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, 1998. 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, 34,606,329 shares outstanding at the close
of business on October 31, 1998.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1998
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets - October 31, 1998
(Unaudited), January 31, 1998 and
October 31, 1997 (Unaudited) 3
Consolidated Statements of Earnings - for the
three and nine months ended October 31, 1998
and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows - for the nine
months ended October 31, 1998 and 1997
(Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
(a) Exhibits
(b) Reports on Form 8-K
- 2 -
PART I. Financial Information
Item 1. Financial Statements
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
October 31, January 31, October 31,
1998 1998 1997
--------- --------- ---------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 43,922 $ 107,252 $ 24,483
Short-term investments - - 15,000
Accounts receivable, less allowances
of $7,778, $6,988 and $6,736 92,457 99,492 82,305
Inventories 519,427 386,431 415,371
Deferred income taxes 21,286 17,373 19,125
Prepaid expenses 34,754 20,539 30,848
--------- --------- ---------
Total current assets 711,846 631,087 587,132
Property and equipment, net 183,397 156,367 146,942
Deferred income taxes 7,674 8,859 9,223
Other assets, net 40,588 30,754 30,667
--------- --------- ---------
$ 943,505 $ 827,067 $ 773,964
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 153,969 $ 90,054 $ 65,196
Accounts payable and accrued liabilities 154,052 118,456 138,037
Income taxes payable 5,171 23,501 2,951
Merchandise and other customer credits 19,756 17,992 15,989
--------- --------- ---------
Total current liabilities 332,948 250,003 222,173
Reserve for product return - 2,580 3,956
Long-term debt 94,315 90,930 93,080
Postretirement/employment benefit obligations 21,176 20,121 19,889
Other long-term liabilities 30,782 19,709 17,860
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value; authorized
60,000 shares, outstanding 34,606, 34,930 and 35,116 346 349 351
Additional paid-in capital 181,177 168,085 167,562
Retained earnings 294,289 293,689 262,038
Accumulated other comprehensive loss -
Foreign currency translation adjustments (11,528) (18,399) (12,945)
--------- --------- ---------
Total stockholders' equity 464,284 443,724 417,006
--------- --------- ---------
$ 943,505 $ 827,067 $ 773,964
========= ========= =========
See notes to consolidated financial statements
- 3 -
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
For the For the
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- -------------- --------------- ---------------
Net sales $ 252,560 $ 233,074 $ 726,441 $ 649,922
Cost of sales 113,968 106,195 331,155 300,162
-------------- -------------- --------------- ---------------
Gross profit 138,592 126,879 395,286 349,760
Selling, general and administrative expenses 115,684 105,033 326,168 291,263
Provision for uncollectible accounts 453 420 1,217 1,123
-------------- -------------- --------------- --------------
Earnings from operations 22,455 21,426 67,901 57,374
Other expenses, net 1,554 1,315 4,141 3,474
-------------- -------------- --------------- ---------------
Earnings before income taxes 20,901 20,111 63,760 53,900
Provision for income taxes 8,779 8,648 26,993 23,177
-------------- -------------- --------------- ---------------
Net earnings $ 12,122 $ 11,463 $ 36,767 $ 30,723
============== ============== =============== ===============
Net earnings per share:
Basic $ 0.35 $ 0.33 $ 1.05 $ 0.88
============== ============== =============== ===============
Diluted $ 0.34 $ 0.32 $ 1.02 $ 0.85
============== ============== =============== ===============
Weighted average number of common shares:
Basic 34,847 35,099 35,063 34,937
Diluted 35,525 36,286 36,045 36,158
See notes to consolidated financial statements.
