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, 1999. 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, 72,358,012 shares outstanding at the close
of business on October 31, 1999.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1999
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets - October 31, 1999
(Unaudited), January 31, 1999 and
October 31, 1998 (Unaudited) 3
Consolidated Statements of Earnings - for the
three and nine month periods ended
October 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows - for
the nine months ended October 31, 1999
and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
(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,
1999 1999 1998
-------------- ------------- --------------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 155,937 $ 188,593 $ 43,922
Accounts receivable, less allowances
of $9,176, $8,106 and $7,778 107,006 108,381 92,457
Inventories 575,962 481,439 519,427
Deferred income taxes 30,251 18,061 21,286
Prepaid expenses and other current assets 34,502 19,170 34,754
---------------- --------------- ----------------
Total current assets 903,658 815,644 711,846
Property and equipment, net 217,004 189,795 183,397
Deferred income taxes 8,037 9,032 7,674
Other assets, net 133,692 42,552 40,588
---------------- --------------- ----------------
$ 1,262,391 $ 1,057,023 $ 943,505
================ =============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 43,959 $ 97,370 $ 153,969
Accounts payable and accrued liabilities 194,253 140,660 154,052
Income taxes payable 10,370 32,485 5,171
Merchandise and other customer credits 26,353 22,202 19,756
---------------- --------------- ----------------
Total current liabilities 274,935 292,717 332,948
Long-term debt 251,618 194,420 94,315
Postretirement/employment benefit obligations 22,990 21,539 21,176
Other long-term liabilities 34,651 31,894 30,782
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value; authorized 120,000 shares,
issued and outstanding 72,358, 69,466 and 69,212 724 695 692
Additional paid-in capital 290,395 184,890 180,831
Retained earnings 393,587 344,223 294,289
Accumulated other comprehensive loss -
Foreign currency translation adjustments (6,509) (13,355) (11,528)
---------------- --------------- ----------------
Total stockholders' equity 678,197 516,453 464,284
---------------- --------------- ----------------
$ 1,262,391 $ 1,057,023 $ 943,505
================ =============== ================
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,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
Net sales $ 322,706 $ 252,560 $ 902,050 $ 726,441
Cost of sales 141,216 113,968 397,227 331,155
------------ ------------ ------------- ------------
Gross profit 181,490 138,592 504,823 395,286
Selling, general and administrative expenses 142,008 116,137 393,949 327,385
------------ ------------ ------------- ------------
Earnings from operations 39,482 22,455 110,874 67,901
Other expenses, net 2,257 1,554 6,170 4,141
------------ ------------ ------------- ------------
Earnings before income taxes 37,225 20,901 104,704 63,760
Provision for income taxes 15,263 8,779 43,604 26,993
------------ ------------ ------------- ------------
Net earnings $ 21,962 $ 12,122 $ 61,100 $ 36,767
============ ============ ============= ============
Net earnings per share:
Basic $ 0.30 $ 0.17 $ 0.86 $ 0.52
============ ============ ============= ============
Diluted $ 0.29 $ 0.17 $ 0.82 $ 0.51
============ ============ ============= ============
Weighted average number of common shares:
Basic 72,330 69,694 71,166 70,126
Diluted 75,602 71,050 74,117 72,090
See notes to consolidated financial statements.
