stock in 2002 at an aggregate cost of $37,526,000, or an average cost of
$27.80 per share; repurchased and retired 1,628,000 shares of Common Stock in
2001 at an aggregate cost of $39,265,000, or an average cost of $24.12 per
share; and repurchased and retired 465,000 shares of Common Stock in 2000 at an
aggregate cost of $13,319,000, or an average cost of $28.64 per share.
STOCKHOLDER RIGHTS PLAN
In September 1998, the Board of Directors amended and restated the Company's
existing Stockholder Rights Plan ("Rights Plan") to extend its expiration date
from November 17, 1998 to September 17, 2008. Under the Rights Plan, as amended,
each outstanding share of the Company's Common Stock has a stock purchase right,
initially subject to redemption at $0.01 per right, which right first becomes
exercisable should certain takeover-related events occur. Following certain such
events, but before any person has acquired beneficial ownership of 15% of the
Company's common shares, each right may be used to purchase 0.0025 of a share of
Series A Junior Participating Cumulative Preferred Stock at an exercise price of
$165.00 (subject to adjustment); after such an acquisition, each right becomes
nonredeemable and may be used to purchase, for the exercise price, common shares
having a market value equal to two times the exercise price. If, after such an
acquisition, a merger of the Company occurs (or 50% of the Company's assets are
sold), each right may be exercised to purchase, for the exercise price, common
shares of the acquiring corporation having a market value equal to two times the
exercise price. Rights held by such a 15% owner may not be exercised.
PREFERRED STOCK
The Board of Directors is authorized to issue, without further action by the
stockholders, shares of Preferred Stock and to fix and alter the rights related
to such stock. In March 1987, the stockholders authorized 2,000,000 shares of
Preferred Stock, par value $0.01 per share. In November 1988, the Board of
Directors designated certain shares of such Preferred Stock as Series A Junior
Participating Cumulative Preferred Stock, par value $0.01 per share, to be
issued in connection with the exercise of certain stock purchase rights under
the Rights Plan. At January 31, 2003 and 2002, there were no shares of Preferred
Stock issued or outstanding.
CASH DIVIDENDS
The Board of Directors declared an increase of 33% in the quarterly dividend
rate on common shares in May 2000, increasing the quarterly rate to $0.04 per
share. On February 20, 2003, the Board of Directors declared a quarterly
dividend of $0.04 per common share. This dividend will be paid on April 10, 2003
to stockholders of record on March 20, 2003.
TIFFANY & CO. AND SUBSIDIARIES
49
O. STOCK COMPENSATION PLANS
In May 1998, the stockholders approved both the Company's 1998 Employee
Incentive Plan and the Directors Option Plan. No award may be made under either
plan after March 19, 2008. Under the Employee Incentive Plan, the maximum number
of shares of Common Stock subject to issuance is 10,369,764 (subject to
adjustment); awards may be made to employees of the Company or its related
companies in the form of stock options, stock appreciation rights, shares of
stock and cash; awards made in the form of non-qualified stock options,
tax-qualified incentive stock options or stock appreciation rights may have a
maximum term of 10 years from the date of grant (vesting in increments of 25%
per year over a four-year period on the yearly anniversary date of the grant)
and may not be granted for an exercise price below fair-market value. With the
adoption of the Employee Incentive Plan, no further stock options may be granted
under the Company's 1986 Stock Option Plan; however, 3,461,719 shares remain
subject to issuance based on prior grants made under such plan.
Under the Directors Option Plan, the maximum number of shares of Common Stock
subject to issuance is 1,000,000 (subject to adjustment); awards may be made to
non-employee directors of the Company in the form of stock options or shares of
stock but may not exceed 20,000 (subject to adjustment) shares per non-employee
director in any fiscal year; awards made in the form of stock options may have a
maximum term of 10 years from the date of grant (vesting in increments of 50%
per year over a two-year period on the yearly anniversary date of the grant) and
may not be granted for an exercise price below fair-market value unless the
director has agreed to forego all or a portion of his or her annual cash
retainer or other fees for service as a director in exchange for below market
exercise price options. No further options may be granted under the 1988
Directors Option Plan, which has expired; all Director options awarded under the
1988 Plan were granted at 50% below the market value at the date of grant. The
Company recognized compensation expense relating to options granted at below
market value based on the difference between the option price and the
fair-market value at the date of grant.
