MERGER AGREEMENT
OnNovember 24, 2019 ,Tiffany & Co. (the "Registrant") entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Registrant, LVMH Moët Hennessy - Louis Vuitton SE, a societas Europaea (European company) organized under the laws ofFrance ("Parent"),Breakfast Holdings Acquisition Corp. , aDelaware corporation and an indirect wholly owned subsidiary of Parent ("Holding"), andBreakfast Acquisition Corp. , aDelaware corporation and a direct wholly owned subsidiary of Holding ("Merger Sub"). Pursuant to the Merger Agreement, Merger Sub will be merged with and into the Registrant (the "Merger"), with the Registrant continuing as the surviving company in the Merger and a wholly owned indirect subsidiary of Parent. For additional information related to the Merger Agreement, please refer to the Registrant's Definitive Proxy Statement on Schedule 14A filed with theU.S. Securities and Exchange Commission (the "SEC") onJanuary 6, 2020 and "Item 1. Financial Statements - Note 2. Merger Agreement".
NOVEL CORONAVIRUS
An outbreak of a novel strain of the coronavirus, COVID-19, was identified inChina inDecember 2019 and was subsequently recognized as a pandemic by theWorld Health Organization onMarch 11, 2020 . This COVID-19 outbreak has severely restricted the level of economic activity around the world. In response to COVID-19, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego time outside of their homes. Temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. Further, individuals' ability to travel has been curtailed through mandated travel restrictions and has been further limited through additional voluntary or mandated closures of travel-related businesses. Such actions, together with changes in consumers' willingness to congregate in populated areas and lower levels of disposable income due to rising unemployment rates, have resulted in significant business disruptions across a wide array of industries and an overall decline of the global economy. These factors, among others, have resulted in a significant decline in customer traffic, consumer confidence and local tourist spending on discretionary items around the world. As a result of the COVID-19 outbreak, a substantial number of the Company's retail stores was closed for some portion of time in the three months endedApril 30, 2020 . For example, Company retail store closures peaked at approximately 75% to 80% of the Company's retail stores worldwide during the month of April. As ofApril 30, 2020 , approximately 70% of the Company's retail stores remained closed worldwide, as all of the Company's retail stores in theAmericas remained closed, approximately 15% of the Company's retail stores inAsia Pacific remained closed, approximately 95% of the Company's retail stores inJapan remained closed and approximately 85% of the Company's retail stores inEurope remained closed. During this time, the Company's sites in its e-commerce enabled countries remained operational, and the Company's e-commerce sales in the three months endedApril 30, 2020 increased 23% worldwide, with key markets such asthe United States and theUnited Kingdom having increased 14% and 15%, respectively, compared to the prior year period. In addition, sales through the Company's Mainland China e-commerce site have grown sequentially every quarter since the portal was launched inJuly 2019 . This strong global online sales performance has continued through the month ofMay 2020 , with worldwide e-commerce sales more than doubling those ofMay 2019 due to significant increases across every region. The Company's worldwide e-commerce sales represented approximately 15% of its total net sales during the period fromFebruary 1 through May 31, 2020 , versus the 6% that global e-commerce sales represented in each of the last three full fiscal years. As ofMay 29, 2020 , approximately 80% of the Company's retail stores worldwide were fully or partially open, including approximately 70% of the Company's retail stores in theAmericas , approximately 90% of the Company's retail stores inAsia Pacific , approximately 90% of the Company's retail stores inJapan and approximately 65% of the Company's retail stores inEurope , in each case in accordance with applicable guidelines established by local governments. However, onMay 31, 2020 , in connection with the widespread protests across the country and out of concern for the wellbeing of its customers and employees, the Company once again closed all of its retail locations in theU.S. As ofJune 8, 2020 , approximately 55% of the Company's stores in theU.S. were fully or partially opened. Despite these recent store openings, the Company continues to experience a significant decline in customer traffic and retail sales in many locations as compared to comparable periods in the prior year, with certain exceptions. ForTIFFANY & CO. 31
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example, retail sales in Mainland China, the first market impacted by COVID-19, declined approximately 85% and 15% during February andMarch 2020 , respectively, but increased approximately 30% inApril 2020 , in each case as compared to the corresponding period in the prior year. This sequential growth in Mainland China has continued to accelerate, withMay 2020 retail sales in that country increasing approximately 90% overMay 2019 . However, despite the growth in Mainland China, the Company's worldwide net sales inMay 2020 declined approximately 40% as compared toMay 2019 . While management expects that customer traffic and worldwide net sales will significantly increase throughout the remainder of its fiscal year endingJanuary 31, 2021 relative to the Company's year-to-date performance, sales declines to date are expected to have a significant negative impact on the Company's sales, earnings and cash flows as compared to the prior year. In light of the impact of COVID-19, the Company has also been reviewing and carefully managing its