- 4 -
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
October 31,
---------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 61,100 $ 36,767
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 26,902 21,580
Loss on equity investment 250 -
Provision for uncollectible accounts 992 1,217
Reduction in reserve for product return - (2,580)
Provision for inventories 5,776 3,350
Tax benefit from exercise of stock options 17,676 5,432
Deferred income taxes (10,786) (2,438)
Provision for postretirement/employment benefits 1,451 1,055
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 2,240 10,490
Inventories (79,628) (114,704)
Prepaid expenses (13,963) (12,219)
Other assets, net (16,789) (2,550)
Accounts payable 8,985 24,907
Accrued liabilities 39,357 8,232
Income taxes payable (22,587) (18,813)
Merchandise and other customer credits 3,438 1,764
Other long-term liabilities 2,439 3,275
-------------- --------------
Net cash provided by (used in) operating activities 26,853 (35,235)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equity investment (70,636) -
Capital expenditures (52,743) (47,112)
Acquisitions, net of liabilities assumed (7,031) (8,150)
Proceeds from lease incentives 4,316 3,063
-------------- --------------
Net cash used in investing activities (126,094) (52,199)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 71,426 -
Proceeds from issuance of long-term debt 47,498 -
(Repayments of) proceeds from short-term borrowings (55,435) 54,014
Repurchase of Common Stock - (29,773)
Proceeds from exercise of stock options 14,832 8,643
Cash dividends on Common Stock (11,736) (8,780)
-------------- --------------
Net cash provided by financing activities 66,585 24,104
-------------- --------------
Net decrease in cash and cash equivalents (32,656) (63,330)
Cash and cash equivalents at beginning of year 188,593 107,252
-------------- --------------
Cash and cash equivalents at end of period $ 155,937 $ 43,922
============== ==============
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, 1999 and the results of its operations and cash flows for
the interim periods presented. The consolidated balance sheet data for
January 31, 1999 is 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 earnings generated in the last quarter of the fiscal year,
the results of operations for the three and nine months ended October
31, 1999 and 1998 are not necessarily indicative of the results of the
entire fiscal year.
2. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Supplemental cash flow information:
October 31, October 31,
(in thousands) 1999 1998
-------------- ------------ -----------
Cash paid during the nine months for:
Interest $ 8,258 $ 5,187
============ ============
Income taxes $59,171 $42,356
============ ============
Details of businesses acquired in
purchase transactions:
Fair value of assets acquired $ 7,048 $12,302
Less: liabilities assumed 17 4,152
------------ ------------
Net cash paid for acquisitions $ 7,031 $ 8,150
============ ============
Supplemental Noncash Investing
and Financing Activities:
Issuance of Common Stock for the
Employee Profit Sharing and
Retirement Savings Plan $ 1,600 $ 1,400
============ ============
- 6 -
3. INVENTORIES
-----------
October 31, January 31, October 31,
(in thousands) 1999 1999 1998
-------------- --------------- --------------- ---------------
Finished goods $507,933 $413,371 $444,555
Raw materials 64,338 66,258 76,149
Work-in-process 7,127 3,599 1,960
--------------- --------------- ---------------
579,398 483,228 522,664
Reserves (3,436) (1,789) (3,237)
--------------- --------------- ---------------
$575,962 $481,439 $519,427
=============== =============== ===============
LIFO-based inventories at October 31, 1999, January 31, 1999 and
October 31, 1998 were $432,860,000, $363,322,000 and $387,995,000,
with the current cost exceeding the LIFO inventory value by
approximately $16,870,000, $15,870,000 and $16,870,000 at the end of
each period. The LIFO valuation method had no effect on net earnings
for the three month period ended October 31, 1999 and 1998. The LIFO
valuation method had the effect of decreasing net earnings by $0.01
and $0.02 per diluted share in each of the nine month periods ended
October 31, 1999 and 1998.
4. DEBT
----
On October 26, 1999, the Company entered into a yen 5,500,000,000,
five-year term loan agreement, bearing interest at the six-month
Japanese LIBOR rate plus 50 basis points, adjusted every six months.
The proceeds from this loan were primarily used to reduce short-term
indebtedness in Japan.
5. FINANCIAL HEDGING INSTRUMENTS
-----------------------------
On October 26, 1999, the Company entered into a five-year, yen
5,500,000,000 interest rate swap agreement. In addition to the interest
on the yen 5,500,000,000 term loan, the Company will pay a fixed rate
of interest of 1.815 percent and will receive the six-month Japanese
LIBOR rate plus 50 basis points, adjusted every six months.
In accordance with the Company's foreign currency hedging program, at
October 31, 1999, the Company had outstanding purchased put options
maturing at various dates through October 24, 2000, giving it the
right, but not the obligation, to sell yen 13,186,000,000 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, 1999, there were no deferred
unrealized gains on the Company's purchased put options.
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,
1999, the Company had $19,421,000 of such contracts outstanding, which
will mature on November 26, 1999. At October 31, 1998, the Company had
$17,008,000 of such contracts outstanding, which subsequently matured
on January 26, 1999.