A summary of activity for the Company's stock option plans is presented below:
Weighted-
Number Average
of Exercise
Shares Price
- -------------------------------------------------------
Outstanding, January 31, 2000 11,285,624 $ 14.66
Granted 1,581,300 33.06
Exercised (1,307,545) 8.21
Forfeited (228,850) 20.71
-----------------------
Outstanding, January 31, 2001 11,330,529 17.85
Granted 2,067,250 33.80
Exercised (642,870) 9.58
Forfeited (246,949) 28.65
-----------------------
Outstanding, January 31, 2002 12,507,960 20.70
Granted 2,231,900 26.28
Exercised (1,184,732) 8.73
Forfeited (349,989) 33.33
-----------------------
OUTSTANDING, JANUARY 31, 2003 13,205,139 $ 22.38
=======================
Options exercisable at January 31, 2003, 2002 and 2001 were 8,522,446, 7,805,486
and 6,438,929.
TIFFANY & CO. AND SUBSIDIARIES
50
The following tables summarize information concerning options outstanding and
exercisable at January 31, 2003:
Options Outstanding
-------------------------------------
Weighted-
Average Weighted-
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life (years) Price
- --------------------------------------------------------
$ 1.81-$ 9.45 2,524,888 3.98 $ 6.25
$ 9.48-$14.98 3,542,785 5.94 13.01
$17.59-$25.85 2,217,800 9.79 25.53
$25.94-$34.02 3,168,816 8.51 33.12
$34.92-$39.97 323,750 8.04 37.23
$42.08-$42.08 1,427,100 6.97 42.08
-------------------------------------
13,205,139 6.99 $ 22.38
=====================================
Options Exercisable
-----------------------
Weighted-
Average
Range of Number Exercise
Exercise Prices Exercisable Price
- ------------------------------------------
$ 1.81-$ 9.45 2,524,888 $ 6.25
$ 9.48-$14.98 3,542,785 13.01
$17.59-$25.85 63,391 19.78
$25.94-$34.02 1,185,353 32.86
$34.92-$39.97 109,379 37.25
$42.08-$42.08 1,096,650 42.08
----------------------
8,522,446 $ 17.87
======================
P. EMPLOYEE BENEFIT PLANS
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company maintains a noncontributory defined benefit pension plan ("Plan")
covering substantially all domestic salaried and full-time hourly employees. The
Company accounts for pension expense using the projected unit credit actuarial
method for financial reporting purposes. Plan benefits are based on the highest
five consecutive years of compensation or as a percentage of actual
compensation, as applicable in the circumstances, and the number of years of
service. The actuarial present value of the vested benefit obligation is
calculated based on the expected date of separation or retirement of the
Company's eligible employees. The Company funds the Plan's trust in accordance
with regulatory limits to provide for current service and for unfunded projected
benefit obligation over a reasonable period. Assets of the Plan consist
primarily of equity mutual funds, common stocks and U.S. Government, corporate
and mortgage obligations. The Plan's assets also include investments in the
Company's Common Stock representing 6% and 11% of Plan assets at January 31,
2003 and 2002.
The Company provides certain health-care and life insurance benefits for retired
employees and accrues the cost of providing these benefits throughout the
employees' active service periods until they attain full eligibility for those
benefits. Substantially all of the Company's U.S. employees may become eligible
for these benefits if they reach normal or early retirement age while working
for the Company. The Company's employee and retiree healthcare benefits are
administered by an insurance company, and premiums on life insurance are based
on prior years' claims experience.
