SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934 for the quarter ended October 31, 2002.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934 for the transition from ________ to _____________.
Commission file number: 1-9494
TIFFANY & CO.
(Exact name of registrant as specified in its charter)
Delaware 13-3228013
(State of incorporation) (I.R.S. Employer Identification No.)
727 Fifth Ave. New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 755-8000
Former name, former address and former fiscal year, if changed since last report
_________.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock as of the latest practicable
date: Common Stock, $.01 par value, 145,153,789 shares outstanding at the close
of business on October 31, 2002.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2002
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - October 31, 2002,
January 31, 2002 and
October 31, 2001 (Unaudited) 3
Consolidated Statements of Earnings - for the
three and nine month periods ended
October 31, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows - for
the nine months ended October 31, 2002
and 2001 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-21
Item 4. Controls and Procedures 22
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
(a) Exhibits
(b) Reports on Form 8-K
- 2 -
PART I. Financial Information
Item 1. Financial Statements
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)
October 31, January 31, October 31,
2002 2002 2001
-------------- --------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 90,646 $ 173,675 $ 106,404
Accounts receivable, less allowances
of $7,021, $6,878 and $7,042 96,112 98,527 99,094
Inventories, net 777,932 611,653 702,752
Deferred income taxes 48,660 41,170 38,030
Prepaid expenses and other current assets 43,171 26,826 40,507
-------------- -------------- --------------
Total current assets 1,056,521 951,851 986,787
Property and equipment, net 650,499 525,585 511,271
Deferred income taxes 6,377 4,560 5,360
Other assets, net 154,463 147,872 153,375
-------------- -------------- --------------
$ 1,867,860 $ 1,629,868 $ 1,656,793
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 58,268 $ 40,402 $ 113,331
Current portion of long-term debt 51,500 51,500
Obligation under capital lease - - 45,221
Accounts payable and accrued liabilities 182,123 134,694 150,889
Income taxes payable 485 48,997 2,543
Merchandise and other customer credits 39,520 38,755 35,418
--------------- --------------- --------------
Total current liabilities 331,896 314,348 347,402
Long-term debt 295,947 179,065 237,548
Postretirement/employment benefit obligations 33,999 29,999 28,822
Other long-term liabilities 80,843 69,511 74,602
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value; authorized 240,000 shares,
issued and outstanding 145,154, 145,001 and 144,897 1,451 1,450 1,449
Additional paid-in capital 350,469 330,743 327,359
Retained earnings 801,927 743,543 669,291
Accumulated other comprehensive(loss) gain:
Foreign currency translation adjustments (27,206) (45,306) (33,218)
Cash flow hedging instruments (1,466) 6,515 3,538
-------------- --------------- --------------
Total stockholders' equity 1,125,175 1,036,945 968,419
-------------- --------------- --------------
$ 1,867,860 $ 1,629,868 $ 1,656,793
============== =============== ==============
See notes to consolidated financial statements
- 3 -
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------- ---------------------------------
2002 2001 2002 2001
------------ ------------- -------------- -------------
Net sales $ 366,033 $ 333,074 $ 1,087,589 $ 1,040,776
Cost of sales 150,220 140,235 445,554 441,926
------------ ------------- -------------- -------------
Gross profit 215,813 192,839 642,035 598,850
Selling, general and administrative expenses 165,900 146,798 474,478 437,918
------------ ------------- -------------- -------------
Earnings from operations 49,913 46,041 167,557 160,932
Other expenses, net 5,446 5,993 14,052 9,527
------------ ------------- -------------- -------------
Earnings before income taxes 44,467 40,048 153,505 151,405
Provision for income taxes 9,283 16,020 52,898 60,563
------------ ------------- -------------- -------------
Net earnings $ 35,184 $ 24,028 $ 100,607 $ 90,842
============ ============= ============== =============
Net earnings per share:
Basic $ 0.24 $ 0.17 $ 0.69 $ 0.62
============ ============= ============== =============
Diluted $ 0.24 $ 0.16 $ 0.68 $ 0.60
============ ============= ============== =============
Weighted average number of common shares:
Basic 145,137 145,273 145,450 145,743
Diluted 148,066 150,114 149,046 151,046
See notes to consolidated financial statements.
-4-
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
October 31,
------------------------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 100,607 $ 90,842
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 56,285 46,640
(Gain) loss on equity investments 2,592 (2,780)
Provision for uncollectible accounts 1,005 816
Provision for inventories 6,506 4,500
Tax benefit from exercise of stock options 10,314 3,488
Deferred income taxes (4,529) (10,175)
Loss on disposal of fixed assets 476 426
Provision for postretirement/employment benefits 4,000 2,688
Changes in assets and liabilities, excluding effects
of acquisitions:
Accounts receivable 6,875 10,778
Inventories (115,422) (65,335)
Prepaid expenses and other current assets (22,035) (14,524)
Other assets, net 564 (9,999)
Accounts payable 12,008 (7,138)
Accrued liabilities 17,170 2,687
Income taxes payable (51,660) (39,191)
Merchandise and other customer credits 666 (610)
Other long-term liabilities 7,486 6,705
------------------- ------------------
Net cash provided by operating activities 32,908 19,818
------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (175,319) (135,780)
Acquisitions, net of cash acquired (24,554) -
Equity investments - (9,535)
Proceeds from lease incentives 2,945 1,950
------------------- ------------------
Net cash used in investing activities (196,928) (143,365)
------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 100,000 -
Proceeds from short-term borrowings, net 8,315 85,511
Repurchase of Common Stock (26,195) (36,416)
Proceeds from exercise of stock options 9,848 4,576
Cash dividends on Common Stock (17,463) (17,519)
------------------- ------------------
Net cash provided by financing activities 74,505 36,152
------------------- ------------------
Effect of exchange rate changes on
cash and cash equivalents 6,486 (1,814)
------------------- ------------------
Net decrease in cash and cash equivalents (83,029) (89,209)
Cash and cash equivalents at beginning of year 173,675 195,613
------------------- ------------------
Cash and cash equivalents at end of nine months $ 90,646 $ 106,404
=================== ==================
See notes to consolidated financial statements.