- 4 -
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the
Nine Months Ended
October 31,
--------------------------------
1998 1997
---- ----
Cash Flows From Operating Activities:
Net earnings $ 36,767 $ 30,723
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 21,580 16,774
Provision for uncollectible accounts 1,217 1,123
Reduction in reserve for product return (2,580) (1,844)
Provision for inventories 3,350 5,033
Tax benefit from exercise of stock options 5,432 6,498
Deferred income taxes (2,438) (3,753)
Provision for postretirement/employment benefits 1,055 698
Changes in assets and liabilities:
Accounts receivable 10,490 (3,569)
Inventories (114,704) (87,210)
Prepaid expenses (12,219) (9,648)
Other assets, net (2,550) (954)
Accounts payable 24,907 23,759
Accrued liabilities 8,232 5,893
Income taxes payable (18,813) (22,839)
Merchandise and other customer credits 1,764 1,752
Other long-term liabilities 3,275 1,800
--------------- --------------
Net cash used in operating activities (35,235) (35,764)
--------------- --------------
Cash Flows From Investing Activities:
Purchase of short-term investments - (15,000)
Capital expenditures (47,112) (33,988)
Acquisitions, net of liabilities assumed (8,150) -
Proceeds from lease incentives 3,063 851
--------------- --------------
Net cash used in investing activities (52,199) (48,137)
--------------- --------------
Cash Flows From Financing Activities:
Proceeds from (payments on) short-term borrowings 54,014 (11,353)
Repurchase of Common Stock (29,773) -
Proceeds from exercise of stock options 8,643 9,220
Cash dividends on Common Stock (8,780) (6,644)
--------------- --------------
Net cash provided by (used in) financing activities 24,104 (8,777)
--------------- --------------
Net decrease in cash and cash equivalents (63,330) (92,678)
Cash and cash equivalents at beginning of year 107,252 117,161
--------------- --------------
Cash and cash equivalents at end of nine months $ 43,922 $ 24,483
=============== ==============
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"). All material intercompany balances and
transactions have been eliminated. 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, 1998
and the results of operations and cash flows for the interim periods
presented. The consolidated balance sheet data for January 31, 1998 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.
Since the Company's business is seasonal, with a higher proportion of
sales and income generated in the last quarter of the fiscal year, the
results of operations for the three and nine months ended October 31,
1998 and 1997 are not necessarily indicative of the results of the
entire fiscal year.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
Supplemental cash flow information for the nine months ended October
31, 1998 and 1997 is as follows:
October 31, October 31,
(in thousands) 1998 1997
-------------- ------------------ ------------------
Cash paid during the nine months for:
Interest $ 5,187 $ 4,872
================ ================
Income taxes $42,356 $43,282
================ ================
Details of businesses acquired in
purchase transactions were as follows:
Fair value of assets acquired $12,302 -
Less: Liabilities assumed 4,152 -
---------------- ----------------
Net cash paid for acquisitions $ 8,150 -
================ ================
Supplemental Noncash Investing
and Financing Activities:
Issuance of Common Stock for the
Employee Profit Sharing and
Retirement Savings Plan $ 1,400 $ 1,800
================ ================
- 6 -
3. INVENTORIES
-----------
Inventories at October 31, 1998, January 31, 1998 and October 31, 1997
are summarized as follows:
October 31, January 31, October 31,
(in thousands) 1998 1998 1997
----------- ----------- -----------
Finished goods $ 444,555 $ 327,314 $ 362,518
Raw materials 76,149 57,926 55,722
Work-in-process 1,960 2,918 1,964
--------- --------- ---------
522,664 388,158 420,204
Reserves (3,237) (1,727) (4,833)
--------- --------- ---------
$ 519,427 $ 386,431 $ 415,371
========= ========= =========
At October 31, 1998, January 31, 1998 and October 31, 1997,
$387,995,000, $292,353,000 and $309,181,000, respectively, of
inventories were valued using the LIFO method. The excess of current
cost over the LIFO inventory value was $16,870,000 at October 31,1998,
$15,870,000 at January 31, 1998 and $17,927,000 at October 31, 1997.
The LIFO valuation method had no effect on net earnings for the three
month period ended October 31, 1998 and had the effect of decreasing
net earnings by $0.02 per diluted share in the three month period ended
October 31, 1997. The LIFO valuation had the effect of decreasing net
earnings by $0.02 and $0.05 per diluted share in each of the nine month
periods ended October 31, 1998 and 1997.
4. DEBT
----
During the quarter ended April 30, 1998, the Company's $130,000,000
multicurrency revolving credit facility (the "Credit Facility") was
amended to increase the amount the Company is entitled to borrow to
$160,000,000 and to increase the number of participating banks from
four to five. The amended Credit Facility entitles the Company to
borrow up to $31,250,000 on a pro-rata basis from each of three banks,
up to $30,000,000 from one bank and up to $36,250,000 from an agent
bank; all borrowings are at interest rates based on a prime rate or a
reserve-adjusted LIBOR.