TIFFANY & CO. AND SUBSIDIARIES
51
The following tables provide a reconciliation of benefit obligations, plan
assets and funded status of the plans:
January 31,
---------------------------------------------------
Other Postretirement
Pension Benefits Benefits
---------------------------------------------------
(in thousands) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 106,373 $ 89,819 $ 38,787 $ 25,794
Service cost 7,094 6,040 2,415 2,769
Interest cost 7,072 6,297 2,042 2,064
Participants' contributions - - 35 33
Amendment - 1,132 - -
Actuarial loss (gain) 5,098 6,037 (4,017) 9,093
Benefits paid (3,024) (2,952) (1,231) (966)
---------------------------------------------------
Benefit obligation at end of year $ 122,613 $ 106,373 $ 38,031 $ 38,787
===================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 72,867 $ 79,281 $ - $ -
Actual return on plan assets (7,412) (3,462) - -
Employer contribution 16,937 - 1,196 933
Participants' contributions - - 35 33
Benefits paid (3,024) (2,952) (1,231) (966)
---------------------------------------------------
Fair value of plan assets at end of year $ 79,368 $ 72,867 $ - $ -
===================================================
Funded status $ (43,245) $ (33,506) $ (38,031) $ (38,787)
Unrecognized net actuarial loss 26,805 7,867 4,346 8,337
Unrecognized prior service cost 1,025 1,132 287 281
---------------------------------------------------
Accrued benefit cost $ (15,415) $ (24,507) $ (33,398) $ (30,169)
===================================================
TIFFANY & CO. AND SUBSIDIARIES
52
The following table provides the amounts recognized in the Consolidated Balance
Sheets:
January 31,
------------------------------------------------------
Other Postretirement
Pension Benefits Benefits
------------------------------------------------------
(in thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------
Accrued benefit liability $ (20,950) $ (24,507) $ (33,398) $ (30,169)
Minimum pension liability adjustment:
Intangible asset 1,025 - - -
Accumulated other comprehensive income (pre-tax) 4,510 - - -
------------------------------------------------------
Net amount recognized $ (15,415) $ (24,507) $ (33,398) $ (30,169)
======================================================
Net periodic pension and other postretirement benefit expense included the
following components:
Years Ended January 31,
-----------------------------------------------------------------
Other Postretirement
Pension Benefits Benefits
-----------------------------------------------------------------
(in thousands) 2003 2002 2001 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Service cost-benefits earned during period $ 7,094 $ 6,040 $ 4,632 $ 2,415 $ 2,769 $ 2,129
Interest cost on accumulated benefit obligation 7,072 6,297 5,487 2,042 2,064 1,642
Return on plan assets (6,428) (5,808) (5,166) - - -
Net amortization and deferrals 107 41 241 (32) 23 (5)
-----------------------------------------------------------------
Net expense $ 7,845 $ 6,570 $ 5,194 $ 4,425 $ 4,856 $ 3,766
=================================================================
January 31,
---------------------------------------------------
Other Postretirement
Pension Benefits Benefits
---------------------------------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------
Weighted-average assumptions:
Discount rate 6.50% 6.75% 6.50% 6.75%
Expected return on plan assets 7.50% 9.00% - -
Rate of increase in compensation 4.00% 4.00% - -
TIFFANY & CO. AND SUBSIDIARIES
53
For postretirement benefit measurement purposes, 11.00% (for pre-age 65
retirees) and 12.00% (for post-age 65 retirees) annual rates of increase in the
per capita cost of covered health care were assumed for 2002. The rate was
assumed to decrease gradually to 5.00% for both groups by 2017 and remain at
that level thereafter.
Assumed health-care cost trend rates have a significant effect on the amounts
reported for the Company's postretirement health-care benefits plan. A
one-percentage-point change in the assumed health-care cost trend rate would
increase the Company's accumulated postretirement benefit obligation by
$6,191,000 and the aggregate service and interest cost components of net
periodic postretirement benefits by $968,000 for the year ended January 31,
2003. Decreasing the health-care cost trend rate by one percentage point would
decrease the Company's accumulated postretirement benefit obligation by
$4,991,000 and the aggregate service and interest cost components of net
periodic postretirement benefits by $764,000 for the year ended January 31,
2003.