- 5 -
TIFFANY & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
The accompanying consolidated financial statements include the
accounts of Tiffany & Co. and all majority-owned domestic and foreign
subsidiaries (the "Company"). Intercompany accounts, transactions and
profits have been eliminated in consolidation. The interim statements
are unaudited and, in the opinion of management, include all
adjustments (which include only normal recurring adjustments including
the adjustment necessary as a result of the use of the LIFO(last-in,
first-out) method of inventory valuation, which is based on
assumptions as to inflation rates and projected fiscal year-end
inventory levels) necessary to present fairly the Company's financial
position as of October 31, 2002 and the results of its operations and
cash flows for the interim periods presented. The consolidated balance
sheet data for January 31, 2002 are derived from the audited financial
statements which are included in the Company's report on Form 10-K,
which should be read in connection with these financial statements. In
accordance with the rules of the Securities and Exchange Commission,
these financial statements do not include all disclosures required by
generally accepted accounting principles.
Certain reclassifications were made to the prior year's financial
statements and note disclosures to conform to the current year's
presentation and such reclassifications were principally related to
employee benefits and lease liabilities.
Since the Company's business is seasonal, with a higher proportion of
sales and earnings generated in the last quarter of the fiscal year,
the results of its operations for the three and nine months ended
October 31, 2002 and 2001 are not necessarily indicative of the
results of the entire fiscal year.
2. ACQUISITIONS
------------
In 2001, the Company purchased approximately 45% of Little Switzerland
Inc.'s ("Little Switzerland") outstanding shares of common stock by
means of a direct investment in newly-issued shares. The Company
accounted for this investment under the equity method. In 2001, the
Company also provided Little Switzerland with an interest bearing loan
in the amount of $2,500,000.
In August 2002, TSAC Corp., an indirect wholly-owned subsidiary of the
Company, entered into a stock purchase agreement with several parties
to purchase their shares of common stock of Little Switzerland,
representing approximately 12% of Little Switzerland's outstanding
common stock. As a condition to that purchase, TSAC Corp. also
commenced a cash tender offer to acquire the remaining balance of the
outstanding shares of Little Switzerland's common stock. The offer
(following an extension of the offering period) expired on October 25,
2002. In October 2002, the Company purchased and paid for the shares
acquired pursuant to the stock purchase agreement as well as the
shares tendered prior to the expiration date of the cash tender offer.
As of October 31, 2002, the Company owned 98% of the outstanding
shares of Little Switzerland. On November 20, 2002, TSAC merged with
and into Little Switzerland. Under the terms of the merger, common
stock of Little Switzerland not owned by TSAC Corp., has been
converted into the right to receive the same consideration paid in the
tender offer.
-6-
ACQUISITIONS (continued)
------------------------
The cost of acquiring all of the outstanding shares of Little
Switzerland, other than those already owned by the Company, but
including the shares acquired pursuant to the stock purchase
agreement, including professional fees and other related costs is
expected to total approximately $27,100,000. The Company has paid
$24,554,000, net of cash acquired, through October 31, 2002. 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, its financial condition
or the financial results of its operations.
The purchase price has been preliminarily allocated to the assets
acquired and liabilities assumed according to estimated fair values
and is subject to adjustment when additional information concerning
asset and liability valuations and transaction costs are finalized.
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 Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations."
3. INCOME TAXES
------------
The effective income tax rates for the three and nine months ended
October 31, 2002 are 20.9% and 34.5%. The effective tax rate for the
three and nine months ended October 31, 2001 was 40.0%. The difference
in the tax rates from the prior year is principally due to the Company
recognizing in the third quarter of fiscal 2002 the current period and
cumulative United States tax benefits provided by the Extraterritorial
Income Exclusion Act of 2000 ("ETI"). Absent the cumulative benefit
recorded, the effective tax rate for the three and nine months ended
October 31, 2002 would have been 38.9%.
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. ETI provides for the
exclusion from United States income tax 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
that this tax benefit was applicable to its operations and, therefore,
has recognized a tax benefit in the quarter.
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.