- 7 -
6. 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 for the basic and diluted earnings per share ("EPS")
computations:
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------------- ----------------------------
(in thousands) 1999 1998 1999 1998
-------------- ---- ---- ---- ----
Net earnings for basic
and diluted EPS $21,962 $12,122 $61,100 $36,767
========= ========= ========= =========
Weighted average shares
for basic EPS 72,330 69,694 71,166 70,126
Weighted average incremental
shares from assumed
exercise of stock options: 3,272 1,356 2,951 1,964
--------- --------- ---------- ---------
Weighted average shares
for diluted EPS 75,602 71,050 74,117 72,090
========== ========= ========== =========
7. COMPREHENSIVE EARNINGS
----------------------
Comprehensive earnings include all changes in equity during a period
except those resulting from investments by and distributions to
stockholders. 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 were:
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------------- ----------------------------
(in thousands) 1999 1998 1999 1998
-------------- ---- ---- ---- ----
Net earnings $21,962 $12,122 $61,100 $36,767
Other comprehensive
gain(loss):
Foreign currency 7,097 11,977 6,846 6,871
translation adjustments
-------------- ------------- --------------- ------------
Comprehensive earnings $29,059 $24,099 $67,946 $43,638
=============== ============= =============== ============
Foreign currency translation adjustments are not adjusted for income
taxes since they relate to investments that are permanent in nature.
- 8 -
8. OPERATING SEGMENTS
------------------
The Company operates three reportable business segments: U.S. Retail,
International Retail and Direct Marketing (see Management's Discussion
and Analysis of Financial Condition and Results of Operations for an
overview of the Company's business). The Company's reportable segments
represent channels of distribution that offer similar merchandise and
service and marketing and distribution strategies. The Company's
Executive Officers evaluate the performance of its operating segments
on the basis of net sales and earnings from operations after the
elimination of intersegment sales and transfers.
Certain information relating to the Company's reportable operating
segments is set forth below:
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------------------- ---------------------------------
(in thousands) 1999 1998 1999 1998
-------------- ---- ---- ---- ----
Net sales:
U.S. Retail $ 161,491 $ 125,762 $ 452,694 $ 363,519
International Retail 132,869 101,249 371,917 290,987
Direct Marketing 28,346 25,549 77,439 71,935
--------------- ---------------- --------------- ---------------
$ 322,706 $ 252,560 $ 902,050 $ 726,441
=============== =============== ============== ===============
Earnings from
operations*:
U.S. Retail $ 30,715 $ 19,833 $ 87,735 $ 65,346
International Retail 29,094 22,327 89,382 64,296
Direct Marketing 2,952 2,027 10,964 8,265
--------------- ---------------- --------------- ---------------
$ 62,761 $ 44,187 $ 188,081 $ 137,907
=============== =============== ============== ===============
* Represents earnings from operations before unallocated
corporate expenses and interest and other expenses, net.
Executive Officers of the Company evaluate the performance of the
Company's assets on a consolidated basis. Therefore, separate financial
information for the Company's assets on a segment basis is not
available.
- 9 -
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) 1999 1998 1999 1998
-------------- ---- ---- ---- ----
Earnings from
operations for
reportable segments $ 62,761 $ 44,187 $ 188,081 $ 137,907
Unallocated
corporate expenses (23,279) (21,732) (77,207) (70,006)
Interest and other
expenses, net (2,257) (1,554) (6,170) (4,141)
--------------- --------------- -------------- ---------------
Earnings before
income taxes $ 37,225 $ 20,901 $ 104,704 $ 63,760
=============== =============== =============== ===============
9. COMMON STOCK
------------
On July 23, 1999, the Company issued 1,450,000 shares of its Common
Stock at a price of $49.375 per share, resulting in net proceeds of
$71,426,000. The net proceeds from the sale were added to the Company's
working capital and have been used to support ongoing business
expansion.
On May 20, 1999, the stockholders approved an amendment to the
Company's Restated Certificate of Incorporation to increase the number
of common shares authorized from 60,000,000 shares to 120,000,000
shares.