OTHER RETIREMENT PLANS
The Company has deferred compensation arrangements for certain executives and
eligible employees which generally provide for payments at specified future
dates, upon retirement, death or termination of employment. Benefit payments are
funded by either contributions from eligible participants or from the Company,
depending on the plan. The amounts accrued under these plans were $20,340,000
and $18,163,000 at January 31, 2003 and 2002, and are reflected in other
long-term liabilities. Amounts contributed and the related investment returns
are reflected in other assets, net.
PROFIT SHARING AND RETIREMENT SAVINGS PLAN
The Company also maintains an Employee Profit Sharing and Retirement Savings
Plan ("EPSRS Plan") that covers substantially all U.S.-based employees. Under
the profit- sharing portion of the EPSRS Plan, the Company makes contributions,
in the form of newly-issued Company Common Stock, to the employees' accounts
based upon the achievement of certain targeted earnings objectives established
by, or as otherwise determined by, the Board of Directors. The Company recorded
charges of $2,000,000, $1,000,000 and $2,800,000 in 2002, 2001 and 2000. Under
the retirement savings portion of the EPSRS Plan, employees who meet certain
eligibility requirements may participate by contributing up to 15% of their
annual compensation, and the Company will provide a 50% matching cash
contribution up to 6% of each participant's total compensation. The Company
recorded charges of $4,238,000, $4,054,000 and $3,635,000 in 2002, 2001 and
2000. Contributions to both portions of the EPSRS Plan are made in the following
year.
Under the profit-sharing portion of the EPSRS Plan, the Company's stock
contribution is required to be maintained in such stock until the employee
either leaves or retires from the Company. Under the retirement savings portion
of the EPSRS Plan, the employees have the ability to elect to invest their
contribution and the matching contribution in company stock. At January 31,
2003, investments in company stock in the profit-sharing portion and in the
retirement savings portion represented 21% and 19% of total EPSRS Plan assets.
TIFFANY & CO. AND SUBSIDIARIES
54
Q. INCOME TAXES
Earnings before income taxes consisted of the following:
Years Ended January 31,
----------------------------------
(in thousands) 2003 2002 2001
- -------------------------------------------------------
United States $ 216,713 $ 204,955 $ 245,665
Foreign 82,924 84,357 71,976
----------------------------------
$ 299,637 $ 289,312 $ 317,641
==================================
Components of the provision for income taxes were as follows:
Years Ended January 31,
----------------------------------
(in thousands) 2003 2002 2001
- -------------------------------------------------------
Current:
Federal $ 64,500 $ 72,943 $ 80,530
State 17,090 21,091 21,309
Foreign 33,362 28,328 25,988
----------------------------------
114,952 122,362 127,827
----------------------------------
Deferred:
Federal (3,367) (5,166) 476
State (1,597) (2,429) (1,222)
Foreign (245) 958 (24)
----------------------------------
(5,209) (6,637) (770)
----------------------------------
$ 109,743 $ 115,725 $ 127,057
==================================
Deferred tax assets (liabilities) consisted of the following:
January 31,
-------------------
(in thousands) 2003 2002
- ----------------------------------------------------------
Deferred tax assets:
Postretirement/employment benefits $ 15,230 $ 13,835
Inventory reserves 28,088 24,939
Accrued expenses 9,115 11,066
Financial hedging instruments 162 (602)
Depreciation 9,798 4,288
Pension contribution 7,965 6,478
Other 6,593 5,445
-------------------
76,951 65,449
===================
Deferred tax liabilities:
Undistributed earnings of
foreign subsidiaries (22,328) (19,719)
Trademark amortization (3,648) -
-------------------
(25,976) (19,719)
-------------------
Net deferred tax asset $ 50,975 $ 45,730
===================
The income tax effects of items comprising the deferred income tax benefit were
as follows:
Years Ended January 31,
------------------------------
(in thousands) 2003 2002 2001
