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 quarter ended October 31, 2003. 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 .
------- ------
Indicate by check mark whether the registrant is an accelerated filer (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, 146,634,595 shares outstanding at the close
of business on November 28, 2003.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2003
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - October 31, 2003,
January 31, 2003 and October 31, 2002 (Unaudited) 3
Consolidated Statements of Earnings - for the
three and nine months ended October 31, 2003 and
2002 (Unaudited) 4
Consolidated Statements of Cash Flows - for the nine
months ended October 31, 2003 and 2002 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-22
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
(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,
2003 2003 2002
-------------- -------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 152,724 $ 156,197 $ 90,646
Accounts receivable, less allowances
of $6,485, $8,258 and $7,021 115,411 113,061 96,112
Inventories, net 897,482 732,088 777,932
Deferred income taxes 44,503 44,380 48,660
Prepaid expenses and other current assets 43,840 24,662 39,519
---------------- ---------------- ----------------
Total current assets 1,253,960 1,070,388 1,052,869
Property, plant and equipment, net 877,205 677,630 650,499
Deferred income taxes 1,967 6,595 6,377
Other assets, net 158,854 168,973 159,177
---------------- ---------------- ----------------
$ 2,291,986 $ 1,923,586 $ 1,868,922
================ ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 128,202 $ 52,552 $ 58,268
Current portion of long-term debt 50,573 - 51,500
Accounts payable and accrued liabilities 199,756 163,338 182,123
Income taxes payable 952 41,297 485
Merchandise and other customer credits 44,867 42,720 39,520
---------------- ---------------- ----------------
Total current liabilities 424,350 299,907 331,896
Long-term debt 386,677 297,107 295,947
Postretirement/employment benefit obligations 36,803 33,117 33,999
Other long-term liabilities 97,508 85,406 81,905
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value; authorized 240,000 shares,
issued and outstanding 146,285, 144,865 and 145,154 1,463 1,449 1,451
Additional paid-in capital 384,315 351,398 350,469
Retained earnings 955,060 874,694 801,927
Accumulated other comprehensive (loss) gain:
Foreign currency translation adjustments 11,148 (14,561) (27,206)
Deferred hedging losses, net of tax (2,691) (2,284) (1,466)
Minimum pension liability adjustment, net of tax (2,647) (2,647) -
---------------- ---------------- ----------------
Total stockholders' equity 1,346,648 1,208,049 1,125,175
---------------- ---------------- ----------------
$ 2,291,986 $ 1,923,586 $ 1,868,922
================ ================ ================
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,
------------------------------ ----------------------------------
2003 2002 2003 2002
------------ ------------- --------------- --------------
Net sales $ 430,123 $ 366,033 $ 1,268,457 $ 1,087,589
Cost of sales 192,402 150,220 546,120 445,554
------------ ------------- --------------- --------------
Gross profit 237,721 215,813 722,337 642,035
Selling, general and administrative expenses 188,506 165,900 545,700 474,478
------------ ------------- --------------- --------------
Earnings from operations 49,215 49,913 176,637 167,557
Other expenses, net 4,933 5,446 10,696 14,052
------------ ------------- --------------- --------------
Earnings before income taxes 44,282 44,467 165,941 153,505
Provision for income taxes 16,251 9,283 60,900 52,898
------------ ------------- --------------- --------------
Net earnings $ 28,031 $ 35,184 $ 105,041 $ 100,607
============ ============= =============== ==============
Net earnings per share:
Basic $ 0.19 $ 0.24 $ 0.72 $ 0.69
============ ============= =============== ==============
Diluted $ 0.19 $ 0.24 $ 0.71 $ 0.68
============ ============= =============== ==============
Weighted average number of common shares:
Basic 146,047 145,137 145,412 145,450
Diluted 149,079 148,066 148,024 149,046
See notes to consolidated financial statements.
- 4 -
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
October 31,
-----------------------------------------
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 105,041 $ 100,607
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 65,659 56,761
Loss on equity investments 1,087 2,592
Provision for uncollectible accounts 821 1,005
Provision for inventories 4,299 6,506
Deferred income taxes 4,937 (4,529)
Provision for postretirement/employment benefits 3,686 4,000
Deferred hedging losses (gains) transferred to earnings 2,247 (7,004)
Changes in assets and liabilities, excluding effects
of acquisitions:
Accounts receivable 925 6,875
Inventories (143,557) (115,422)
Prepaid expenses and other current assets (20,497) (10,080)
Other assets, net 6,506 (4,150)
Accounts payable 20,322 12,008
Accrued liabilities 9,709 17,170
Income taxes payable (26,952) (41,346)
Merchandise and other customer credits 2,049 666
Other long-term liabilities 13,048 7,249
------------------ ------------------
Net cash provided by operating activities 49,330 32,908
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (247,752) (175,319)
Acquisitions, net of cash acquired 0 (24,554)
Proceeds from lease incentives 3,214 2,945
------------------ ------------------
Net cash used in investing activities (244,538) (196,928)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 135,105 100,000
Repayment of long-term debt (4,000) 0
Proceeds from short-term borrowings, net 73,048 8,315
Repurchase of Common Stock (4,610) (26,195)
Proceeds from exercise of stock options 16,831 9,848
Cash dividends on Common Stock (20,366) (17,463)
------------------ ------------------
Net cash provided by financing activities 196,008 74,505
------------------ ------------------
Effect of exchange rate changes on
cash and cash equivalents (4,273) 6,486
------------------ ------------------
Net decrease in cash and cash equivalents (3,473) (83,029)
Cash and cash equivalents at beginning of year 156,197 173,675
------------------ ------------------
Cash and cash equivalents at end of nine months $ 152,724 $ 90,646
================== ==================
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, 2003 and the results of its operations and
cash flows for the interim periods presented. The consolidated balance
sheet data for January 31, 2003 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
statement amounts and related note disclosures to conform with the
current year's presentation.