operating expenses and eliminating certain non-essential spending. As part of these efforts, the Company has negotiated, and continues to negotiate, with its landlords for rent concessions principally under leases for retail stores. As a result of COVID-19, governments in many markets in which the Company operates have also implemented programs to encourage companies to retain and pay employeeswho are unable to work, orwho are limited in the work that they can perform due to limitations resulting from travel bans, work-from-home policies and shelter-in-place orders, among others. These programs generally provide credits for retaining and continuing to pay employees. To date, the Company has continued to pay its employees, although at a reduced level after a period of time for certain employees in closed or partially closed locationswho cannot work from home, and has not taken action to reduce its workforce in connection with COVID-19. In response to the COVID-19 outbreak, the Company has taken steps to further strengthen its financial position and balance sheet, and to maintain financial liquidity and flexibility, which included drawing down$500.0 million on its five-year, multi-bank, multi-currency committed unsecured revolving credit facility (the "Credit Facility") during the three months endedApril 30, 2020 as a precautionary measure in order to increase its cash position and maintain financial flexibility in light of the uncertainty in the global markets resulting from COVID-19. This drawdown was permitted under the Merger Agreement. OnJune 8, 2020 , as a precautionary measure in order to maintain flexibility with respect to its liquidity sources and provide additional financial maintenance covenant headroom, the Company entered into amendments to its Credit Facility, the Guaranty in respect of its Tiffany-Shanghai Credit Facility, and its Senior Notes due 2026 and 2042, in order to modify the financial ratio thresholds set forth in certain covenants contained in the agreements governing these debt issuances through and including the Company's fiscal quarter endingApril 30, 2021 . These amendments are permitted under the Merger Agreement. See "Item 1. Financial Statements - Note 8. Debt" for additional information. The extent to which the COVID-19 outbreak impacts the Company's business operations, financial results, and liquidity will depend on numerous factors that the Company may not be able to accurately predict or assess due to their dynamic and evolving nature, including the duration and scope of the COVID-19 outbreak; the negative impact the outbreak has on global and regional economies and economic activity, including the duration and magnitude of its impact on consumer discretionary spending and levels of consumer confidence; and how quickly economies recover after the COVID-19 outbreak subsides. Accordingly, management cannot predict with certainty for how long and to what extent the COVID-19 outbreak will impact its business operations or the global economy as a whole. The Company will continue to take steps to mitigate the potential risks posed by the spread and related circumstances and impacts of COVID-19. The Company's management also remains focused on addressing these recent challenges presented by COVID-19 by preserving the Company's liquidity and managing its cash flows with preemptive actions such as those described above. Despite the aforementioned challenges, the Company intends to continue to execute on its strategic plans and operational initiatives during this outbreak. However, the uncertainties associated with the protective and preventative measures being put in place or recommended by both governmental entities and other businesses, among other uncertainties, will likely result in delays or modifications to these plans and initiatives.TIFFANY & CO. 32
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OVERVIEW
The Registrant is a holding company that operates throughTiffany and Company ("Tiffany") and the Registrant's other subsidiary companies (collectively, the "Company"). The Registrant, through its subsidiaries, designs and manufactures products and operatesTIFFANY & CO. retail stores worldwide, and also sells its products through Internet, catalog, business-to-business and wholesale operations. The Company's principal merchandise offering is jewelry (representing 92% of worldwide net sales in the fiscal year endedJanuary 31, 2020 ); it also sells watches, home and accessories products and fragrances.
The Company's reportable segments are as follows:
•
& CO. products in certain markets through Internet, catalog, business-to-business and wholesale operations;
•
well as sales of
business-to-business and wholesale operations;
•
sales of
wholesale operations;
•
sales ofTIFFANY & CO. products in certain markets through Internet and wholesale operations; and
• Other consists of all non-reportable segments. Other includes the Emerging
Markets region, which includes sales in five Company-operated
stores and wholesale operations in theMiddle East . In addition, Other includes wholesale sales of diamonds as well as earnings received from third-party licensing agreements.
SUMMARY OF FIRST QUARTER RESULTS
• Worldwide net sales decreased 45% to
("first quarter") ended
reportable segments, which management attributed to the effects of COVID-19
and the resulting store closures; comparable sales decreased 44%. On a
constant-exchange-rate basis (see "Non-GAAP Measures" below), worldwide net
sales decreased 44% and comparable sales decreased 43%.
• Net loss of
above factors. Net loss in the first quarter of 2020 also included the impact
of costs related to the pending Merger, as well as the compensation received
in respect of the previous acquisition of the premises containing one of the
Company's leased retail stores and an administrative office in
contribution to The
"Non-GAAP Measures." Excluding these items, Net loss was
$0.53 per share.
