UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2009.
OR
---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _____________.
Commission file number: 1-9494
TIFFANY & CO.
(Exact name of registrant as specified in its charter)
Delaware 13-3228013
(State of incorporation) (I.R.S. Employer Identification No.)
727 Fifth Ave. New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 755-8000
Former name, former address and former fiscal year, if changed since last report
_________.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes . No X .
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer _____
Non-accelerated filer (Do not check if a smaller reporting company) _____ Smaller reporting company _____
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes . No X .
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock as of the latest practicable
date: Common Stock, $.01 par value, 124,073,910 shares outstanding at the close
of business on May 31, 2009.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2009
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - April 30, 2009,
January 31, 2009 and April 30, 2008 (Unaudited) 3
Condensed Consolidated Statements of Earnings - for the
three months ended April 30, 2009 and 2008 (Unaudited) 4
Condensed Consolidated Statements of Stockholders' Equity -
for the three months ended April 30, 2009 and
Comprehensive Earnings - for the three months
ended April 30, 2009 and 2008 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows - for the
three months ended April 30, 2009 and 2008 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1A. Risk Factors 25-27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 6. Exhibits 29
(a) Exhibits
2
PART I. Financial Information
Item 1. Financial Statements
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
-----------
(in thousands, except per share amounts)
April 30, January 31, April 30,
2009 2009 2008
----------------- ----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 303,729 $ 160,445 $ 159,625
Accounts receivable, less allowances
of $8,837, $9,934 and $8,225 135,437 164,447 193,154
Inventories, net 1,553,717 1,601,236 1,466,166
Deferred income taxes 12,130 13,640 27,388
Prepaid expenses and other current assets 120,772 108,966 86,784
----------------- ----------------- -----------------
Total current assets 2,125,785 2,048,734 1,933,117
Property, plant and equipment, net 721,452 741,048 742,116
Deferred income taxes 165,482 166,517 164,847
Other assets, net 149,533 145,984 169,771
----------------- ----------------- -----------------
$ 3,162,252 $ 3,102,283 $ 3,009,851
================= ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 74,199 $ 242,966 $ 199,421
Current portion of long-term debt 40,170 40,426 65,728
Accounts payable and accrued liabilities 163,102 223,566 175,777
Income taxes payable 25,324 27,653 49,979
Merchandise and other customer credits 64,239 67,311 68,573
----------------- ----------------- -----------------
Total current liabilities 367,034 601,922 559,478
Long-term debt 707,477 425,412 346,010
Pension/postretirement benefit obligations 203,550 200,603 81,836
Deferred gains on sale-leasebacks 125,555 133,641 144,577
Other long-term liabilities 151,977 152,334 134,422
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.01 par value; authorized 2,000 shares, none
issued and outstanding -- -- --
Common Stock, $0.01 par value; authorized 240,000 shares,
issued and outstanding 124,047, 123,844 and 126,281 1,240 1,238 1,263
Additional paid-in capital 691,977 687,267 656,704
Retained earnings 974,535 971,299 1,032,173
Accumulated other comprehensive (loss) gain, net of tax:
Foreign currency translation adjustments (18,989) (26,238) 48,607
Deferred hedging (loss) gain (6,602) (8,984) 3,116
Unrealized loss on marketable securities (5,478) (6,140) (529)
Net unrealized (loss) gain on benefit plans (30,024) (30,071) 2,194
----------------- ----------------- -----------------
Total stockholders' equity 1,606,659 1,588,371 1,743,528
----------------- ----------------- -----------------
$ 3,162,252 $ 3,102,283 $ 3,009,851
================= ================= =================
See notes to condensed consolidated financial statements.
3
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
---------------------------------------------
(Unaudited)
-----------
(in thousands except per share amounts)
Three Months Ended
April 30,
-----------------------------------------------
2009 2008
---------------------- ---------------------
Net sales $ 523,059 $ 668,149
Cost of sales 232,032 286,895
---------------------- ---------------------
Gross profit 291,027 381,254
Selling, general and administrative expenses 236,587 277,945
---------------------- ---------------------
Earnings from operations 54,440 103,309
Interest and other expenses, net 12,444 1,508
---------------------- ---------------------
Earnings from operations before income taxes 41,996 101,801
Provision for income taxes 17,655 37,411
---------------------- ---------------------
Net earnings $ 24,341 $ 64,390
====================== =====================
Net earnings per share:
Basic $ 0.20 $ 0.51
====================== =====================
Diluted $ 0.20 $ 0.50
====================== =====================
Weighted-average number of common shares:
Basic 124,001 126,458
Diluted 124,164 128,773
See notes to condensed consolidated financial statements.
4
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
AND COMPREHENSIVE EARNINGS
--------------------------
(Unaudited)
-----------
(in thousands)
Accumulated
Total Other Common Stock Additional
Stockholders' Retained Comprehensive Paid-In
Equity Earnings (Loss) Gain Shares Amount Capital
----------------------------------------------------------------------------------------------------------------------
Balances, January 31, 2009 $ 1,588,371 $ 971,299 $ (71,433) 123,844 $ 1,238 $ 687,267
Exercise of stock options and vesting of
restricted stock units ("RSUs") 224 - - 203 2 222
Tax effect of exercise of stock options and
vesting of RSUs (1,125) - - - - (1,125)
Share-based compensation expense 5,613 - - - - 5,613
Cash dividends on Common Stock (21,105) (21,105) - - - -
Deferred hedging gain, net of tax 2,382 - 2,382 - - -
Unrealized gain on marketable securities, -
net of tax 662 - 662 - -
Foreign currency translation adjustments, -
net of tax 7,249 - 7,249 - -
Net unrealized gain on benefit plans, -
net of tax 47 - 47 - -
Net earnings 24,341 24,341 - - - -
------------------------------------------------------------------------
Balances, April 30, 2009 $ 1,606,659 $ 974,535 $ (61,093) 124,047 $ 1,240 $691,977
========================================================================
Three Months Ended
April 30,
--------------------------------
2009 2008
--------------------------------
Comprehensive earnings are as follows:
Net earnings $ 24,341 $ 64,390
Deferred hedging gain, net of tax 2,382 2,227
Foreign currency translation adjustments, net of tax 7,249 6,490
Unrealized gain on marketable securities,
net of tax 662 92
Net unrealized gain on benefit plans, net of tax 47 66
--------------------------------
Comprehensive earnings $ 34,681 $ 73,265
================================
See notes to condensed consolidated financial statements.
5
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
-----------
(in thousands)
Three Months Ended
April 30,
-------------------------------------------------
2009 2008
----------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 24,341 $ 64,390
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 32,929 33,419
Amortization of gain on sale-leaseback (2,335) (2,511)
Excess tax benefits from share-based payment arrangements (4) (4,854)
Provision for inventories 7,150 4,451
Provision for pension/postretirement benefits 5,845 6,224
Share-based compensation expense 5,523 11,661
Changes in assets and liabilities:
Accounts receivable 26,181 4,187
Inventories 25,662 (86,942)
Prepaid expenses and other current assets (9,813) 6,504
Accounts payable and accrued liabilities (62,473) (25,487)
Income taxes payable (3,822) (166,012)
Merchandise and other customer credits (3,268) 534
Other, net (4,770) (129)
----------------------- ----------------------
Net cash provided by (used in) operating activities 41,146 (154,565)
----------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14,685) (26,208)
Other (1,264) (1,047)
----------------------- ----------------------
Net cash used in investing activities (15,949) (27,255)
----------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment of) proceeds from credit facility borrowings, net (70,289) 154,729
Repayment of other short-term borrowings (93,000) --
Repayment of long-term debt -- (1,433)
Proceeds from issuance of long-term debt 300,000 --
Repurchase of Common Stock -- (54,837)
Proceeds from exercise of stock options 224 7,248
Excess tax benefits from share-based payment arrangements 4 4,854
Cash dividends on Common Stock (21,105) (18,887)
Other (764) --
----------------------- ----------------------
Net cash provided by financing activities 115,070 91,674
----------------------- ----------------------
Effect of exchange rate changes on cash and cash equivalents 3,017 3,117
----------------------- ----------------------
Net increase (decrease) in cash and cash equivalents 143,284 (87,029)
Cash and cash equivalents at beginning of year 160,445 246,654
----------------------- ----------------------
Cash and cash equivalents at end of three months $ 303,729 $ 159,625
======================= ======================
See notes to condensed consolidated financial statements.