-7-
4. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Nine Months Ended
October 31,
---------------------------------------
Cash paid for: 2002 2001
---------------- ---------------
(in thousands)
--------------
Interest $ 9,508 $ 11,596
================ ===============
Income taxes $96,035 $104,559
================ ===============
Details of businesses acquired in
purchase transactions:
(in thousands)
--------------
Fair value of assets acquired $42,039 $ -
Less: liabilities assumed 16,454 -
---------------- ---------------
Cash paid for acquisitions 25,585 -
Less: cash acquired 1,031 -
---------------- ---------------
Net cash paid for acquisitions $24,554 $ -
================ ===============
Supplemental Noncash Investing
and Financing Activities:
(in thousands)
--------------
Issuance of Common Stock for the
Employee Profit Sharing and
Retirement Savings Plan $ 1,000 $ 2,800
================ ===============
5. INVENTORIES
-----------
October 31, January 31, October 31,
(in thousands) 2002 2002 2001
-------------- -------------------- ------------------ ---------------------
Finished goods $655,853 $528,671 $605,534
Raw materials 90,567 67,779 72,470
Work-in-process 36,038 18,722 28,633
-------------------- ------------------ ---------------------
782,458 615,172 706,637
Reserves (4,526) (3,519) (3,885)
-------------------- ------------------ ---------------------
Inventories, net $777,932 $611,653 $702,752
==================== ================== =====================
LIFO-based inventories at October 31, 2002, January 31, 2002 and
October 31, 2001 were $575,660,000, $481,716,000 and $544,868,000,
with the current cost exceeding the LIFO inventory value by
approximately $19,471,000, $18,971,000 and $19,432,000 at the end of
each period. The LIFO valuation method had no effect on net earnings
per diluted share for the three months ended October 31, 2002 and
2001. The LIFO valuation method had no effect on net earnings per
diluted share for the nine months ended October 31, 2002 and had the
effect of decreasing net earnings per diluted share by $0.01 for the
nine months ended October 31, 2001.
-8-
6. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
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
will be required to review goodwill and certain other intangible
assets annually for potential impairment. With respect to goodwill
amortization, the Company adopted SFAS No. 142 effective February 1,
2002. The result of the application of the non-amortization provisions
of SFAS No. 142 for goodwill was not significant for the three and
nine months ended October 31, 2002. During the second quarter of 2002,
the Company completed its test for goodwill impairment and concluded
that goodwill was not impaired.
In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and financial
reporting for legal obligations and costs associated with the
retirement of tangible long-lived assets. The provisions of SFAS No.
143 will be effective for the Company's financial statements for the
fiscal year beginning February 1, 2003. The Company does not expect
the adoption of this standard to have a significant impact on its
financial position, earnings or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the
accounting for impairment or disposal of long-lived assets and
discontinued operations. On February 1, 2002, the Company adopted this
standard and its application had no significant impact on its
financial position, earnings or cash flows.
7. LONG-TERM DEBT
--------------
In July 2002, the Company, in a private transaction with various
institutional lenders, issued, at par, $40,000,000 of 6.15% Series C
Senior Notes Due July 18, 2009 and $60,000,000 of 6.56% Series D Notes
Due July 18, 2012 with seven-year and 10-year lump sum repayments upon
maturities. The proceeds of these issues are being and will be used by
the Company for general corporate purposes, including seasonal working
capital and to redeem the Company's $51,500,000 principal amount 7.52%
Senior Notes due in January 2003. The Note Purchase Agreements require
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.
-9-
8. FINANCIAL HEDGING INSTRUMENTS
-----------------------------
Effective February 1, 2001, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." The adoption of SFAS No.
133 resulted in the Company recording transition adjustments in the
first quarter of 2001 to recognize its derivative instruments at fair
market value. The cumulative effect of these transition adjustments
was recorded to cost of sales and amounted to $1,653,000, which
reduced net earnings by $975,000, net of income taxes, and an increase
to accumulated comprehensive earnings of $3,773,000, net of income
taxes of $2,622,000.
Hedging activity affected accumulated other comprehensive (loss) gain,
net of income taxes as follows:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------- -------------------------------
(in thousands) 2002 2001 2002 2001
-------------- ------------- -------------- ------------- -------------
Balance at beginning of
period $ ( 993) $ 6,758 $ 6,515 $ -
Impact of adoption - - - 3,773
Derivative gains
transferred to earnings (1,029) (1,485) (4,510) (2,966)
Change in fair value 556 (1,735) (3,471) 2,731
------------- -------------- ------------- -------------
Balance at end of period $(1,466) $ 3,538 $(1,466) $ 3,538
============= ============== ============= =============
The Company expects $776,000 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.
In July 2002, the Company entered into an interest-rate swap agreement
to hedge the change in fair value of its fixed-rate obligation issued
in July 2002. Under the swap agreement, the Company pays variable rate
interest and receives fixed interest rate payments periodically over
the life of the instrument. The Company accounts for its interest-rate
swap as a fair value hedge and, therefore, recognizes gains or losses
on the derivative instrument and the hedged item attributable to the
hedged risk in earnings in the current period. Under SFAS No. 133, the
ineffectiveness of a fair value hedge is required to be calculated.
Ineffectiveness results when gains and losses on the hedged item are
not completely offset by gains and losses in the hedge instrument. The
Company determined that there is no ineffectiveness in the fair value
hedge.
-10-
9. EARNINGS PER SHARE
------------------
Basic earnings per share is computed as net earnings divided by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share includes the dilutive effect of the assumed
exercise of stock options.
The following table summarizes the reconciliation of the numerators
and denominators for the basic and diluted earnings per share ("EPS")
computations:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------ -------------------------------
(in thousands) 2002 2001 2002 2001
-------------- ---- ---- ---- ----
Net earnings for basic
and diluted EPS $35,184 $24,028 $100,607 $90,842
============== ============== ============== ===============
Weighted average shares
for basic EPS 145,137 145,273 145,450 145,743
Incremental shares from
assumed exercise of
stock options 2,929 4,841 3,596 5,303
-------------- -------------- -------------- ---------------
Weighted average shares
for diluted EPS 148,066 150,114 149,046 151,046
============== ============== ============== ===============
For the three months ended October 31, 2002 and 2001, there were
5,094,000 and 3,254,000 stock options excluded from the computations
of earnings per diluted share due to their antidilutive effect. For
the nine months ended October 31, 2002 and 2001, there were 4,906,000
and 3,145,000 stock options excluded from the computations of earnings
per diluted share due to their antidilutive effect.