5. FINANCIAL HEDGING INSTRUMENTS
-----------------------------
In accordance with the Company's foreign currency hedging program, at
October 31, 1998 the Company had outstanding purchased put options
maturing at various dates through January 24, 2000, giving it the
right, but not the obligation, to sell yen 15,735,000,000 for dollars
at predetermined contract-exchange rates. If the market yen-exchange
rates at maturity are below the contract rates, the Company will allow
the options to expire. At October 31, 1998, there were no deferred
unrealized gains on the Company's purchased put options.
- 7 -
To mitigate the exchange rate fluctuations primarily related to
intercompany inventory purchases for the Company's business in Japan,
the Company enters into forward exchange yen contracts. At October 31,
1998, the Company had $17,008,000 of such contracts outstanding, which
will mature on January 26, 1999. At October 31, 1997, the Company had
$44,050,000 of such contracts outstanding, which subsequently matured
on January 26, 1998.
6. STOCKHOLDERS' EQUITY
--------------------
During the quarter ended October 31, 1998, the Board of Directors
amended and restated the Company's existing Stockholder Rights Plan
(the "Rights Plan") to extend its expiration date from November 17,
1998 to September 17, 2008. Under the Rights Plan, as amended, each
outstanding share of the Company's Common Stock has a stock purchase
right, initially subject to redemption at $0.01 per right, which right
first becomes exercisable should certain take-over-related events
occur. Following certain such events, but before any person has
acquired beneficial ownership of 15% of the Company's common shares,
each right may be used to purchase one one-hundredth of a share of
Series A Junior Participating Cumulative Preferred Stock at an
exercise price of $165 (subject to adjustment); after such an
acquisition, each right becomes nonredeemable and may be used to
purchase for the exercise price common shares having a market value
equal to two times the exercise price. If, after such acquisition, a
merger of the Company occurs (or 50% of the Company's assets are
sold), each right may be exercised to purchase, for the exercise
price, common shares of the acquiring corporation having a market
value equal to two times the exercise price. Rights held by such a 15%
owner may not be exercised.
On May 21, 1998, the stockholders approved both the Company's 1998
Employee Incentive Plan and Directors Option Plan. No award may be
made under either plan after March 19, 2008. Under the Employee
Incentive Plan, the maximum number of shares of common stock subject
to award is 1,750,000 (subject to adjustment); awards may be made to
employees of the Company or its related companies in the form of stock
options, stock appreciation rights, shares of stock and cash; awards
made in the form of non-qualified stock options, tax-qualified
incentive stock options or stock appreciation rights may have a
maximum term of 10 years and may not be issued for an exercise price
below fair market value. With the adoption of the Employee Incentive
Plan, no further stock options may be issued under the Company's 1986
Stock Option Plan. Under the Directors Option Plan the maximum number
of shares of common stock subject to award is 250,000 (subject to
adjustment); awards may be made to non-employee directors of the
Company in the form of stock options or shares of stock but may not
exceed 5,000 shares per non-employee director in any fiscal year;
awards made in the form of stock options may have a maximum term of 10
years and may not be issued for an exercise price below fair market
value unless the director has agreed to forego all or a portion of his
or her annual cash retainer or other fees for service as a director in
exchange for below market exercise price options. No further options
may be granted under the 1988 Directors Option Plan, which has
expired; all options granted under the 1988 Plan were issued at 50%
below the market value at the date of grant and the Company has
recognized compensation expense relating to such options based on the
difference between the option price and the fair market value at the
date of grant.
- 8 -
7. EARNINGS PER SHARE
------------------
Basic earnings per share are computed by dividing net earnings by the
weighted average number of shares outstanding during the period.
Diluted earnings per share are calculated to give effect to potentially
dilutive stock options that were outstanding during the period.
The following table summarizes the reconciliation of the numerators and
denominators, as required by SFAS No. 128, for the basic and diluted
EPS computations for the three and nine months ended October 31, 1998
and 1997:
For the For the
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ ------------------
(in thousands) 1998 1997 1998 1997
--------------- ---- ---- ---- ----
Net earnings for basic
and diluted EPS $12,122 $11,463 $36,767 $30,723
======= ======= ======= =======
Weighted average shares
for basic EPS 34,847 35,099 35,063 34,937
Incremental shares from
assumed exercise of
stock options: 678 1,187 982 1,221
-------- -------- ------- ------
Weighted average shares
for diluted EPS 35,525 36,286 36,045 36,158
======= ======= ======= =======
8. COMPREHENSIVE EARNINGS
----------------------
Effective February 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which requires disclosure of
comprehensive earnings in interim periods and additional disclosures of
the components of comprehensive earnings on an annual basis.