The Company's business is seasonal, with a higher proportion of sales
and earnings generated in the last quarter of the fiscal year and,
therefore, the results of its operations for the three and nine months
ended October 31, 2003 and 2002 are not necessarily indicative of the
results of the entire fiscal year.
2. STOCK - BASED COMPENSATION
--------------------------
Employee stock options are accounted for using the intrinsic value
method in accordance with Accounting Principle Board Opinion No. 25
"Accounting for Stock Issued to Employees" and its related
interpretations. Compensation costs were not recorded in net earnings
for stock options, as all options granted had an exercise price equal
to the market value of the underlying common stock on the date of
grant.
-6-
STOCK - BASED COMPENSATION (continued)
--------------------------------------
As required by Statement of Financial Accounting Standards ("SFAS")
No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure", which amends SFAS No. 123, "Accounting for Stock-Based
Compensation", the following table estimates the pro forma effect on
net earnings and earnings per share had the Company applied the fair
value recognition provision of SFAS No. 123 to stock-based employee
compensation:
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------------------------------------------------
(in thousands, except per
share amounts) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------
Net earnings as reported $28,031 $35,184 $105,041 $100,607
Less: Stock-based
employee compensation
expense determined under
the fair-value method for
all awards, net of tax (3,292) (3,168) (9,911) (9,490)
-------------------------------- ---------------------------
$24,739 $32,016 $ 95,130 $ 91,117
Pro forma net earnings ================================ ===========================
Earnings per basic share:
As reported $ 0.19 $ 0.24 $ 0.72 $ 0.69
================================ ===========================
Pro forma $ 0.17 $ 0.22 $ 0.65 $ 0.63
================================ ===========================
Earnings per diluted
share:
As reported $ 0.19 $ 0.24 $ 0.71 $ 0.68
================================ ===========================
Pro forma $ 0.17 $ 0.22 $ 0.64 $ 0.61
================================ ===========================
3. ACQUISITIONS
------------
In May 2001, a subsidiary of the Company purchased 45% of Little
Switzerland Inc.'s ("Little Switzerland") outstanding shares of common
stock at a cost of $9,546,000. The Company accounted for this
investment under the equity method based upon its ownership interest
and its significant influence. In 2001, the Company also provided
Little Switzerland with an interest-bearing loan in the amount of
$2,500,000. The Company recorded equity losses for its share of Little
Switzerland's results from operations (through September 30, 2002) in
other expenses, net in the amount of $503,000 in the three months
ended October 31, 2002 and $1,138,000 in the nine months ended October
31, 2002.
-7-
ACQUISITIONS (continued)
------------------------
In October 2002, the subsidiary of the Company purchased and paid
$27,530,000 for additional shares acquired, which, with the shares
previously owned, represented 98% of the outstanding shares of Little
Switzerland. On November 20, 2002, the subsidiary merged with and into
Little Switzerland. The purchase price has been allocated to the
assets acquired and liabilities assumed according to estimated fair
values. The amount assigned to goodwill at January 31, 2003 has been
reduced by $733,000 due to the finalization of deferred taxes, which
was completed in the third quarter of 2003. The total amount of the
purchase price allocated to goodwill is $8,803,000. The Company
commenced the consolidation of Little Switzerland's operations
effective October 1, 2002.
The acquisition was accounted for in accordance with SFAS No. 141,
"Business Combinations."
4. INCOME TAXES
------------
The effective income tax rate for the three and nine months ended
October 31, 2003 was 36.7%. The effective income tax rate for the
three and nine months ended October 31, 2002 was 20.9% and 34.5%. The
change in the tax rate from the prior year was due to the Company
recognizing, in 2002, the cumulative effect of prior periods' tax
benefits provided by the Extraterritorial Income Exclusion Act of 2000
("ETI"). The Company began recognizing the tax benefits related to the
ETI in the third quarter of 2002 when the Company determined the ETI
was applicable to its operations.
In November 2000, the United States Government repealed the tax
provisions associated with Foreign Sales Corporations ("FSC") and
enacted, in their place, the ETI, certain provisions of which differed
from those governed by the FSC regulations. The ETI provides for the
exclusion from United States income tax of certain extraterritorial
income earned from the sale of qualified United States origin goods.