10. COMPREHENSIVE EARNINGS
----------------------
The components of comprehensive earnings were:
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------------- ----------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
--------------
Net earnings $35,184 $24,028 $100,607 $90,842
Other comprehensive
gain(loss):
Cash flow hedging
instruments, net of tax ( 473) (3,220) (7,981) 3,538
Foreign currency
translation adjustments (4,919) 4,125 18,100 (8,372)
-------------- --------------- ---------------- --------------
Comprehensive earnings $29,792 $24,933 $110,726 $86,008
============== =============== ================ ==============
Foreign currency translation adjustments are not adjusted for income
taxes since they relate to investments that are permanent in nature.
-11-
11. OPERATING SEGMENTS
------------------
The Company's reportable segments are: U.S. Retail, International
Retail, Direct Marketing and Specialty Retail (see Management's
Discussion and Analysis of Financial Condition and Results of
Operations for an overview of the Company's business). Effective
October 1, 2002 the Company established the Specialty Retail segment
to include the consolidated results of Little Switzerland, Inc., as
well as the consolidated results from any future ventures operated
under non-TIFFANY & CO. brand 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.
Certain information relating to the Company's reportable segments is
set forth below:
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------------- --------------------------------------
(in thousands) 2002 2001 2002 2001
-------------- ---- ---- ---- ----
Net sales:
U.S. Retail $ 168,493 $ 152,068 $ 521,381 $ 497,243
International Retail 156,281 147,220 452,381 444,217
Direct Marketing 37,337 33,786 109,905 99,316
Specialty Retail 3,922 - 3,922 -
--------------- --------------- ----------------- ---------------
$ 366,033 $ 333,074 $ 1,087,589 $ 1,040,776
=============== =============== ================= ===============
Earnings(losses) from
operations*:
U.S. Retail $ 27,363 $ 23,990 $ 103,461 $ 104,594
International Retail 44,897 41,751 133,151 122,529
Direct Marketing 4,085 1,553 15,813 6,913
Specialty Retail ( 972) - ( 972) -
--------------- --------------- ------------------ ----------------
$ 75,373 $ 67,294 $ 251,453 $ 234,036
=============== =============== ================== ================
* Represents earnings from operations before unallocated
corporate expenses and interest and other expenses, net.
Executive Officers of the Company evaluate the performance of the
Company's assets related to the operations under the TIFFANY & CO.
brand trademarks or tradenames on an aggregate basis. Little
Switzerland's assets are not signficant to the Company. Therefore,
separate financial information for the Company's assets on a segment
basis is not presented.
-12-
OPERATING SEGMENTS (continued)
------------------------------
The following table sets forth a reconciliation of the reportable
segment's earnings from operations to the Company's consolidated
earnings before income taxes:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------------ ----------------------------------------
(in thousands) 2002 2001 2002 2001
-------------- ---- ---- ---- ----
Earnings from
operations for
reportable segments $ 75,373 $ 67,294 $ 251,453 $ 234,036
Unallocated
corporate expenses (25,460) (21,253) (83,896) (73,104)
Other expenses, net (5,446) (5,993) (14,052) (9,527)
---------------- ---------------- ----------------- -------------------
Earnings before
income taxes $ 44,467 $ 40,048 $ 153,505 $ 151,405
================ ================ ================= ===================
12. SUBSEQUENT EVENTS
-----------------
In November 2002, the Company announced that it will no longer solicit
new employee service award programs through its Business Sales
division and will phase out of the service award business as its
existing customer commitments are satisfied. Sales affected by this
action represent less than $30,000,000 annually, or less than half of
the Business Sales division's sales. The Company expects to record a
pre-tax charge of approximately $1,300,000 in the fourth quarter
ending January 31, 2003 primarily related to employee separation
costs.
On November 21, 2002, the Company's Board of Directors declared a
quarterly dividend of $0.04 per share. This dividend will be paid on
January 10, 2003 to stockholders of record on December 20, 2002.
-13-
PART I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
- ---------------------
Overview
- --------
The Company operates four channels of distribution. U.S. Retail includes retail
sales in Company-operated TIFFANY & CO. stores in the U.S. International Retail
primarily includes retail sales in Company-operated TIFFANY & CO. stores and
boutiques in markets outside the U.S., as well as a limited amount of
business-to-business sales, Internet sales and wholesale sales of TIFFANY & CO.
products to independent retailers and distributors in certain of those markets.
Direct Marketing includes business-to-business, catalog and Internet sales of
TIFFANY & CO. products in the U.S. Specialty Retail includes the retail sales
made in Little Switzerland, Inc. stores, which the Company acquired in October,
2002. For the most part, Little Switzerland sells non-TIFFANY & CO. products,
but does sell certain TIFFANY & CO. merchandise in certain of its stores.
All references to years relate to the fiscal year that ends on January 31 of the
following calendar year.