- --------------------------------------------------------------
Postretirement/employment
benefit obligations $ (1,395) $ (1,730) $ (1,360)
Undistributed earnings of
foreign subsidiaries 2,609 4,575 5,074
Accelerated depreciation (4,028) (2,461) (1,129)
Inventory reserves (1,847) (930) (1,874)
Financial hedging instruments (764) 1,775 (553)
Inventory capitalization (1,602) (6,518) (671)
Asset impairment - (2,732) -
Accrued expenses 1,936 392 3,391
Excess pension contribution 375 753 (2,324)
Other (493) 239 (1,324)
------------------------------
$ (5,209) $ (6,637) $ (770)
==============================
Reconciliations of the provision for income taxes at the statutory Federal
income tax rate to the Company's effective tax rate were as follows:
Years Ended January 31,
------------------------------
2003 2002 2001
- --------------------------------------------------------------
Statutory Federal income
tax rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal benefit 4.0 4.3 4.1
Foreign losses with
no tax benefit 0.7 0.3 0.6
Extraterritorial income
exclusion (3.8) - -
Other 0.7 0.4 0.3
------------------------------
36.6% 40.0% 40.0%
==============================
In November 2000, the United States Government repealed the tax provisions
associated with Foreign Sales Corporations ("FSC") and enacted, in their place,
the Extraterritorial Income Exclusion Act ("ETI"), certain provisions of which
differed from those governed by the FSC regulations. The ETI provides for the
exclusion from United States income tax of certain extraterritorial income
earned from the sale of qualified United States origin goods. Qualified United
States origin goods are generally defined as those wherein not more than 50% of
the fair-market value (including intangible values) is attributable
TIFFANY & CO. AND SUBSIDIARIES
55
to foreign content or value added outside the United States. In the third
quarter ended October 31, 2002, the Company determined that this tax benefit was
applicable to its operations and, therefore, has recognized a tax benefit. It is
unknown if this benefit will continue to be available to the Company in the
future, as the World Trade Organization ("WTO") ruled in January 2002 in favor
of a complaint by the European Union, and joined by Canada, Japan and India,
that the ETI exclusion constitutes a prohibited export subsidy under WTO
regulations. The United States Government is currently reviewing its options in
response to this ruling.
R. SEGMENT INFORMATION
The Company's reportable segments are: U.S. Retail, International Retail, Direct
Marketing and Specialty Retail.
The Company's products are primarily sold in more than 100 TIFFANY & CO. retail
locations in key markets around the world. Net sales by geographic area are
presented by attributing revenues from external customers on the basis of the
country in which the merchandise is sold.
Effective October 1, 2002, the Company established the Specialty Retail segment
to include the consolidated results of Little Switzerland, as well as the
consolidated results from other ventures operated under non-TIFFANY & CO.
trademarks or trade names. The Company's other 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. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
Certain information relating to the Company's reportable segments is set forth
below:
Years Ended January 31,
-------------------------------------
(in thousands) 2003 2002 2001
- -----------------------------------------------------------------------------
Net sales:
U.S. Retail $ 819,814 $ 786,792 $ 833,221
International Retail 683,489 659,028 679,274
Direct Marketing 179,175 160,715 155,561
Specialty Retail 24,124 - -
-------------------------------------
$ 1,706,602 $ 1,606,535 $ 1,668,056
=====================================
Earnings (losses) from operations*:
U.S. Retail $ 198,755 $ 199,310 $ 230,795
International Retail 205,398 196,816 188,216
Direct Marketing 41,747 28,104 22,277
Specialty Retail (1,646) - -
-------------------------------------
$ 444,254 $ 424,230 $ 441,288
=====================================
* Represents earnings from operations before unallocated corporate expenses and
interest and other expenses, net.