• Inventories, net increased 2% from
TIFFANY & CO. 33
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Table of Contents RESULTS OF OPERATIONS Non-GAAP Measures The Company reports information in accordance withU.S. Generally Accepted Accounting Principles ("GAAP"). Internally, management also monitors and measures its performance using certain sales and earnings measures that include or exclude amounts, or are subject to adjustments that have the effect of including or excluding amounts, from the most directly comparable GAAP measure ("non-GAAP financial measures"). The Company presents such non-GAAP financial measures in reporting its financial results to provide investors with useful supplemental information that will allow them to evaluate the Company's operating results using the same measures that management uses to monitor and measure its performance. The Company's management does not, nor does it suggest that investors should, consider non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. These non-GAAP financial measures presented here may not be comparable to similarly-titled measures used by other companies.Net Sales . The Company's reported net sales reflect either a translation-related benefit from strengthening foreign currencies or a detriment from a strengtheningU.S. dollar. Internally, management monitors and measures its sales performance on a non-GAAP basis that eliminates the positive or negative effects that result from translating sales made outside theU.S. intoU.S. dollars ("constant-exchange-rate basis"). Sales on a constant-exchange-rate basis are calculated by taking the current year's sales in local currencies and translating them intoU.S. dollars using the prior year's foreign currency exchange rates. Management believes this constant-exchange-rate basis provides a useful supplemental basis for the assessment of sales performance and of comparability between reporting periods. The following tables reconcile the sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous year: First Quarter 2020 vs. 2019 Constant- GAAP Translation Exchange- Reported Effect Rate BasisNet Sales : Worldwide (45 )% (1 )% (44 )% Americas (45 ) (1 ) (44 ) Asia-Pacific (46 ) (2 ) (44 ) Japan (40 ) 1 (41 ) Europe (40 ) (2 ) (38 ) Other (65 ) - (65 ) Comparable Sales: Worldwide (44 )% (1 )% (43 )% Americas (45 ) (1 ) (44 ) Asia-Pacific (45 ) (3 ) (42 ) Japan (41 ) 1 (42 ) Europe (42 ) (2 ) (40 ) Other (53 ) - (53 ) TIFFANY & CO. 34
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Table of Contents First Quarter 2020 vs. 2019 Constant- GAAP Translation Exchange- Reported Effect Rate Basis Jewelry sales by product category: Jewelry collections (44 )% (1 )% (43 )% Engagement jewelry (49 ) (1 ) (48 ) Designer jewelry (39 ) (1 ) (38 ) Statements of Earnings. Internally, management monitors and measures its earnings performance excluding certain items listed below. Management believes excluding such items provides a useful supplemental basis for the assessment of the Company's results relative to the corresponding period in the prior year. The following tables reconcile certain GAAP amounts to non-GAAP amounts: Sydney, Australia Recovery and (in millions, except per Charges related to the Charitable share amounts) GAAP pending Merger a Contribution b Non-GAAP Three Months Ended April 30, 2020 Gross Profit$ 309.0 $ 0.4 $ -$ 309.4 As a % of sales 55.6 % - % - % 55.7 % Selling, general & 414.4 (16.3 ) (12.0 ) 386.1 administrative expenses As a % of sales 74.6 % (2.9 )% (2.2 )% 69.5 % Loss from operations (105.4 ) 16.7 12.0 (76.7 ) As a % of sales (19.0 )% 3.0 % 2.2 % (13.8 )% Other income, net (25.4 ) - 31.4 6.0 (Benefit) provision for (25.2 ) 1.3 (4.5 ) (28.4 ) income taxes Effective income tax rate 28.0 % 7.6 % 22.9 % 30.7 % Net loss (64.6 ) 15.4 (14.9 ) (64.1 ) Diluted earnings per (0.53 ) 0.13 (0.12 ) (0.53 ) share*
a Costs recorded in the first quarter of 2020 related to the pending Merger.
See "Item 1. Financial Statements - Note 2. Merger Agreement" for additional
information. b Recognition of (i) a pre-tax gain of$31.4 million related to amounts received as compensation for the previous acquisition of the premises
containing one of the Company's leased retail stores and an administrative
office in
and (ii) a pre-tax expense of
The
connection with the compensation referenced above. See "Item 1. Financial
Statements - Note 12. Commitments and Contingencies" for additional information on the compulsory acquisition matter.
* Amounts may not add due to rounding.
Comparable Sales
Comparable sales include sales transacted in Company-operated stores open for more than 12 months. Sales from e-commerce sites are included in comparable sales for those sites that have been operating for more than 12 months. Sales for relocated stores are included in comparable sales if the relocation occurs within the same geographical market. In all markets, the results of a store in which the square footage has been expanded or reduced remain in the comparable sales base.TIFFANY & CO. 35
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Net sales by segment were as follows:
First Quarter (in millions) 2020 2019 Increase/(Decrease) Americas$ 225.1 $ 406.3 (45 )% Asia-Pacific 173.7 324.1 (46 ) Japan 86.3 144.7 (40 ) Europe 61.3 102.5 (40 ) Other 9.1 25.5 (65 )$ 555.5 $ 1,003.1 (45 ) Worldwide net sales decreased$447.6 million , or 45%, in the first quarter of 2020 reflecting lower sales in all reportable segments, which management attributed to the effects of COVID-19 and the resulting store closures across the markets. On a constant-exchange-rate basis, worldwide net sales decreased 44% compared to the prior year.
Jewelry sales by product category were as follows:
First Quarter
(in millions) 2020 2019 $ Change % Change
Jewelry collections
Net sales reflected decreases across each of the jewelry categories.