On May 20, 1999, the Board of Directors declared a two-for-one split of
the Company's Common Stock, effected in the form of a share
distribution (stock dividend) paid on July 21, 1999 to stockholders of
record on June 23, 1999. Stock options and per share data have been
retroactively adjusted to reflect the split.
10. EQUITY INVESTMENT
-----------------
On July 16, 1999, the Company made a strategic investment in Aber
Resources Ltd. ("Aber"), a publicly-traded company headquartered in
Canada, by purchasing 8 million shares of its common stock at a cost of
$70,636,000, representing approximately 14.9% of Aber's outstanding
shares. Aber holds a 40% interest in the Diavik Diamonds Project in
Canada's Northwest Territories, an operation being developed to mine
gem-quality diamond reserves. Production is expected to commence in
2003. This investment is included in Other assets, net and is accounted
for under the equity method. The Company's share of Aber's results
from operations has been included in Other expenses, net and is
not material.
In addition, the Company will form a joint venture and enter into a
diamond purchase agreement with Aber. It is expected that this
commercial relationship will enable the Company to secure a considerable
portion of its future diamond needs.
- 10 -
11. SUBSEQUENT EVENTS
-----------------
On November 18, 1999, the Company's Board of Directors declared a
quarterly dividend of $0.06 per common share. This dividend will be
paid on January 10, 2000 to stockholders of record on December 20,
1999.
On November 22, 1999, the Company purchased the land and building for
its flagship store at Fifth Avenue and 57th Street, New York City, for
a cash purchase price of $94,000,000, plus $5,300,000 in fees and
expenses. The financial effect between the cost of leasing and the cost
of ownership is not expected to have a significant impact upon
earnings.
- 11 -
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; International Retail includes retail sales in
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; and Direct Marketing includes
corporate (business-to-business) sales and catalog sales in the U.S.
All references to full years relate to the fiscal year that ends on January 31
of the following calendar year.
Net sales rose 28% in the three-month period (third quarter) ended October 31,
1999 and rose 24% in the nine-month period (year-to-date) ended October 31,
1999. Sales growth, combined with higher operating margins, resulted in net
earnings growth of 81% in the third quarter and 66% 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) 1999 1998 1999 1998
- -------------- -------- -------- -------- --------
U.S. Retail $161,491 $125,762 $452,694 $363,519
International Retail 132,869 101,249 371,917 290,987
Direct Marketing 28,346 25,549 77,439 71,935
-------- -------- -------- --------
$322,706 $252,560 $902,050 $726,441
======== ======== ======== ========
U.S. Retail sales rose 28% in the third quarter and 25% in the year-to-date.
This was primarily due to comparable store sales growth of 22% in the third
quarter and 15% in the year-to-date, as well as from sales in new stores opened
during the past year. Sales in the Company's flagship New York store rose 16% in
the third quarter and 12% in the year-to-date, while comparable branch store
sales increased 24% in the third quarter and 17% in the year-to-date. Comparable
store sales growth primarily resulted from an increased number of transactions.
In addition, purchases by domestic customers continued to account for the
largest portion of the sales growth, although there was an increase in sales to
foreign tourists. In 1999, the Company opened a second store in Dallas, Texas, a
second store in Los Angeles, California, a store in Boca Raton, Florida and
acquired the business of a TIFFANY & CO. boutique in Guam from Mitsukoshi Ltd.
The Company's strategy is to open three to five new U.S. stores each year.
Wholesale sales to independent retailers in the U.S., which represented less
than 3% of total Company sales, declined in the third quarter and the
year-to-date. The Company will discontinue such business effective January 1,
2000, in order to focus on Company-operated store
- 12 -
distribution in the U.S. Management does not expect that this decision will
significantly impact the Company's financial position or earnings.
International Retail sales increased 31% in the third quarter and 28% in the
year-to-date. In Japan, the Company's largest international market, comparable
store sales in local currency rose 10% in the third quarter and 12% in the
year-to-date due to sales growth throughout Japan. 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 yen
strengthened in 1999's third quarter and year-to-date and, as a result, total
Japan retail sales, when translated into U.S. dollars, increased 34% and 30% in
the third quarter and the year-to-date, respectively. The Company's hedging
program uses yen put options in order to stabilize 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 the Asia-Pacific region outside Japan, comparable store sales in local
currencies rose 49% in the third quarter and 33% in the year-to-date due to
improvement in most markets. In Europe, comparable store sales in local
currencies rose 33% in the third quarter and 24% in the year-to-date,
particularly due to strength in London.