6
TIFFANY & CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements include the
accounts of Tiffany & Co. (the "Company") and its subsidiaries in which a
controlling interest is maintained. Controlling interest is determined by
majority ownership interest and the absence of substantive third-party
participating rights or, in the case of variable interest entities, by
majority exposure to expected losses, residual returns or both.
Intercompany accounts, transactions and profits have been eliminated in
consolidation. The interim statements are unaudited and, in the opinion of
management, include all adjustments (which include only normal recurring
adjustments) necessary to fairly state the Company's financial position as
of April 30, 2009 and 2008 and the results of its operations and cash flows
for the interim periods presented. The condensed consolidated balance sheet
data for January 31, 2009 is derived from the audited financial statements,
which are included in the Company's Annual Report on Form 10-K and should
be read in connection with these financial statements. As permitted by the
rules of the Securities and Exchange Commission, these financial statements
do not include all disclosures required by generally accepted accounting
principles.
The Company's business is seasonal in nature, with the fourth quarter
typically representing at least one-third of annual net sales and
approximately one-half of annual net earnings. Therefore, the results of
its operations for the three months ended April 30, 2009 and 2008 are not
necessarily indicative of the results of the entire fiscal year.
2. NEW ACCOUNTING STANDARDS
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 160,
"Noncontrolling Interests in Consolidated Financial Statements." SFAS No.
160 requires a company to clearly identify and present ownership interests
in subsidiaries held by parties other than the company in the consolidated
financial statements within the equity section but separate from the
company's equity. It also requires the amount of consolidated net earnings
attributable to the parent and to the noncontrolling interest to be clearly
identified and presented on the face of the consolidated statement of
earnings; changes in ownership interest to be accounted for similarly, as
equity transactions; and, when a subsidiary is deconsolidated, that any
retained noncontrolling equity investment in the former subsidiary and the
gain or loss on the deconsolidation of the subsidiary be measured at fair
value. The provisions of SFAS No. 160 did not have a material effect on the
Company's financial position or earnings.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which establishes a framework for measuring fair value of assets and
liabilities and expands disclosures about fair value measurements. The
changes to current practice resulting from the application of SFAS No. 157
relate to the definition of fair value, the methods used to measure fair
value, and the expanded disclosures about fair value measurements. SFAS No.
157 is effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB deferred the implementation of the provisions of
SFAS No. 157 relating to nonfinancial assets and liabilities, except those
that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually), to fiscal years beginning after
November 15, 2008. Management adopted the remaining provisions of SFAS No.
157 on February 1, 2009. This adoption impacts the way in which the Company
calculates fair value for its annual impairment review of goodwill and when
conditions exist that require the Company to calculate the fair value of
long-lived assets; management has determined that this did not have a
material effect on the Company's financial position or earnings.
3. RESTRUCTURING CHARGES
In the fourth quarter of 2008, the Company's New York subsidiary offered a
voluntary retirement incentive to approximately 800 U.S. employees who met
certain age and service eligibility requirements. Approximately 600
employees accepted the early retirement incentive and retired from the
Company
7
effective February 1, 2009. In addition, to further align the Company's
ongoing cost structure with the anticipated retail environment for luxury
goods, management approved a plan in January 2009 to involuntarily
terminate additional manufacturing, selling and administrative employees,
primarily in the U.S. The employment of most of these employees ended in
February 2009. In total, these actions resulted in a reduction of
approximately 10% of worldwide staffing.
Cash expenditures related to the restructuring charges are expected to
total $33,361,000. Most of this amount will be paid in 2009. The following
table presents the reconciliation of the cash-related restructuring
liabilities and spending against those liabilities:
Restructuring
(in thousands) Liability
---------------------------------------------------------------------------
Liability as of February 1, 2009 $ 33,361
Payments (14,788)
---------------------
Liability as of April 30, 2009 $ 18,573
=====================
4. INVENTORIES
April 30, January 31, April 30,
(in thousands) 2009 2009 2008
---------------------------------------------------------------------------
Finished goods $ 1,082,029 $ 1,115,333 $ 987,383
Raw materials 413,159 416,805 374,721
Work-in-process 58,529 69,098 104,062
---------------------------------------------------------
Inventories, net $ 1,553,717 $ 1,601,236 $ 1,466,166
=========================================================
5. INCOME TAXES
During the three months ended April 30, 2009, the gross amount of
unrecognized tax benefits increased $884,000 to $55,365,000. As of that
date, the changes in the unrecognized tax benefits that, if recognized,
would affect the effective tax rate and accrued interest and penalties, was
not material.
The Company is subject to taxation in the U.S. and various states and
foreign jurisdictions. As a matter of course, various taxing authorities
regularly audit the Company. The Company's tax filings are currently being
examined by tax authorities in jurisdictions where its subsidiaries have a
material presence, including U.S. Federal tax year 2006 and Japan (tax
years 2003-2005). Tax years from 2003-present are open to examination in
various state and other foreign jurisdictions. The Company believes that
its tax positions comply with applicable tax laws and that it has
adequately provided for these matters. However, the audits may result in
proposed assessments where the ultimate resolution may result in the
Company owing additional taxes. The Company anticipates that it is
reasonably possible that the total gross amount of unrecognized tax
benefits will decrease by approximately $13,000,000 - $28,000,000 in the
next 12 months, a portion of which would affect the effective tax rate.
Future developments may result in a change in this assessment.
6. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period.
Diluted EPS includes the dilutive effect of the assumed exercise of stock
options and unvested restricted stock units.
8
The following table summarizes the reconciliation of the numerators and
denominators for the basic and diluted EPS computations:
Three Months Ended April 30,
-----------------------------------------
(in thousands) 2009 2008
-----------------------------------------------------------------------------------------------------
Net earnings for basic and diluted EPS $ 24,341 $ 64,390
=========================================
Weighted-average shares for basic EPS 124,001 126,458
Incremental shares based upon the assumed exercise of stock
options and unvested restricted stock units 163 2,315
-----------------------------------------
124,164 128,773
Weighted-average shares for diluted EPS
=========================================
For the three months ended April 30, 2009 and 2008, there were 8,485,000
and 1,805,000 stock options and restricted stock units excluded from the
computations of earnings per diluted share due to their antidilutive
effect.
7. DEBT
In April 2009, the Company, in a private transaction with various
institutional lenders, issued, at par, $50,000,000 10% Series A Senior
Notes due April 2018. The proceeds are available for general corporate
purposes. The agreement requires lump sum repayments upon maturity and
includes specific financial covenants and ratios and limits certain
payments, investments and indebtedness, in addition to other requirements
customary to such borrowings. The note purchase agreement contains
provisions for an uncommitted shelf facility by which the Company may
issue, over the next three years, up to an additional $100,000,000 of
Senior Notes for up to a 12-year term at a fixed interest rate based on the
Treasury rates available at the time of borrowing plus an applicable credit
spread.
In February 2009, the Company, in a private transaction, issued, at par,
$125,000,000 of its 10% Series A-2009 Senior Notes due February 2017 and
$125,000,000 of its 10% Series B-2009 Senior Notes due February 2019. The
proceeds are available to refinance existing indebtedness and for general
corporate purposes. The agreement requires lump sum repayments upon
maturity and includes specific financial covenants and ratios and limits
certain payments, investments and indebtedness, in addition to other
requirements customary to such borrowings.
8. HEDGING INSTRUMENTS
Background Information
The Company uses a limited number of derivative financial instruments,
including put option contracts, net-zero-cost collar arrangements
(combination of call and put option contracts) and foreign exchange forward
contracts to mitigate its exposures to foreign currency and precious metal
price exposures. Derivative instruments are recorded on the consolidated
balance sheet at their fair values, as either assets or liabilities, with
an offset to current or comprehensive earnings, depending on whether the
derivative is designated as part of an effective hedge transaction and, if
it is, the type of hedge transaction. If a derivative instrument meets
certain hedge accounting criteria, the derivative instrument is designated
as one of the following on the date the derivative is entered into in
accordance with SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"):
o Fair Value Hedge - A hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm
commitment. For fair value hedge transactions, both the effective
and ineffective portions of the changes in the fair value of the
derivative and changes in the fair value of the item being hedged
are recorded in current earnings.
o Cash Flow Hedge - A hedge of the exposure to variability in the
cash flows of a recognized asset, liability or a forecasted
transaction. For cash flow hedge transactions, the effective
portion of the changes in fair value of derivatives are reported
as other comprehensive income ("OCI") and are recognized in
current earnings in the period or periods during which the hedged
transaction affects
9
current earnings. Amounts excluded from the effectiveness
calculation and any ineffective portions of the change in fair
value of the derivative are recognized in current earnings.