Qualified United States origin goods are generally defined as those
wherein not more than 50% of the fair market value (including
intangible values) is attributable to foreign content or value added
outside the United States.
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.
-8-
5. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Nine Months Ended
October 31,
------------------------------------
(in thousands) 2003 2002
---------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest, net of interest capitalization $ 6,795 $ 7,309
================ ================
Income taxes $80,276 $96,035
================ ================
Details of businesses acquired in
purchase transactions:
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:
Issuance of Common Stock for the
Employee Profit Sharing and
Retirement Savings Plan $ 2,000 $ 1,000
================ ================
6. INVENTORIES
-----------
October 31, January 31, October 31,
(in thousands) 2003 2003 2002
----------------------------------------------------------------------------------------------------
Finished goods $706,653 $615,247 $655,853
Raw materials 141,520 91,505 90,567
Work-in-process 53,911 29,698 36,038
---------------- --------------- ---------------
902,084 736,450 782,458
Reserves (4,602) (4,362) (4,526)
---------------- --------------- ---------------
Inventories, net $897,482 $732,088 $777,932
================ =============== ===============
LIFO-based inventories at October 31, 2003, January 31, 2003 and
October 31, 2002 were $632,909,000, $532,160,000 and $575,660,000,
with the current cost exceeding the LIFO inventory value by
approximately $27,735,000, $20,135,000 and $19,471,000 at the end of
each period. The LIFO valuation method had the effect of decreasing
net earnings per diluted share by $0.01 and $0.03 for the three and
nine months ended October 31, 2003 and had no effect on net earnings
per diluted share for the three and nine months ended October 31,
2002.
7. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In September 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement Obligations,"
which addresses the accounting and financial reporting for legal
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company adopted
the provisions of SFAS No. 143, effective February 1, 2003, and its
impact was not significant on the Company's financial position,
earnings or cash flows.
-9-
NEW ACCOUNTING PRONOUNCEMENTS (continued)
-----------------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In
general, SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of SFAS No. 149 did not have a
significant impact on the Company's financial position, earnings or
cash flows.
8. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
In June 2003, a wholly-owned subsidiary of the Company acquired the
land and building housing its Japan flagship store located in Tokyo's
Ginza shopping district. The cost to purchase the land and building
was $140,400,000 of which $134,700,000 and $5,200,000 has been
allocated to land and building, with the remaining costs allocated to
other balance sheet accounts. The building is being depreciated on a
straight-line basis over its estimated useful life of 39 years.
9. DEBT
----
As discussed in Note 8, the Company purchased the land and building
housing its Japan flagship store. This purchase was financed with a
short-term yen 11,000,000,000 bridge loan ("Bridge Loan") with a bank.
The loan had an interest rate of 0.58% and matured on September 30,
2003. The loan was paid in full upon maturity.
In September 2003, a subsidiary of the Company issued yen
15,000,000,000 of senior unsecured First Series Yen denominated Bonds
("Bonds") due 2010 with principal due upon maturity and a fixed coupon
rate of 2.02% payable in semi-annual installments. The Bonds were sold
in a private transaction to qualified institutional investors in
Japan. The obligations under the Bonds are unconditionally and
irrevocably guaranteed by the Company. The proceeds from the issuance
have been primarily used by the Company to repay the Bridge Loan.
In connection with the acquisition of Little Switzerland in 2002, the
Company assumed their outstanding debt. Little Switzerland had a
senior collateralized revolving and term loan credit facility ("LS
Facility"), which allowed Little Switzerland to borrow up to
$12,000,000, through March 21, 2005, of which up to $8,000,000 was a
revolving loan and $4,000,000 was a term loan. In May 2003, the
Company replaced the LS Facility with an unsecured revolving credit
facility ("LS Credit Facility"), guaranteed by the Company, which
allows Little Switzerland to borrow up to $10,000,000 at an interest
rate of 0.80% above LIBOR or a LIBOR Market Index. The LS Credit
Facility, which expires in November 2005, contains covenants that
require the Company to maintain certain debt/equity and
interest-coverage ratios, in addition to other requirements customary
to loan facilities of this nature. There was no gain or loss
associated with the replacement of the LS Facility.
-10-
10. 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) 2003 2002 2003 2002
-----------------------------------------------------------------------------------------------------
Net earnings for basic
and diluted EPS $28,031 $35,184 $105,041 $100,607
============== ============== ============== =============
Weighted average shares
for basic EPS 146,047 145,137 145,412 145,450
Incremental shares from
assumed exercise of
stock options 3,032 2,929 2,612 3,596
-------------- -------------- -------------- -------------
Weighted average shares
for diluted EPS 149,079 148,066 148,024 149,046
============== ============== ============== =============
For the three months ended October 31, 2003 and 2002, there were
1,421,000 and 5,094,000 stock option shares excluded from the
computations of earnings per diluted share due to their antidilutive
effect. For the nine months ended October 31, 2003 and 2002, there
were 4,665,000 and 4,906,000 stock option shares excluded from the
computations of earnings per diluted share due to their antidilutive
effect.