In the three months (third quarter) ended October 31, 2002, net sales increased
10% to $366,033,000. In the nine months (year-to-date) ended October 31, 2002,
net sales increased 4% to $1,087,589,000. The Company's reported sales reflect
either a translation-related benefit from strengthening foreign currencies or a
detriment from a strengthening U.S. dollar. Therefore, on a
constant-exchange-rate basis, net sales increased 10% in the third quarter and
5% in the year-to-date; worldwide comparable store sales rose 3% in the third
quarter and declined 1% in the year-to-date. Net earnings rose 46% to
$35,184,000 in the third quarter (which included a non-recurring tax benefit -
see "Provision for Income Taxes") and rose 11% to $100,607,000 in the
year-to-date.
Certain operating data as a percentage of net sales were as follows:
Three Months Nine Months
Ended October 31, Ended October 31,
------------------- -------------------
2002 2001 2002 2001
------------------- -------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 41.0 42.1 41.0 42.5
------------------- -------------------
Gross profit 59.0 57.9 59.0 57.5
Selling, general
and administrative expenses 45.3 44.1 43.6 42.1
------------------ -------------------
Earnings from operations 13.6 13.8 15.4 15.4
Other expenses, net 1.5 1.8 1.3 0.9
------------------ -------------------
Earnings before income taxes 12.1 12.0 14.1 14.5
Provision for income taxes 2.5 4.8 4.9 5.8
------------------ -------------------
Net earnings 9.6% 7.2% 9.3% 8.7%
================== ===================
Note: Columns may not add due to rounding.
- 14 -
Net Sales
- ---------
Net sales by channel of distribution were as follows:
Three Months Nine Months
Ended October 31, Ended October 31,
------------------- ---------------------
(in thousands) 2002 2001 2002 2001
- -------------- ------------------- ---------------------
U.S. Retail $168,493 $152,068 $ 521,381 $ 497,243
International Retail 156,281 147,220 452,381 444,217
Direct Marketing 37,337 33,786 109,905 99,316
Specialty Retail 3,922 - 3,922 -
----------------------------------------
$366,033 $333,074 $1,087,589 $1,040,776
================== =====================
U.S. Retail sales increased 11% in the third quarter and 5% year-to-date.
Comparable store sales rose 9% in the third quarter and 3% year-to-date. Sales
in the New York flagship store increased 10% in the third quarter and rose
fractionally year-to-date, while comparable branch store sales increased 8% in
the third quarter and 3% year-to-date. The increases in the third quarter were
primarily due to a higher number of customers and transactions, which occurred
following the one-year anniversary of September 11, 2001. Sales increased to
both local customers and tourists.
International Retail sales increased 6% in the third quarter and 2% year-to-date
(increases of 6% and 4% on constant-exchange-rate bases). In Japan, total retail
sales in local currency rose 1% in the third quarter and rose fractionally
year-to-date, primarily reflecting a decline in jewelry unit volume offset by an
increased average price per unit sold and new store openings; comparable store
sales in local currency declined 7% in both the third quarter and year-to-date.
The Company is in the process of repositioning its merchandising and marketing
efforts in Japan to mitigate the effect of declining 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. Prior
agreements expired in 2001. The new agreements largely continue the principles
on which Mitsukoshi and Tiffany have been cooperating since 1993, when the
relationship was last renegotiated. The main agreement, which will expire on
January 31, 2007, covers the continued operation of 24 TIFFANY & CO. boutiques.
Separate agreements cover the operation of a freestanding TIFFANY & CO. store on
Tokyo's Ginza. Under the new agreements, the Company is not restricted from
further expansion of its Tokyo operations. Under the main agreement, the Company
pays to Mitsukoshi a percentage of certain sales; this percentage is lower than
under the prior agreements. There will be a further reduction in fees paid to
Mitsukoshi in 2003 and beyond, as the Company employs increasing numbers of its
own personnel in certain boutiques.
In non-U.S. markets outside of Japan, comparable store sales on a
constant-exchange-rate basis in the third quarter and year-to-date increased 1%
and 2% in the Asia-Pacific region and increased 9% and declined 3% in Europe.
Year-to-date, the Company opened U.S. stores in Bellevue, Washington, East
Hampton, New York, St. Louis, Missouri and Orlando, Florida and,
internationally, opened department-store boutiques in Japan (2), Korea and
Taiwan. In November 2002, the Company opened a new U.S. store in Honolulu,
Hawaii (which replaced two hotel-boutiques) and, internationally, a
department-store boutique in Paris, France. In total, worldwide retail gross
square footage has increased 6% in 2002.
Direct Marketing sales increased 11% in both the third quarter and year-to-date.
Business Sales division sales rose 1% and declined 5% in those periods
- 15 -
reflecting a decline in the average size per order. Combined Internet/catalog
sales rose 19% and 27% in those periods due to strong growth in Internet sales
that primarily resulted from a higher number of orders.
In November 2002, the Company announced that it will no longer solicit new
employee service award programs through its Business Sales division and will
phase out of the service award business as existing customer commitments are
satisfied. Service award programs are used by employers to commemorate
employees' anniversaries with gifts. Tiffany's Business Sales division will
continue to offer a range of business gifts, as well as event-related trophies
and other awards. Sales affected by this action represent less than $30 million
annually, or less than half of the Business Sales division's sales. The Company
expects to take a related pre-tax charge of approximately $1.3 million in its
fourth quarter ending January 31, 2003 primarily related to employee separation
costs.
The Company has established a new channel of distribution, "Specialty Retail,"
to include the consolidated results of Little Switzerland, Inc., (effective
October 1, 2002) as well as the results from any future ventures controlled by
the Company and which will operate under non-TIFFANY & CO. trademarks or trade
names. At October 31, 2002, the Company owned 98% of Little Switzerland.
Specialty Retail sales were $3,922,000 in the third quarter of 2002.