Comprehensive earnings include all changes in equity during a period
except those resulting from investments by and distributions to
stockholders. Under SFAS No. 130, the Company's foreign currency
translation adjustments, reported separately in stockholders' equity,
are required to be included in the determination of comprehensive
earnings.
The components of comprehensive earnings for the three and nine months
ended October 31, 1998 and 1997 were:
For the For the
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ -----------------
(in thousands) 1998 1997 1998 1997
-------------- ---- ---- ---- ----
Net earnings $12,122 $11,463 $36,767 $30,723
Other comprehensive
gain(loss):
Foreign currency 11,977 (540) 6,871 (2,860)
translation adjustments
------- -------- ------- -------
Comprehensive earnings $24,099 $10,923 $43,638 $27,863
======= ======== ======= =======
- 9 -
Foreign currency translation adjustments are not adjusted for income
taxes since they relate to investments that are permanent in nature.
Prior year financial statements have been presented to conform with
SFAS No. 130.
9. ACCOUNTING STANDARDS
--------------------
In February 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement
of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use,"("SOP No. 98-1"). SOP No. 98-1
requires certain costs incurred in connection with developing or
obtaining internal-use software to be capitalized and other costs to
be expensed. The Company adopted SOP No. 98-1 effective February 1998,
and its application for the three and nine months ended October 31,
1998 had no material effect on the Company's financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS
No. 133"), which requires that an entity recognize all derivative
instruments as either assets or liabilities on its balance sheet at
their fair value. Gains and losses resulting from changes in the fair
value of derivatives are recorded each period in current or
comprehensive earnings, depending on whether a derivative is
designated as part of a hedge transaction, and, if it is, the type of
hedge transaction. Gains and losses on derivative instruments reported
in comprehensive earnings will be reclassified to earnings in the
period in which earnings are affected by the hedged item. SFAS No. 133
is effective for the Company's financial statements for the fiscal
year ending January 31, 2001 and the Company is currently evaluating
the impact, if any, of this new FASB statement on its financial
position and results of operations.
10. SUBSEQUENT EVENT
----------------
On November 19, 1998, the Company's Board of Directors declared a
quarterly dividend of $0.09 per common share. This dividend will be
paid on January 11, 1999 to stockholders of record on December 21,
1998.
- 10 -
PART I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
- ---------------------
Overview
- --------
The Company operates three channels of distribution: U.S. Retail includes retail
sales in Company-operated stores in the U.S., wholesale sales to independent
retailers in the U.S. and wholesale sales of fragrance products to independent
retailers in the Americas; Direct Marketing includes corporate
(business-to-business) and catalog sales in the U.S.; and International Retail
includes retail sales through Company-operated stores and boutiques, corporate
sales and wholesale sales to independent retailers and distributors in the
Asia-Pacific region, Europe, Canada, the Middle East and Latin America.
The Company's net sales increased 8% to $252,560,000 in the three months (third
quarter) ended October 31, 1998 and rose 12% to $726,441,000 in the nine months
(year-to-date) ended October 31, 1998. Net earnings rose 6% to $12,122,000, or
$0.34 per diluted share, in the third quarter and increased 20% to $36,767,000,
or $1.02 per diluted share, in the year-to-date.
Net sales by channel of distribution were as follows:
Three Months Nine Months
Ended October 31, Ended October 31,
------------------- -------------------
(in thousands) 1998 1997 1998 1997
- -------------- -------- -------- -------- --------
U.S. Retail $125,762 $114,467 $363,519 $307,660
Direct Marketing 25,549 24,651 71,935 62,375
International Retail 101,249 93,956 290,987 279,887
-------- -------- -------- --------
$252,560 $233,074 $726,441 $649,922
======== ======== ======== ========
U.S. Retail sales rose 10% in the third quarter and increased 18% in the
year-to-date. Sales performance was comprised of a 1% decline in comparable
store sales in the third quarter and an 8% increase in the year-to-date, as well
as strong sales results in new stores that were opened during the past year. In
the Company's New York flagship store, comparable store sales declined 7% in the
third quarter and increased 2% in the year-to-date. Comparable branch store
sales rose 3% in the third quarter and 12% in the year-to-date. Management
believes that comparable store sales in New York and several branch stores
during the third quarter were affected by several factors, including volatility
in the equity markets and economic concerns which may have affected consumer
confidence and spending. In most markets, sales growth was affected by a decline
in the average retail transaction size although there was an increased number of
transactions. Sales to domestic customers increased, while sales to foreign
tourists declined.
