Condensed Consolidated Financial Statements

3 Months Ended

Apr. 30, 2020

Condensed Consolidated Financial Statements [Abstract]

Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements include the accounts of Tiffany & Co. (also referred to as the "Registrant") and its subsidiaries (the "Company") in which a controlling interest is maintained. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities ("VIEs"), if the Company has the power to significantly direct the activities of a VIE, as well as the obligation to absorb significant losses of or the right to receive significant benefits from the VIE. Intercompany accounts, transactions and profits have been eliminated in consolidation. The interim financial statements are unaudited and, in the opinion of management, include all adjustments (which represent normal recurring adjustments) necessary to fairly state the Company's financial position as of April 30, 2020 and 2019 and the results of its operations and cash flows for the interim periods presented. The condensed consolidated balance sheet data for January 31, 2020 are derived from the audited financial statements, which are included in the Company's Annual Report on Form 10-K and should be read in connection with these financial statements. As permitted by the rules of the Securities and Exchange Commission, these financial statements do not include all disclosures required by generally accepted accounting principles.

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. Therefore, the results of its operations for the three months ended April 30, 2020 and 2019 are not necessarily indicative of the results of the entire fiscal year.

An outbreak of a novel strain of the coronavirus, COVID-19, was identified in China in December 2019 and was subsequently recognized as a pandemic by the World Health Organization on March 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 and 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 ended April 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 of April 30, 2020, approximately 70% of the Company's retail stores remained closed worldwide, as all of the Company's retail stores in the Americas remained closed, 15% of the Company's retail stores in Asia Pacific remained closed, 95% of the Company's retail stores in Japan remained closed and 85% of the Company's retail stores in Europe 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 ended April 30, 2020 increased 23% worldwide, with key markets such as the United States and the United Kingdom having increased 14% and 15%, respectively, compared to the prior year period.

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 employees who are unable to work, or who 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 locations who cannot work from home, and has not taken action to reduce its workforce in connection with COVID-19.

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 (as defined in "Note 8. Debt") during the three months ended April 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 (as defined in "Note 2. Merger Agreement").

At April 30, 2020, the Company was in compliance with all debt covenants. 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 Shanghai Guaranty (as defined in "Note 8. Debt") 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 ending April 30, 2021. These amendments are permitted under the Merger Agreement (as defined in "Note 2. Merger Agreement").

These amendments were executed on June 8, 2020 and effect changes to certain provisions and covenants during the period beginning with the fiscal quarter ending July 31, 2020 and continuing through the fiscal quarter ending April 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 ending July 31, 2020, (ii) 20 basis points at all pricing levels from August 1, 2020 until November 1, 2020 and (iii) 30 basis points at all pricing levels from November 1, 2020 through April 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 to April 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 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.