Gross Profit
- ------------
Gross profit as a percentage of net sales ("gross margin") in the third quarter
and year-to-date was higher than the prior year. Management attributes the
increases largely to favorable shifts in sales mix, as well as to improved
efficiencies in product manufacturing and sourcing and selective price
increases.
The Company's hedging program uses yen put options to stabilize product costs in
Japan over the short-term despite exchange rate fluctuations, and the Company
adjusts its retail prices in Japan from time to time to address longer-term
changes in the yen/dollar relationship and local competitive pricing.
Management's ongoing strategy and objectives include achieving further product
manufacturing/sourcing efficiencies, leveraging its fixed costs and implementing
selective price adjustments in order to maintain the Company's gross margin at,
or above, prior year levels. However, for the fourth quarter of 2002, management
expects a modest year-over-year decline in gross margin, due to an expected
shift in sales mix, as well as the effect of consolidating the sales of Little
Switzerland, which achieves a gross margin below the Company's average.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
SG&A rose 13% in the third quarter and 8% year-to-date. 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 the third quarter to support the launch of a new collection of
watches. As a percentage of net sales, SG&A rose in both periods due to
insufficient sales growth to absorb the rate of increase in fixed expenses.
Management's longer-term objective is to reduce this ratio by leveraging
anticipated improved rates of sales growth against the Company's fixed-expense
base.
Other Expenses, Net
- -------------------
Other expenses, net in the third quarter were lower than the prior year due to
lower interest expense resulting from the effect of the capitalization of
interest costs related to the Company's construction of its 266,000 square foot
customer fulfillment/distribution center ("CFC") in Hanover Township, New
Jersey, effective in the first quarter of 2002. In addition, interest expense
rose in 2001 primarily due to construction costs and the conversion of an
operating lease into a capital lease. Other expenses, net year-to-date
- 16 -
were higher than the prior year primarily due to a pretax gain in the first
quarter of 2001 of $5,257,000, based on the Company's equity interest in Aber
Diamond Corporation ("Aber"), a publicly-traded company headquartered in Canada,
which sold its interest in the Snap Lake Project to De Beers Canada Mining, Inc.
in February 2001.
Provision for Income Taxes
- --------------------------
The Company's effective tax rate was 20.9% in the third quarter and 34.5%
year-to-date, compared with 40.0% in the corresponding prior-year periods. The
rate in the third quarter includes the effect of a non-recurring tax benefit of
$8,015,000, principally reflecting the recognition of the cumulative U.S. tax
benefits as provided by the Extraterritorial Income Exclusion Act of 2000
("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
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 that this tax benefit was applicable to
its operations and, therefore, has recognized a tax benefit in the quarter. The
Company expects the effective tax rate for the fourth quarter to be 38.9%.
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.
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. With respect to goodwill amortization, the Company adopted
SFAS No. 142 effective February 1, 2002. The result of the application of the
non-amortization provisions of SFAS No. 142 for goodwill was not significant for
the three months and nine months ended October 31, 2002. During the second
quarter of 2002, the Company completed its test for goodwill impairment and
concluded that goodwill was not impaired.
In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and financial reporting
for legal obligations and costs associated with the retirement of tangible
long-lived assets. The provisions of SFAS No. 143 will be effective for the
Company's financial statements for the fiscal year beginning February 1, 2003.
The Company does not expect the adoption of this standard to have a significant
impact on its financial position, earnings or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses the accounting for impairment or
disposal of long-lived assets and discontinued operations. On February 1, 2002,
the Company adopted this standard and its application had no significant impact
on its financial position, earnings or cash flows.
- 17 -
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 $32,908,000
in the nine months ended October 31, 2002 compared with an inflow of $19,818,000
in the prior year.
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were $724,625,000
and 3.2:1 at October 31, 2002 compared with $637,503,000 and 3.0:1 at January
31, 2002 and $639,385,000 and 2.8:1 at October 31, 2001.
Accounts receivable, less allowances at October 31, 2002 were 2% below January
31, 2002 and 3% below October 31, 2001.
Inventories, net at October 31, 2002 were 27% above January 31, 2002 and 11%
above October 31, 2001. Finished goods inventories increased due to
lower-than-expected sales, new store openings and expanded product offerings
(including a new collection of watches); higher raw material and work-in-process
inventories were necessary to support the expansion of internal manufacturing
activities. In addition, $37,000,000 of the increase was due to the acquisition
of Little Switzerland and the resulting consolidation of its inventories at
October 31, 2002. The translation effect of a weakening U.S. dollar also
contributed to the growth of inventory versus January 31, 2002. Management
expects that inventory levels at the end of 2002 will be higher than at the end
of 2001 due to anticipated sales growth, new stores, product introductions
(including a new watch collection) and the acquisition of Little Switzerland.
The Company's ongoing inventory objectives are to continue to refine: worldwide
replenishment systems; the specialized disciplines of product development,
category management and sales demand forecasting; presentation and management of
inventory assortments in each store; and warehouse management and supply-chain
logistics.
Capital expenditures of $175,319,000 in the nine months ended October 31, 2002
compared with $135,780,000 in the prior year. Expenditures for 2002 are expected
to be approximately $250,000,000. Capital expenditures in 2002 are supporting
the opening, renovation and expansion of stores, expansion of distribution and
manufacturing facilities and ongoing investments in new systems. In addition, in
the third quarter of 2002, the Company acquired 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 approximately $43,000,000 and construction is
expected to commence in the first half of 2003 and be completed in the second
half of 2004.