The Company formally documents the nature and relationships between the
hedging instruments and hedged items for a derivative to qualify as a hedge
at inception and throughout the hedged period. The Company also documents
its risk management objectives, strategies for undertaking the various
hedge transactions and method of assessing hedge effectiveness.
Additionally, for hedges of forecasted transactions, the significant
characteristics and expected terms of a forecasted transaction must be
specifically identified, and it must be probable that each forecasted
transaction will occur. If it were deemed probable that the forecasted
transaction would not occur, the gain or loss would be recognized in
current earnings. Financial instruments qualifying for hedge accounting
must maintain a specified level of effectiveness between the hedge
instrument and the item being hedged, both at inception and throughout the
hedged period.
The Company does not use derivative financial instruments for trading or
speculative purposes.
Types of Derivative Instruments
Put Option Contracts - The Company's Japanese subsidiary satisfies nearly
all of its inventory requirements by purchasing merchandise, payable in
U.S. dollars, from the Company's principal subsidiary. To minimize the
potentially negative effect of a significant strengthening of the U.S.
dollar against the Japanese yen, the Company purchases put option contracts
as hedges of forecasted purchases of merchandise over a maximum term of 12
months. If the market yen exchange rate at the time of the put option
contract's expiration is stronger than the contracted exchange rate, the
Company allows the option to expire, limiting its loss to the cost of the
put option contract. The Company accounts for its put option contracts as
cash flow hedges. The Company assesses hedge effectiveness based on the
total changes in the options' cash flows.
As of April 30, 2009, the notional amount of put option contracts
outstanding was approximately $130,000,000.
Precious Metal Collars - The Company hedges a portion of its forecasted
purchases of precious metals for use in its internal manufacturing
operations in order to minimize the effect of changes in platinum and
silver prices. The Company uses a combination of call and put option
contracts in net-zero-cost collar arrangements. If the price of the
precious metal at the time of the expiration of the precious metal collar
is within the call and put price, the precious metal collar would expire at
no cost to the Company. The Company accounts for its precious metal collars
as cash flow hedges. The Company assesses hedge effectiveness based on the
total changes in the precious metal collars' cash flows. The maximum term
over which the Company is hedging its exposure to the variability of future
cash flows for all forecasted transactions is 12 months.
As of April 30, 2009, there were 4,400 and 256,000 ounces of platinum and
silver precious metal collar contracts outstanding.
Foreign Exchange Forward Contracts - The Company uses foreign exchange
forward contracts to offset the foreign currency exchange risks associated
with foreign currency-denominated liabilities and intercompany transactions
between entities with differing functional currencies. These foreign
exchange forward contracts are designated and accounted for as either cash
flow hedges or economic hedges that are not designated as hedging
instruments. Gains or losses on foreign exchange forward contracts
substantially offset losses or gains on the liabilities and transactions
being hedged. As of April 30, 2009, the notional amount of foreign exchange
forward contracts accounted for as cash flow hedges was approximately
$15,000,000 and the notional amount of foreign exchange forward contracts
accounted for as undesignated hedges was approximately $10,000,000. The
term of all outstanding foreign exchange forward contracts as of April 30,
2009 ranged from one to 12 months.
10
Information on the location and amounts of derivative gains and losses in
the Condensed Consolidated Statements of Earnings for the three months
ended April 30, 2009 is as follows:
Pre-Tax Gain Pre-tax Gain or (Loss)
Recognized in OCI Recognized in
(in thousands) (Effective Portion) Earnings
----------------------------------------------------------------------------------------------------------
Derivatives in SFAS No. 133 Cash Flow Hedging
Relationships:
Put option contracts a $ 657 $ (988)
Precious metal collars a 1,830 161
Foreign exchange forward contracts b 115 (352)c
Derivatives Not Designated as Hedging Instruments
Under SFAS No. 133:
Foreign exchange forward contracts b -- 21 c
--------------------------------------------------
Total gain $ 2,602 $ (1,158)
==================================================
a The gain or loss recognized in earnings is included within Cost of
Sales on the Company's Condensed Consolidated Statement of Earnings.
b The gain or loss recognized in earnings is included within Interest
and other expenses, net on the Company's Condensed Consolidated
Statement of Earnings.
c Gains or losses on foreign exchange forward contracts substantially
offset foreign exchange losses or gains on the liabilities and
transactions being hedged.
There was no material ineffectiveness related to the Company's put option
contracts, precious metal collars or foreign exchange forward contracts for
the period ended April 30, 2009. The Company expects that approximately
$8,000,000 of net pre-tax derivative losses included in accumulated other
comprehensive income at April 30, 2009 will be reclassified into earnings
within the next 12 months. This amount will vary due to fluctuations in
foreign currency exchange rates and precious metals prices.
For information regarding the location and amount of the derivative
instrument in the Condensed Consolidated Balance Sheet, refer to "Note 9 -
Fair Value of Financial Instruments."
Concentration of Credit Risk
A number of major international financial institutions are counterparties
to the Company's derivative financial instruments. The Company enters into
financial instrument agreements only with counterparties meeting certain
credit standards (a credit rating of A/A2 or better at the time of the
agreement), limiting the amount of agreements or contracts it enters into
with any one party. The Company may be exposed to credit losses in the
event of nonperformance by individual counterparties or the entire group of
counterparties. The Company has not recognized any losses due to
counterparty non-performance for the three months ended April 30, 2009.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 157 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date.
SFAS No. 157 also establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or
liabilities. Level 1 inputs are considered to carry the most weight within
the fair value hierarchy due to the low levels of judgment required in
determining fair values.
11
Level 2 - Observable market-based inputs or unobservable inputs that are
corroborated by market data.
Level 3 - Unobservable inputs reflecting the reporting entity's own
assumptions. Level 3 inputs are considered to carry the least weight within
the fair value hierarchy due to substantial levels of judgment required in
determining fair values.
The Company uses the market approach to measure fair value for its mutual
funds, put option contracts, precious metal collars and foreign exchange
forward contracts. The market approach uses prices and other relevant
information generated by market transactions involving identical or
comparable assets or liabilities.
Financial assets and liabilities carried at fair value at April 30, 2009
are classified in the table below in one of the three categories described
above:
Estimated Fair Value
-------------------------------------------------
Carrying Total Fair
(in thousands) Value Level 1 Level 2 Level 3 Value
-------------------------------------------------------------------------------------------------------------
Mutual funds a $ 21,523 $ 21,523 $ -- $ -- $ 21,523
Derivatives designated as hedging instruments under SFAS No. 133:
Put option contracts b 1,853 -- 1,853 -- 1,853
Precious metal collars b 362 -- 362 -- 362
Foreign exchange
forward contracts b 291 -- 291 -- 291
Derivatives not designated as hedging instruments under SFAS No. 133:
Foreign exchange
forward contracts b 17 -- 17 -- 17
-----------------------------------------------------------------------------------
Total assets $ 24,046 $ 21,523 $ 2,523 $ -- $ 24,046
===================================================================================
Estimated Fair Value
-------------------------------------------------
Carrying Total Fair
(in thousands) Value Level 1 Level 2 Level 3 Value
-------------------------------------------------------------------------------------------------------------
Derivatives designated as hedging instruments under SFAS No. 133:
Put option contracts c $ 57 $ -- $ 57 $ -- $ 57
Precious metal collars c 1,951 -- 1,951 -- 1,951
Foreign exchange
forward contracts c 893 -- 893 -- 893
Derivatives not designated as hedging instruments under SFAS No. 133:
Foreign exchange
forward contracts c 164 -- 164 -- 164
-----------------------------------------------------------------------------------
Total liabilities $ 3,065 $ -- $ 3,065 $ -- $ 3,065
===================================================================================
a This amount is included within Other assets, net on the Company's
Condensed Consolidated Balance Sheet.
b This amount is included within Prepaid expenses and other current
assets on the Company's Condensed Consolidated Balance Sheet.
c This amount is included within Accounts payable and accrued
liabilities on the Company's Condensed Consolidated Balance Sheet.