11. COMPREHENSIVE EARNINGS
----------------------
The components of comprehensive earnings were:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------------------------------
(in thousands) 2003 2002 2003 2002
------------------------------------------------------------------------------------- ----------
Net earnings $28,031 $35,184 $105,041 $100,607
Other comprehensive
gain(loss):
Deferred hedging
losses, net of tax (1,080) (473) (407) (7,981)
Foreign currency
translation adjustments 25,116 (4,919) 25,709 18,100
------------- ------------- ------------- -------------
Comprehensive earnings $52,067 $29,792 $130,343 $110,726
============= ============== ============= ==============
Foreign currency translation adjustments are not adjusted for income
taxes since they relate to investments that are permanent in nature.
-11-
12. SEGMENT INFORMATION
--------------------
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 other ventures that are now or
will be operated under non-TIFFANY & CO. trademarks or trade names.
The Company's other reportable segments represent channels of
distribution that offer similar merchandise and service and have
similar marketing and distribution strategies. In deciding how to
allocate resources and assess performance, the Company's Executive
Officers regularly evaluate the performance of its reportable segments
on the basis of net sales and earnings from operations, after the
elimination of inter-segment 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) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------
Net sales:
U.S. Retail $ 202,844 $ 168,493 $ 589,466 $ 521,381
International Retail 173,533 156,281 508,044 452,381
Direct Marketing 39,311 37,337 120,537 109,905
Specialty Retail 14,435 3,922 50,410 3,922
---------------- -------------- ----------------- -----------------
$ 430,123 $ 366,033 $ 1,268,457 $ 1,087,589
================ ============== ================= =================
Earnings(losses) from
operations*:
U.S. Retail $ 37,654 $ 27,205 $ 118,638 $ 99,954
International Retail 43,568 43,172 134,429 126,730
Direct Marketing 5,053 4,461 22,145 16,533
Specialty Retail (4,132) (1,024) (7,213) (1,024)
---------------- -------------- ----------------- -----------------
$ 82,143 $ 73,814 $ 267,999 $ 242,193
================ ============== ================= =================
<FN>
* Represents earnings from operations before unallocated corporate expenses and
interest and other expenses, net.
</FN>
-12-
SEGMENT INFORMATION (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) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------
Earnings from
operations for
reportable segments $ 82,143 $ 73,814 $ 267,999 $ 242,193
Unallocated
corporate expenses (32,928) (23,901) (91,362) (74,636)
Other expenses, net (4,933) (5,446) (10,696) (14,052)
-------------- -------------- -------------- --------------
Earnings before
income taxes $ 44,282 $ 44,467 $ 165,941 $ 153,505
============== ============== ============== ==============
13. SUBSEQUENT EVENTS
-----------------
On November 20, 2003, the Company's Board of Directors declared a
quarterly dividend of $0.05 per share. This dividend will be paid on
January 12, 2004 to stockholders of record on December 19, 2003.
On November 20, 2003, the Board of Directors extended the Company's
stock repurchase program until November 30, 2006 and increased the
remaining authorization by $100,000,000, allowing the Company to
repurchase up to $116,500,000 of the Company's outstanding Common
Stock in addition to those which already have been purchased.
-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:
o U.S. Retail - sales in Company-operated TIFFANY & CO. stores in the U.S.;
o International Retail - sales in Company-operated TIFFANY & CO. stores and
department store boutiques outside the U.S., (also includes
business-to-business sales, Internet sales and wholesale sales of TIFFANY &
CO. products outside the U.S.);
o Direct Marketing - business-to-business, catalog and Internet sales of
TIFFANY & CO. products in the U.S.;
o Specialty Retail - worldwide sales made under non-TIFFANY & CO. trademarks
or trade names, including LITTLE SWITZERLAND.
All references to years relate to the fiscal year that ends on January 31 of the
following calendar year.
Net sales increased 18% to $430,123,000 in the three months (third quarter)
ended October 31, 2003 and increased 17% to $1,268,457,000 in the nine months
(year-to-date) ended October 31, 2003. 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 rose 15% in the third quarter and 14% in
the year-to-date, and worldwide comparable store sales rose 10% in the third
quarter and 6% in the year-to-date. Net earnings declined 20% to $28,031,000 in
the third quarter, or $0.19 per diluted share versus $0.24 in the prior year.
Net earnings increased 4% to $105,041,000 in the year-to-date, or $0.71 per
diluted share versus $0.68 in the prior year.