Changes in net sales by reportable segment were as follows:
(in millions) Comparable Sales Non-comparable Sales Wholesale/Other Total
Americas
(0.3 ) $ (8.5 )$ (181.2 ) Asia-Pacific (117.2 ) 0.2 (33.4 ) (150.4 ) Japan (55.6 ) 1.4 (4.2 ) (58.4 ) Europe (42.1 ) - 0.9 (41.2 ) Changes in jewelry sales relative to the prior year by reportable segment were as follows: Average Price per Unit Sold Number of As Reported Impact of Currency Translation Units Sold Change in Jewelry Sales Americas (4 )% - % (41 )% Asia-Pacific (1 ) (3 ) (46 ) Japan (2 ) 1 (41 ) Europe (1 ) (2 ) (40 ) TIFFANY & CO. 36
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For each reportable segment, the decrease in the number of jewelry units sold reflected decreases across all jewelry categories, which management attributed to the effects of COVID-19 and the resulting store closures across the markets.Americas . Total net sales decreased$181.2 million , or 45%, which included comparable sales decreasing$172.4 million , or 45%. Sales decreased across the region, which management attributed to the effects of COVID-19, and the resulting closures of all stores across the region that began inmid-March 2020 and continued through the end of the first quarter. On a constant-exchange-rate basis, total net sales and comparable sales each decreased 44%.Asia-Pacific . Total net sales decreased$150.4 million , or 46%, which included comparable sales decreasing$117.2 million , or 45%. Sales decreased across the region, which management attributed to the effects of COVID-19, and the resulting store closures across the region beginning with Mainland China in February and spreading throughout the other markets in the region in March and April. On a constant-exchange-rate basis, total net sales decreased 44% and comparable sales decreased 42%.Japan . Total net sales decreased$58.4 million , or 40%, which included comparable sales decreasing$55.6 million , or 41%. Management attributed the decreases to the effects of COVID-19, including the resulting store closures across the region, which primarily began in earlyApril 2020 , and the decline in tourist traffic beginning early in the first quarter. On a constant-exchange-rate basis, total net sales decreased 41% and comparable sales decreased 42%.Europe . Total net sales decreased$41.2 million , or 40%, which included comparable sales decreasing$42.1 million , or 42%. Sales decreased across the region, which management attributed to the effects of COVID-19, and the resulting store closures across the region, which began inmid-March 2020 and persisted into the second half of April, when the Company's stores in a limited number of markets began to reopen. On a constant-exchange-rate basis, total net sales decreased 38% and comparable sales decreased 40%.
Other. Other sales decreased by
Store Data. In the first quarter of 2020, the Company closed one
Company-operated store each in the
Gross Margin First Quarter (dollars in millions) 2020 2019 As reported: Gross profit$ 309.0 $ 619.2
Gross profit as a percentage of net sales 55.6 % 61.7 % On a Non-GAAP basis*: Gross profit
$ 309.4
Gross profit as a percentage of net sales 55.7 %
* See "Non-GAAP Measures" above for additional information. Gross margin (gross profit as a percentage of net sales) decreased 610 basis points in the first quarter of 2020 largely due to (i) sales deleverage on fixed costs resulting from the effects of COVID-19 on net sales, (ii) certain overhead costs not capitalized in the period resulting from certain manufacturing locations being closed or operating at reduced capacity during the first quarter due to COVID-19 and (iii) an increase in inventory reserves. Additionally, the current year included the impact of a$12.3 million charge that was recorded to fully reserve the asset related to an expected insurance recovery in respect of the bankruptcy filing of a metal refiner to which the Company entrusted precious scrap metal (see "Item 1. Financial Statements - Note 12. Commitments and Contingencies"). Management periodically reviews and adjusts its retail prices when appropriate to address product input cost increases, specific market conditions and changes in foreign currencies/U.S. dollar relationships. Its long-termTIFFANY & CO. 37
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strategy is to continue that approach, although significant increases in product input costs or weakening foreign currencies can affect gross margin negatively over the short-term until management makes necessary price adjustments. Among the market conditions that management considers are consumer demand for the product category involved, which may be influenced by consumer confidence and competitive pricing conditions. Management uses derivative instruments to mitigate certain foreign exchange and precious metal price exposures (see "Item 1. Financial Statements - Note 9. Hedging Instruments"). Management adjusted retail prices in the first quarter of 2020 and 2019 across most geographic regions and product categories, some of which were intended to mitigate foreign currency fluctuations.
Selling, General and Administrative ("SG&A") Expenses
First Quarter (dollars in millions) 2020 2019 As reported: SG&A expenses$ 414.4 $ 458.3 SG&A expenses as a percentage of net sales ("SG&A expense ratio") 74.6 % 45.7 % On a Non-GAAP basis*: SG&A expenses$ 386.1 SG&A expense ratio 69.5 %
* See "Non-GAAP Measures" above for additional information.
SG&A expenses decreased$43.9 million , or 10%, in the first quarter of 2020, which included$16.3 million in costs related to the pending Merger and a$12.0 million charitable contribution to TheTiffany & Co. Foundation (see "Non-GAAP Measures" for further details). These costs were more than offset by decreased store occupancy expenses and a decrease in labor and incentive compensation costs. Excluding the pending Merger-related costs and the charitable contribution noted above, SG&A expenses decreased$72.2 million , or 16%, compared to the prior year (see "Non-GAAP Measures"). SG&A expenses as a percentage of net sales increased significantly due to sales deleverage on operating expenses resulting from the effects of COVID-19 on net sales. Changes in foreign currency exchange rates did not have a meaningful effect on SG&A expenses in the first quarter as compared with the prior year.
(Loss) Earnings from Operations
First Quarter (in millions) 2020 2019 As reported: (Loss) earnings from operations$ (105.4 ) $ 160.9 Operating margin (19.0 )% 16.0 % On a Non-GAAP basis*: Loss from operations$ (76.7 ) Operating margin (13.8 )%
* See "Non-GAAP Measures" above for additional information.