12
10. EMPLOYEE BENEFIT PLANS
The Company maintains several pension and retirement plans, as well as
provides certain health-care and life insurance benefits.
Net periodic pension and other postretirement benefit expense included the
following components:
Three Months Ended April 30,
-------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------
(in thousands) 2009 2008 2009 2008
------------------------------------------------------------------------------------------------------------
Service cost $ 2,948 $ 4,570 $ 268 $ 417
Interest cost 5,681 4,397 646 478
Expected return on plan assets (3,726) (3,914) -- --
Amortization of prior service cost 268 321 (165) (198)
Amortization of net loss (74) 153 (1) --
-------------------------------------------------------------------
Net expense $ 5,097 $ 5,527 $ 748 $ 697
===================================================================
11. SEGMENT INFORMATION
The Company's reportable segments are as follows:
o Americas includes sales in TIFFANY & CO. stores in the United
States, Canada and Latin/South America, as well as sales of
TIFFANY & CO. products in certain of those markets through
business-to-business, Internet, catalog and wholesale operations;
o Asia-Pacific includes sales in TIFFANY & CO. stores in that
region, as well as sales of TIFFANY & CO. products in certain
markets through business-to-business, Internet and wholesale
operations;
o Europe includes sales in TIFFANY & CO. stores in that region, as
well as sales of TIFFANY & CO. products in certain markets
through business-to-business, Internet and wholesale operations;
and
o Other consists of all non-reportable segments. Other consists
primarily of wholesale sales of diamonds obtained through bulk
purchases that were subsequently deemed not suitable for the
Company's needs. In addition, Other includes worldwide sales made
by businesses operated under trademarks or trade names other than
TIFFANY & CO., such as IRIDESSE, as well as earnings received
from third-party licensing agreements.
Certain information relating to the Company's segments is set forth below:
Three Months Ended April 30,
-------------------------------------------------------
(in thousands) 2009 2008
-----------------------------------------------------------------------------------------------------------
Net sales:
Americas $ 258,994 $ 373,565
Asia-Pacific 201,427 222,037
Europe 55,590 60,125
-------------------------------------------------------
Total reportable segments 516,011 655,727
Other 7,048 12,422
-------------------------------------------------------
$ 523,059 $ 668,149
=======================================================
13
Three Months Ended April 30,
-------------------------------------------------------
(in thousands) 2009 2008
-----------------------------------------------------------------------------------------------------------
Earnings (losses) from operations*:
Americas $ 29,469 $ 68,291
Asia-Pacific 47,943 56,365
Europe 7,820 11,574
--------------------------- ---------------------------
Total reportable segments 85,232 136,230
Other (6,305) (4,025)
--------------------------- ---------------------------
$ 78,927 $ 132,205
=========================== ===========================
*Represents earnings (losses) from operations before unallocated corporate
expenses and other expenses, net.
The following table sets forth a reconciliation of the segments' earnings
from operations to the Company's consolidated earnings from operations
before income taxes:
Three Months Ended April 30,
-------------------------------------------------------
(in thousands) 2009 2008
-----------------------------------------------------------------------------------------------------------
Earnings from operations for segments $ 78,927 $ 132,205
Unallocated corporate expenses (24,487) (28,896)
Other expenses, net (12,444) (1,508)
-------------------------------------------------------
Earnings from operations before income taxes $ 41,996 $ 101,801
=======================================================
Unallocated corporate expenses includes certain costs related to
administrative support functions which the Company does not allocate to its
segments. Such unallocated costs include those for information technology,
finance, legal and human resources.
12. SUBSEQUENT EVENT
On May 21, 2009, the Company's Board of Directors declared a quarterly
dividend on its Common Stock of $0.17 per share. This dividend will be paid
on July 10, 2009 to stockholders of record on June 22, 2009.
14
PART I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
--------
Tiffany & Co. (the "Company") is a holding company that operates through its
subsidiary companies. The Company's principal subsidiary, Tiffany and Company,
is a jeweler and specialty retailer whose principal merchandise offering is fine
jewelry. The Company also sells timepieces, sterling silverware, china, crystal,
stationery, fragrances and accessories. Through Tiffany and Company and other
subsidiaries, the Company is engaged in product design, manufacturing and
retailing activities.
The Company's reportable segments are as follows:
o Americas includes sales in TIFFANY & CO. stores in the United States,
Canada and Latin/South America, as well as sales of TIFFANY & CO.
products in certain of those markets through business-to-business,
Internet, catalog and wholesale operations;
o Asia-Pacific includes sales in TIFFANY & CO. stores in that region, as
well as sales of TIFFANY & CO. products in certain markets through
business-to-business, Internet and wholesale operations;
o Europe includes sales in TIFFANY & CO. stores in that region, as well
as sales of TIFFANY & CO. products in certain markets through
business-to-business, Internet and wholesale operations; and
o Other consists of all non-reportable segments. Other consists
primarily of wholesale sales of diamonds obtained through bulk
purchases that were subsequently deemed not suitable for the Company's
needs. In addition, Other includes worldwide sales made by businesses
operated under trademarks or trade names other than TIFFANY & CO.,
such as IRIDESSE, as well as earnings received from third-party
licensing agreements.
All references to years relate to fiscal years ended or ending on January 31 of
the following calendar year.
HIGHLIGHTS
----------
o Worldwide net sales decreased 22% in the three months ("first
quarter") ended April 30, 2009. The lack of consumer confidence and
disposable income brought about by the global economic downturn
continues to affect sales in most markets. This was also the case in
the second half of 2008.
o Worldwide comparable store sales decreased 21% in the first quarter on
a constant-exchange-rate basis (see "Non-GAAP Measures" below).
o The Company opened three (net) TIFFANY & CO. retail locations in the
first quarter.
o Net earnings decreased 62% to $24,341,000 in the first quarter. Net
earnings per diluted share decreased 61% in the first quarter.
o The Company secured additional long-term financing in order to
refinance certain maturing debt and to provide for the Company's
long-term working capital needs.
NON-GAAP MEASURES
-----------------
The Company's reported sales reflect either a translation-related benefit from
strengthening foreign currencies or a detriment from a strengthening U.S.
dollar.
The Company reports information in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP"). Internally, management monitors its sales
performance on a non-GAAP basis that eliminates the positive or negative effects
that result from translating international sales into U.S. dollars
("constant-exchange-rate basis").
15
Management believes this constant-exchange-rate basis provides a more
representative assessment of the sales performance and provides better
comparability between reporting periods.
The Company's management does not, nor does it suggest that investors should,
consider such non-GAAP financial measures in isolation from, or as a substitute
for, financial information prepared in accordance with GAAP. The Company
presents such non-GAAP financial measures in reporting its financial results to
provide investors with an additional tool to evaluate the Company's operating
results. The following table reconciles sales percentage increases (decreases)
from the GAAP to the non-GAAP basis versus the previous year:
First Quarter 2009 vs. 2008
-------------------------------------------------------------------------------
Constant-Exchange-
GAAP Reported Translation Effect Rate Basis
-------------------------------------------------------------------------------
Net Sales:
----------
Worldwide (22)% (4)% (18)%
Americas (31)% (1)% (30)%
U.S. (31)% -- (31)%
Asia-Pacific (9)% (2)% (7)%
Japan (7)% 6 % (13)%
Other Asia-Pacific (11)% (15)% 4 %
Europe (8)% (26)% 18 %
Comparable Store Sales:
-----------------------
Worldwide (24)% (3)% (21)%
Americas (34)% (2)% (32)%
U.S. (34)% -- (34)%
Asia-Pacific (10)% (1)% (9)%
Japan (6)% 7 % (13)%
Other Asia-Pacific (16)% (11)% (5)%
Europe (19)% (22)% 3 %
RESULTS OF OPERATIONS
---------------------
Certain operating data as a percentage of net sales were as follows:
First Quarter
-----------------------------------------
2009 2008
-----------------------------------------
Net sales 100.0% 100.0%
Cost of sales 44.4 42.9
-----------------------------------------
Gross profit 55.6 57.1
Selling, general and administrative expenses 45.2 41.6
-----------------------------------------
Earnings from operations 10.4 15.5
Interest and other expenses, net 2.4 0.3
-----------------------------------------
Earnings from operations before income taxes 8.0 15.2
Provision for income taxes 3.3 5.6
-----------------------------------------
Net earnings 4.7% 9.6%
=========================================
16
Net Sales
---------
Net sales were as follows:
First Quarter
---------------------------------------------------------------------------------
(in thousands) 2009 2008 Decrease
--------------------------------------------------------------------------------------------------------------------
Americas $ 258,994 $ 373,565 (31)%
Asia-Pacific 201,427 222,037 (9)%
Europe 55,590 60,125 (8)%
Other 7,048 12,422 (43)%
--------------------------------------------------------------------------------
$ 523,059 $ 668,149 (22)%
================================================================================
Comparable Store Sales. Reference will be made to comparable store sales below.