Certain operating data as a percentage of net sales were as follows:
Three Months Nine Months
Ended October 31, Ended October 31,
------------------ ------------------
2003 2002 2003 2002
------------------ ------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 44.7 41.0 43.1 41.0
------------------ ------------------
Gross profit 55.3 59.0 56.9 59.0
Selling, general
and administrative expenses 43.8 45.3 43.0 43.6
------------------ ------------------
Earnings from operations 11.5 13.7 13.9 15.4
Other expenses, net 1.2 1.5 0.8 1.3
------------------ ------------------
Earnings before income taxes 10.3 12.2 13.1 14.1
Provision for income taxes 3.8 2.6 4.8 4.8
------------------ ------------------
Net earnings 6.5% 9.6% 8.3% 9.3%
------------------ ------------------
-14-
Net Sales
- ---------
Net sales by channel of distribution were as follows:
Three Months Nine Months
Ended October 31, Ended October 31,
------------------- ----------------------
(in thousands) 2003 2002 2003 2002
- -------------- ------------------- ----------------------
U.S. Retail $202,844 $168,493 $ 589,466 $ 521,381
International Retail 173,533 156,281 508,044 452,381
Direct Marketing 39,311 37,337 120,537 109,905
Specialty Retail 14,435 3,922 50,410 3,922
------------------- -----------------------
$430,123 $366,033 $1,268,457 $1,087,589
------------------- -----------------------
U.S. Retail sales rose 20% in the third quarter and 13% in the year-to-date due
to comparable store sales growth of 16% and 9% and the opening of new stores.
Comparable branch store sales rose 16% and 10%, while sales in the New York
flagship store rose 15% and 4%. The comparable store sales growth resulted from
an increase in the average transaction size as well as in the number of
transactions. Comparable store sales growth was generated by increased sales to
local customers and tourists.
International Retail sales increased 11% in the third quarter and 12% in the
year-to-date. On a constant-exchange-rate basis, International Retail sales
increased 5% and 6%.
In Japan, total retail sales in local currency increased fractionally in the
third quarter and 3% in the year-to-date, reflecting an increased average price
per jewelry unit sold and a decline in jewelry unit volume (primarily due to
lower unit sales of silver jewelry); comparable store sales in local currency
declined 3% in the third quarter and 1% in the year-to-date. Japan sales have
been affected by generally weak consumer spending and increased competition. The
Company is seeking to mitigate sales lost due to diminished demand for diamond
engagement rings and silver jewelry in Japan by changes in its merchandise and
marketing practices.
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 rose 25% and
10% in the Asia-Pacific region due to strong growth in most markets, and rose
10% and 11% in Europe primarily due to strength in London.
Worldwide retail gross square footage of Company-operated TIFFANY & CO. stores
will increase by approximately 5% in 2003. Actual/expected 2003 store openings
are as follows:
Location Actual Opening 2003 Expected Opening 2003
- -------- ------------------- ---------------------
Coral Cables, Florida First Quarter
Guam (conversion from wholesale) First Quarter
Walnut Creek, California Second Quarter
Palm Desert, California Third Quarter
Ikebukuro, Japan First Quarter
Sapporo, Japan First Quarter
Nagoya, Japan (relocation) First Quarter
Tamagawa, Japan Fourth Quarter
Korea First Quarter
Hong Kong* Fourth Quarter
Brazil Third Quarter
Mexico Third Quarter
* - Includes 2 new locations and the closing of an existing location
-15-
Direct Marketing sales rose 5% in the third quarter and 10% in the year-to-date.
Combined Internet/catalog sales increased 23% in the third quarter and 22% in
the year-to-date primarily due to a higher number of orders. The Business Sales
division's sales declined 19% in the third quarter and 6% in the year-to-date
reflecting a decline in the number of orders shipped but an increase in the
average dollars per order. As announced in November 2002, the Business Sales
division is no longer soliciting employee service award programs and is phasing
out of that portion of its business as existing customer commitments are
satisfied. Annual sales affected by this action represented less than
$30,000,000, or less than half of the Business Sales division's sales in 2002.
The Business Sales division will continue to offer a range of business gifts, as
well as event-related trophies and other awards.
The Company established a new channel of distribution, "Specialty Retail," in
2002 to include the consolidated results of Little Switzerland, Inc., (effective
October 1, 2002) as well as the consolidated results from other ventures that
are now or will be operated under non-TIFFANY & CO. trademarks or trade names.
Therefore, results in the third quarter and year-to-date are not fully
comparative to the prior year.
Gross Profit
- ------------
Gross profit as a percentage of net sales ("gross margin") in the third quarter
and year-to-date was lower than the prior year due to: the consolidation of
Little Switzerland, which retails goods manufactured by others and achieves a
gross margin below the Company's average; the opening of the Company's Customer
Fulfillment/Distribution Center ("CFC") in the third quarter; changes in sales
mix toward higher-priced, lower-margin diamond jewelry as the U.S. retail
selling environment improved and the sales of silver jewelry in Japan declined;
and higher inventory costs due to increased precious metal costs.