Loss from operations of
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Results by segment are as follows:
% of Net % of Net (in millions) First Quarter 2020 Sales First Quarter 2019 Sales (Loss) earnings from operations*: Americas $ (41.2 ) (18.3 )% $ 56.8 14.0 % Asia-Pacific 15.9 9.2 86.0 26.5 Japan 16.4 19.0 53.4 36.9 Europe (10.0 ) (16.3 ) 12.2 11.9 Other (5.1 ) (56.7 ) 1.2 4.8 (24.0 ) 209.6 Unallocated corporate expenses (52.7 ) (9.5 )% (48.7 ) (4.9 )% Other operating expenses (28.7 ) - (Loss) earnings from operations $ (105.4 ) (19.0 )% $ 160.9 16.0 %
* Percentages represent (loss) earnings from operations as a percentage of each
segment's net sales.
On a segment basis, the (loss) earnings from operations to each segment's net
sales in the first quarter of 2020 compared with 2019 was as follows:
•
expenses, which management attributed to the effects of COVID-19 on net sales, as discussed above, and a decrease in gross margin;
•
expenses, which management attributed to the effects of COVID-19 on net sales, as discussed above, and a decrease in gross margin;
•
expenses, which management attributed to the effects of COVID-19 on net sales, as discussed above, and a decrease in gross margin; and
•
expenses, which management attributed to the effects of COVID-19 on net sales, as discussed above, and a decrease in gross margin. Unallocated corporate expenses include costs related to administrative support functions which the Company does not allocate to its segments. Such unallocated costs include those for centralized information technology, finance, legal and human resources departments. Unallocated corporate expenses increased$4.0 million , or 8%, in the first quarter of 2020 when compared to the prior year, as a result of a$12.3 million charge that was recorded to fully reserve the asset related to an expected insurance recovery in respect of the bankruptcy filing of a metal refiner to which the Company entrusted precious scrap metal (see "Item 1. Financial Statements - Note 12. Commitments and Contingencies") offset by a decrease in incentive compensation expense. The first quarter 2020 amounts included in other operating expenses in the table above represent (i)$16.7 million for costs incurred related to the pending Merger (see "Item 1. Financial Statements - Note 2. Merger Agreement") and (ii)$12.0 million of expense for a charitable contribution to TheTiffany & Co. Foundation.
Interest Expense and Financing Costs
Interest expense and financing costs decreased
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Other Income, net
Other income, net was$25.4 million in the first quarter of 2020, compared to Other income, net of$1.0 million in the prior year. Other income, net in the first quarter of 2020 included the recognition of a gain of$31.4 million related to amounts received as compensation for the previous acquisition of the premises containing one of the Company's leased retail stores and an administrative office inSydney, Australia under compulsory acquisition laws inAustralia . See "Item 1. Financial Statements - Note 12. Commitments and Contingencies" for additional information.
(Benefit) Provision for Income Taxes
The effective income tax rate for the first quarter of 2020 was 28.0% versus 17.3% in the prior year. The increase in the effective income tax rate for the first quarter was primarily due to the jurisdictional mix of earnings, which are taxed at the statutory tax rates applicable to each jurisdiction, as well as an estimated increase in the Global Intangible Low-Taxed Income ("GILTI") tax, each of which reflects the impact of COVID-19 on the Company's results of operations. The Company's effective tax rate could be negatively impacted to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates. The effective income tax rate for the first quarter of 2019 included the recognition of an income tax benefit of$7.5 million , or 500 basis points or$0.06 per diluted share, related to an increase in the estimated 2018 Foreign Derived Intangible Income ("FDII") benefit as a result ofU.S. Treasury guidance issued during the first quarter of 2019.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs have been, and are expected to remain, primarily a function of its ongoing, seasonal and expansion-related working capital requirements and capital expenditure needs. Over the long term, the Company manages its cash and capital structure to maintain a strong financial position that provides flexibility to pursue strategic priorities. Management regularly assesses its working capital needs, capital expenditure requirements, debt service, dividend payouts, share repurchases and future investments. In response to the COVID-19 outbreak, the Company has taken steps to further strengthen its financial position and balance sheet, and to maintain financial liquidity and flexibility, which included drawing down$500.0 million on its Credit Facility during the three months endedApril 30, 2020 as a precautionary measure in order to increase its cash position and maintain financial flexibility in light of the uncertainty in the global markets resulting from COVID-19. This drawdown was permitted under the Merger Agreement. AtApril 30, 2020 , the Company was in compliance with all debt covenants. The Company monitors its covenant compliance carefully. The agreements governing certain of the Company's material debt instruments include covenants that incorporate a (i) debt incurrence test premised on a fixed charge coverage ratio, which is the ratio of the Company's EBIT (earnings before interest and taxes) plus rent expense to its interest expense plus rent expense, and (ii) leverage ratio, which is the ratio of the Company's total adjusted debt to its consolidated EBITDAR (earnings before interest, taxes, depreciation, amortization and rent expenses). Specifically, under the terms of the Company's Senior Notes due 2026 and 2042, the Company is restricted from incurring, or permitting its subsidiaries to incur, indebtedness if, among other conditions, the Company's fixed charge coverage ratio is less than 2.0 to 1.0. Under the terms of the Credit Facility, the Guaranty in respect of the three-year, multi-bank revolving credit agreement entered into by the Company's