The Company's international retail expansion in 1999 has included: in Japan,
opening two new department store boutiques and renovating/expanding five
existing boutiques and its Tokyo Ginza flagship store; expanding its Hong
Kong-Landmark store; opening a second store in Mexico City; and opening a store
in Paris.
Direct Marketing sales increased 11% in the third quarter and 8% in the
year-to-date. Corporate sales increased 9% and 5% in the third quarter and
year-to-date, while catalog sales rose 14% and 12% in the third quarter and
year-to-date. The Company anticipates increasing its catalog mailings by
approximately 7% in 1999.
Gross Profit
- ------------
Gross profit as a percentage of net sales was 56.2% in the third quarter and
56.0% in the year-to-date, compared with 54.9% and 54.4% in the respective
prior-year periods. Management attributes the increases to favorable shifts in
sales mix and leveraging of fixed costs, as well as product
manufacturing/sourcing efficiencies and selective price increases. In order to
maintain gross margin at, or above, prior-year levels, the Company's strategy
includes selective price increases, achieving further product
manufacturing/sourcing efficiencies and leveraging fixed costs.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased 22% in the third quarter
and 20% in the year-to-date, 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 44.0% in the third quarter and 43.7% in the
year-to-date represented improvements of 2.0 points and 1.4 points versus 1998.
Management's ongoing objective is to reduce the expense ratio by leveraging the
Company's fixed-expense base.
- 13 -
Other Expenses, net
- -------------------
Other expenses, net rose in the third quarter and the year-to-date primarily due
to higher interest expense related to a $100,000,000 long-term financing that
the Company completed in December 1998. Management expects Other expenses, net
in the next four quarters to be higher than prior-year levels resulting from the
Company's purchase of its flagship store in New York in November 1999 (see
Financial Condition).
Provision for Income Taxes
- --------------------------
The provision for income taxes resulted in an effective tax rate of 41.0% in the
third quarter and 41.6% in the year-to-date, compared with 42.0% and 42.3% in
the respective 1998 periods. The lower rates were due to a shift in the
geographical business mix toward lower-tax jurisdictions as a result of the
Company's ongoing expansion program.
Year 2000
- ---------
The Company recognizes the need to ensure that its operations will not be
adversely impacted by year 2000 computer hardware and software failures
(information technology systems) and embedded chip or processor failures
(non-information technology systems). 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 reporting
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 modify and test
computer software and operating procedures. The objective of these efforts is to
achieve year 2000 compliance with minimal impact on customer service or other
disruption to, or loss of integrity in, business or financial operations.
Sources of potential failure in internal systems have been identified and
conversion efforts have been completed.
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). An analysis has also been completed of all "non-information
technology" systems (i.e., those using embedded microprocessor technology such
as security systems, safes, telephone systems and warehouse automation
equipment) and upgrades or replacements have been deployed as required. 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 together
with end-users has completed the determination of the significance of these
applications to the Company and their status regarding year 2000 compliance. All
significant applications have been remediated and tested year for 2000
compliance.
The Company has also evaluated year 2000 issues that may be experienced by key
merchandise and service vendors in order to assess the potential effect of
vendor failure on the Company's operations. The responses
- 14 -
from key vendors and suppliers indicate that substantially all are year 2000
compliant at this time, will be year 2000 compliant before December 31, 1999, or
are not dependent on computer technology to deliver products and services to the
Company.
Contingency plans for manual and delayed information processing have also been
completed. These plans were developed because of the possibility of year 2000
failures or service interruptions within the domestic and international network
communications infrastructure that the Company relies upon for daily operations.
These plans and procedures address both proactive and reactive measures that may
be deployed to provide merchandise to stores and customers and continue domestic
and international operations. While the Company currently expects no significant
adverse effect in its business, financial condition, results of operations or
cash flows due to year 2000 issues, its beliefs and expectations are based on
assumptions that ultimately may prove to be inaccurate.