The Company's Executive Officers evaluate the performance of the Company's
assets related to the operations under TIFFANY & CO. trademarks or trade names
on an aggregate basis. Assets related to the operations under non-TIFFANY & CO.
trademarks or trade names are not significant to the Company. Therefore,
separate financial information for the Company's assets on a segment basis is
not presented. For the years ended January 31, 2003 and 2002, total assets were
$1,923,586,000 and $1,631,074,000.
TIFFANY & CO. AND SUBSIDIARIES
56
The following table sets forth reconciliations of the reportable
segments' earnings from operations to the Company's consolidated
earnings before income taxes:
Years Ended January 31,
------------------------------------
(in thousands) 2003 2002 2001
- ---------------------------------------------------------------
Earnings from operations
for reportable segments $ 444,254 $ 424,230 $ 441,288
Unallocated corporate
expenses (125,057) (114,333) (113,892)
Interest and other
expenses, net (19,560) (20,585) (9,755)
------------------------------------
Earnings before
income taxes $ 299,637 $ 289,312 $ 317,641
====================================
Sales to unaffiliated customers and long-lived assets were as follows:
GEOGRAPHIC AREAS
Years Ended January 31,
--------------------------------------
(in thousands) 2003 2002 2001
- ------------------------------------------------------------
Net sales:
United States $ 1,026,383 $ 972,178 $ 1,022,203
Japan 441,764 448,239 463,130
Other countries 238,455 186,118 182,723
--------------------------------------
$ 1,706,602 $1,606,535 $ 1,668,056
======================================
Long-lived assets:
United States $ 600,624 $ 504,187 $ 407,412
Japan 4,106 4,541 6,490
Other countries 89,792 32,684 24,246
--------------------------------------
$ 694,522 $ 541,412 $ 438,148
======================================
CLASSES OF SIMILAR PRODUCTS
Years Ended January 31,
--------------------------------------
(in thousands) 2003 2002 2001
- ------------------------------------------------------------
Net sales:
Jewelry $ 1,360,243 $ 1,276,344 $1,300,697
Tableware,
timepieces
and other 346,359 330,191 367,359
--------------------------------------
$ 1,706,602 $ 1,606,535 $1,668,056
======================================
TIFFANY & CO. AND SUBSIDIARIES
57
S. QUARTERLY FINANCIAL DATA (UNAUDITED)
2002 Quarter Ended
-----------------------------------------------
(in thousands, except per share amounts) April 30 July 31 October 31 January 31
- ----------------------------------------------------------------------------------------------------
Net sales $ 347,129 $ 374,427 $ 366,033 $ 619,013
Gross profit 206,415 219,807 215,813 369,413
Earnings from operations 58,566 59,078 49,913 151,640
Net earnings 32,709 32,714 35,184 89,287
Net earnings per share:
Basic $ 0.22 $ 0.22 $ 0.24 $ 0.62
-----------------------------------------------
Diluted $ 0.22 $ 0.22 $ 0.24 $ 0.60
-----------------------------------------------
2001 Quarter Ended
-----------------------------------------------
(in thousands, except per share amounts) April 30 July 31 October 31 January 31
- ----------------------------------------------------------------------------------------------------
Net sales $ 336,401 $ 371,301 $ 333,074 $ 565,759
Gross profit 190,140 215,871 192,839 344,627
Earnings from operations 49,221 65,670 46,041 148,965
Net earnings 30,762 36,052 24,028 82,745
Net earnings per share:
Basic $ 0.21 $ 0.25 $ 0.17 $ 0.57
-----------------------------------------------
Diluted $ 0.20 $ 0.24 $ 0.16 $ 0.55
-----------------------------------------------
The sum of the quarterly net earnings per share amounts may not equal the
full-year amount since the computations of the weighted-average number of
common-equivalent shares outstanding for each quarter and the full year are made
independently.
TIFFANY & CO. AND SUBSIDIARIES
58