wholly owned subsidiary,Tiffany & Co. (Shanghai )Commercial Company Limited (the "Shanghai Guaranty"), and the Company's Senior Notes due 2026 and 2042, the Company is required to maintain a maximum leverage ratio of 3.50 to 1.00 for the four quarter period ending as of the end of each fiscal quarter. Based on the Company's forecasts and plans, the Company expected to remain in compliance with the leverage ratio financial maintenance covenant, although the impact of COVID-19 on the Company's EBIT could increase that leverage ratio. The Company also expected that it would not meet the fixed charge coverage ratio test for incurrence of additional debt under its Senior Notes as of the end of the second fiscal quarter of fiscal 2020, although it did not expect to need to incur additional debt within the next 12 months. Nonetheless, as a precautionary measure in order to maintain flexibility with respect to its liquidity sources and provide additional financial maintenance covenant headroom, the Company entered into amendments to its Credit Facility, the Shanghai Guaranty, and its Senior Notes due 2026 and 2042, in order to modify the financial maintenance covenant and, in the case of the Senior Notes due 2026 and 2042, the fixed charge coverage ratio test for debt incurrence, through and including the Company's fiscal quarter endingApril 30, 2021 . These amendments are permitted under the Merger Agreement.TIFFANY & CO. 40
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These amendments were executed onJune 8, 2020 and effect changes to certain provisions and covenants during the period beginning with the fiscal quarter endingJuly 31, 2020 and continuing through the fiscal quarter endingApril 30, 2021 (such period of time, the "Covenant Relief Period"), including, among others: (a) an increase in the maximum leverage ratio under the Credit Facility, the Shanghai Guaranty, and the 2026 and 2042 Senior Notes, to 4.50 to 1.00; and (b) a reduction of the fixed charge coverage ratio in the 2026 and 2042 Senior Notes to 0.75 to 1.00. During the Covenant Relief Period, the facility fee under the Credit Facility will be increased by 5 basis points at all pricing levels, and the applicable margin will be increased by (i) 10 basis points at all pricing levels through the quarter endingJuly 31, 2020 , (ii) 20 basis points at all pricing levels fromAugust 1, 2020 untilNovember 1, 2020 and (iii) 30 basis points at all pricing levels fromNovember 1, 2020 throughApril 30, 2021 . The coupon rate under the 2026 and 2042 Senior Notes will be increased by 25 basis points during the Covenant Relief Period. The Company has the right to terminate the Covenant Relief Period under the Credit Facility, Shanghai Guaranty and the 2026 and 2042 Senior Notes, including the attendant covenant and pricing modifications referenced above, prior toApril 30, 2021 , subject to the Company's certification that its leverage ratio does not exceed 3.50 to 1.00 at such time. Management believes that cash on hand, internally generated cash flows and the funds available under its revolving credit facilities are sufficient to support the Company's liquidity and capital requirements for the foreseeable future, including the next 12 months. The following table summarizes cash flows from operating, investing and financing activities: First Quarter (in millions) 2020 2019 Net cash provided by (used in): Operating activities$ (217.6 ) $ 31.1 Investing activities (47.8 ) (52.1 ) Financing activities 434.0 (69.1 ) Effect of exchange rate changes on cash and cash equivalents 2.9
7.0
Net increase (decrease) in cash and cash equivalents
Operating Activities The Company had net cash outflows from operating activities of$217.6 million in the first quarter of 2020 compared with net cash inflows from operating activities of$31.1 million in the first quarter of 2019. The change in operating cash flows was primarily due to the net loss of$64.6 million incurred in the first quarter of 2020, which management attributed to the effects of COVID-19, compared to net income of$125.2 million generated in the first quarter of 2019. Working Capital. Working capital (current assets less current liabilities) was$2.8 billion atApril 30, 2020 , compared with$2.9 billion atJanuary 31, 2020 and$2.8 billion atApril 30, 2019 . Accounts receivable, net atApril 30, 2020 were 36% lower than atJanuary 31, 2020 and 28% lower than atApril 30, 2019 . The decrease in Accounts receivable, net atApril 30, 2020 primarily reflected the decrease in sales during the first quarter of 2020 attributed to the effects of COVID-19, including resulting store closures. Currency translation did not have a significant effect on the change compared toJanuary 31, 2020 orApril 30, 2019 . Inventories, net atApril 30, 2020 were 2% higher than atJanuary 31, 2020 andApril 30, 2019 , primarily due to increases in finished goods inventories compared to both periods. Currency translation did not have a significant effect on the change compared toJanuary 31, 2020 orApril 30, 2019 . Accounts payable and accrued liabilities atApril 30, 2020 were 40% lower than atJanuary 31, 2020 and 17% lower than atApril 30, 2019 . The decrease compared to both periods included (i) declines in trade payables and (ii) the recognition of a gain previously deferred related to amounts received as compensation for the previous acquisition of the premises containing one of the Company's leased retail stores and an administrative office inTIFFANY & CO. 41
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Sydney, Australia under compulsory acquisition laws in that country (see "Item 1. Financial Statements - Note 12. Commitments and Contingencies" for additional information). Investing Activities The Company had net cash outflows from investing activities of$47.8 million in the first quarter of 2020 compared with$52.1 million in the first quarter of 2019.Marketable Securities and Short-Term Investments. The Company invests a portion of its cash in marketable securities and short-term investments. The Company had net proceeds from the sales of marketable securities and short-term investments of$9.9 million during the first quarter of 2020 compared with$7.4 million during the first quarter of 2019.