Comparable store sales include only sales transacted in company-operated stores
and boutiques. A store's sales are included in comparable store sales when the
store has been open for more than 12 months. In markets other than Japan, sales
for relocated stores are included in comparable store sales if the relocation
occurs within the same geographical market. In Japan (included in the
Asia-Pacific segment), sales for a new store or boutique are not included if the
store or boutique was relocated from one department store to another or from a
department store to a free-standing location. In all markets, the results of a
store in which the square footage has been expanded or reduced remain in the
comparable store base.
Americas. Total sales in the Americas decreased $114,571,000, or 31%, in the
first quarter primarily due to a decline in the number of units sold. Comparable
U.S. store sales declined 34%, or $103,444,000, in the first quarter, while
non-comparable U.S. store sales grew $4,262,000 in the first quarter. The U.S.
comparable store sales decline consisted of a 42% decrease in New York Flagship
store sales and a 32% decline in comparable branch store sales. Combined
Internet and catalog sales in the U.S. declined 17%, or $5,766,000.
Asia-Pacific. Total sales in Asia-Pacific decreased $20,610,000, or 9%, in the
first quarter primarily due to a decline in the number of units sold. Comparable
store sales declined 10%, or $21,072,000, in the first quarter. On a
constant-exchange-rate basis, Asia-Pacific sales decreased 7% and comparable
store sales decreased 9% (consisting of a 13% decline in Japan comparable store
sales and a 5% decrease in comparable store sales in countries other than
Japan).
Europe. Total sales in Europe decreased $4,535,000, or 8%, in the first quarter
primarily due to foreign currency translation, as on a constant-exchange-rate
basis, sales increased 18% due to incremental sales from new stores opened
during the past 12 months. The overall sales decline consisted of a comparable
store sales decline of 19%, or $9,161,000 and a decline of $3,658,000 in
e-commerce and other sales, while non-comparable store sales were $8,284,000. On
a constant-exchange-rate basis, comparable store sales rose 3%, reflecting
growth in the United Kingdom and certain other countries.
Other. Other sales decreased $5,374,000, or 43%, in the first quarter primarily
due to lower wholesale sales of diamonds that were deemed not suitable for the
Company's needs. This was partly offset by increased sales in IRIDESSE stores.
IRIDESSE locations will be closed as agreements are reached with landlords and
inventory is sold. Recent liquidation sales at these stores led to the sales
increase. Wholesale diamond sales decreased 89% to $1,005,000 in the first
quarter.
Store Data. Management expects to open 13 Company-operated TIFFANY & CO. stores
and boutiques in 2009, increasing the store base by 6%.
17
Management's announced openings and closings of TIFFANY & CO. stores are:
Actual Openings Expected Openings
Location (Closings) 2009 (Closings) 2009
--------------------------------------------------------------------------------------------------------------------
Americas:
Toronto - Yorkdale Shopping Centre, Canada First Quarter
Guadalajara, Mexico First Quarter
Roseville, California Third Quarter
Seattle - University Village, Washington Third Quarter
Las Vegas, Nevada Fourth Quarter
Asia-Pacific:
Busan - Shinsegae Centum, Korea First Quarter
Hangzhou, China First Quarter
Ikebukuro - Mitsukoshi, Japan (First Quarter)
Kagoshima - Mitsukoshi, Japan (Second Quarter)
Kagoshima - Yamakataya, Japan Second Quarter
Canton Road, Hong Kong Second Quarter
Ikebukuro - Seibu, Japan Third Quarter
Seoul - Shinsegae Youngdeungpo, Korea Third Quarter
Melbourne - Chadstone Mall, Australia Fourth Quarter
Europe:
Amsterdam, Netherlands Fourth Quarter
Gross Margin
------------
Gross margin (gross profit as a percentage of net sales) decreased in the first
quarter by 1.5 percentage points primarily due to (i) 2.3 percentage points
related to higher product costs, partly offset by (ii) a 0.8 percentage point
improvement due to a decrease in low margin wholesale sales of diamonds.
The Company adjusts its retail prices from time to time to address specific
market conditions, product cost increases and longer-term changes in foreign
currencies/U.S. dollar relationships. Among the market conditions that the
Company addresses is consumer demand for the product category involved. Consumer
demand is influenced by consumer confidence and competitive pricing conditions.
The Company uses a limited number of derivative instruments to mitigate foreign
exchange and precious metal price exposures (see "Item 1. Notes to Condensed
Consolidated Financial Statements - Note 8. Hedging Instruments").
Selling, General and Administrative ("SG&A") Expenses
-----------------------------------------------------
SG&A expenses decreased $41,358,000, or 15%, in the first quarter, primarily due
to (i) decreased labor and benefit costs of $17,529,000 as a result of the
staffing reduction initiatives announced during the fourth quarter of 2008 (see
"Item 1. Notes to Condensed Consolidated Financial Statements - Note 3.
Restructuring Charges"); (ii) decreased marketing expenses of $16,308,000; and
(iii) a decline in variable expenses due to lower sales, all of which more than
offset incremental costs of new stores opened in the past 12 months. Changes in
foreign currency exchange rates had the effect of decreasing overall SG&A
expenses in the first quarter by 3% compared to the prior year. SG&A expenses as
a percentage of net sales increased by 3.6 percentage points in the first
quarter due to the decline in sales.
18
Earnings from Operations
------------------------
First Quarter % of Net First Quarter % of Net
(in thousands) 2009 Sales* 2008 Sales*
--------------------------------------------------------------------------------------------------------------------
Earnings (losses) from operations:
Americas $ 29,469 11.4% $ 68,291 18.3%
Asia-Pacific 47,943 23.8% 56,365 25.4%
Europe 7,820 14.1% 11,574 19.2%
Other (6,305) (89.5%) (4,025) (32.4%)
----------------------------------------------------------------------------
78,927 132,205
Unallocated corporate expenses (24,487) 4.7% (28,896) 4.3%
----------------------------------------------------------------------------
Earnings from operations $ 54,440 10.4% $ 103,309 15.5%
============================================================================
* Percentages represent earnings (losses) from operations as a percentage of
each segment's net sales.
Earnings from operations decreased 47% in the first quarter. On a segment basis,
the ratio of earnings (losses) from operations (before the effect of unallocated
corporate expenses and other expenses, net) to each segment's net sales in the
first quarter of 2009 and 2008 was as follows:
o Americas - the ratio decreased 6.9 percentage points primarily
resulting from a decrease in gross margin (due to higher product
costs) and a decline in sales which more than offset cost savings from
the initiatives implemented at the end of 2008;
o Asia-Pacific - the ratio decreased 1.6 percentage points primarily due
to a decrease in gross margin (due to higher product costs), partly
offset by reduced operating expenses attributed to the cost savings
initiatives;
o Europe - the ratio decreased 5.1 percentage points primarily due to a
decrease in gross margin (due to higher product costs) and increased
operating expenses (associated with new stores opened over the past 12
months); and
o Other - the increased operating loss is attributable to costs
associated with closing the IRIDESSE locations.
Unallocated corporate expenses includes costs related to administrative support
functions which the Company does not allocate to its segments. Such unallocated
costs include those for information technology, finance, legal and human
resources.
Interest and Other Expenses, net
--------------------------------
Interest and other expenses, net increased $10,936,000 in the first quarter
primarily due to higher interest expense related to increased long-term
borrowings.
Provision for Income Taxes
--------------------------
The effective income tax rate for the first quarter of 2009 was 42.0% versus
36.7% in the prior year reflecting differences in the geographical mix of
earnings.
2009 Outlook
------------
Uncertainty in the global economic environment has made it more difficult to
predict when consumer sentiment with respect to jewelry purchases will improve.