Direct Marketing sales increased 4% in the third quarter and 15% in the
year-to-date. Corporate division sales rose 4% in the third quarter and 9% in
the year-to-date, while catalog division sales rose 3% and 26% in the respective
periods. In assessing the increase in catalog division sales during the
year-to-date period, it is important to consider that the transition in April
1997 to the Company's new Customer Service/Distribution Center affected sales in
1997 due to decreased order fulfillment and catalog mailings. The Company's
catalog mailings will have increased by approximately 12% to 24 million catalogs
by the end of Fiscal 1998.
- 11 -
International Retail sales increased 8% in the third quarter and 4% in the
year-to-date, which equated to increases of 17% in the third quarter and 13% in
the year-to-date on a constant-currencies basis (excluding the effect of
translating local-currency-denominated sales into the generally stronger U.S.
dollar). In Japan, Tiffany's largest international market, total retail sales in
local currency rose 28% in the third quarter and 23% in the year-to-date,
primarily due to comparable store sales growth of 23% in the third quarter and
17% in the year-to-date.
The Company's reported sales and earnings reflect either a translation-related
benefit from a strengthening Japanese yen or a detriment from a strengthening
U.S. dollar. The Company maintains a foreign currency hedging program for
merchandise purchase transactions initiated from Japan in order to reduce the
potentially negative impact on the Company's financial results of a significant
strengthening of the U.S. dollar. The hedging program has achieved its objective
by stabilizing product costs, over the short-term, despite exchange rate
fluctuations. However, as a result of changes in the relationship between the
yen and the dollar, the Company adjusts its retail prices when necessary to
maintain its gross margin over the longer-term.
In Asia-Pacific markets outside Japan, comparable store sales in local
currencies declined 10% in the third quarter and 14% in the year-to-date.
Management attributes these declines to adverse local economic conditions and
reduced sales to foreign travelers.
In Europe, comparable store sales in local currencies increased 13% in the third
quarter and 15% in the year-to-date due to retail sales growth in most markets.
Gross Profit
- ------------
Gross profit as a percentage of net sales (gross margin) was 54.9% and 54.4% in
the third quarter and year-to-date, compared with 54.4% and 53.8% in the
corresponding prior-year periods. The Company's ongoing gross margin and pricing
strategy is to pass through product-cost increases with higher retail selling
prices, in order to maintain gross margin at or above prior-year levels.
Operating Expenses
- ------------------
Operating expenses (selling, general and administrative expenses plus the
provision for uncollectible accounts) increased 10% and 12% in the third quarter
and year-to-date. The increases were primarily due to incremental occupancy,
staffing and marketing expenses related to the Company's worldwide expansion
program, as well as to sales-related variable expenses. As a percentage of net
sales, the operating expense ratios of 46.0% and 45.1% in the third quarter and
year-to-date were higher than prior-year periods. Management's objective is to
reduce the expense ratio by leveraging the Company's fixed-expense base.
Other Expenses, net
- -------------------
Other expenses (primarily interest expense) increased in the third quarter and
year-to-date. On the basis of current plans, as well as anticipated share
repurchases, interest rates and foreign currency exchange rates, management
expects interest expense for the remainder of Fiscal 1998 to be higher than the
prior-year period.
Provision for Income Taxes
- --------------------------
The provision for income taxes resulted in an effective tax rate of 42.0% in the
third quarter and 42.3% in the year-to-date, compared with 43.0% in the
corresponding prior-year periods, due to a shift in the geographical business
mix toward lower-tax jurisdictions.