In addition to the cost of internal resources, the Company's total cost for
achieving year 2000 compliance is estimated to be $8,500,000 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 $1,403,000 in the year-to-date of 1999 and $8,363,000 on a
cumulative basis.
FINANCIAL CONDITION
- -------------------
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. Management believes
that the Company's financial condition at October 31, 1999 provides sufficient
resources to support current business activities and planned expansion.
The Company incurred a net cash inflow from operating activities of $26,853,000
in the nine months ended October 31, 1999 compared with an outflow of
$35,235,000 in the nine months ended October 31, 1998. The improved cash flow
primarily resulted from increased net earnings, as well as a decreased use of
working capital.
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were $628,723,000
and 3.3:1 at October 31, 1999, compared with $522,927,000 and 2.8:1 at January
31, 1999 and $378,898,000 and 2.1:1 at October 31, 1998.
Accounts receivable at October 31, 1999 were 1% lower than at January 31, 1999
(which is a seasonal high-point) but were 16% higher than at October 31, 1998
due to sales growth.
Inventories (which represent the largest portion of assets) at October 31, 1999
were 20% higher than at January 31, 1999 and were 11% higher than at October 31,
1998. The increases were due to higher finished goods to support sales growth,
new stores and new/expanded product offerings. In addition, the increases were
also partly due to the translation effect of a stronger Japanese yen. The
Company's ongoing objective is to improve inventory performance through:
refinement of worldwide replenishment systems; focus on the specialized
- 15 -
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.
Capital expenditures in the nine months ended October 31, 1999 were $52,743,000,
compared with $47,112,000 in the prior-year period. Based on current plans,
management expects that capital expenditures will be approximately $75 million
in 1999.
On July 16, 1999, the Company made a strategic investment in Aber Resources Ltd.
("Aber"), a publicly-traded company headquartered in Canada, by purchasing 8
million shares of its common stock at a cost of $70,636,000, representing
approximately 14.9% of Aber's outstanding shares. Aber holds a 40% interest in
the Diavik Diamonds Project in Canada's Northwest Territories, an operation
being developed to mine gem-quality diamond reserves. Production is expected to
commence in 2003. The investment is included in Other assets, net and is
accounted for under the equity method. The Company's share of Aber's results
from operations has been included in Other expenses, net and is not material.
In addition, the Company will form a joint venture and enter into a
diamond-purchase agreement with Aber. It is expected that this commercial
relationship will enable the Company to secure a considerable portion of its
future diamond needs.
On July 23, 1999, the Company issued 1,450,000 shares of its Common Stock at a
price of $49.375 per share, resulting in net proceeds of $71,426,000. The net
proceeds from the sale were added to the Company's working capital and have been
used to support ongoing business expansion.
On October 26, 1999, the Company entered into a yen 5,500,000,000, five-year
term loan agreement, bearing interest at the six-month Japanese LIBOR rate plus
50 basis points, adjusted every six months. The proceeds were primarily used to
reduce short-term indebtedness in Japan.
As a result of the above factors, net-debt (short-term borrowings and 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
$139,640,000 and 17% at October 31, 1999, compared with $103,197,000 and 17% at
January 31, 1999 and $204,362,000 and 31% at October 31, 1998.
On November 22, 1999, the Company purchased the land and building for its
flagship store at Fifth Avenue and 57th Street, New York City, for a cash
purchase price of $94,000,000, plus $5,300,000 in fees and expenses. The
financial effect between the cost of leasing and the cost of ownership is not
expected to have a significant impact upon earnings.
The Company's sources of working capital are internally-generated cash flows and
borrowings available under a five-year, $160,000,000 multicurrency,
noncollateralized, five-bank revolving credit facility 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
- 16 -
that are typically required during the third and fourth quarters of the year.
Market Risk
- -----------
The Company is exposed to market risk from fluctuations in foreign currency
exchange rates and interest rates, which could impact 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 which
may expose the Company to significant market risk.