In order to plan the Company's expenditures, management's financial performance
objectives are based on the following assumptions, which may or may not prove
valid, and should be read in conjunction with "Item 1A. Risk Factors" on page
25.
Management's full-year 2009 plan is currently as follows:
o A net sales decline of approximately 11% composed of (i) a mid-teens
percentage decrease in the Americas, factoring in a high-teens
percentage U.S. comparable sales decline (greater in the first half of
the year); (ii) a mid single-digit percentage decrease in
Asia-Pacific, which includes a high single-digit comparable sales
decline on a constant-exchange-rate basis; (iii) a high single-digit
percentage decrease in Europe, with
19
comparable sales equal to last year on a constant-exchange-rate basis;
and (iv) a 20% decrease in Other sales.
o The Company's worldwide expansion strategy is to continue to
open Company-operated TIFFANY & CO. stores and boutiques.
The Company has moderated the rate of anticipated store
openings in 2009 to five in the Americas, seven in
Asia-Pacific and one in Europe.
o A three-percentage-point decline in operating margin compared against
the prior year (when excluding the non-recurring items in 2008 as
discussed in the notes to "Item 6. Selected Financial Data" in the
Company's Annual Report on Form 10-K) based upon an expected decline
in gross margin and an increase in the ratio of SG&A expenses to net
sales.
o This plan includes (i) savings of $60,000,000 resulting from
the staff reduction initiatives taken at the end of 2008;
(ii) reduced marketing spending; and (iii) variable and
other fixed cost savings.
o Interest and other expenses, net of approximately $50,000,000, which
represents an increase from the prior year due to higher interest
expense as a result of recent long-term debt issuances.
o An effective tax rate of 37%.
o Net earnings per diluted share of $1.50 - $1.60.
o Net inventories declining by a single-digit percentage.
o Capital expenditures of $100,000,000.
New Accounting Standards
------------------------
See "Item 1. Financial Statements - Note 2. New Accounting Standards" to
condensed consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The global credit and equity markets have undergone significant disruption,
making it difficult for many businesses to obtain financing on favorable terms.
The Company has taken steps to address these challenges. First, as noted in the
2009 Outlook section above, management has reduced costs to better align the
Company's expenses with the expected sales decline. Secondly, the Company
secured $400,000,000 of long-term debt, which consists of $100,000,000 issued in
December 2008, $250,000,000 issued in February 2009 and $50,000,000 issued in
April 2009 (see "Recent Borrowings" below) to: (i) refinance debt obligations
that have come due or are expected to mature over the next year; (ii) use the
funds for general corporate purposes; and (iii) provide for financial
flexibility in the event that disruptions in the economy or credit markets
continue or worsen.
The Company is party to a multibank, multicurrency, committed $450,000,000
unsecured revolving credit facility ("Credit Facility"), and has the option to
increase the committed amount to $500,000,000, subject to bank approval. The
Credit Facility is intended for working capital and other corporate purposes.
There was $68,753,000 outstanding and $381,247,000 available to be borrowed
under the Credit Facility at April 30, 2009. The Credit Facility expires in July
2010 and the Company intends to renew the facility.
Management believes that the proceeds from the debt financing that the Company
recently issued, other cash on hand, internally-generated cash flows and the
funds available under its revolving Credit Facility are sufficient to support
the Company's planned worldwide business expansion, debt service, capital
expenditures, working capital needs and dividends for the foreseeable future.
Based on the Company's business plan for 2009, management expects the Company to
generate free cash flow (cash flow from operating activities minus capital
expenditures) in excess of $400,000,000.
20
The following table summarizes cash flows from operating, investing and
financing activities:
First Quarter
---------------------------------------------------
(in thousands) 2009 2008
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 41,146 $ (154,565)
Investing activities (15,949) (27,255)
Financing activities 115,070 91,674
Effect of exchange rates on cash and cash equivalents 3,017 3,117
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 143,284 $ (87,029)
===================================================
Operating Activities
--------------------
The Company's net cash inflow from operating activities of $41,146,000 in the
first quarter of 2009 compared with an outflow of $154,565,000 in the same
period in 2008. The cash outflow in the first quarter of 2008 was primarily due
to increased tax payments and inventory purchases.
Working Capital. Working capital (current assets less current liabilities) and
the corresponding current ratio (current assets divided by current liabilities)
were $1,758,751,000 and 5.8 at April 30, 2009, compared with $1,446,812,000 and
3.4 at January 31, 2009 and $1,373,639,000 and 3.5 at April 30, 2008.
Accounts receivable, less allowances at April 30, 2009 were 18% lower than at
January 31, 2009 and were 30% lower than at April 30, 2008 primarily due to a
decline in sales. Changes in foreign currency exchange rates had an
insignificant effect on the change in accounts receivable balances compared to
January 31, 2009 and April 30, 2008.
Inventories, net at April 30, 2009 were 6% above balances at April 30, 2008 due
to new store openings and weak sales trends and were 3% below balances at
January 31, 2009 due to steps management has taken to reduce internal
manufacturing and purchases from vendors. Changes in foreign currency exchange
rates had an insignificant effect on the change in inventories, net compared to
January 31, 2009 and decreased inventories, net by 3% compared to April 30,
2008.
Investing Activities
--------------------
The Company's net cash outflow from investing activities of $15,949,000 in the
first quarter of 2009 compared with an outflow of $27,255,000 in the first
quarter of 2008. The decreased outflow in the current year is primarily due to
lower capital expenditures as a result of the moderated rate of store openings
in the current year.
Capital Expenditures. Capital expenditures were $14,685,000 in the first quarter
of 2009 compared with $26,208,000 in the first quarter of 2008. In both years,
expenditures were primarily related to the opening, renovation and expansion of
stores and distribution facilities and ongoing investments in new systems.
Financing Activities
--------------------
The Company's net cash inflow from financing activities of $115,070,000 in the
first quarter of 2009 compared with an inflow of $91,674,000 in the first
quarter of 2008. The increased cash inflow in 2009 was primarily due to proceeds
received from the issuance of long-term debt, partly offset by repayments of the
Credit Facility and other short-term borrowings.
Share Repurchases. At April 30, 2009, there remained $402,427,000 of
authorization for future repurchases. The Company's stock repurchase program
expires in January 2011. At least annually, the Company's Board of Directors
reviews its policies with respect to dividends and share repurchases with a view
to actual and projected earnings, cash flow and capital requirements. The
Company suspended share repurchases during the third quarter of 2008 in order to
conserve cash, and such suspension continued at the time of this filing. During
the first quarter of 2008, the Company repurchased $54,837,000 of shares
outstanding.
Recent Borrowings. In April 2009, the Company, in a private transaction with
various institutional lenders, issued, at par, $50,000,000 10% Series A Senior
Notes due April 2018. The proceeds are available for general corporate purposes.
The agreement requires lump sum repayments upon maturity and includes specific
financial covenants and
21
ratios and limits certain payments, investments and indebtedness, in addition to
other requirements customary to such borrowings.
In March 2009, the Company repaid $93,000,000 of its other short-term
borrowings.
In February 2009, the Company, in a private transaction, issued, at par,
$125,000,000 of its 10% Series A-2009 Senior Notes due February 2017 and
$125,000,000 of its 10% Series B-2009 Senior Notes due February 2019. The
proceeds are available to refinance existing indebtedness and for general
corporate purposes. The agreement requires lump sum repayments upon maturity and
includes specific financial covenants and ratios and limits certain payments,
investments and indebtedness, in addition to other requirements customary to
such borrowings.
The ratio of total debt (short-term borrowings, current portion of long-term
debt and long-term debt) to stockholders' equity was 51% at April 30, 2009, 45%
at January 31, 2009, and 35% at April 30, 2008. The increase in the ratio as of
April 30, 2009 and January 31, 2009 largely reflects increased borrowings.
At April 30, 2009, the Company was in compliance with all debt covenants.
Contractual Obligations
-----------------------
The Company's contractual cash obligations and commercial commitments at April
30, 2009 and the effects such obligations and commitments are expected to have
on the Company's liquidity and cash flows in future periods have not changed
significantly since January 31, 2009. Also see Recent Borrowings above.
Seasonality
-----------
As a jeweler and specialty retailer, the Company's business is seasonal in
nature, with the fourth quarter typically representing at least one-third of
annual net sales and approximately one-half of annual net earnings. Management
expects such seasonality to continue.