In 2001, the Company commenced construction of its CFC that will fulfill direct
shipments to retail, catalog, Internet and business sales customers. Upon
completion of the CFC, the Company's 370,000 square foot Parsippany, New Jersey
customer service/distribution center and administrative office facility ("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 $98,500,000, of which $63,320,000 has been
incurred to date. In 2000, the Company began a four-year project to renovate and
reconfigure its New York flagship store in order to increase the total sales
area by approximately 25%, and to provide additional space for customer service,
customer hospitality and special exhibitions. The new second floor opened in
November 2001 and provides an expanded presentation of engagement and other
jewelry.
- 18 -
In addition, in conjunction with the New York store project, the Company
relocated its after-sales service functions to a new location and relocated
several of its administrative functions. The Company has spent $52,476,000 to
date for the New York store and related projects. Based on current plans, the
Company estimates that the overall cost of these projects will be approximately
$95,000,000.
In August 2002, TSAC Corp., an indirect wholly-owned subsidiary of the Company,
entered into a stock purchase agreement with several parties to purchase their
shares of common stock of Little Switzerland, Inc. ("Little Switzerland"),
representing approximately 12% of Little Switzerland's outstanding common stock,
at $2.40 per share. As a condition to that agreement, TSAC Corp. also commenced
a cash tender offer to acquire the balance of the outstanding shares of Little
Switzerland's common stock at $2.40 per share. The offer (following an extension
of the offering period) expired on October 25, 2002. The merger was completed on
November 20, 2002. The total amount of funds required to purchase all of the
outstanding shares of Little Switzerland, other than those already owned by the
Company but including the shares acquired pursuant to the stock purchase
agreement, and related fees and expenses is expected to total $27,100,000. In
2001, the Company made an equity investment in Little Switzerland by purchasing
7,410,000 newly-issued shares of common stock, which represented approximately
45% of Little Switzerland's shares, at a cost of $9,546,000. The Company also
provided a loan of $2,500,000.
In July 2002, the Company, in a private transaction with various institutional
lenders, issued, at par, $40,000,000 of 6.15% Series C Senior Notes Due July 18,
2009 and $60,000,000 of 6.56% Series D Notes Due July 18, 2012 with seven-year
and 10-year lump sum repayments upon maturities. The proceeds of these issues
are being, and will be, used by the Company for general corporate purposes,
including seasonal working capital and to redeem the Company's $51,500,000
principal amount 7.52% Senior Notes due in January 2003. The Note Purchase
Agreements require lump sum repayment upon maturity, maintenance of specific
financial covenants and ratios and limits certain changes to indebtedness and
the general nature of the business, in addition to other requirements customary
in such circumstances.
In July 2002, the Company entered into an interest-rate swap agreement to hedge
the change in fair value of its fixed-rate obligation issued in July 2002. Under
the swap agreement, the Company pays variable rate interest and receives fixed
interest rate payments periodically over the life of the instrument. The Company
accounts for its interest-rate swap as a fair value hedge and therefore,
recognizes gains or losses on the derivative instrument and the hedged item
attributable to the hedged risk in earnings in the current period. Under SFAS
No. 133, the ineffectiveness of a fair value hedge is required to be calculated.
Ineffectiveness results when gains and losses on the hedged item are not
completely offset by gains and losses in the hedge instrument. The Company
determined that there is no ineffectiveness in the fair-value hedge.
In September 2000, the Board of Directors extended the Company's original stock
repurchase program until November 2003. The program was initially authorized in
November 1997 for the repurchase of up to $100,000,000 of the Company's Common
Stock in the open market over a three-year period. That authorization was
superseded in September 2000 by a further authorization of repurchases of up to
$100,000,000 of the Company's Common Stock in the open market. The timing and
actual number of shares repurchased depend on a variety of factors such as price
and other market conditions. In the nine months ended October 31, 2002, the
Company repurchased and retired 950,000 shares of Common Stock at a cost of
$26,195,000, or an average cost of $27.57 per share. At October 31, 2002,
$32,427,000 of purchase authority remained available for future share
repurchases.
- 19 -
In 1999, the Company made a strategic investment in Aber by purchasing 8 million
unregistered shares of its common stock, which represents approximately 14.7% of
Aber's outstanding shares, at a cost of $70,636,000. Aber holds a 40% interest
in the Diavik Diamonds Project in Canada's Northwest Territories, an operation
being developed to mine diamonds. Production is expected to commence in the
first quarter of 2003. In addition, the Company has 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 in the process of establishing the necessary facilities in
Yellowknife, Canada and Antwerp, Belgium to handle the receipt and sorting of
diamonds and a portion of the subsequent cutting and polishing operations.
The Company's sources of working capital are internally-generated cash flows and
borrowings available under a multicurrency revolving credit facility ("Credit
Facility"). In November 2001, the Credit Facility was amended to increase the
borrowing limit from $160,000,000 to $200,000,000 and the number of banks from
five to six. The Credit Facility entitles the Company to borrow $38,750,000 from
each of three banks, $25,000,000 from one bank, $15,000,000 from another bank
and $43,750,000 from an agent bank. All borrowings are at interest rates based
on a prime rate or a reserve-adjusted LIBOR and are affected by local borrowing
conditions. The Credit Facility expires in November 2006.
Management anticipates that internally-generated cash flows, funds available
under the Credit Facility and the proceeds from the Senior Notes offering will
be sufficient to support the Company's planned worldwide business expansion and
seasonal working capital increases that are typically required during the third
and fourth quarters of the year.