- 12 -
New Accounting Standards
- ------------------------
In February 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," ("SOP No. 98-1"). SOP No. 98-1 requires certain costs incurred in
connection with developing or obtaining internal-use software to be capitalized
and other costs to be expensed. The Company adopted SOP No. 98-1 effective
February 1998, and its application for the three and nine months ended October
31, 1998 had no material effect on the Company's financial position or results
of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133"), which requires that an
entity recognize all derivative instruments as either assets or liabilities on
its balance sheet at their fair value. Gains and losses resulting from changes
in the fair value of derivatives are recorded each period in current earnings or
comprehensive earnings, depending on whether a derivative is designated as part
of a hedge transaction, and, if it is, the type of hedge transaction. Gains and
losses on derivative instruments reported in comprehensive earnings will be
reclassified as earnings in the period in which earnings are affected by the
hedged item. SFAS No. 133 is effective for the Company's financial statements
for the fiscal year ending January 31, 2001 and the Company is currently
evaluating the impact, if any, of the new FASB statement on its financial
position and results of operations.
Euro Conversion
- ---------------
Effective January 1, 1999, member countries of the European Economic and
Monetary Union will convert to a common currency known as the Euro, and will
establish fixed conversion rates between their existing currencies ("legacy
currencies") and the Euro. The Euro will be traded on currency exchanges and may
be used in business transactions. The conversion to the Euro will eliminate
currency exchange rate risk between the member countries. Beginning in January
2002, new Euro-denominated bills and coins will be issued, and legacy currencies
will be withdrawn from circulation. The Company's operating subsidiaries
affected by the Euro conversion are addressing the issues raised by the Euro
currency conversion. These issues include, among others, the need to adapt
information technology systems, and business processes and equipment to
accommodate Euro-denominated transactions.
The Company's policy is to maintain uniform pricing among the member countries
and, as a result, the Company does not anticipate that the conversion to the
Euro will have a material impact on the financial position, results of
operations or liquidity of those European businesses.
Year 2000
- ---------
The Company recognizes the need to ensure that its operations will not be
adversely affected by year 2000 computer hardware and software failures. Certain
systems will, unless modified, be unable to process date-sensitive calculations
using the year 2000. Such failures are a known risk to the future integrity of
the Company's' financial reports and to virtually all aspects of the Company's
operations, including the Company's ability to process sales transactions,
fulfill customer orders and receive and manage inventories and other assets.
Accordingly, the Company has established a disciplined process to identify,
prioritize and evaluate year 2000 problems and to replace or revise and test
computer software and operating procedures. The objective of these efforts is to
achieve year 2000 compliance with minimal effect on customer service or other
disruption to, or loss of integrity in, business or financial operations. At
this date, sources of potential failure in internal systems have been identified
and conversion efforts are underway. These conversion efforts are scheduled to
be complete by spring 1999. By that time, the Company will have been required to
remediate or replace (i) internally-developed computer code, and (ii) code
purchased from third-party software vendors. As
- 13 -
of October 31, 1998, these efforts were 90% complete in category (i) and 60%
complete in category (ii), and are on schedule with the Company's timetable for
completion.
The foregoing conversion efforts address "information technology" systems, i.e.
those operated and maintained by the Company's U.S.-based information technology
staff, such as financial, order entry, inventory control and forecasting
systems. Other applications software is maintained on personal computers by
end-users in the U.S. and by wholly-owned Company subsidiaries outside the U.S.
Typically, such software has been purchased from third-party vendors and
specific applications have been developed by the end-user. The information
technology staff is assisting users in evaluating and determining whether such
applications are material to the Company and are year 2000 compliant and, if
necessary, in developing a plan for remediation and testing. The Company is also
in the process of evaluating year 2000 issues that may be experienced by key
merchandise and service vendors in order to evaluate the potential effect of
vendor failure on the Company's operations; at this date, that evaluation has
not been completed, although responses to date indicate that many, if not most,
of the Company's merchandise vendors are not dependent upon computer-technology.
Successful remediation of year 2000 issues will depend, to some extent, on the
Company's ability to retain or otherwise secure sufficient programming resources
to timely complete this process given the high demand for such resources
throughout the world.
The Company has not yet established a contingency plan in the event of year 2000
failure. Because the theoretical possibility for such failure now exists for
numerous applications throughout the operations of the Company, management
considers the present expenditure of resources to develop contingency plans for
all such operations to be counterproductive to ongoing efforts to define and
remediate deficiencies. At such time as the remediation program has further
progressed and likely failures have been identified, contingency plans,
including for manual and delayed information processing, may be created.