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 long-term strategy and objectives include achieving further product
manufacturing/sourcing efficiencies, leveraging its fixed costs and implementing
selective price adjustments in order to maintain the Company's gross margin at,
or above, prior year levels. However, management expects gross margin in the
fourth quarter to be slightly below the prior year due to the opening of the
CFC, sales mix and higher inventory costs, as well as ongoing costs related to
establishing rough diamond sourcing and processing organizations in Belgium and
Canada, all of which are expected to more than offset benefits from growth in
internal jewelry manufacturing and from the sourcing of a portion of the
Company's diamond needs from mines in Canada.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
SG&A rose 14% in the third quarter and 15% in the year-to-date, due to
incremental depreciation, staffing and occupancy expenses related to the
Company's expansion, as well as higher insurance costs, higher marketing
expenses, (which includes increased advertising for timepieces), the
consolidation of Little Switzerland's SG&A and business development costs
related to the Specialty Retail channel. As a percentage of net sales, SG&A
declined in both periods, as the strong sales growth more than absorbed the rate
of increase in fixed expenses. Management's longer-term objective is to reduce
this ratio by leveraging anticipated rates of comparable store sales growth
against the Company's fixed-expense base, although management expects the ratio
in full year 2003 to be approximately unchanged from the prior year due to the
above-mentioned factors.
-16-
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 the Company have been cooperating since 1993, when the
relationship was last renegotiated. The main agreement, which will expire on
January 31, 2007, covers the continued operation of TIFFANY & CO. boutiques.
Separate agreements cover the operation of a freestanding TIFFANY & CO. store on
Tokyo's Ginza. Under the new agreements, the Company is not restricted from
further expansion of its Tokyo operations. Under the main agreement, the Company
pays to Mitsukoshi a percentage of certain sales; this percentage is lower than
under the prior agreements. Fees paid to Mitsukoshi were reduced in 2002 and
were further reduced at the start of 2003. The Company will employ increasing
numbers of its own personnel in certain Mitsukoshi boutiques in the future.
Other Expenses, Net
- -------------------
Other expenses, net in the third quarter and year-to-date were lower than the
prior year principally due to lower interest expense as well as a reduction in
the Company's portion of losses in its equity investments, primarily due to the
consolidation of Little Switzerland which the Company acquired in October 2002.
Provision for Income Taxes
- --------------------------
The effective income tax rate was 36.7% in both the third quarter and
year-to-date versus 20.9% and 34.5% in the prior-year periods. The change in the
tax rate from the prior year was due to the Company recognizing in 2002 the
cumulative effect of prior periods' tax benefits provided by the
Extraterritorial Income Exclusion Act of 2000 ("ETI"). Tax benefits related to
the ETI were not recognized until the third quarter of 2002 when the Company
determined the ETI was applicable to its operations and recorded a nonrecurring,
cumulative tax benefit.
In November 2000, the United States Government repealed the tax provisions
associated with Foreign Sales Corporations ("FSC") and enacted, in their place,
the ETI, certain provisions of which differed from those governed by the FSC
regulations. The ETI provides for the exclusion from United States income tax of
certain extraterritorial income earned from the sale of qualified United States
origin goods. Qualified United States origin goods are generally defined as
those wherein not more than 50% of the fair market value (including intangible
values) is attributable to foreign content or value added outside the United
States. It is unknown if this benefit will continue to be available to the
Company in the future because 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 September 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses the accounting and financial
reporting for legal obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company adopted
the provisions of SFAS No. 143, effective February 1, 2003, and its impact was
not significant on the Company's financial position, earnings or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
-17-
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." In general, SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS No. 149 did not have a
significant impact on the Company's financial position, earnings or cash flows.
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity needs have been, and are expected to remain, primarily a
function of its seasonal working capital requirements and capital expenditure
needs, which have increased due to the Company's expansion.
The Company achieved a net cash inflow from operating activities of $49,330,000
in the nine months ended October 31, 2003 compared with an inflow of $32,908,000
in the 2002 period.
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were $829,610,000
and 3.0:1 at October 31, 2003 compared with $770,481,000 and 3.6:1 at January
31, 2003 and $720,973,000 and 3.2:1 at October 31, 2002.
Accounts receivable, less allowances at October 31, 2003 were 2% above January
31, 2003 (which is typically a seasonal high point) and were 20% higher than
October 31, 2002 due to sales growth.
Inventories, net at October 31, 2003 were 23% above January 31, 2003 and 15%
above October 31, 2002. Finished goods inventories increased versus October 31,
2002 largely due to the translation effect from a weaker U.S. dollar, new store
openings and expanded product offerings. Higher raw material and work-in-process
inventories versus October 31, 2002 and January 31, 2003 were necessary to
support the expansion of internal jewelry manufacturing activities. Management
expects that inventory levels at the end of 2003 will be higher than at the end
of 2002 to support anticipated comparable store sales growth, new stores,
product introductions and the Company's expansion of its diamond sourcing
operations. 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 were $247,752,000 in the nine months ended October 31,
2003, compared with $175,319,000 in the 2002 period. Expenditures for full year
2003 are expected to be approximately $280,000,000 due to costs related to the
opening, renovation and expansion of stores and distribution facilities, ongoing
investments in new systems and the expenditure of $140,400,000 in June 2003 to
purchase the land and building housing the Company's Tokyo flagship store.
In 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 2004 and be completed in the first half of 2006.
The Company does not expect to continue to acquire real estate housing retail
branch operations because it now owns its three flagship stores.