The Company uses foreign currency-purchased put options and, to a lesser extent,
foreign-exchange forward contracts to reduce its risk in foreign
currency-denominated transactions in order to minimize the impact of a
significant strengthening of the U.S. dollar against other foreign currencies.
Gains and losses on these instruments substantially offset any losses and gains
on the assets, liabilities and transactions being hedged. The Company's primary
net foreign currency market exposure is the Japanese yen. Management does not
foresee nor expect any significant changes in foreign currency exposure in the
near future.
The Company manages its portfolio of fixed-rate debt to reduce its exposure to
interest rate changes. The fair value of the Company's fixed-rate long-term debt
is sensitive to interest rate changes. Interest rate changes would result in
gains/losses in the market value of this debt due to differences between market
interest rates and rates at the inception of the debt obligation. Management
does not foresee nor expect any significant changes in its exposure to interest
rate fluctuations, or in how such exposure is managed in the near future.
The Company uses an interest rate swap to manage its yen-denominated floating
rate long-term debt in order to reduce the impact of interest rate changes on
earnings and cash flows and to lower overall borrowing costs.
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, catalog
mailings, 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. 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
- 17 -
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 sales in Japan will not
decline substantially; (ii) that there will not be a substantial adverse change
in the exchange relationship between the Japanese yen and the U.S. dollar; (iii)
that the Company's commercial relationship with Mitsukoshi, Ltd. ("Mitsukoshi")
and Mitsukoshi's ability to continue as a leading department store operator in
Japan will continue; (iv) that Mitsukoshi and other department store operators
in Japan, in the face of declining sales, will not close or consolidate stores
in which TIFFANY & CO. boutiques are located; (v) that low or negative growth in
the economy or in the financial markets will not occur and reduce discretionary
spending on goods that are, or are perceived to be, "luxuries"; (vi) that
existing product supply arrangements, including license agreements with
third-party designers Elsa Peretti and Paloma Picasso, will continue; (vii) that
the wholesale market for high-quality cut diamonds will provide continuity of
supply and pricing; (viii) that new stores and other sales locations can be
leased or otherwise obtained on suitable terms in desired markets and that
construction can be completed on a timely basis; (ix) that new systems,
particularly for inventory management, can be successfully integrated into the
Company's operations, and that warehousing and distribution productivity and
capacity can be further improved to support the Company's worldwide distribution
requirements; and (x) that no downturn in consumer spending will occur during
the fourth quarter of any year.
- 18 -
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.128 Translation of Loan Agreement between Tiffany & Co. Japan
Inc. and the Fuji Bank, Ltd., Hong Kong Branch dated 22
October 1999, Guaranty issued in connection therewith by the
Registrant and Agreement on Bank Transactions referenced in
the aforesaid Loan Agreement; Schedule to the Master
Agreement dated as of October 18, 1999 between The Chase
Manhattan Bank and Tiffany & Co. Japan Inc. (made with
reference to International Swap Dealers Association, Inc.
Master Agreement form copyrighted 1992), Guaranty dated
October 18, 1999 issued in connection with such Master
Agreement by Tiffany and Company, Tiffany & Co.
International and Registrant in favor of The Chase Manhattan
Bank and Confirmation issued October 29, 1999 by The Chase
Manhattan Bank.
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 13, 1999 By: /s/ James N. Fernandez
----------------------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
- 19 -
EXHIBIT INDEX
Exhibit
Number
10.128 Translation of Loan Agreement between Tiffany & Co. Japan Inc. and
the Fuji Bank, Ltd., Hong Kong Branch dated 22 October 1999, Guaranty
issued in connection therewith by the Registrant and Agreement on Bank
Transactions referenced in the aforesaid Loan Agreement; Schedule to
the Master Agreement dated as of October 18, 1999 between The Chase
Manhattan Bank and Tiffany & Co. Japan Inc. (made with reference to
International Swap Dealers Association, Inc. Master Agreement form
copyrighted 1992), Guaranty dated October 18, 1999 issued in
connection with such Master Agreement by Tiffany and Company, Tiffany
& Co. International and Registrant in favor of The Chase Manhattan
Bank and Confirmation issued October 29, 1999 by The Chase Manhattan
Bank.
27 Financial Data Schedule
(submitted to SEC only)