Net-debt (short-term borrowings plus the current portion of long-term debt plus
long-term debt less cash and cash equivalents) and the corresponding ratio of
net-debt as a percentage of total capital (net-debt plus stockholders' equity)
were $315,069,000 and 22% at October 31, 2002, compared with $97,292,000 and 9%
at January 31, 2002 and $244,475,000 and 20% at October 31, 2001.
The Company's contractual cash obligations and commercial commitments at October
31, 2002 and the effects such obligations and commitments are expected to have
on the Company's liquidity and cash flows in future periods have not
significantly changed since January 31, 2002.
Market Risk
- -----------
The Company is exposed to market risk from fluctuations in foreign currency
exchange rates and interest rates, which could affect its consolidated financial
position, results of operations and cash flows. The Company manages its exposure
to market risk through its regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial instruments. The
Company uses derivative financial instruments as risk management tools and not
for trading or speculative purposes, and does not maintain such instruments that
may expose the Company to significant market risk.
The Company uses foreign currency-purchased put options, primarily yen, and, to
a lesser extent, foreign-exchange forward contracts, to minimize the impact of a
significant strengthening of the U.S. dollar on foreign currency-denominated
transactions. Gains or losses on these instruments substantially offset losses
or gains on the assets, liabilities and transactions being hedged. Management
does not foresee nor expect any significant changes in foreign currency exposure
in the near future.
- 20 -
The Company also manages its fixed-rate debt liability to reduce its exposure to
interest rate changes. The fair value of the Company's fixed-rate long-term debt
is sensitive to interest rate changes. Interest rate changes would result in
gains (losses) in the market value of this debt due to differences between
market interest rates and rates at the inception of the debt obligation. The
Company uses an interest-rate swap to manage its yen-denominated floating-rate
long-term debt in order to reduce the impact of interest rate changes on
earnings and cash flows and to lower overall borrowing costs. Management neither
foresees nor expects significant changes in exposure to interest rate
fluctuations, nor in market risk-management practices.
Seasonality
- -----------
As a jeweler and specialty retailer, the Company's business is seasonal in
nature, with the fourth quarter typically representing a proportionally greater
percentage of annual sales, earnings from operations and cash flow. Management
expects such seasonality to continue.
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 or 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. boutiques are located; (vii) that Mitsukoshi's
ability to continue as a leading department store operator in Japan will
continue; (viii) that existing product supply arrangements, including license
arrangements with third-party designers Elsa Peretti and Paloma Picasso, will
continue; (ix) that the wholesale market for high-quality cut diamonds will
provide continuity of supply and pricing; (x) that the investment in Aber
achieves its financial and strategic objectives; (xi) that new systems,
particularly for inventory management, can be successfully integrated into the
Company's operations; (xii) that warehousing and distribution productivity and
capacity can be further improved to support the Company's worldwide distribution
requirements; (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 equity
in the TIFFANY & CO. brand.
- 21 -
PART I FINANCIAL INFORMATION
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Within 90 days before filing this report, an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was carried out by the Company under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the date of their
evaluation, the Company's disclosure controls and procedures have been designed
and are being operated in a manner that provides reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. The Company
believes that a controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
(b) Changes in Internal Controls
Subsequent to the date of the most recent evaluation of the Company's
internal controls, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
- 22 -
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
10.106 Amended and Restated Tiffany and Company Executive Deferral
Plan originally made effective October 1, 1989, as
amended effective January 1, 2003.
(b) Reports on Form 8-K:
On August 13, 2002 Registrant filed a Report on Form 8-K reporting the
issuance of a press release announcing Registrant's intent to acquire
the outstanding shares of Little Switzerland, Inc.
On August 13, 2002, Registrant filed a Report on Form 8-K reporting
the issuance of a press release announcing second quarter results for
the period ended July 31, 2002.
On August 14, 2002, Registrant filed a Report on Form 8-K in
accordance with Order No. 4-460 and pursuant to Section 21 (a) (1) of
the Securities and Exchange Act of 1934, reporting the filing of sworn
statements by the Registrant's principal executive officer and the
principal financial officer. Copies of each written statement were
furnished as Exhibits 99.1 and 99.2 to the report.
On September 11, 2002, Registrant filed a Report on Form 8-K attaching
the Certifications (pursuant to 18 U.S.C. Section 1350) of the
principal executive officer and principal financial officer relating
to Registrant's Quarterly Report on Form 10-Q for the period ended
July 31, 2002. Copies of each written certification were furnished as
Exhibits 99.1 and 99.2 to the report.
On October 11, 2002, Registrant filed a Report on Form 8-K reporting
the issuance of a press release announcing Registrant's purchase of
the building housing its London store.
- 23 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIFFANY & CO.
(Registrant)
Date: December 12, 2002 By: /s/ James N. Fernandez
---------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
- 24 -
CERTIFICATIONS
I, Michael J. Kowalski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tiffany & Co.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process,
- 25 -
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
December 12, 2002 Michael J. Kowalski
-------------------------------------
Michael J. Kowalski
President and Chief Executive Officer
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I, James N. Fernandez., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tiffany & Co.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
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b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
December 12, 2002 /s/ James N. Fernandez
--------------------------------------------------
James N. Fernandez
Executive Vice President - Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.106 Amended and Restated Tiffany and Company Executive Deferral
Plan originally made effective October 1, 1989, as amended
effective January 1, 2003.
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