In 2001, the Company commenced construction of its CFC, a leased distribution
center. The CFC opened in September 2003 and is being used to process direct
shipments to customers. The Company's Parsippany, New Jersey retail
-18-
service/distribution center ("RSC"), formerly known as the customer
service/distribution center ("CSC"),will focus on replenishing retail store
inventories. The Company estimates that the overall cost of the CFC project will
be approximately $111,000,000, of which $105,600,000 has been incurred to date.
In 2000, the Company began a five-year project to renovate and reconfigure its
New York flagship store in order to increase the total sales area by
approximately 25% (completed November 2001), and to provide additional space for
customer service, customer hospitality and special exhibitions. The renovated
second floor re-opened in 2001 to provide an expanded presentation of engagement
and other jewelry. The renovated sixth floor that now houses the customer
service department re-opened in 2002. The renovated fourth floor that offers
tableware merchandise re-opened in November 2003. 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 $69,600,000 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 $100,000,000.
In June 2003, the Company purchased the land and building housing its Japan
flagship store. This purchase was financed with a short-term yen 11,000,000,000
bridge loan ("Bridge Loan") with a bank. The loan had an interest rate of 0.58%
and matured on September 30, 2003. The loan was paid in full upon maturity.
In September 2003, a subsidiary of the Company issued yen 15,000,000,000 of
senior unsecured First Series Yen denominated Bonds ("Bonds") due 2010 with
principal due upon maturity and a fixed coupon rate of 2.02% payable in
semi-annual installments. The Bonds were sold in a private transaction to
qualified institutional investors in Japan. The obligations under the Bonds are
unconditionally and irrevocably guaranteed by the Company. The proceeds from the
issuance have been primarily used by the Company to repay the Bridge Loan.
In July 2002, the Company, in a private transaction with various institutional
lenders, issued, at par, $40,000,000 of 6.15% Series C Senior Notes Due July 18,
2009 and $60,000,000 of 6.56% Series D Senior Notes Due July 18, 2012 with
seven-year and 10-year lump sum repayments upon maturities. The proceeds of
these issues were 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 which came due in January 2003. The Note Purchase
Agreements require maintenance of specific financial covenants and ratios and
limit certain changes to indebtedness and the general nature of the business, in
addition to other requirements customary to such borrowings. Concurrently, the
Company entered into an interest-rate swap agreement to hedge the change in fair
value of its fixed-rate obligation. Under the swap agreement, the Company pays
variable rate interest and receives fixed interest-rate payments periodically
over the life of the instrument. The Company accounts for its interest-rate swap
as a fair value hedge and, therefore, recognizes gains or losses on the
derivative instrument and the hedged item attributable to the hedged risk in
earnings in the current period. The terms of the swap agreement match the terms
of the underlying debt, thereby resulting in no ineffectiveness.
In May 2001, a subsidiary of the Company purchased 45% of Little Switzerland's
outstanding shares of common stock at a cost of $9,546,000. The Company
accounted for this investment under the equity method based upon its ownership
interest and its significant influence. In 2001, the Company also provided
Little Switzerland with an interest-bearing loan in the amount of $2,500,000.
The Company recorded equity losses for its share of Little Switzerland's results
from operations (through September 30, 2002) in other expenses, net and amounted
to a loss of $503,000 and $1,138,000 for the three
-19-
months and nine months ended October 31, 2002. In October 2002, the Company's
subsidiary purchased and paid $27,530,000 for additional shares, which, together
with shares previously owned, represented 98% of the outstanding shares of
Little Switzerland. On November 20, 2002, the subsidiary merged with and into
Little Switzerland. The purchase price has been allocated to the assets acquired
and liabilities assumed according to estimated fair values. The amount assigned
to goodwill at January 31, 2003 has been reduced by $733,000 due to the
finalization of deferred taxes, which was completed in the third quarter of
2003. The total amount of the purchase price allocated to goodwill is
$8,803,000. The Company commenced the consolidation of Little Switzerland's
operations effective October 1, 2002. The acquisition was accounted for in
accordance with SFAS No. 141, "Business Combinations."
In 1999, the Company made a strategic investment in Aber Diamond Corporation
("Aber") by purchasing eight million unregistered shares of its common stock,
which represents 14.7% of Aber's outstanding shares, at a cost of $70,636,000.
Aber holds a 40% interest in the Diavik Diamond Mine in Canada's Northwest
Territories, an operation developed to mine diamonds. Production commenced in
the first quarter of 2003. In addition, the Company entered into a diamond
purchase agreement with Aber whereby the Company has the obligation to purchase,
subject to the Company's quality standards, a minimum of $50,000,000 of diamonds
per year for 10 years. It is expected that this commercial relationship will
enable the Company to secure a considerable portion of its future diamond needs.
The Company has established a diamond sorting/processing facility in Antwerp,
Belgium and a polishing operation in Yellowknife, Canada to handle a portion of
the subsequent cutting and polishing requirements.