In addition to the cost of internal resources (which the Company has not
segregated or otherwise estimated), the Company's cost of achieving year 2000
compliance is estimated to be $8,000,000 for third-party service providers and
will be incurred through the year ending January 31, 2000. Year 2000 costs for
such providers are charged to operations as incurred and amounted to $4,412,000
in the year-to-date and $4,998,000 on a cumulative basis. A substantial portion
of the Company's programming and system design resources has been and will be
devoted to the year 2000 project. As a consequence, many projects intended to
improve asset efficiency and customer service have been deferred.
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 which have increased due
to the Company's expansion. Management believes that the Company's financial
condition at October 31, 1998 provides sufficient resources to support current
business activities and planned expansion. Working capital (current assets minus
current liabilities) and the corresponding current ratio (current assets divided
by current liabilities) were $378,898,000 and 2.1:1 at October 31, 1998,
compared with $381,084,000 and 2.5:1 at January 31, 1998 and $364,959,000 and
2.6:1 at October 31, 1997.
Accounts receivable at October 31, 1998 were 7% below January 31, 1998 (which
represents a seasonally-high point) but were 12% above October 31, 1997. The
increased receivables versus prior year largely reflected sales growth.
- 14 -
Inventories (which represent the largest portion of total assets) at October 31,
1998 were 34% higher than January 31, 1998 and were 25% above October 31, 1997
in order to support new stores, new products, expanded internal manufacturing
and related gemstone purchases and the Company's strategy to accelerate its
receipt of merchandise from suppliers prior to the start of the holiday season
in order to optimize merchandise availability in its stores. The Company's
ongoing objective is to improve inventory performance through: refinement of
worldwide replenishment systems; focus on the specialized disciplines of product
development, assortment planning and inventory management; improved presentation
and management of display inventories in each store; assortment editing by
product category; and a time-phased program of improvements in warehouse
management and supply-chain logistics.
Short-term borrowings at October 31, 1998 were 71% higher than January 31, 1998
and were 136% above October 31, 1997. These increases primarily resulted from
the Company's stock repurchase program as well as seasonal working capital
increases (primarily inventory purchases).
The Company incurred a net cash outflow from operating activities of $35,235,000
in the year-to-date ended October 31, 1998, compared with an outflow of
$35,764,000 in the corresponding period a year ago.
Capital expenditures were $47,112,000 in the year-to-date ended October 31, 1998
compared with $33,988,000 in the prior year. The increase was largely due to
costs associated with new store openings, relocation of an existing store and
expansion of manufacturing and administrative facilities. Based on current
plans, management expects that capital expenditures will be approximately
$70,000,000 in Fiscal 1998.
The Company's sources of working capital are internally-generated cash flows and
borrowings available under a five-year, $160,000,000 multicurrency,
noncollateralized revolving credit facility (amended in the first quarter of
Fiscal 1998 to increase the amount from $130,000,000 and the number of banks
from four to five) which expires on June 30, 2002. Management anticipates that
internally-generated cash flows and funds available under the revolving credit
facility will be sufficient to support the Company's planned worldwide business
expansion and the seasonal working capital increases that are typically required
during the third and fourth quarters of the year.
Seasonality
- -----------
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 retail prices, gross
profit, expenses, inventory performance, capital expenditures, cash flow and
year 2000 compliance. In addition, management makes other forward-looking
statements from time to time concerning objectives and expectations for store
openings, sales, earnings and cash flow. As a retailer, the Company's success in
achieving its objectives and expectations is partially dependent upon economic
conditions 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 new stores and other sales locations can be leased or otherwise
obtained on suitable lease terms in desired markets and that construction can be
completed on a timely basis; (ii) that existing product supply arrangements,
including license agreements with third-party designers, will continue; (iii)
that the market for high-quality cut diamonds
- 15 -
will provide continuity of supply and pricing; (iv) that new systems,
particularly for inventory management, can be successfully integrated into the
Company's operations and that warehousing and distribution productivity can be
further improved to support the Company's worldwide distribution requirements;
(v) that the exchange relationship between the Japanese yen and the U.S. dollar
in Fiscal 1998 will not substantially change during the year; and (vi) that the
year 2000 compliance program can be timely completed.
- 16 -
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (SEC/EDGAR only).
(b) Reports on Form 8-K
None
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 09, 1998 By: /s/ James N. Fernandez
-----------------------------------
James N. Fernandez
Executive Vice President
and Chief Financial Officer
(principal financial officer)
- 17 -
EXHIBIT INDEX
Exhibit
Number
27 Financial Data Schedule
(submitted to SEC only)