Financing Activities
The Company had net cash inflows from financing activities of$434.0 million in the first quarter of 2020, compared with net cash outflows of$69.1 million in the first quarter of 2019. Year-over-year changes in cash flows from financing activities were largely driven by changes in net borrowings and share repurchases.
Recent Borrowings. The Company had net proceeds from borrowings as follows:
First Quarter (in millions) 2020 2019
Short-term borrowings:
Proceeds from credit facility borrowings, net
$ 510.5 $ 28.9 As noted above, during the first quarter of 2020, the Company drew down$500.0 million on its Credit Facility as a precautionary measure in order to increase its cash position and maintain financial flexibility in light of current uncertainty in the global markets resulting from COVID-19. This drawdown was permitted under the Merger Agreement. The drawdown proceeds from the Credit Facility can be repaid at any time. Under all of the Company's credit facilities, atApril 30, 2020 , there were$651.9 million of borrowings outstanding,$2.0 million of letters of credit issued and$340.3 million available for borrowing. AtApril 30, 2019 , there were$142.1 million of borrowings outstanding,$3.6 million of letters of credit issued and$886.1 million available for borrowing. The weighted-average interest rate for the amounts outstanding atApril 30, 2020 and 2019 was 2.5% and 4.4%, respectively.
The ratio of total debt (short-term borrowings and long-term debt) to
stockholders' equity was 48% at
At
Shares Repurchases. InMay 2018 , the Registrant's Board of Directors approved a new share repurchase program (the "2018 Program"). The 2018 Program, which became effectiveJune 1, 2018 and expires onJanuary 31, 2022 , authorizes the Company to repurchase up to$1.0 billion of its Common Stock through open market transactions, including through Rule 10b5-1 plans and one or more accelerated share repurchase or other structured repurchase transactions, and/or privately negotiated transactions. As ofApril 30, 2020 ,$471.6 million remained available under the 2018 Program; however, pursuant to the terms of the Merger Agreement, and subject to certain limited exceptions, the Company may not repurchase its Common Stock other than in connection with the forfeiture provisions of Company equity awards or the cashless exercise or tax withholding provisions of such Company equity awards, in each case, granted under the Company's stock-based compensation plans. Accordingly, the Company did not repurchase any shares of its Common Stock during the first quarter of 2020 pursuant to the 2018 Program, andTIFFANY & CO. 42
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does not expect to repurchase any shares of its Common Stock in connection with the 2018 Program prior to the Merger or earlier termination of the Merger Agreement.
The Company's share repurchase activity during the first quarter of 2020 and 2019 was as follows:
First Quarter
(in millions, except per share amounts) 2020 2019 Cost of repurchases
$ -$ 25.4 Shares repurchased and retired - 0.3 Average cost per share $ -$ 93.77 Contractual Obligations SinceJanuary 31, 2020 , the Company's contractual obligations as they relate to short-term borrowings have changed as a result of the drawdown of$500.0 million under the Credit Facility described above under "Financing Activities". The Company's remaining contractual cash obligations and commercial commitments atApril 30, 2020 , and the effects such obligations and commitments are expected to have on the Company's liquidity and cash flows in future periods, have not changed significantly sinceJanuary 31, 2020 .
Seasonality
As a jeweler and specialty retailer, the Company's business is seasonal in nature, with the fourth quarter typically representing approximately one-third of annual net sales and a higher percentage of annual net earnings. Management expects such seasonality to continue.