In November 2003, the Board of Directors extended and expanded the Company's
stock repurchase program, which expired in November 2003, until November 30,
2006. The Board increased the remaining authorization by $100,000,000. The
program now authorizes expenditures up to $116,500,000 to repurchase outstanding
shares of the Company's Common Stock. The timing of purchases and the actual
number of shares to be repurchased depends on a variety of factors such as price
and other market conditions. In the nine months ended October 31, 2003, the
Company repurchased and retired 200,000 shares of Common Stock at a cost of
$4,610,000, or an average cost of $23.05 per share.
The Company's sources of working capital are internally-generated cash flows,
borrowings available under a multicurrency revolving credit facility ("Credit
Facility") and Little Switzerland's revolving credit facility guaranteed by the
Company ("LS Facility"). In November 2001, the Company entered into a Credit
Facility to increase the borrowing limit from $160,000,000 to $200,000,000 and
the number of banks from five to six. All borrowings are at interest rates based
on a prime rate or LIBOR and are affected by local borrowing conditions. The
Credit Facility expires in November 2006. The LS Facility allows Little
Switzerland to borrow up to $10,000,000 at an interest rate of 0.80% above LIBOR
or a LIBOR Market Index. Both the LS Facility, which expires in November 2005,
and the Credit Facility contain covenants that require maintenance of certain
debt/equity and interest-coverage ratios, in addition to other requirements
customary to loan facilities of this nature.
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 $412,728,000 and 23% at October 31, 2003, compared with $193,462,000 and
14% at January 31, 2003 and $315,069,000 and 22% at October 31, 2002. The
increases were largely due to the Company's purchase of its Tokyo flagship store
in June 2003.
Based on the Company's financial position at October 31, 2003, management
anticipates that internally-generated cash flows and funds available under
-20-
the Credit Facility will be sufficient to support the Company's planned
worldwide business expansion and seasonal working capital increases that are
typically required during the third and fourth quarters of the year.
The Company's contractual cash obligations and commercial commitments at October
31, 2003 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, 2003.
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
strengthening of the U.S. dollar on foreign currency-denominated transactions.
Gains or losses on these instruments substantially offset losses or gains on the
assets, liabilities and transactions being hedged. Management does not foresee
nor expect any significant changes in foreign currency exposure in the near
future.
The fair value of the Company's fixed-rate long-term debt is sensitive to
interest rate changes. Interest rate changes would result in gains (losses) in
the market value of this debt due to differences between market interest rates
and rates at the inception of the debt obligation. In order to manage the
exposure to interest rate changes, the Company entered into an interest-rate
swap to reduce the amount of fixed-rate debt exposed to interest rate movements.
The Company also uses an interest rate swap to manage its yen-denominated
floating-rate long-term debt in order to reduce the impact of interest rate
changes on earnings and cash flows.
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
-21-
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 or crises do not result in military, terrorist or other conditions
creating long- or short-term disruptions or disincentives to, or changes in the
pattern, practice or frequency of tourist travel to the various regions where
the Company operates retail stores nor to the Company's continuing ability to
operate in those regions; (iv) that sales in Japan will not decline
substantially; (v) that there will not be a substantial adverse change in the
exchange relationship between the Japanese yen and the U.S. dollar; (vi) that
Mitsukoshi and other department store operators in Japan, in the face of
declining or stagnant department store sales, will not close or consolidate
stores in which TIFFANY & CO. retail locations are located; (vii) that
Mitsukoshi will continue as a leading department store operator in Japan; (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 rough and 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 and existing stores and other sales locations can
be leased, re-leased or otherwise obtained on suitable terms in desired markets
and that construction can be completed on a timely basis; (xiv) that the Company
can successfully improve the results of Little Switzerland and achieve
satisfactory results from any future ventures into which it enters that are
operated under non-TIFFANY & CO. trademarks or trade names; and (xv) that the
Company's expansion plans for retail and direct selling operations and
merchandise development, production and management can continue to be executed
without meaningfully diminishing the distinctive appeal of the TIFFANY & CO.
brand.
-22-
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 and as of October 31, 2003, 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.
-23-
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification by Michael J. Kowalski pursuant to Section 302
of Sarbanes-Oxley Act of 2002.
31.2 Certification by James N. Fernandez pursuant to Section 302
of Sarbanes-Oxley Act of 2002.
32 Certification by Michael J. Kowalski and James N. Fernandez
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On August 13, 2003, Registrant filed a Current Report on Form 8-K
reporting the issuance of a press release announcing its sales
and earnings for the second quarter ended July 31, 2003.
On September 29, 2003, Registrant filed a Current Report on Form
8-K reporting the issuance of a press release announcing that J.
Thomas Presby has been appointed to fill a newly created seat on
the Board of Directors.
On September 30, 2003, Registrant filed a Current Report on Form
8-K reporting the issuance of a press release announcing that
Tiffany & Co. Japan, Inc., an indirect wholly-owned subsidiary of
Tiffany & Co., completed long-term debt financing.
-24-
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 4, 2003 By:/s/ James N. Fernandez
----------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
-25-
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
31.1 Certification by Michael J. Kowalski pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
31.2 Certification by James N. Fernandez pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32 Joint certification by Michael J. Kowalski and James N. Fernandez
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.