Forward-Looking Statements
--------------------------
This quarterly report on Form 10-Q contains certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 concerning the Company's goals, plans and
projections with respect to store openings, sales, retail prices, gross margin,
expenses, effective tax rate, net earnings and net earnings per share,
inventories, capital expenditures, cash flow and liquidity. In addition,
management makes other forward-looking statements from time to time concerning
objectives and expectations. One can identify these forward-looking statements
by the fact that they use words such as "believes," "intends," "plans," and
"expects" and other words and terms of similar meaning and expression in
connection with any discussion of future operating or financial performance. One
can also identify forward-looking statements by the fact that they do not relate
strictly to historical or current facts. Such forward-looking statements are
based on management's current plan and involve inherent risks, uncertainties and
assumptions that could cause actual outcomes to differ materially from the
current plan. The Company has included important factors in the cautionary
statements included in its 2008 Annual Report on Form 10-K and in this quarterly
report, particularly under "Item 1A. Risk Factors," that the Company believes
could cause actual results to differ materially from any forward-looking
statement.
Although the Company believes it has been prudent in its plans and assumptions,
no assurance can be given that any goal or plan set forth in forward-looking
statements can or will be achieved, and readers are cautioned not to place undue
reliance on such statements which speak only as of the date this quarterly
report was first filed with the Securities and Exchange Commission. The Company
undertakes no obligation to update any of the forward-looking information
included in this document, whether as a result of new information, future
events, changes in expectations or otherwise.
22
PART I. Financial Information
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from fluctuations in foreign currency
exchange rates and precious metal prices, which could affect its consolidated
financial position, earnings 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.
Foreign Currency Risk
The Company's Japanese subsidiary satisfies nearly all of its inventory
requirements by purchasing merchandise, payable in U.S. dollars, from the
Company's principal subsidiary. To minimize the potentially negative effect of a
significant strengthening of the U.S. dollar against the Japanese yen, the
Company purchases put option contracts as hedges of forecasted purchases of
merchandise over a maximum term of 12 months. The fair value of put option
contracts is sensitive to changes in yen exchange rates. If the market yen
exchange rate at the time of the put option contract's expiration is stronger
than the contracted exchange rate, the Company allows the option to expire,
limiting its loss to the cost of the put option contract.
The Company also uses foreign exchange forward contracts to offset the foreign
currency exchange risks associated with foreign currency-denominated liabilities
and intercompany transactions between entities with differing functional
currencies. Gains or losses on these foreign exchange forward contracts
substantially offset losses or gains on the liabilities and transactions being
hedged. The term of all outstanding foreign exchange forward contracts as of
April 30, 2009 ranged from one to 12 months.
Precious Metal Price Risk
The Company hedges a portion of its forecasted purchases of precious metals for
use in its internal manufacturing operations in order to minimize the effect of
changes in platinum and silver prices. The Company uses a combination of call
and put option contracts in net-zero-cost collar arrangements ("precious metal
collars"). If the price of the precious metal at the time of the expiration of
the precious metal collar is within the call and put price, the precious metal
collar would expire at no cost to the Company. The maximum term over which the
Company is hedging its exposure to the variability of future cash flows for all
forecasted transactions is 12 months.
23
PART I. Financial Information
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934), the Registrant's chief executive officer and chief financial officer
concluded that, as of the end of the period covered by this report, the
Registrant's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Registrant in the reports that it
files or submits under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and (ii) accumulated and communicated to our management,
including our chief executive officer and chief financial officer, to allow
timely decisions regarding required disclosure.
In the ordinary course of business, the Registrant reviews its system of
internal control over financial reporting and makes changes to its systems and
processes to improve controls and increase efficiency, while ensuring that the
Registrant maintains an effective internal control environment. Changes may
include such activities as implementing new, more efficient systems and
automating manual processes.
The Registrant's chief executive officer and chief financial officer have
determined that there have been no changes in the Registrant's internal control
over financial reporting during the period covered by this report identified in
connection with the evaluation described above that have materially affected, or
are reasonably likely to materially affect, Registrant's internal control over
financial reporting.
The Registrant's management, including its chief executive officer and
chief financial officer, necessarily applied their judgment in assessing the
costs and benefits of such controls and procedures. By their nature, such
controls and procedures cannot provide absolute certainty, but can provide
reasonable assurance regarding management's control objectives. Our chief
executive officer and our chief financial officer have concluded that the
Registrant's disclosure controls and procedures are (i) designed to provide such
reasonable assurance and (ii) are effective at that reasonable assurance level.
24
PART II. Other Information
Item 1A. Risk Factors
As is the case for any retailer, the Registrant's success in achieving its
objectives and expectations is dependent upon general economic conditions,
competitive conditions and consumer attitudes. However, certain factors are
specific to the Registrant and/or the markets in which it operates. The
following "risk factors" are specific to the Registrant; these risk factors
affect the likelihood that the Registrant will achieve the financial objectives
and expectations communicated by management:
(i) Risk: that challenging global economic conditions and related low levels of
consumer confidence continue or worsen over a prolonged period of time and
adversely affect the Registrant's sales.
As a retailer of goods which are discretionary purchases, the Registrant's
sales results are particularly sensitive to changes in economic conditions and
consumer confidence. Consumer confidence is affected by general business
conditions; changes in the market value of securities and real estate;
inflation; interest rates and the availability of consumer credit; tax rates;
and expectations of future economic conditions and employment prospects.
Consumer spending for discretionary goods generally declines during times
of falling consumer confidence, which negatively affects the Registrant's
earnings because of its cost base and inventory investment.
Many of the Registrant's competitors may continue to react to falling
consumer confidence by reducing their retail prices; such reductions and/or
inventory liquidations can have a short-term adverse effect on the Registrant's
sales.
In addition, some observers believe that the short-term attractiveness of
"luxury" goods may have waned in certain markets, thus reducing demand. This
could adversely affect the Registrant's sales and margins.
Uncertainty surrounding the current global economic environment makes it
more difficult for the Registrant to forecast operating results. The
Registrant's forecasts employ the use of estimates and assumptions. Actual
results could differ from forecasts, and those differences could be material.
(ii) Risk: that sales will decline or remain flat in the Registrant's fourth
fiscal quarter, which includes the holiday selling season.
The Registrant's business is seasonal in nature, with the fourth quarter
typically representing at least one-third of annual net sales and approximately
one-half of annual net earnings. Poor sales results during the Registrant's
fourth quarter will have a material adverse effect on the Registrant's sales and
profits.
(iii) Risk: that regional instability and conflict will disrupt tourist travel.
Unsettled regional and global conflicts or crises which result in military,
terrorist or other conditions creating disruptions or disincentives to, or
changes in the pattern, practice or frequency of tourist travel to the various
regions where the Registrant operates retail stores could adversely affect the
Registrant's sales and profits.
(iv) Risk: that foreign currencies will weaken against the U.S. dollar and
require the Registrant to raise prices or shrink profit margins in locations
outside of the U.S.
The Registrant operates retail stores and boutiques in various countries
outside of the U.S. and, as a result, is exposed to market risk from
fluctuations in foreign currency exchange rates. The Registrant's sales in those
countries represented 46% of its net sales, of which Japan represented 19% of
net sales, in Fiscal 2008. A substantial weakening of foreign currencies against
the U.S. dollar would require the Registrant to raise its retail prices or
reduce its profit margins in various locations outside of the U.S. Consumers in
those markets may not accept significant price increases on the Registrant's
goods; thus, there is a risk that a substantial weakening of foreign currencies
will result in reduced sales or profit margins.
(v) Risk: that the Registrant will be unable to continue to offer merchandise
designed by Elsa Peretti or Paloma Picasso.
25
The Registrant's long-standing right to sell the jewelry designs of Elsa
Peretti and Paloma Picasso and use their trademarks is responsible for a
substantial portion of the Registrant's revenues. Merchandise designed by Ms.
Peretti and by Ms. Picasso accounted for 11% and 3% of Fiscal 2008 net sales.
Tiffany has exclusive license arrangements with Ms. Peretti and Ms. Picasso;
these arrangements are subject to royalty payments as well as other
requirements. Each license may be terminated by Tiffany or the designer on six
months notice, even in the case where no default has occurred. Also, no
agreements have been made for the continued sale of the designs or use of the
trademarks ELSA PERETTI or PALOMA PICASSO following the death of either
designer. Loss of either license would materially adversely affect the
Registrant's business through lost sales and profits.