Forward-Looking Statements
The historical trends and results reported in this quarterly report on Form 10-Q should not be considered an indication of future performance. Further, statements contained in this quarterly report on Form 10-Q that are not statements of historical fact, including those that refer to plans, assumptions and expectations for future periods, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, each as amended. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements about the consummation of the pending Merger (as defined under "Item 2. Management's Discussion and Analysis - Merger Agreement") and the anticipated benefits thereof. Forward-looking statements include, but are not limited to, statements that can be identified by the use of words such as 'expects,' 'projects,' 'anticipates,' 'assumes,' 'forecasts,' 'plans,' 'believes,' 'intends,' 'estimates,' 'pursues,' 'scheduled,' 'continues,' 'outlook,' 'may,' 'will,' 'can,' 'should' and variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements the Company makes regarding its plans, assumptions, expectations, beliefs and objectives with respect to the pending Merger; the Company's assumptions, expectations and beliefs with respect to COVID-19, including the impact thereof on the Company's business, revenues, cash flows and results of operations; store openings and closings; store productivity; the renovation of the Company's New York Flagship store, including the timing and cost thereof, and the temporary relocation of its retail operations to6 East 57th Street ; product introductions; sales; sales growth; sales trends; store traffic; the Company's strategy and initiatives and the pace of execution thereon; the amount and timing of investment spending; the Company's objectives to compete in the global luxury market and to improve financial performance; retail prices; gross margin; operating margin; expenses; interest expense and financing costs; effective income tax rate; the nature, amount or scope of charges resulting from recent revisions to theU.S. tax code; net earnings and net earnings per share; share count; inventories; capital expenditures; cash flow; liquidity, including the need to incur additional indebtedness; compliance with covenants under the Company's debt instruments, including the financial ratio thresholds set forth therein; currency translation; macroeconomic and geopolitical conditions; growth opportunities; litigation outcomes and recovery related thereto; amounts recovered under Company insurance policies; contributions to Company pension plans; and certain ongoing or planned real estate, product, marketing, retail, customer experience, manufacturing, supply chain, information systems development, upgrades and replacement, and other operational initiatives and strategic priorities.TIFFANY & CO. 43
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These forward-looking statements are not guarantees of future results and are based upon the current views, assumptions and plans of management, and speak only as of the date on which they are made and are subject to a number of factors, risks and uncertainties, many of which are outside of the Company's control. You should not place undue reliance on such statements. Actual results could therefore differ materially from the planned, assumed or expected results expressed in, or implied by, these forward-looking statements. While the Company cannot predict all of the factors that could form the basis of such differences, key factors, risks and uncertainties include, but are not limited to: the recent outbreak of COVID-19, including the duration and scope thereof, the availability of a vaccine or cure that mitigates the effect of the virus, and changes in financial, business, travel and tourism, consumer discretionary spending and other general consumer behaviors, political, public health and other conditions, circumstances, requirements and practices resulting therefrom; global macroeconomic and geopolitical developments; changes in interest and foreign currency rates; changes in taxation policies and regulations (including changes effected by the recent revisions to theU.S. tax code) or changes in the guidance related to, or interpretation of, such policies and regulations; shifting tourism trends; the recent widespread protests in theU.S. ; regional instability; violence (including terrorist activities); political activities or events (including the potential for rapid and unexpected changes in government, economic and political policies, the imposition of additional duties, tariffs, taxes and other charges or other barriers to trade, including as a result of changes in diplomatic and trade relations or agreements with other countries); weather conditions that may affect local and tourist consumer spending; changes in consumer confidence, preferences and shopping patterns, as well as the Company's ability to accurately predict and timely respond to such changes; shifts in the Company's product and geographic sales mix; variations in the cost and availability of diamonds, gemstones and precious metals; adverse publicity regarding the Company and its products, the Company's third-party vendors or the diamond or jewelry industry more generally; any non-compliance by third-party vendors and suppliers with the Company's sourcing and quality standards, codes of conduct, or contractual requirements as well as applicable laws and regulations; changes in the Company's competitive landscape; disruptions impacting the Company's business and operations; failure to successfully implement or make changes to the Company's information systems; changes in the cost and timing estimates associated with the renovation of the Company's New York Flagship store; delays caused by third parties involved in the aforementioned renovation; any casualty, damage or destruction to the Company's New York Flagship store or6 East 57th Street location; the Company's ability to successfully control costs and execute on, and achieve the expected benefits from, the operational initiatives and strategic priorities referenced above; conditions to the completion of the pending Merger may not be satisfied or the regulatory approvals required for the pending Merger may not be obtained, in each case, on the terms expected or on the anticipated schedule which contemplates closing of the acquisition in the middle of 2020; the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement (as defined under "Item 2. Management's Discussion and Analysis - Merger Agreement") or affect the ability of the parties to recognize the benefits of the pending Merger; the effect of the announcement or pendency of the Merger on the Company's business relationships, operating results and business generally; risks that the pending Merger disrupts the Company's current plans and operations and potential difficulties in the Company's employee retention as a result of the pending Merger; potential litigation that may be instituted against the Company or its directors or officers related to the pending Merger or the Merger Agreement and any adverse outcome of any such litigation; the amount of the costs, fees, expenses and other charges related to the pending Merger, including in the event of any unexpected delays; other risks to consummation of the pending Merger, including the risk that the pending Merger will not be consummated within the expected time period, or at all, which may affect the Company's business and the price of its common stock; and any adverse effects on the Company by other general industry, economic, business and/or competitive factors. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks. Developments relating to these and other factors may also warrant changes to the Company's operating and strategic plans, including with respect to store openings, closings and renovations, capital expenditures, information systems development, inventory management, and continuing execution on, or timing of, the aforementioned initiatives and priorities. Such consequences and changes could also cause actual results to differ materially from the expected results expressed in, or implied by, the forward-looking statements. Additional information about potential risks and uncertainties that could affect the Company's business and financial results is included under "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 , "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 1A. Risk Factors" in this quarterly report on Form 10-Q, the definitive proxy statement on Schedule 14A that the Company filed onJanuary 6, 2020 , and in the Company's other filings made with theU.S. Securities and Exchange Commission ("SEC") from time to time, which are available via theSEC's website atTIFFANY & CO. 44
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www.sec.gov. Readers of this Quarterly Report on Form 10-Q should consider the risks, uncertainties and factors outlined above and in the aforementioned Form 10-K and in this Form 10-Q in evaluating, and are cautioned not to place undue reliance on, the forward-looking statements contained herein. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by applicable law or regulation.
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