(vi) Risk: that changes in prices of diamonds and precious metals or reduced
supply availability might adversely affect the Registrant's ability to produce
and sell products at desired profit margins.
Most of the Registrant's jewelry and non-jewelry offerings are made with
diamonds, gemstones and/or precious metals. A significant change in the prices
of these commodities could adversely affect the Registrant's business, which is
vulnerable to the risks inherent in the trade for such commodities. A
substantial increase in the price of raw materials and/or high-quality rough and
polished diamonds within the quality grades, colors and sizes that customers
demand could lead to decreased customer demand and lost sales and/or reduced
gross profit margins. Conversely, a decrease in the prices of raw materials
could have a disruptive effect, negatively or positively, on sales demand and
short-term margins.
Acquiring diamonds for the engagement business has, at times, been
difficult because of supply limitations; Tiffany may not be able to maintain a
comprehensive selection of diamonds in each retail location due to the broad
assortment of sizes, colors, clarity grades and cuts demanded by customers. A
substantial increase or decrease in the supply of raw materials and/or
high-quality rough and polished diamonds within the quality grades, colors and
sizes that customers demand could lead to decreased customer demand and lost
sales and/or reduced gross profit margins.
If trade relationships between the Registrant and one or more of its
significant vendors were disrupted, the Registrant's sales could be adversely
affected in the short-term until alternative supply arrangements could be
established.
(vii) Risk: that the value of the TIFFANY & CO. trademark will decline due to
the sale of counterfeit merchandise by infringers.
The TIFFANY & CO. trademark is an asset which is essential to the
competitiveness and success of the Registrant's business and the Registrant
takes appropriate action to protect it. Tiffany actively pursues those who
produce or sell counterfeit TIFFANY & CO. goods through civil action and
cooperation with criminal law enforcement agencies. However, the Registrant's
enforcement actions have not stopped the imitation and counterfeit of the
Registrant's merchandise or the infringement of the trademark, and counterfeit
TIFFANY & CO. goods remain available in many markets. In recent years, there has
been an increase in the availability of counterfeit goods, predominantly silver
jewelry, in various markets by street vendors and small retailers, as well as on
the Internet. The continued sale of counterfeit merchandise could have an
adverse effect on the TIFFANY & CO. brand by undermining Tiffany's reputation
for quality goods and making such goods appear less desirable to consumers of
luxury goods. Damage to the brand would result in lost sales and profits.
(viii) Risk: that the Registrant will be unable to lease sufficient space for
its retail stores in prime locations.
The Registrant, positioned as a luxury goods retailer, has established its
retail presence in choice store locations. If the Registrant cannot secure and
retain locations on suitable terms in prime and desired luxury shopping
locations, its expansion plans, sales and profits will be jeopardized.
In Japan, many of the retail locations are located in department stores.
TIFFANY & CO. boutiques located in department stores in Japan represented 79% of
net sales in Japan and 15% of consolidated net sales in Fiscal 2008. In recent
years, the Japanese department store industry has, in general, suffered
declining sales and there is a risk that such financial difficulties will force
further consolidations or store closings. Should one or more Japanese department
store operators elect or be required to close one or more stores now housing a
TIFFANY & CO. boutique, the Registrant's sales and profits would be reduced
while alternative premises were being obtained. The Registrant's commercial
relationships with department stores in Japan, and their abilities to continue
as leading
26
department store operators, have been and will continue to be substantial
factors in the Registrant's continued success in Japan.
(ix) Risk: that the Registrant's business is dependent upon the distinctive
appeal of the TIFFANY & CO. brand.
The TIFFANY & CO. brand's association with quality, luxury and exclusivity
is integral to the success of the Registrant's business. The Registrant's
expansion plans for retail and direct selling operations and merchandise
development, production and management support the brand's appeal. Consequently,
poor maintenance, promotion and positioning of the TIFFANY & CO. brand, as well
as market over-saturation, may adversely affect the business by diminishing the
distinctive appeal of the TIFFANY & CO. brand and tarnishing its image. This
would result in lower sales and profits.
(x) Risk: that the current volatile global economy may have a material adverse
effect on the Company's liquidity and capital resources.
U.S. and global credit and equity markets have recently undergone
significant disruption, making it difficult for many businesses, including the
Registrant, to obtain financing on acceptable terms. A prolonged downturn in the
economy, extending further than those included in management's projections,
could have an effect on the Registrant's cost of borrowing, could diminish its
ability to service or maintain existing financing, and could make it more
difficult for the Registrant to obtain additional financing or to refinance
existing long-term obligations. In addition, increased disruption in the markets
could lead to the failure of financial institutions. If any of the banks
participating in the Registrant's revolving credit facility were to declare
bankruptcy, the Registrant would no longer have access to those committed funds.
Further deterioration in the stock market could continue to negatively
impact the valuation of pension plan assets and result in increased minimum
funding requirements.
27
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains the Company's stock repurchases of equity
securities in the first quarter of Fiscal 2009:
Issuer Purchases of Equity Securities
(d) Maximum Number
(c) Total Number of (or Approximate Dollar
Shares (or Units) Value) of Shares, (or
(a) Total Number of (b) Average Purchased as Part of Units) that May Yet Be
Shares (or Units) Price Paid per Publicly Announced Purchased Under the
Period Purchased Share (or Unit) Plans or Programs Plans or Programs
------------------------------------------------------------------------------------------------------------------------
February 1, 2009 to -- -- -- $402,427,000
February 28, 2009
March 1, 2009 to
March 31, 2009 -- -- -- $402,427,000
April 1, 2009 to
April 30, 2009 -- -- -- $402,427,000
TOTAL -- -- -- $402,427,000
-----------------------------------------------------------------------------------------------------------------------
In March 2005, the Company's Board of Directors approved a stock repurchase
program ("2005 Program") that authorized the repurchase of up to $400,000,000 of
the Company's Common Stock through March 2007 by means of open market or private
transactions. In August 2006, the Company's Board of Directors extended the
expiration date of the Company's 2005 Program to December 2009, and authorized
the repurchase of up to an additional $700,000,000 of the Company's Common
Stock. In January 2008, the Company's Board of Directors extended the expiration
date of the program to January 2011 and authorized the repurchase of up to an
additional $500,000,000 of the Company's Common Stock.
During the third quarter of 2008, the Company announced that its Board of
Directors had suspended share repurchases, and no repurchases were made during
the fourth quarter of 2008 or in the first quarter of 2009 in order to preserve
cash. Such suspension continued as of the date this quarterly report on Form
10-Q was first filed with the Securities and Exchange Commission. At April 30,
2009, there remained $402,427,000 of authorization for future repurchases.
28
ITEM 6 Exhibits
(a) Exhibits:
10.155a Acknowledgment of First Amendment dated May 1, 2009 to the
Note Purchase and Private Shelf Agreement dated as of December
23, 2008 by and between Registrant and various institutional
note purchasers (see Exhibit 10.155 filed with Registrant's
Report on Form 8-K dated February 13, 2009).
10.151b Amended and restated 2005 Employee Incentive Plan
(last amended May 21, 2009).
10.154 Terms of Stock Option Award (Transferable Non-Qualified Option)
under Registrant's 2008 Directors Equity Compensation Plan as
revised May 21, 2009.
10.155 Terms of Restricted Stock Grants under Registrant's 2008
Directors Equity Compensation Plan as adopted on May 21,2009.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
29
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIFFANY & CO.
(Registrant)
Date: May 28, 2009 By: /s/ James N. Fernandez
----------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Exhibit Index
10.155a Acknowledgment of First Amendment dated May 1, 2009 to the
Note Purchase and Private Shelf Agreement dated as of December
23, 2008 by and between Registrant and various institutional
note purchasers (see Exhibit 10.155 filed with Registrant's
Report on Form 8-K dated February 13, 2009).
10.151b Amended and restated 2005 Employee Incentive Plan
(last amended May 21, 2009).
10.154 Terms of Stock Option Award (Transferable Non-Qualified Option)
under Registrant's 2008 Directors Equity Compensation Plan as
revised May 21, 2009.
10.155 Terms of Restricted Stock Grants under Registrant's 2008
Directors Equity Compensation Plan as adopted on May 21,2009.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.